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Heads up - perhaps super funds will be permitted to borrow?

 
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Old 25-09-2007, 10:28 AM   #1
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Heads up - perhaps super funds will be permitted to borrow?

Just wanted to give everyone advance notice that there's a bill in the Senate at the moment which might have the result that super funds will be permitted to borrow.

The bill is aimed at confirming the governments position that although most instalment warrants involve a borrowing they are permitted investments for super funds.

But from a preliminary perusal it seems to me that it might end up that super funds can borrow provided

1) the borrowing is used to acquire an asset that's held on trust so the super fund trustee gets beneficial ownership over time through paying instalments;
2) the lender has limited recourse to only the relevant asset acquired and not other assets of the super fund
3) the asset must otherwise be one the super fund can acquire (i.e. rules around acquiring in-house assets etc will still apply.

It's too early to say, but this could really open the floodgates for self-managed super funds to buy commercial and residential property in circumstances where the super account balance was insufficient to do so previously...

It could fuel another property boom and lead to lots of work and fees for the financial services industry in structuring such arrangements

Too early to judge but it looks like it could be much broader than merely instalment warrants on listed shares.

I'll post further once I've had a chance to look more closely at the proposals.

Cheers
N
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Old 25-09-2007, 10:39 AM   #2
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interesting.. imagine all the tied up money in super money now available to borrow to buy property!
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Old 25-09-2007, 10:46 AM   #3
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Hi Nigel,

Thanks for that info.

But with a tax rate of only 15% does it make much sense to borrow in a Superfund when the deductions will be much greater outside super when negatively geared against your salary etc which is likely to be at a much higher tax rate?

Cheers - Gordon
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Old 25-09-2007, 10:50 AM   #4
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Good point Austini, and I would imagine borrowing would be quite conservative.. as who is going to pay the bank interest and property maintaince/costs? Rent would have to cover the loan repayment meaning a low LVR of 40%.
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Old 25-09-2007, 11:08 AM   #5
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But with a tax rate of only 15% does it make much sense to borrow in a Superfund when the deductions will be much greater outside super when negatively geared against your salary etc which is likely to be at a much higher tax rate?
Your question assumes that people only borrow for the deductions ?

I would gladly borrow in my SMSF for the sake of additional leverage - keeping a low LVR (as noted by crc_error) to maintain cashflow.
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Old 25-09-2007, 11:33 AM   #6
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Number 2 would be a big stumbling block impeding the purchase of property until the lending institutions get their products in order.

Presently any property loan as a total liability associated with it which would mean that all asset of the SMSF are at risk to cover a bad property loan.

Possibly the banks will come up with a +ve geared property loan product?

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Old 25-09-2007, 11:44 AM   #7
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This is interesting. I wonder if it's the first step in allowing first home buyers to use their superannuation as a deposit on a home. Stranger things have happened.
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Old 25-09-2007, 12:40 PM   #8
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If this goes through, it will send property prices into the stratosphere. I believe - and have believed for a long time now - that FHB's should be allowed to use their super money as a deposit on a home AND use their SGC to pay back the loan, with conditions of course.

Those being:
- the money can only be used to service the original loan to purchase the home (cannot use SGC money for reno's, upgrade etc)
- equity lending is prohibited unless it is for investment purposes and if investments are sold, any profits must be used to pay down the home loan
- the SGC portion is used to pay down principal only ON TOP OF regular payments - cannot use the SGC as part of regular payments
- once the loan has been paid back, the money used to pay the loan must be replaced inside super with additional super payments made from employee's salary

It might happen... Yeah and I just saw a pig fly past my office window.

Mark
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Old 25-09-2007, 12:50 PM   #9
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Mark, setting up schemes like using your super to buy a house, what do you think that will do to prices? Are we going to forfit our super now aswell to buy a house?

You been a property investor want to see property prices go up, so schemes like this will only encourage that to happen.

What do you think will happen.. Auction day comes, 20 buyers are there, now all of the sudden all 20 buyers can use their super to buy a house? Who has this helped? The property owner selling, as he will get more for their house..
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Old 25-09-2007, 01:02 PM   #10
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Who has this helped?

The smart people who have taken advantage of the super co contributions. Theyll have like 10k more than the others...

What happens when the people grow out of this house and need a new one, they wont be first home owners so they cant use super again, it will encourage people to buy the best from the start.

Id like to see it happen, it could be one of the only things that help young people...
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