Gearing your Super

For many years super funds were only allowed to borrow under very limited circumstances. However, with the government wanting to make superannuation more attractive to more people, it now allows for gearing within super funds.

Instalment warrants have been used by superannuation funds for some time and they involve borrowing. The government has rules to confirm that these products do not break the general borrowing restriction.

For super funds to borrow, the rule requires the asset being purchased to be held ‘in trust’ by an external entity that arranges the borrowing. In addition, the borrowing must be a ‘non-recourse’ loan – this means if the loan is in default, the lender or any other party under the arrangement cannot claim repayment from the other assets of the fund.

An example of a non-recourse loan

An instalment warrant allows the fund to buy shares at less than the full price with the balance due at a future date. The balance is a loan from the instalment warrant provider. If the fund does not pay the balance on the due date, the shares are forfeited. The warrant provider cannot claim the balance from the fund’s other assets.

Advantages of instalment warrants

Improved diversification because more assets can be purchased with the available funds
Increased income because the holder of a warrant is entitled to receive the dividends
Improved tax effectiveness because the fund receives franking credits and can claim a tax deduction for interest on the loan.
Potential for higher capital gains through gearing.

Smorgasbord of opportunities

These rules allow a super fund to borrow to invest in any asset that it can legitimately invest in directly. This includes property, managed funds, and listed or unlisted shares.

Whilst some retail funds may offer geared products, a self managed super fund provides the greatest investment flexibility. Investors can have the best of all worlds – an investment that is tax sheltered and protected from creditors and where they can use the multiplier effect of gearing.

This is a strategy that many investors should carefully consider. Talk to us to determine if it’s right for you.