Gearing in Super

Borrowing to invest within a Self Managed Super Fund (SMSF) has the potential to boost super and help you reach your retirement goals sooner.

In September 2007, the Government opened the door to gearing within SMSFs – meaning it’s now possible to borrow to invest in a broad range of investments inside a SMSF.

Gearing in Super – how it works

You need cash within your SMSF. Your SMSF then borrows an additional amount from a lender.  The SMSF then uses this combined amount to invest in assets.

Under the rules, this asset can be anything the SMSF is permitted to invest in, such as shares, property, and managed funds.

The law requires that the ‘beneficial ownership’ of the asset is held on trust by a Custodian. This gives the SMSF the right then to receive income from the asset, and to take legal ownership of it once the loan has been repaid.

Ongoing, any income earned by the asset goes into your SMSF, which is also responsible for paying the bank interest on the loan.

What are the benefits?

• Diversification - with more money to invest, you can buy assets you otherwise couldn’t afford. This can provide diversification benefits to your portfolio.
• Tax effectiveness - as opposed to gearing outside super, you can take advantage of the tax-effectiveness of the superannuation environment – including the ability to make tax-free withdrawals after age 60. Interest on the borrowed money is generally tax-deductible too.
• Exposure is limited - legally, the loan from the lender must be ‘limited recourse’ in nature – meaning the bank only has rights against the asset purchased with the borrowed money, not other super or personal assets of the SMSF.

What are the risks?

• Magnified losses as well as gains
• A fall in the market value of an investment doesn’t change the amount owed to the lender
• Interest costs may outweigh investment returns – potentially leading to margin call
• Changes in interest rates can impact the cost of the investment.

Who is gearing suitable for?

Because of the risks, gearing in super is rarely suitable for conservative investors. But having an appetite for investment risk is only part of the equation.

Generally speaking, you need to have a SMSF with at least $200,000 before considering gearing in super. To help mitigate the risks, you also need to maintain adequate cash flow – so it’s most suitable to those who are still working.

Most importantly, gearing in super should be seen as a long-term strategy. Typically an investment timeframe of about ten years is recommended to help ride out the inevitable highs and lows.

If you want to know more about gearing in super, speak to your financial adviser.

The information provided on this website is for general investment information purposes only. You need to consider your own investment objectives, financial situation and particular needs before deciding whether or not to borrow to invest . You should consider, based on your individual circumstances, whether or not it is appropriate to seek advice from a financial adviser. St.George Bank - A Division of Westpac Banking Corporation ABN 33 007 457 141 AFSL 233714