Aaron Dunn, CEO of Smarter SMSF, said although there is little detail about changes that may be implemented to the current negative gearing rules, SMSFs do not usually use the strategy for tax purposes.
Generally, personal investment portfolios use negative gearing on borrowings and losses to offset income and capital gains tax. However, SMSFs are only taxed at 15 per cent, much lower than most income tax rates, so as the investment strategy is to make a profit, negative gearing is not relevant to SMSFs.
“Negative gearing is not as prevalent in the SMSF sector, and it is not a strategy that many funds would use,” Dunn said.
“That’s not to say there may be some people who may look at it purely in an investment context but the contributions coming in cover what any shortfall would be. Using negative gearing for growth may make sense, but 15 per cent tax in super versus 45 per cent in negative gearing as a rule means the majority of funds aren’t doing it.”
David Busoli, principal with SMSF Alliance, said the concept of negative gearing in SMSF is difficult to achieve even if a trustee wanted to.
“Banks won’t do more than a 70 per cent Loan to Value Ratio and if you do have that ,or 50 per cent on shares, you are then not going to be negatively geared,” Busoli explained.
“That is why the limit is set at 70 per cent under safe harbour provisions so in most cases SMSFs will be neutral or positively geared.”
Busoli continued that negative gearing is only effective if there is a decent tax rate and as SMSFs have a maximum of a 15 per cent tax rate, it’s not really an effective strategy in the SMSF environment.
“It’s hard to do. If you’re dealing with a bank it won’t do it and private loans have to satisfy safe harbour provisions at 70 per cent so you wouldn’t be able to achieve a negatively geared situation even if you wanted to,” he said.
I’d actually argue that ‘negative gearing’ isn’t used in an SMSF context. It is, albeit not as common or easily obtainable via an SMSF as doing it in your personal name.
SMSFs can borrow up to 80% (sometimes higher via specialist lenders), and with interest rates at 7% to 8% coupled with standard depreciation deductions; the deductible expenses outweigh the income generated from most properties.
For higher-income earners it’s normal for them to have the maximum concessional contributions of now $30,000 per year each hitting their SMSF (mix of employer and personal), so the negative gearing does absorb some of this extra income at a fund level while the individuals are claiming the PERSONAL tax deductions via their additional concessional contributions.
In summary negative gearing is possible in an indirect way.