Borrowing in superPresented by: <insert presenters name><business / office name><date>

General advice warning

<insert your licensee’s disclaimer here>

Agenda

• Explain the borrowing in super rules

• Explore the opportunities created

• Consider a range of important issues

• Outline how we can help you

The borrowing in super rules

• Superannuation legislation was amended effective 24/9/07

• This enables super funds (including SMSFs) to borrow to investin any eligible asset, including shares, managed funds and property

• Certain conditions need to be met for the arrangement to be compliant

Here’s how it works

Loan

Bank SMSF

Security trust

Cash +borrowed

money

Bank can only holdsecurity overtrust assets,not other SMSF assets

Security trustee holds legal ownership of assets

Eligible assets

Eg: Direct property, shares, managed funds

SMSF can acquire legal ownership after paying sufficient instalments

The opportunities

• Make a larger investment within super fund (eg in shares or managed funds)

• Gearing strategy aimed at building greater wealth when compared to not borrowing in super

• Acquire assets in super where borrowing is required because of larger purchase price (eg property)

• Now a viable alternative to borrowing in own name (ie outside super)

Meet Kate

* Assumed to remain constant over investment period

• Aged 45 and plans to retire in 20 years

• Has SMSF

• Wants to buy $600,000 commercial property

• Currently yielding 5%* pa

• She anticipates capital growth of 3.5%* pa

• Has $300,000 in cash

• Needs to borrow $300,000

Her two options

1. Buy property outside super by:

• Using $300,000 in cash, and

• Borrowing $300,000 in her own name

2. Buy property inside super by:

• Making $300,000 personal after-tax super contribution, and

• Arranging for fund to borrow $300,000

Key assumptions

• Loan interest rate is 9.5%* pa

• Will make interest-only payments

• Property will be sold after 20 years and loan repaid

• Salary is $100,000 pa

• Marginal tax rate is 41.5%* #

* Assumed to remain constant over investment period

# Includes Medicare levy of 1.5%

Results after 20 years

Other assumptions: A $600 loan application fee and a $375 annual loan fee is payable in both options. Where investment income and tax benefits are insufficient to meet interest payments, the value of the property is reduced to cover the shortfall. Otherwise the excess investment income and tax savings are reinvested. When buying the property in super, any income losses are carried forward and applied against future taxable income where possible. When buying the property in super, no CGT is payable as the investment is sold after commencing a pension. When buying the property outside super, CGT is payable at Kate’s marginal tax rate, after allowing for the 50% discount.

Buy property outside super

Buy propertyinside super

$993,556

$1,279,759

$0

$500,000

$1,000,000

$1,500,000 Extra$286,203

Why was borrowing in super better?• Kate’s property was positively geared from outset

(ie income exceeded loan interest and other costs)

• ‘Excess income’ taxed at:

• Maximum rate of 15% inside super

• Kate’s marginal tax rate (41.5%*) outside super

• Positive gearing generally favours borrowing inside super

* Includes Medicare levy of 1.5%

What about negatively geared assets?• Occurs when loan interest and other costs exceed

investment income

• ‘Income losses’ offset income that would otherwise be taxed at:

• 15% inside super but, if no other fund income, lossesmust be carried forward to future financial years

• Your marginal tax rate (up to 46.5%*) outside super

• Negative gearing can generally favour borrowing outside super

* Includes Medicare levy of 1.5%

Other issues to consider

• Negatively geared assets can become positively geared

• Depends on:

• How much you borrow as % of asset value

• Investment returns

• Interest rates

• Timeframe

• Loan principal repayments

• Generally less CGT if asset held in super

• You’ll need advice

The arrangement must comply

• Examples include:

• Sole purpose test

• Funds trust deed and investment strategy

• Acquisitions from a related party

• Borrowing from a related party

• Can’t borrow against existing fund assets (except cash)

• Non-compliance could result in civil, criminal or other penalties

How advice can help

1. Determine whether borrowing in super suits your circumstances

2. Help ensure arrangement complies with super rules

3. Arrange the loan

4. Establish and/or administer SMSF

5. Work with your accountant

6. Address other needs

• other investment advice

• insurance

• retirement and estate planning

7. Provide access to new solutions as available

Conclusion

• Borrowing in super is another opportunity that may maximise your financial future

• Ensure your current strategy is aligned to your individual circumstances

• Whole range of financial solutions depending on your needs

• Seek advice

thank you

any questions?