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15. Pay Maximum Superannuation Contributions Before You Re-pay Your Loans

It is better to pay maximum superannuation contributions rather than re-pay loans, and our standing instructions to doctors include advice to not re-pay loans until the maximum superannuation contributions have been completed each year.

In some ways your SMSF can be thought of a tax effective loan reduction sinking fund. Instead of re-paying part of your loans each year, out of after tax dollars, and without any tax relief, you instead pay extra superannuation contributions each year, reduce your tax bill, and enjoy concessionally taxed, or even tax free, investment earnings, and then withdraw the benefits tax free at age 60 and pay off the loans.

This is particularly where the debt is deductible business or investment debt, and has a relatively low after tax cost of interest, and where the doctor is approaching age 55. We acknowledge that younger doctors with non-deductible home loans may prefer the emotional satisfaction of paying off the home loan quickly over the rational satisfaction of maximizing overall financial results.

Thoughts to bear in mind include:

there are ways of converting expensive non-deductible home loans to lower cost business or investment loans;
doctors should be more debt tolerant than most due to:
- the height of their incomes;
- the scalability of their incomes;
- the stability and security of their incomes; and
- the longevity of their incomes;
doctors can borrow in a tax efficient way to pay deductible superannuation contributions; and
whenever you expend cash at a time that you have a loan, you are in effect borrowing for that expenditure since you could have instead used that cash to pay back that loan, so non-debt based superannuation contributions are tantamount to debt funded contributions if the contributor is not debt free at the time the contributions are paid.