BORROWING to invest, or gearing, is a popular way to accelerate wealth accumulation.
But, as is often the case, there are exceptions to the rule, and the risks can be significant if not managed carefully.
The latest trend in self-managed super funds (SMSF) is the opportunity to borrow to purchase an investment asset, such as property or shares, using a limited resource borrowing arrangement.
Gearing in SMSFs is a relatively new strategic option for people wishing to accumulate assets in super for retirement, given the reduction in contribution limits.
Borrowing allows you to purchase and accumulate quality assets within super that you would otherwise not have had access to.
Used in the right way, and with a long-term plan in place, SMSF trustees can increase the amount they are able to invest which, in turn, maximises their potential investment return.
The income earned from the geared asset can be used to cover the expense in purchasing and maintaining that asset, including repaying the loan.
It can help to alleviate the burden of cash flow by facilitating access to existing equity within your SMSF, and any income or capital gains earned from the asset will be taxed at the SMSF’s concessional tax rate.
Another advantage is the opportunity to increase your SMSF’s asset base without making contributions.
Despite this, gearing in super is often much more complicated than gearing on a personal basis.
There are many legislative rules that make this area complex and therefore, advice must be sought so that you do not end up breaching the rules and paying tax at the highest marginal rate of 49 per cent.
With borrowing to invest also comes risks – higher costs, ability to fund sufficient cash flow, possible tax losses and legal fees are just some to be wary of.
The rule with borrowing within SMSFs is that just because you can, doesn’t mean you should.
It’s not the tax benefit you are receiving but the quality of the asset you are purchasing that needs to be the focus of your investment decision.
If you wish to obtain advice on whether a borrowing strategy would be appropriate in your situation or have any questions regarding this please give the staff at Ritchie Advice a call we would be more than happy to help.
This advice may not be suitable to you because it contains general advice which does not take into consideration any of your personal circumstances. All strategies and information provided in this article is general advice only.
Ritchie Advice Pty Ltd ABN 12 150 128 448, is a Corporate Authorised Representative 408050 of Dover Financial Advisers Pty Ltd, Australian Financial Services Licensee No. 307248.