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Self Managed Super Fund (SMSF) Article
Instalment Warrants & SMSFs

By Tony Negline.

This article may be out of date.

2nd April 2008

Click here to buy - A How To Book of SMSF's by Tony Negline

An Instalment Warrant (IW) is similar to buying something on lay-by.  You make a down payment and after a period of time pay the outstanding capital.  Like all lay-by arrangements, if the outstanding amount is not paid the original down payment is generally not returned to the putative purchaser.

There is one very important difference between IWs and normal lay-by arrangements.  IWs charge interest and other costs on the amount of money outstanding.

Except for some limited exemptions super funds cannot borrow unless the borrowing is non-recourse.  That is, if the borrower decides not to pay out the outstanding loan then the product provider cannot get back the loan balance from the purchaser’s other assets.

IW providers use options protect themselves.  These are only exercised if the product’s purchaser decides not to pay the outstanding debts.  The option enables the product provider to sell the shares so that they receive, at least, the outstanding loan so they do not end up loosing any capital.  The cost of this option is often part of the borrowing costs.  If the loan is repaid then the investor will get to own their shares outright.

Many SMSFs have used Instalments to purchase ASX listed shares.  They have done this for a variety of reasons such as they want to buy shares for an initial lower cost that they believe would appreciate over a period of time.

Whilst an IW is running, the investor still gets all the dividend payments and franking credits which may be very valuable to a super fund.

IW Shareholder Applications enable an investor who already owns shares to place those shares into an IW.  The warrant product provider takes the shares into the product and the loan created by the provider results in a cheque being forwarded to the investor.  The investor is then free to do whatever they like with the proceeds.  In December 2002 the tax office and the APRA decided that Shareholder Applications contravened the super laws.

For example suppose you own shares in XYZ company which is currently trading at $10.  An IW 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.  At some point this loan would have to be repaid.

One innovation only a few years old is called Self Funding Installments.  This product structure takes the annual dividends and uses them to automatically pay the annual interest expense.  Any money left is then used to repay some of the capital borrowed.  The beauty of this product is that it dramatically simplifies the administration and cash flow impacts of IWs for the investor.  Unfortunately it doesn't reduce the bookkeeping requirements.

Recent super law amendments have made it clear that super funds can invest in IWs (Sec 64A of the SIS Act) and it would appear that many people are using these new rules not only for ASX listed shares but in ways not necessarily intended.  For example, antique cars and coin collections.  Unlicensed accountants should think carefully about recommending IWs to their clients.

On 4 April the ATO released some very important documents about Instalments (  It’s fair to say that there are many issues about IWs which are causing the ATO concern.  In particular it said that it doesn’t like non-commercial interest rates (ie non-arm’s length) being charged.  It is also alarmed about the capitalization of interest and the use of personal guarantees secured beyond the charge over the asset purchased using assets of SMSF members.

Anyone contemplating these types of transactions will need to make sure that they establish their Security Trust appropriately and have clear documentation in place especially the loan agreement (which needs to contain provisions for what happens in the event of default).

It is reasonable to expect that at some stage the government may remove access to this opportunity.

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