Six super tips and traps for 2008
Tuesday, 15 January 2008
Last Updated: Tuesday, 15 January 2008
By Michael Laurence
The changing economic landscape, as well as the new Government, signal that the fortunes of your superannuation will need your close attention over 2008.
Australia’s super savings will multiply by almost three times over the next 15 years to reach a heavyweight $3.2 trillion-plus (in today’s dollars), forecasts actuary and superannuation consultant Rice Warner in the latest edition of its highly respected Superannuation Market Projects Report.
Rice Warner expects that the shakeup of the super regime from July 2007 – introducing the carrot of tax-free super benefits from age 60 – will make the mountain of super money a remarkable 60% bigger than it otherwise would have been.
This free-flow of money into super, along with recent amendments to super law that allow self-managed funds to borrow to invest, present plenty of opportunities and pitfalls that should become increasingly apparent over the 12 months ahead.
Here are six super tips, and traps, for 2008 and beyond:
1. Borrow to invest only with extreme caution: One of the most heavily promoted self-managed fund strategies of 2008 will be to borrow to invest. This strategy is already becoming red hot.
From September 2007, self-managed funds have been allowed to borrow to invest – provided stringent conditions are met. This is despite the long-standing, and remaining, general prohibition on borrowing by self-managed funds to acquire investments. (The new borrowing provisions should be viewed as an exception to the no-borrowing rule.)
In the event of a default on loan instalments, a lender’s recourse against the super fund is limited to the asset that was being acquired with the loan. This condition may, however, give some super fund trustees a false sense of security.
For instance, a fund will typically contribute a large amount of its existing cash as a deposit for a geared investment, and members may agree to go personal guarantor for their super fund’s investment loan.
The result is that much of a member’s super and non-super savings could be at risk – including any amounts paid by a fund as a deposit, and in interest and fees involving the loan, which could be lost to the point of a default.
A default may occur if, for example, the value of the geared asset significantly falls and fund trustees expect that it is unlikely to recover.
For a brief rundown on the stringent conditions under the recent amendments, see the tax office’s coverage here.
2. Don’t overlook appropriate opportunities from the new borrow-to-invest rules: While super funds should only borrow with utmost caution – as discussed in point one – don’t dismiss the strategy out of hand.
SME owners might, for example, want to borrow to buy their business premises. And this might make much sense, depending upon the circumstances of the members and any professional advice received.
For a detailed look at the implications for a self-managed fund owning the premises of the members’ businesses, see Wealth/Super, 6 February 2007.
Many specialist self-managed fund advisers warn about possible increased risks and difficulties if a fund’s investment portfolio is dominated by a single valuable asset such as a factory or shop. If that asset fails to provide an adequate return, the retirement well being of the members can be jeopardised. Also property can be difficult to readily sell for an adequate price to pay member retirement or death benefits.
Obtain quality professional advice from a truly independent person before arranging for your fund to buy your business premises.
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