Gearing residential property in your Super Fund

QUESTION: I want to gear residential property into my Self Managed Superannuation Fund. Does the Superannuation Deed I purchased from LawCentral www.lawcentral.com.au allow gearing of residential property?

ANSWER: "Gearing" is when you borrow money to buy an asset. "Negative gearing" is when you borrow so much money that the income from the asset does not cover the interest repayments. You therefore lose money. You can claim this loss off your taxable income. (Hopefully, the capital gain, the low tax rate of capital gain and the lower tax rate you have been paying all those years outweighs the losses.)
The gearing that has been allowed for shares has recently been extended to real estate (residential and commercial, both are fine). This is through a complex derivative called an Instalment Warrant.

Superannuation regulators view Instalment Warrants as borrowings. Since you can't borrow in a Superannuation Fund, you couldn't have property Instalment Warrants. The Government has changed the borrowing provisions for Superannuation Funds. Now property Instalment Warrants can be used.

The Government went further than anyone expected - Instalment Warrants can be issued by anyone to a Superannuation Fund (not just those on listed securities). Further, there is no requirement for there to be a secondary market for the warrant.

In effect you can choose the residential property you want to buy. Alternatively, you can purchase units in the Residential Property Trust of Australia (an unlisted property trust).

For our Platinum Members that paid their $99 to upgrade I have set the requirements of a valid warrant.

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