SHARES INSIDE SUPER AND SMSFs

Most people will already have some exposure to shares if they have ever been employed, ie. via their super fund.

We encourage people to consider putting up to the maximum tax-deductible contribution limit of $25,000 p.a. (at the date of writing, but can be higher depending on your age) each year into super to primarily invest in shares (if you are eligible to do this, ie. business owners, self-employed, and some employees; alternatively if you are an employee, check if your employer allows “salary-sacrificing” of super) – but, only if you have the excess cash savings to afford this.

And, to consider doing this before making principal payments off the loan on your principal place of residence (PPOR) and/or investment properties.

To elaborate on this further, when faced with the option of paying down debt versus growing your overall gross asset base, we generally opt for growth, but only if it is safe and affordable to do so.

In addition, the tax advantages of super make the long-term returns on your money invested here much greater, and so the earlier you start investing in this structure the better your long-term returns will be.

However, this approach is mainly suited to people with higher disposable incomes.

If you are on a lower income, are very young (<30 y/o) and/or have higher commitments, then making this sort of yearly contribution into super may be much harder, and you may be better off initially focusing on paying off your PPOR loan and/or gradually buying affordable residential investment properties instead.

Or, making annual contributions into super that are smaller and more affordable for you.

We also encourage people to consider setting up a self-managed super fund (SMSF) as early as possible, and contrary to standard commentary on this, with a balance as low as $50,000-$75,000.

Regardless of the fees and relative cost efficiencies of operating a SMSF with such relatively low balances, the experience of taking control and managing your own long-term retirement fund is priceless, and we believe the sooner you learn to do this by yourself the better.

These days low-cost online SMSF administration providers are doing accounting and audit fees for under $1000 p.a..

We also prefer to use SMSFs primarily to invest in shares initially, rather than property – with the exception of owning your own business premises.

SHARES OUTSIDE SUPER

Holding some shares outside super with excess cash savings may also be beneficial, but generally only when your non tax-deductible PPOR debt has been paid off.

To explain this further, if your PPOR home loan interest rate is at 7% p.a., paying this loan down or putting money into your home loan offset account is the equivalent of earning 12% p.a. before tax in a term deposit or bond, or as a total return from shares – this is very hard to beat, so paying your home loan off in this instance is a pretty good option as it is a virtually risk-free strategy.

The only times where it may make sense not to pay down your non-deductible PPOR debt are when you compare this to making tax-deductible contributions into super and/or using borrowings to invest in property (or shares), as the effects of tax-deductible contributions and leverage in these situations, as well as compounding capital growth on a larger asset base, may give you an even better long-term investment outcome.

GEARED SHARE INVESTMENTS

If you do purchase shares outside super, although it is generally safer to do so with cash, the use of very conservative borrowings (ie. at a <30% loan-to-valuation ratio/LVR through margin lending) may be appropriate in some circumstances.

You can also invest in shares outside super using borrowings from loans or line of credits secured against any residential investment properties you own and/or your own PPOR, but doing this will mean that you are effectively at 100% LVR with your share investments (albeit without the threat of a margin call as with margin lending).

Adopting this sort of strategy involves additional risks though, particularly given the volatility of share prices which may mean that at times you are in a “negative equity” position.

As such when investing in shares in this way you need a very clearly articulated and focused approach, as well as a long-term timeframe.

Although it certainly won’t suit everyone’s risk tolerance and personality, it can be a very effective strategy nonetheless and we tend to suggest this approach for people who already have equity available in their residential investment properties and/or PPOR, and who don’t want to or can’t (due to the nature of their financial position) invest directly in commercial property for further diversification into income-generating assets.

A further strategy involves adding a margin loan to the share investments funded by these loans/line of credits, and although again can be very effective, involves significantly greater risks and much more “active” risk management.

We will describe how we do this in more detail later on as this website develops.

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