Sent: 16-03-2010 10:05:15
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Instalment Warrants & Super Funds
During the past week two Federal Ministers issued Press Releases and Treasury issued one discussion paper about instalment warrants including the use of these products within super funds.
The government has gone a long way to accommodate these investment structures and their changes appear to provide a reasonable level of certainty for these structures.
Once topic of discussed was the concept of Shareholder Applications.
This is best explained by an example: suppose you own shares in XYZ company which is currently trading at $10. An Installment Warrant provider has a five year Instalment over this share which can be purchase for $5.20 capital. If you purchased this with your current shareholding the provider would send you $4.80. To regain full ownership of all the shares this loan would have to be fully repaid.
Prior to December 2002 it had been assumed that Shareholder Applications were okay for Instalment Warrants.
At that time the ATO and APRA announced that they believed these types of transactions contravened the super laws because they argued that it amounted to placing a charge over the fund's assets which of course, in general, is not permitted.
With this type of structure no one was really sure if CGT applied with the Instalment Warrant was taken out. It was always assumed that it wasn't the case.
The Treasury paper says that for CGT purposes the law will be changed to ensure that it doesn't apply to Shareholder Applicants. Elsewhere it goes on to say that the "trustee of a superannuation fund that invests in a traditional instalment warrant over a single exchange traded security will be covered by both proposed rules." That is the Instalment Warrant provisions in the super laws and the income tax rules proposed in the discussion paper.
Perhaps this implies that Shareholder Applications will be allowed for super funds and their listed equities.
If this is the case then this would be a sensible outcome. I suggest that you don't take any action in relation to this until appropriate legislation is finalised (assuming that this actually does occur).
Even more sensible is the fact that the Ministerial Press Releases and Treasury discussion paper also seem to imply that Instalment Warrants and more particularly that the superannuation gearing arrangements are with us for the long haul.
This would also be another sensible outcome.
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