Paul’s verdict

Technically it could work but also consider the human factors such as risk and effort

One of the things I enjoy about my long-running Verdict column is the opportunity to explore so many different money questions in a lot more detail. While every answer will have clear-cut technical aspects, what is of far more relevance is the human factor.

Technically, using a tax-effective vehicle such as super to hold and gear assets makes a lot of sense. All but very high income earners get to put money into super via salary sacrifice at a very attractive tax rate of 15%, well below what most of us pay in personal tax. We can also add “after-tax” money, that is our savings, if we want to. This is also a sensible idea from a technical perspective. Inside super income is also taxed at 15% and capital gains at 10%, so for most workers these are far better than the tax we pay outside super.

To then consider borrowing to buy an investment property in your own super fund makes sense. With our rapidly growing population, it is not a lucky guess to figure that well-located property, bought at a reasonable price, will do well over time. At your ages, you and your husband have plenty of that – I’d say a couple of decades to retirement. By then I’d hope it is paid off. Its value should go up over time, as should the rent. So taking you two decades or more down the road and in retirement, it is likely that there will remain big tax advantages in super. So the rent from your property can flow to you at either a zero or low rate of tax.

Sounds great, so do you run out and do this? Right now in a good fund such as AustralianSuper you will have a well-diversified global portfolio of shares, property and fixed interest. Over the past decade or so, I would think your returns have been around 8% or 9% a year. These big funds have very low fees and you really do not need to do anything.

With a DIY super fund with $450,000, you could certainly add borrowings to invest in property. But I want you to go over the costs and legal requirements to have your own super fund with a good fee-for-service professional. I don’t want you being sold one! They are expensive to run. Borrowing to buy a property inside a DIY fund requires you to follow quite technical rules.

So I am not against this idea at all but I would need about half this magazine to take you through every issue. So go ahead and do your research, examine the costs and risks and then make a decision that suits you. Technically it can work well but does it suit your personal attitude to risk and the amount of time you have to find and maintain the property and your own DIY fund? This is the human factor!

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