Does borrowing for super make sense?

SUMMARY: Is it worth borrowing to tip money into super ahead of 30 June? It’s a very different equation in 2017 than it was in 2007.

Getting money into super ahead of the 30 June change of rules is going to take some planning.

From 30 June, if you already have $1.6m in super, you will not be able to put non-concessional contributions into your fund.

With one last chance to get up to $540,000 into super, will it be worth it to borrow money to get it in to super?

The last time this was an option being seriously contemplated was back in the leadup to 30 June 2007. At that time, ahead of Peter Costello’s big changes, we had a one-off chance to tip in $1 million in NCCs. Back in 2007, many found it tempting to borrow.

But the answer to the question in 2007 and in 2017 is very different.

Firstly, this is because of interest rates. Back in early (and, importantly, pre-GFC) 2007, interest rates were around 8%.

Now, they’re circa 4%.

This is important because if you borrow to put money into superannuation, the interest on the borrowings is not tax-deductible. (For the interest to be a tax deduction, the funds need to be used to generate assessable income in the name of the borrower. And your SMSF is a separate entity, so no tax deduction.)

Back in 2007, my advice to clients was “no, don’t do it”. My reasoning was that it was unlikely, on balance, to be a good idea. The required earnings rate needed to beat the prevailing interest rate (even ignoring super tax) outside super was too high. And, long term, that was a big risk (even given the bull run that equities were experiencing back then).

However, with the cost of capital having halved over that 10-year period, the equation looks quite a bit different.

The break even point – with a bunch of variables ignored – is significantly lower. No guarantees and you’re still punting on markets rising. But the hurdle is, at least, lower.

Secondly, the investment atmosphere in 2017 is very different to 2007.

Back then, markets had been running white-hot for about four years. They were soon to go into free fall, but I’m not going to claim to have predicted that.

In the lead up to January 2017, there is no such concern about overheated markets. Yes, we’ve had a post-Trump bounce. And preceding a bland FY16, there were three good financial years between FY13 and FY15. But we’re not talking bull-run here.

(Footnote: Obviously, anyone who did put $1 million in their super funds in early 2007 and then invested it in share or property markets, was feeling a deep pain 12-18 months later.)

Third, the regulatory environment is different. The largesse of the super system is being wound back.

Costello’s 2007 changes were the zenith of superannuation in Australia. Things will never be better than they were then. And it’s been all downhill from there. It doesn’t seem to be a tide that will turn.

In 2007, the “$1 million opportunity” was a gift horse to the wealthy. It will be the last time, in our lifetimes, such a gift will be offered.

But … there will be individuals out there who want to get that money into super and who don’t have it as liquid assets at the moment. It may, in some cases, make sense to borrow money to tip it in to super.

If you have reached preservation age, then knowing that you can draw on your super to repay the debt is some consolation and a potential plus for doing so.

And the closer to preservation age you are, the less risk the strategy obviously holds.

Being able to invest in a low- or no-tax environment, with a cost-of-funds of 4%, will be something worth considering for some.

However, don’t do it without properly running the numbers for your situation. Or getting a financial adviser to help you to do so.

For some who already have significant assets inside and outside super, it might be worthwhile stuffing more money into super. Even if you have more than $1.6m in super/pension, is it better to be taxed at a maximum of 15% inside the super system, than to have that money sitting outside super, where it will be taxed at up to 49%?

The appeal of getting $540,000 into super might make some real sense, if the debt can be later repaid, easily.

If you’re a couple? Well, you might be able to get $1.08m ($540,000 x 2) and have double the benefit.

Last shot

Potentially, for many, it will be able being able to use this one last opportunity.

If you have more than $1.6m in super on 1 July 2016, you won’t be able to put further NCCs into super. Not at the current rate of $180,000 a year (or $540k pull forward), nor at the post 1 July level of $100,000 (or $300k using pull forward).

But you can load up prior to then, though the money might have to, eventually, stay in super’s taxable regime.

Let’s say that you currently have $3m in super/pension and you’re 64 (or younger). And you have the werewithall to put in another $540k this year (either via borrowings, or cash).

The answer, if you hold cash, is likely to be a no-brainer. Yes. Depending on the quantum of your assets outside super, it’s likely that even if all of the contributed funds end up being pushed into accumulation/super phase, that the 15% tax rate (or 10% for capital gains) will be preferable to the level of tax likely to be paid on those funds outside of super.

If you have the ability to put it in, but with source of funds being borrowings, then the answer could still be yes. If you do your sums and believe that, despite not getting a tax deduction on the funds for the borrowings, that getting the money into a low-tax environment to allow it to grow and compound is worth it … then speak to an adviser who can help you cement your plans.

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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.