Recent changes to the superannuation rules now allow superannuation funds to gear, provided the gearing is structured in accordance with the new rules.
Instalment warrants are an example of a gearing structure that may comply with the new rules. An instalment warrant is a geared product where a portion (usually half) of the asset is paid upfront and a final instalment is paid at a later date.
The investor is entitled to income payable on the whole of the asset during the life of the warrant. The asset is held by an interposed trust and ownership does not pass to the fund until the final instalment or debt is repaid.
The structure is similar to the Telstra 3 instalment offerings, except instalment warrants have an in-built interest payment attached to the instalment to cover the borrowing for the final instalment.
It is important to note, especially for DIY investors, that the new super gearing rules are not confined to investments in listed share instalment warrants offered by financial institutions but allow the investor to establish their own geared investment structure provided they satisfy the strict conditions of the new rules. The key conditions are:
? The super fund rules already allow the fund to invest in the asset directly anyway, such as listed shares, real property, or even artwork;
? The asset is held in trust; and
? The loan on the investment product is limited in recourse to the underlining asset only.
It is also necessary for the investment in the gearing products to be provided for in the super fund trust deed, as well as covered in the fund’s investment strategy and most importantly, to have the sole purpose of providing retirement benefits to the fund members.
Also trustees must make sure that the geared investment does not provide for a charge (such as a mortgage) over an asset of the fund, as this prohibition in the super fund rules has not changed.
In the case of listed share instalment warrants, cash applications for instalment warrants are permissible under the rules, whilst shareholder application is not. In other words, converting existing shares into instalment warrants is not allowed as the fund’s assets would be used as security.
Fund trustees should seek professional advice if they have any doubts as to whether a geared investment product complies with the super fund investment rules. Contact
Anthony de Jager of our office for advice
Also it must be kept in mind that instalment warrants and other geared investment products can magnify investment gains when successful, but it can also increase losses if investments fall in value.
It’s important that fund trustees fully understand the risks associated with this form of gearing.
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