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Self Managed Super Fund (SMSF) Article
Margin lending vs Super

By Tony Negline.

This article may be out of date.

3rd November 2004

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Recent NATSEM (National Centre for Social and Economic Modelling) research has revealed that an average 50 – 69 year old Australian has $83,000 in super assets.

Not very large numbers but it is not all doom and gloom because about 65% of people in this age bracket also own their home outright.  The NATSEM research shows that upon retirement many Australians use some of their super to pay off their remaining home loan.

Most people will not have to worry about having super assets greater than their lump sum or pension Reasonable Benefit Limit.  This year’s lump sum RBL is about $629,000.

When an investor is lucky enough to have lots of super assets the system applies high tax rates to the assets above their RBL.

RBLs have been around for many years but during the Hawke/Keating Government the purpose and scope of RBLs was greatly expanded especially in July 1990 when the requirement to report benefits for RBL assessment purposes to a government agency was introduced.  The then government claimed that the changes were necessary “to ensure that the distribution of [tax] concessions is more equitable”.

At a conceptual level the policy sounds very straightforward and would also appear to have some merit.

The problem has been implementing these simple concepts in the real world.  The practical application of this policy has had big problems from day one.  A few years after the RBL reporting and assessment system started, a friend of mine had the temporary job (in a department with two permanent and fifty temporary staff) of catching up on RBL paper work for the regulator and had to write to individual taxpayers often requesting additional information so that a benefit could be assessed for RBL purposes.  On quite a number of occasions his letters were sent to taxpayers who had been dead for up to two years.  You can imagine the reaction.

Most experienced professionals don’t fully understand all the nuances that the RBL rules can present.  The system is ready made for mistakes at every level and unless you know how the system works you will never know how the problems can arise (so that you can stop them happening) and also how to solve these problems when they occur.

As the NATSEM figures imply the number of people bumping into RBL trouble are tiny.  But each year their numbers are increasing.

RBLs can be a big turn if an investor is deciding between more super or some other investment structure.  Most people approach making super contributions from the following perspective:

It’s not a good story and super often looses.

But if you’re not going use super to fund your retirement what other investment vehicle would you use?

Recently St George Margin Lending published some interesting research which shows that using a margin loan could ultimately produce a better result than super.  The research looks at someone who already has, or can reasonably expect to have, super assets greater than their pension RBL (this year about $1.238 million).

The analysis has been done over a 15 year period and compares making a $20,000 salary sacrifice super contribution each year (which incurs the maximum super surcharge) with a $10,300 contribution to a margin lending arrangement which is 50% geared.  The $10,300 represents after tax amount of taking $20,000 as salary and paying 48.5% tax.  St George has assumed that both these amounts increase by 4% each year.

After 15 years the super fund, if it achieves a 7% return per annum, is worth about $504,000.  If the super were to be taken as a lump sum, then the tax on the excess benefit (at 48.5%) could reduce the after tax benefit to about $260,000.

On the other hand, the margin loan, with an initial 50% gearing ratio, is worth $362,000 after paying off the margin loan.  The margin loan investments are assumed to earn 3% income and 4% capital growth.  After allowing for capital gains tax the margin loan is worth $316,000.

However St George has taken this research one step further.  They have had a look at what happens if the $504,000 in excess super is used to start an allocated pension and compared it to an allocated pension purchased with the net proceeds of the margin loan into super as an undeducted contribution.

After allowing for tax at the highest marginal tax rate, the excess super allocated pension produces an income of $16,500.  The allocated pension purchased with the margin loan money produces a post tax income of $19,300.




Net Amount



Minimum Allocated Pension (age 65)



Net Income




Clearly anyone with excess super benefits needs to think carefully about the longer term benefits of accumulating more super.

How can an employee stop their employer making Super Guarantee contributions?  If the employee can show (using appropriate documentation) that their total super assets are higher than their pension RBL then they can irrevocably elect not to have SG contributions made for them.  As this research shows, it might be a wise move.

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