Gearing Up For The Future
Sun Herald
Sunday October 26, 2008
Having your own super fund has a lot of positives, writes David Potts
NEGATIVE gearing has always been seen as an alternative to super but with your own fund you can do both.There are the same tax breaks - although there's only a 15 per cent deduction on the interest, the tax on the rental income is only 15 per cent too - plus the ultimate prize of no capital gains tax if you sell your property when your DIY fund is in pension phase.Borrowing within a DIY fund is also a way around the annual limits that apply to salary sacrificing or personal contributions.With annual administrative expenses averaging $2000 a year, a DIY fund needs a balance of at least $200,000 for it to be cheaper than an industry or retail fund.Gearing up makes that threshold far easier to achieve.Legislation for super funds to borrow for residential or commercial property was passed last year, although there are still strict rules.Preventing lenders from acquiring a claim over fund assets ahead of the DIY fund's members is the basic idea.And flicking a property you already own into a DIY fund is still banned.There are no limits on the type of asset you can borrow against, other than what the fund is allowed anyway, but it must take the form of an instalment trust. Chief executive of Self-Managed Super Fund Professionals' Association of Australia Andrea Slattery says: "It requires an appropriate investment, a trust structure and a source of non-recourse finance."The normal investment rules apply.For example, a DIY fund can buy a residential investment property from an unrelated third party but not from anyone related to the trustees.Since borrowings are set up similarly to an instalment warrant, an up-front payment is made - for argument's sake a deposit - then down the track a second instalment is made to pay out the loan. The interest accrues normally and is deductible in the fund.Because there's no capital gains tax when a DIY fund is in the pension phase, the gains from gearing can be spectacular. For example, if the asset increases in value by 4 per cent a year, on a $300,000 loan the DIY super fund would do almost $45,000 better than negative gearing after 10 years.And that's only the half of it because there are also the benefits of salary sacrificing into the fund to pay off the interest.The self-employed or those earning less than 10 per cent of their income from one employer can get a tax deduction on what they pay into super.That represents a deduction on the deposit, which you can't do with negative gearing.The only drawbacks to instalment loans are that there's a higher interest rate and lenders are likely to impose a lower loan-to-valuation ratio to compensate them for the risk of a non-recourse loan.
© 2008 Sun Herald
