Using Superannuation for Investments
There is a large difference between using superannuation money for investments or using your taxable income for investments.
Super may have a taxable and tax free component but it is a simple procedure to make a taxable component of your super tax free. You should have consulted with your investment adviser or googled how to withdraw money from your super and re-contribute it as a non-concessional component to make your super tax free.
When you have reached age 60 you can generally withdraw a lump sum from your super tax free.
We have seen in sessions 10 that tax free money is worth more than income from work or other investments.
We have seen in sessions 10 that a tax rebate is more than a tax rebate. In the 30% tax bracket a 30cts tax rebate is worth 42.86cts of income and in the top tax bracket it is worth 81.8cts.
We have also seen in session 20 that you should never use your own money and always consider borrowing money for investment.
Interest on a loan is a tax deduction
If you use money withdrawn from your super to pay interest on a loan you get a direct tax refund of 30% (or higher). This is the equivalent of a return of 42.86%
This makes investment with borrowed money so powerful.
Also, if you borrow money you are beating inflation.
You are paying back a loan with deflated money.
Never use your own money.
You want to use your superannuation to buy an investment property.
If you are paying tax, the biggest advantage of investing in property is the tax deductibility of interest on a loan.
Only buy investment property with borrowed money.
How do you change cash into borrowed money
A convenient way is to invest the cash in bank shares ( or any other shares paying franked dividends) and then use those shares as a security for a loan.
Ideally you should pick a share with a franked dividend that pays the interest on a loan.
Most larger company have a franking credit rate of 30% which means you effectively get a tax rebate at the 30% level. A tax rebate is tax free but your income is taxable. What is the equivalent income for a tax rebate of 30% . Every 30cts of tax rebate is the equivalent of 42.9cts of income because if you pay tax of 30% on 42.9cts of income you get 30cts
Assume interest rate on a loan is 6% . What is the equivalent franked dividend to pay for this interest. A franked dividend of 4.2 % is the equivalent of 6% of income which will pay the interest on a loan.
If we use the bank shares strategy, dividends will pay the interest on a loan and any capital gain (say 6% on bank shares) is a profit. Also bank shares are liquid and you can cash in part of your shares for emergencies.
If you use superannuation to buy the investment without a loan the effective return of your cash is the interest you save on a loan.