Debt Can Work To Advantage Of Self-managed Funds
Newcastle Herald
Thursday April 10, 2008
THE notion that debt is good has taken a battering but it has developed a new lease of life among architects of, and advisers to, self-managed super funds (SMSFs), following a rule change last September that allows super funds to borrow to buy shares and property.
Macquarie Bank is one of the first lenders to promote a loan product for SMSFs. As yet it does not have a formal tax ruling but Macquarie says it is in the pipeline. The question is: why would you want to gear up a super fund with debt? A spokeswoman for the bank says it enables the fund to boost the value of real estate that can be bought by a self-managed super fund. Macquarie limits the loan to 55 per cent of the value of the property. At present, only income-producing residential properties qualify. The property is purchased by a security trustee, who holds it on behalf of the fund. The fund receives all the income and pays all property costs, the loan and its fees. It also receives a 15 per cent tax deduction for the interest cost. One firm rule is that the lender has recourse only to the property being geared in the fund in the event of default. However, this rule does not prevent the lender having recourse to other assets held outside the fund. Any property or shares purchased by a self-managed fund for gearing purposes must be purchased at arm's length from members and trustees, and must satisfy the sole-purpose test applicable to all assets held by super funds that is, its dominant purpose must be to provide income in retirement. Peter Bobbin, a partner at The Argyle Partnership, supports gearing shares and real estate in self-managed super funds and has helped Macquarie with the product roadshow. He says the gearing enables a fund to double its investment.Bobbin says the real gearing benefit is the tax-effective debt repayment, not the usual interest income gearing benefit. Using a $400,000 asset as an example, Bobbin says a taxpayer on the top marginal tax rate would need to earn $373,832 to repay a $200,000 loan.But if the same asset is bought through an SMSF, you need earn only $235,294 in pre-tax dollars, salary sacrifice this into super over five years or more and, after the super contribution tax, the fund has $200,000 to pay off the loan. By putting the loan through the super fund, you could repay the debt more quickly. And you have saved $138,538 in pre-tax dollars.When you reach 60, the $200,000 needed to repay the loan can be withdrawn tax-free. SMH
© 2008 Newcastle Herald