Until September 2007 super funds were only permitted to borrow in certain circumstances
- Borrowing to pay a member benefit, providing no more than 90 days and 10% of the value of the fund
- Borrowing to cover security transactions, providing no more than 7days and 10% of the value of the fund
- Indirect borrowing via listed companies or trusts and geared investment trusts (arm’s-length investments)
New rules allow trustees of super funds to borrow to purchase property and or shares
- Regulations apply to all funds
- Professionally managed funds, or
- Self managed funds
Who may benefit from a geared superannuation investment?
- Those who wish to use gearing in super as a method of increasing capital growth
- Members who wish to bring forward the purchase of investments via super fund borrowing, property investment
- Strategic acquisition of assets, business premises etc
- Those with positively geared investments
We need to consider risk vs return and the level of gearing
When gearing property investments, we need to consider:
- Acquisition costs (legal, lending and stamp duty)
- Any short fall between rental income vs interest repayments
- Negative gearing in a low taxed environment
- Direct property not as easily disposed of
- Disposal costs (legal and agent fees) can be significant
- CGT in relation to any disposal
- GST implications
Gearing equity investments:
- Are done through purchase of Installment Warrants
- Are not new but the ATO have now confirmed their use in the super fund.
These arrangements are packaged as a product allowing a super fund to invest in a leveraged arrangement directly into the share market.
- Direct Equity product
- Non-recourse loan
- Structured product with dividends meeting interest payments
- Issued for a fixed term
- Flexible, can be sold at any time without penalty
