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Borrowing rules and gearing into shares and property investments

Borrowing or gearing inherently carries more risk than normal saving – both the potential gains and losses are multiplied. You can choose to mitigate this loss by buying into a structured product that offers capital protection, but these products are more complicated to understand and the insurance of the loss is undertaken by using derivatives (put and call options).

Is borrowing and gearing right for you?

If you are in the Young Accumulator cycle (see "Utopia's Five Cycles of Superannuation" tab for more information) and have just entered the workforce, you might want to achieve geared share exposure by selecting an institutional superannuation fund that offers a geared share fund option, along with regular investment options.

On the other hand, if you own a self managed super fund (SMSF) there are a lot of choices, such as:

  • Investing in a managed fund that offers geared share fund exposure
  • Investing in a structure product that gives exposure to ASX20 or ASX200 direct shares – these are capital protected
  • Investing directly in shares using a 50% margin loan – just be aware that your SMSF may need to find cash in the event of a margin call

When it comes to borrowing, S67(4A) of the SIS Act now allows SMSFs to borrow if the following conditions are all met:

  1. The loan is, or has been, applied to the acquisition of the asset
  2. The asset must be able to be acquired (i.e. a residential property can be bought from an arm’s length person, but it cannot be bought from a related party)
  3. The asset is held on trust by a different trustee to the trustee of the super fund (called a Bare Trust arrangement)
  4. The rights of the lender are limited to the asset in the event of a default (i.e. other super fund assets are not put at risk)
  5. The rights of the lender to sue the trustee for payment of the loan are restricted to recourse on the asset only

Borrowing and gearing into share and property investments shouldn’t be taken lightly. A careful and considered approach is vital. If you would like more detailed information about borrowing and gearing – advice that’s relevant to you and your specific requirements – contact our superannuation and investment advisers in Perth .