A snapshot of the superannuation borrowing landscape

David Barrett briefly addresses two major challenges that loom for financial advisers: providing the strategic advice associated with a potential recommendation for a superannuation borrowing scheme, and keeping abreast of the developments in the super borrowing field.

Superannuation borrowing is arguably the fastest-growing area of financial advice, and a potentially lucrative one for self-managed superannuation fund (SMSF) advisers.

Anecdotally there is increased client demand in the area, and more and more products and services are finding their way to the market.

However, as a field of advice, superannuation borrowing is not without its challenges.

Firstly, assessing and providing the strategic advice associated with a potential recommendation for a superannuation borrowing scheme presents some interesting conundrums: should a client be borrowing to invest in the first place, and if so, is it more effective to do so inside or outside super?

Secondly, just keeping abreast of the developments in the superannuation borrowing field is a challenge in itself for financial advisers - super borrowing is a relatively new area of law, which is evolving rapidly. 

Strategic advice 

In the wake of the global financial crisis, both advisers and clients are likely to feel some trepidation about 'gearing up'.

It is clear that the Australian Securities and Investments Commission and the courts will look unfavourably on any advice that recommends gearing up if it is inappropriate to a client's circumstances. So the first challenge for financial advisers is justifying a gearing recommendation.

If gearing can be justified, then a further issue is whether it's more effective to do so inside or outside of superannuation.

At first glance, the superannuation alternative might appear the obvious choice - lower tax (15 per cent in accumulation phase) on income and a low or nil effective capital gains tax (CGT) rate upon realisation appear overwhelmingly attractive features for a gearing scheme.

Unfortunately it's not that straight-forward. The lower super tax rate on income is attractive if the gearing scheme results in positive taxable income.

But if the scheme results in net income losses each year (i.e. negative gearing), then the tax benefit of those losses will be greater with a higher marginal tax rate, such as 38.5 per cent or 46.5 per cent.

If a gearing scheme is negatively geared throughout its duration, then superannuation will only provide a better result if the capital gains implications favour super, and more than offset the less optimal income position of super. 

Case-by-case analysis is generally required. Modelling tools to assist financial advisers understand the issues and help with this type of analysis are emerging.

Legislative development

The superannuation borrowing rules were introduced in 2007 and have evolved substantially since. On the whole the developments have resulted in clearer and easier rules for SMSF advisers to work with. But keeping abreast of a new and evolving area of law and SMSF practice is a significant challenge.

The following table summarises the major developments, and provides a snapshot of the areas where further development is pending.

In addition to these larger issues, a range of interpretative issues remains outstanding, and can be followed by financial advisers by tracking NTLG minutes, the Australian Taxation Office (ATO) announcements and industry commentaries.

So, although many SMSF advisers will be drawn to the area of superannuation borrowing, they will be challenged by the provision of client advice on the issue and by staying up-to-date with a rapidly evolving area of law. But nothing worthwhile comes easily!

David Barrett is a division director and Head of MAStech within Macquarie Adviser Services, Macquarie Bank. 

Note: This article is based on laws and regulator views current at the date of preparation, 4 May 2012. It is not intended to be treated as financial, tax or legal advice and does not take into account any individual's financial situation, needs or objectives. Neither Macquarie Bank Limited ABN 46 008 583 542, Macquarie Group Limited ABN 94 122 169 279, nor the author accepts responsibility for reliance on this article.