The real benefit of using superannuation to purchase investment property

Use superannuaton to buy investment propertyWhen buying investment property the most valuable benefit of the superannuation and gearing strategy is the tax effectiveness of repaying the loan.

Very simply, repayment of any loan principle is not a tax deductible expense (interest, depreciation and associated costs are).  This means that any principle payments must be made with after tax dollars.  Under the non-superannuation principle you would need to gross up your income to allow for your marginal tax rate, pay the tax to net the income and then repay the loan.

So, for someone who has a taxable income between $37,000 and $80,000 their marginal tax rate is 34%.  This means that to repay $1,000 off the principle they would need to gross $1,515.  The outcome is worse for those on higher marginal tax rates.  Superannuation, on the other hand, is taxed at a universal rate of 15% so there is less gross income needed to repay the same loan.  For the same $1,000 of principle payment, the gross income needed is $1,176 which equates to very significant savings.

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