property warrants, page-3

Hey Will

as promised, here's some info that I've come across in the past month or 2:

Instalment Warrants in SMSF

An Act was passed 10/2007 which effectively allows a super fund to borrow money on a “Limited Recourse” basis to invest in any asset that is not an in-house asset.

It is important to note that this does not mean that a super fund can simply go out and borrow money & invest in anything. The prohibition on borrowing in a super fund was NOT changed, an exception was made for Instalment Warrants.

As a result of the changes, investment is now allowed via a very specific type of trust - a "Debt Instrument Trust" (DIT), that facilitates the Instalment Warrant.

The Instalment warrant typically works like this:
The fund provides $1 and you borrow $1 (the proportion will depend on the lender, the security, and the investment vehicle). The $2 is put into a DIT and the investment is purchased by the DIT. The super fund gets 100% of any income return and capital gain, AND pays the interest.
Critically, the super fund can ONLY offer the investment within the DIT as security. If the lender requires additional security you must arrange additional security from sources outside the fund. The fund CANNOT offer any of its other assets as additional security.

The lender can be a bank, margin lender, or even you the Trustee/member or a related Party. Seek advice if you want your company to lend the funds to the SMSF, as it may cause Div.7A issues.

Although property instalment warrants have been getting the publicity, the DIT can invest in anything that the SMSF itself could otherwise own: residential or business real property, shares, managed funds or collectables.

It’s not just open slather though. The investments must be purchased at arm’s length, and restrictions still apply to related party transactions eg. you still can’t buy paintings, cars or residential property from the member or family.


Hope this is of interest.

cheers, Nugget