Individuals looking to implement a negative gearing strategy to invest in residential property should do so outside of their SMSF, an accounting firm partner has said.
“For us from a tax perspective negative gearing within self-managed super funds isn’t the best structure,” HLB Mann Judd wealth management partner Jonathan Philpott said.
“If you want the best benefits from it, do it in your own name because the higher marginal tax rate [involved] will give you a greater tax benefit.”
Philpott pointed out trying to take advantage of negative gearing inside an SMSF structure was not the only flaw his firm was seeing with trustees wanting to invest in residential property via borrowings.
“One of the big problems is often these self-managed super funds only have the single property within the fund,” he said.
“So if we do go through a bit of a downturn with the property market, given the fact a loan takes so long to repay, with contributions and rent coming in, often this fund has only got that single property in it for a really long period of time and you end up with a super balance that is a lot lower than what it would have been if they’d just simply left their super in an industry or retail super account.
“So just the investment return itself is a big risk.”
He also warned the strategy was exposed to interest rate rises in the future especially for individuals wanting to undertake a gearing strategy now in order to benefit from the current low interest rate environment.
That in turn could create cash-flow problems for the SMSF members, he said.
“Typically you’re only really wanting to put in your superannuation guarantee contributions plus some salary sacrifice contributions to meet the repayments of the loan,” he said.
“If interest rates go up, you need to be putting more money inboard, more of your own personal cash flow, and if you have a personal mortgage or something like that, you’re really directing funds away from where they should be going.”