D.I.Y. Superannuation and purchasing property using warrants

[nonrecourse]

Purchasing property in your (Do it yourself) DIY super fund,(also called SMSF) has been for many in the too hard basket, unless you had a business because of the restriction on D.I.Y.superannuation funds borrowing. In the early 1990's many got around this restriction by setting up a unit trust with a $2 company as Trustee and then had their D.I.Y. fund purchase units in the trust.

The Trustee of the Unit Trust (controlled by the super fund)then used these funds as a deposit to purchase a commercial property that was mortgaged in the name of the Unit Trust. For many small to medium businesses this was an intellegent and tax efficient means of providing a secure location to operate their business as well as providing a valuable superannuation nest egg.

By setting up a proper commercial lease between the business and the trust the increasing rental income over time paid down the mortgage. In the early years if the business was growing slowly some of the building space could be sublet providing additional income to the trust. In addition the members super contributions were used to purchase more units in the trust thereby allowing further extra payments against the principal.

Because of the low tax environment, increasing rental income, members contributions and diminishing interest charges and increasing property values this "super" investment turned into a compounding juggernaut that knocked the socks off any other investment option.

But alas so superior was this investment that the big commercial superannuation funds lobbied the Treasury and as of 11 August 1999 this option was closed off with the in-house assets restriction S.66 (1) that precluded gearing in a unit trust above 5%).

A grandfather clause was inserted into the act called Subdivision D Transitional arrangements in relation to the in-house assets, 71A pre 11 August 1999 investments and loans

If you were fortunate enough to have set your trust up before 11 August 1999, initially you were allowed to continue with your borrowings until 30 June 2009.

Fast forward to 2006 and the senate enquiry after the ATO and APRA ruled that share investment warrants were deemed to be borrowings which contravened the Superannuation Industry Supervision ("SIS") Act that many of these same commercial superannuation funds had advised their clients to participate in The penalty had this ruling by the ATO been sanctioned was the funds would have lost 45% of the market value of their clients funds

What came out of left field was that because shares warrants were allowed to continue the property investment warrants which was also quietly starting to develop slipped through.

What this means is the "super" property investing opportunties that occurred prior to 11 August 1999 have not only returned but are better why?

The holy grail for any sophisticated investor is to be able to preserve your initial capital, aka nonrecourse loans !!!!!

Warren Buffett has two rules for investing;

Rule #1 Preserve your initial capital
Rule #2 Refer to rule #1

With the new rules put in place the financial institutions are required to provide the property installment warrant with the SMSF providing an initial 30% installment and a nonrecourse loan!!

 

[JIT]

Thanks nonrecourse,

We've been discussing this here since early 2006:

http://www.somersoft.com/forums/showthread.php?t=23915&highlight=quantum

Do you know any more details about these sorts of products?

Thanks.

 

[nonrecourse]

Trying to find out more

Thanks nonrecourse,

We've been discussing this here since early 2006:

http://www.somersoft.com/forums/showthread.php?t=23915&highlight=quantum

Do you know any more details about these sorts of products?

Thanks.

Hello;JIT;
I started a new thread because I wanted to raise a number of other points as well about purchasing property in super. I did read your earlier thread but I forgot who posted it and couldn't find it again.I also read Geoffw's thread about the Bulletin article which spurred me on to do a bit more research.

Last Wednesday I attended Day 2 of the National Tax & Accountants Association Seminar www.nta.com.au/ entitled Super Schools which covered all the recent changes plus a section entitled State-of-the-art Super Investment Structuring Strategies, pages 141-163. and was presented by Dan Butler the solicitor mentioned in the Bulletin article.

The installment warrant method of purchasing property was mentioned late in the afternoon. As the only, or one of the only non accountants and or financial advisors my impression was for most of the people there, property was not on the radar for most of those attending and looking at advising clients.

My question from the floor about redrawing funds from a pre 11 August 1999 unit trust and using this as the installment was confirmed as being available if you have the grandfathered Trust. He also mentioned that super contributions as well as the trust income and undeducted contributions could be used to pay down the installment warrant over time!

I was concerned about the in-house assets rule but it seems the pre 11 August 1999 unit trust to use his words is a golden goose egg that those fortunate enough to have stumbled onto it are now reaping the reward.

As for the Quantum warrants, we can all do better than that. I don't fancy purchasing property in a block that is then managed with the profits skimmed into someone elses pockets. The buildings depreciate its the land that appreciates. Rather than going for a package off the shelf warrant, a bit of lateral thinking and putting it in front of your bankers is the way to go.

I have mentioned it to two mortgage brokers as well as my personal banker and drew blank looks with them all. That is probably why JIT; not many have shown interest.

Next Wednesday we have set up a meeting with my nab manager to explore the warrant issue as the ink on the legislation is hardly dry. I would also expect that the 30% installment will be closer to 50% which is what you'd expect with a nonrecourse loan.

Will do a bit more leg work and report back.

 

[JIT]

Rather than going for a package off the shelf warrant, a bit of lateral thinking and putting it in front of your bankers is the way to go.

If possible, this is what I'd prefer to do too.

Next Wednesday we have set up a meeting with my nab manager to explore the warrant issue as the ink on the legislation is hardly dry. I would also expect that the 30% installment will be closer to 50% which is what you'd expect with a nonrecourse loan.

Will do a bit more leg work and report back.

Great stuff, let us know how you go.

Seems like there's a lot of potential with this product if you can structure it appropriately with a decent property, with a reasonable LVR and finance costs, and without too many problems with banks.

 

[Pat]

Hi

I'm following this with a number of parties so that we can advise our clients who love direct property and it is my understanding that you will be able to choose your own property and will be required to have a 20% deposit plus 1.5 years of interest in your SMSF thus requiring at least $120,000-$150,000 in your SMSF to purchase a property in todays market. The loan will be non-recourse so Warren B is going to be **** a hoop.

I'm gradually extracting details and will give you full details within the next few weeks when these parties are ready to launch.

Sounds like you will need a specialist financier from my digging so far, the local bank won't do.

Stay Tuned

 

[Big Aussie]

Watch for the ATO to come after this with the proverbial sledgehammer!
They have long been dirty on SMSFs purchasing warrants, and are exceptionally dirty on non-recourse loans.

I’m also not sure why you’d WANT to purchase an 80% leveraged property in a SMSF?

 

[nonrecourse]

The ATO has to comply with the Law

Watch for the ATO to come after this with the proverbial sledgehammer!
They have long been dirty on SMSFs purchasing warrants, and are exceptionally dirty on non-recourse loans.

I’m also not sure why you’d WANT to purchase an 80% leveraged property in a SMSF?

G;day Aussie to answer your two questions; 1; yes the ATO has been dirty on warrants particularly with non recourse loans which is why the recent law changes which were initially aimed at shares but has also given SMSF's the ability to safely gear into property.The Ato just like you and me has to comply with the laws enacted by our democratically elected government.

As for your second question of why you'd want to purchase an 80% leveraged property in an SMSF....(with a non recourse loan at best it would be 70% and more realistic 50% leveraged) 2; mate, leveraging is not just about tax savings, using other peoples money is a great wealth builder full stop.

Have a look at a section of the new legislation below that is now LAW and will forever change how some people will invest in property through their SMSF;
Chapter 3
Investment in instalment warrants by
superannuation funds
Outline of chapter
3.1 Schedule 3 to this Bill inserts an exception to the borrowing
restriction contained in section 67 of the Superannuation Industry
(Supervision) Act 1993. This will allow superannuation funds to invest in
instalment warrants of a limited recourse nature over any asset a fund
would be permitted to invest in directly.
3.2 It also inserts a new provision in the in-house asset rules
contained in section 71 of the Superannuation Industry (Supervision)
Act 1993. This will provide that an investment in a related trust forming
part of an instalment warrant arrangement which meets the requirements
of the borrowing exception will only be an in-house asset where the
underlying asset would itself be an in-house asset of the fund if it were
held directly.
Context of amendments
3.3 Section 67 of the Superannuation Industry (Supervision)
Act 1993 prohibits superannuation fund trustees from borrowing money
(with certain exceptions, primarily relating to short term liquidity). The
borrowing prohibition has been in place since the 1980s, and is one of a
number of rules in superannuation legislation designed to limit risk in
superannuation fund investment.
3.4 Sections 82 and 83 of the Superannuation Industry (Supervision)
Act 1993 prohibit superannuation fund trustees from retaining or acquiring
in-house assets representing more than 5 per cent of the value of all the
fund’s assets.
3.5 Subsection 71(1) of the Superannuation Industry (Supervision)
Act 1993 states that an investment in a related trust of the fund is an
in-house asset of the fund (subject to the exceptions set out in Part 8 of the
Superannuation Industry (Supervision) Act 1993).
Tax Laws Amendment (2007 Measures No. 4) Bill 2007
122
3.6 Regulation 13.14 of the Superannuation Industry (Supervision)
Regulations 1994 states that a trustee must not give a charge over, or in
relation to, an asset of the fund. This does not apply in relation to certain
charges specified in Regulation 13.15A, however these relate only to
options and futures contracts provided the superannuation fund meets
certain conditions.
3.7 Over a number of years instalment warrants have been marketed
to superannuation funds, particularly self-managed superannuation funds.
Instalment warrants are a derivative-based investment product, in that
they derive their value from the underlying asset. Traditionally, such
arrangements provide the investor with the right, but not the obligation, to
buy the underlying asset through the payment of instalments. Investors in
instalment warrants have a beneficial interest in the underlying asset,
subject to a security interest held by the issuer that secures the payment of
later instalments. Once the investor has made the first instalment they are
likely to be entitled to income from the underlying asset (eg, dividends
from shares).
3.8 The Commissioner of Taxation (Commissioner) (responsible for
regulating self-managed superannuation funds) and the Australian
Prudential Regulation Authority (APRA) (responsible for regulating other
superannuation funds) have come to the view that these arrangements
constitute a borrowing for the purposes of section 67 of the
Superannuation Industry (Supervision) Act 1993.
3.9 The Commissioner has also determined that an investment by a
self-managed superannuation fund in an instalment warrant is an in-house
asset of the fund under section 71 of the Superannuation Industry
(Supervision) Act 1993.
3.10 The Government has decided to legislate to legitimise
investment by superannuation funds in instalment warrants. The precise
scope of this measure has been determined following consultation with
industry. This Schedule gives effect to that decision.
3.11 Funds that invest in instalment warrants must continue to
comply with other legislative requirements. Furthermore, fund trustees
are still required to demonstrate the appropriateness of including
instalment warrants in their investment strategy.
Summary of new law
3.12 An exception to the prohibition on borrowing in section 67 of
the Superannuation Industry (Supervision) Act 1993 will allow a
Investment in instalment warrants by superannuation funds
123
superannuation fund trustee to borrow money in accordance with an
arrangement that has the following features:
the borrowing is used to acquire an asset that is held on trust
so that the superannuation fund trustee receives a beneficial
interest and a right to acquire the legal ownership of the asset
(or any replacement) through the payment of instalments;
the lender’s recourse against the superannuation fund trustee
in the event of default on the borrowing and related fees, or
the exercise of rights by the fund trustee, is limited to rights
relating to the asset; and
the asset (or any replacement) must be one which the
superannuation fund trustee is permitted to acquire and hold
directly.
3.13 In addition, the in-house assets rules are amended to provide that
an investment in a related trust forming part of an instalment warrant
arrangement which meets the requirements of the borrowing exception
will only be an in-house asset where the underlying asset would itself be
an in-house asset of the fund if it were held directly.
Comparison of key features of new law and current law
New law Current law
Subsection 67(4A) of the
Superannuation Industry (Supervision)
Act 1993 will provide an exception to
the borrowing prohibition for
borrowings that meet certain conditions
commonly found in instalment warrant
arrangements.
Section 67 of the Superannuation
Industry (Supervision) Act 1993
prohibits superannuation fund
trustees from borrowing money
except in limited circumstances,
primarily related to short-term
liquidity.
Subsections 71(8) and (9) of the
Superannuation Industry (Supervision)
Act 1993 will provide that an
investment in a related trust forming
part of an instalment warrant
arrangement which meets the
requirements of the borrowing
exception will only be an in-house
asset where the underlying asset would
itself be an in-house asset of the fund if
it were held directly.
Section 71 of the Superannuation
Industry (Supervision) Act 1993
defines ‘in-house assets’ to include
an investment in a related trust of the
fund.
Tax Laws Amendment (2007 Measures No. 4) Bill 2007
124
Detailed explanation of new law
3.14 An exception to the prohibition on borrowing in section 67 of
the Superannuation Industry (Supervision) Act 1993 will allow a
superannuation fund trustee to borrow money in accordance with an
arrangement that has the following features:
the borrowing is used to acquire an asset that is held on trust
so that the superannuation fund trustee receives a beneficial
interest and a right (but not an obligation) to acquire the legal
ownership of the asset (or any replacement) through the
payment of instalments;
the lender’s recourse against the superannuation fund trustee
in the event of default on the borrowing and related fees, or
the exercise of rights (typically a put option) by the fund
trustee, is limited to rights relating to the asset at the time of
the action. These rights may include taking possession of, or
disposing of, the asset; and
the asset (or any replacement) must be one which the
superannuation fund trustee is permitted to acquire and hold
directly. The asset may be any asset (eg, real property, works
of art in certain circumstances or listed securities) a fund
would be permitted to invest in directly. The existing
investment restrictions, such as those on in-house assets and
acquiring certain assets from a related party of the fund,
continue to apply.
[Schedule 3, item 1, subsection 67(4A) of the Superannuation Industry (Supervision)
Act 1993]
3.15 An investment in a related trust forming part of an instalment
warrant arrangement which meets the requirements of the borrowing
exception in subsection 67(4A) of the Superannuation Industry
(Supervision) Act 1993 will only be an in-house asset under section 71
where the underlying asset would itself be an in-house asset of the fund if
it were held directly. [Schedule 3, item 2, subsections 71(8) and (9) of the
Superannuation Industry (Supervision) Act 1993]
3.16 This means an investment in an instalment warrant will not be
automatically counted against the in-house asset limit. However, the new
provisions will not allow fund trustees to circumvent the existing in-house
asset rules. Where the underlying asset would have been an in-house
asset had the superannuation fund invested in it directly, an investment in
the instalment warrant will be an in-house asset. Where the acquisition of
such an asset would breach the in-house asset rule if it were held directly,
Investment in instalment warrants by superannuation funds
125
the investment in an instalment warrant over that same asset will not be
permitted.
Example 3.1: Limited recourse
ABC shares currently trade for $2.
The T. Do Super Fund (the Fund) buys an instalment warrant over an
ABC share for $1.10 from Bank X (the Issuer) on 1 January 2007.
The completion payment is $1 to be paid on 1 January 2008.
The Issuer acquires an ABC share for $2, effectively loaning the Fund
the completion payment on a limited recourse basis. The share is held
by a separate security trust.
The extra 10 cents the Fund paid constitutes a pre-payment of the
interest on the $1 loan and charges to cover the Issuer’s risk.
During the year, the Fund receives all dividends that ABC pays to its
shareholders.
On 1 January 2008 the Fund has the option to pay the completion
payment of $1 and gain full ownership of the ABC share.
Alternatively, the Fund can choose not to pay the $1 final instalment,
in which case the issuer could sell the share and pay the Fund any
excess in proceeds over the $1 loan. Should the ABC share sell for
less than $1 (the value of the loan) the Issuer cannot recover the
shortfall from the Fund.
As the rights of the Issuer are limited to the rights relating to the ABC
share, the requirements of subsection 67(4A) of the Superannuation
Industry (Supervision) Act 1993 are satisfied.
Example 3.2: In-house asset restriction
Five per cent of the Fields Family Super Fund’s assets are in-house
assets for the purposes of section 71 of the Superannuation Industry
(Supervision) Act 1993.
The trustee of the fund is prohibited from acquiring further in-house
assets by section 83 of the Superannuation Industry (Supervision)
Act 1993.
Therefore, the trustee can not use an instalment warrant arrangement to
acquire a beneficial interest in another in-house asset, for example, an
investment in an instalment warrant over a share in a company
controlled by a member of the Fields Family Super Fund, as this would
breach the in-house asset restriction.
Tax Laws Amendment (2007 Measures No. 4) Bill 2007
126
However, the trustee can use an instalment warrant arrangement to
acquire a beneficial interest over an unrelated asset, for example, listed
shares in an unrelated company. As the underlying asset would not be
an in-house asset if held directly, the investment in the instalment
warrant trust will not be an in-house asset and there will be no breach
of the in-house asset restriction.
Example 3.3: Replacement asset
The Lees Family Super Fund buys an instalment warrant over shares in
RK Company from Little Lender.
RK Company merges with JF Company. RK Company shares are
reissued as shares in RKJF Co as a scrip for scrip roll-over.
The instalment warrant continues with shares in RKJF Co as the
replacement asset.
This arrangement is covered by subsection 67(4A) of the
Superannuation Industry (Supervision) Act 1993.
Giving a charge over an asset
3.17 ‘Shareholder application’ style instalment warrants generally
involve the use of a fund’s existing equity holdings (traditionally, but not
limited to, listed shares) to purchase instalment warrants. That is, the fund
trustee transfers the legal title of an existing asset to a security trustee in
exchange for instalment warrants over that asset. The fund trustee may
also receive cash, generally the difference between the price of the
warrant and the market price of the asset.
3.18 The Commissioner and APRA, in their roles as regulators of
superannuation funds, have determined that such an arrangement involves
the fund trustee placing a charge over an asset of the fund (Joint Press
Release of 16 December 2002). The operating standard set out in
Regulation 13.14 of the Superannuation Industry (Supervision)
Regulations 1994 prohibits a trustee from giving a charge over, or in
relation to, an asset of the fund.
Application and transitional provisions
3.19 These amendments will apply from the day this Bill receives
Royal Assent.
3.20 Existing technical breaches will continue to be managed through
the discretionary powers of the Commissioner and APRA.

 

[Laup]

Borrowing via SMSF

People with SMSF may find this interesting

http://www.investors.asn.au/G730Tcon071126.asp

 

[Dareyou2]

Im very interested in this and hope the banks will bring out a product that will be reasonable

 

[Qlds007]

NR

Residential you will not find the NAB at the moment wil have a bar of it although i can tell you from the top they are considering such a product over the coming months.

I have one or two loans with the NAB and have been dealing with National Acceptance for the last 10 years due to the size of our portfolio.

Commercially it is ready available.

 

[Pat]

Im very interested in this and hope the banks will bring out a product that will be reasonable

Hi Mr/Ms Dare,

The Banks are now out there with their finance but it is the tax advantages that make this type of investing so attractive, especially now that you can choose the property that best suits your long term retirement needs.

 

[MikeF]

Leveraging SMSF's

In September last year the Federal parliament approved an amendment to the Superannuation Industry (Supervision) Act 1993 (the Schedule 3 to Taxation Laws Amendment Act 2007 which inserted a new subsection 67- 4A) which effectively allows Self Managed Super Funds (SMSF) to acquire property with leverage. Prior to this SMSF were not able to leverage property investments.

There is at least one lender that I know of that will be soon be in a position to fund IP (both resi & commercial) via SMSF as a consequence of the the above legislative amendemnets.

An important feature of this new SMSF funding arrangement is that it allows individuals to find their own properties. This is an important point as it differentiates from many others lenders who link up with developers often to sell stock using warrants.

The basic provsions including benefits of the new law can be found in an article by Lynch Meyer Commercial Lawyers (htttp://www.lynchmeyer.com.au/pdf/Taxation_Dec07.pdf).

When you borrow to purchase a negatively geared property investment, you get a tax deduction in respect of the interest you pay (less rental income received), but you have to repay the principal in post tax dollars.
Our new SMSF loan goes beyond negative gearing and provides “Super Leveraged Property Investment” where principal repayments are made virtually from pre tax dollars (that is, income taxed at the concessionary, 15% contribution tax rate).

To put all that another way, the cost of a $500,000 investment property, when purchased with a Seiza SMSF loan, would be less than $317,000 in post tax dollars.

The potential advantages of purchasing an investment property within an SMSF are further enhanced by the fact that, depending on the status of the SMSF at the time of disposal, the total gain should be entirely free of CGT (or, at worst, subject to an effective tax rate of 10%).

 

[Pat]

Yes Mike the advantages are numerous and your explanation of Principal repayments just shows what the power of the salary sacrificing can do with the Property Warrants. As you've mentioned the banks are now ready to lend at reasonable rates and you can choose your own property.

 

[JIT]

Yes Mike the advantages are numerous and your explanation of Principal repayments just shows what the power of the salary sacrificing can do with the Property Warrants. As you've mentioned the banks are now ready to lend at reasonable rates and you can choose your own property.

Hi Pat,

What's the interest rate, LVR, initial and ongoing finance costs, loan terms (interest only, P&I etc.)?

Thanks.

 

[Pat]

Hi Jit,

The Interest Rate will be 1-1.5% above the normal home loan interest rate so about 9.2-9.7%. A premium is paid for the fact that the lender is limited to sell your property to recover his money and cannot touch any of your other SMSF assets. In other words ironclad asset protection especially with the fact that if you are under financial attack under your own name they cannot touch your super.

The highest LVR allowed with the warrants is 80%.

Apart from the higher interest rate there will be an initial upfront establishment fee of between 1-1.5% of the loan amount but we expect this to be further reduced with negotiation and competition over the next couple of months.

There's an establishment fee required to the warrant holder of about $350.

The only ongoing finance fee, apart from the interest rate, is an annual fee, again to the warrant holder, of $650.

The standard term will be 15 years, however the warrant can be rolled into a further term at the end of this period, or paid out earlier. There will be options regarding interest only or paying off some principal.

 

[Dareyou2]

Hi All

When I heard about the legislation change in late December,i thought great this is something i can do.I went down to the bank and thought id have a chat and they said their financial advisor was booked till the middle of January,so i made an appointment.

That appointment was held yesterday.

I went in and told the financial advisor about setting up a SMSF where she quickly gave me a Colonial "Your Choice" booklet and various documents that were spitting out of the pinter,followed by -

"we don't handle that kind of thing".

When i asked about property instalment warrants,the fun began.

If you had of seen her face,it was like i was talking in a different language.After looking at me blankly for about 5 minutes while i was explaining how i am led to believe they work,she excused her self and left the room.

When she re entered the room she advised me that the bank was still deciding how to handle this new law and that the powers to be were in a "think tank" how to handle it all.When i asked how many enquiries she had had about Property Instalments,she addmitted I was the first and had caught her off guard.

All the information i have got of this thread has been refreshing from what I recieved yesterday, I honestly think the banks are sitting back waiting for some kind of format so they can adjust it to suit there own regulations.

Greg

 

[Pat]

Hi Greg,

The big four banks are preferring to lend through innovative suppliers who have done all the legal work regarding the warrants. The stamp duty issues, capital gains tax issues, establishment requirements and the accompanying documentation are not easy.

Your Blank Bank is not surprising.

 

[JIT]

Hi Jit,

The Interest Rate will be 1-1.5% above the normal home loan interest rate so about 9.2-9.7%...

Thanks Pat. Looks like the fees have started to come down, at least compared to what Quantum had to offer some time back.

 

[Dareyou2]

Some Good Advice Just In

As many of you will know, the 24th of September 2007 will go down as a red letter day for anyone comfortable with property as a direct investment. Prior to the 24th it was a difficult proposition within a super fund, but not so now.

This was the day, of course, when instalment warrants within a super fund became law. You may be thinking well big deal, so let me remind you of the advantages:

1. You can buy direct property and gear this investment within your super fund
2. The loan is non-recourse (that is the maximum extent of loss is your deposit. You cannot be personally liable for the debt)
3. The loan has no impact on your ability to borrow outside the fund
4. The investment is in an asset protected environment
5. If the property is sold after your retirement than no capital gains tax is payable
6. Your super guarantee and salary sacrifice contributions to super is going into a specific investment of your choosing

Hallelujah! But… (there’s always a but, isn’t there). The reality requires a little sobriety. This is because charlatans and others of similar ilk, have bolted from the stalls like a favourite in the Melbourne cup in promoting the opportunities herein. Be wary of the vast array of people out there presenting this way and that way of doing it.

The questions to ask of any group promoting instament warrants include:

1. Is financing available (l’ll address this in a moment)?
2. Are the owners or promoters of the properties associated?
3. Are the developer or builder of the properties associated?

In effect, is the instalment warrant promoter entirely independent of the properties for sale?

If not, ask yourself why they need super fund sales to sell the properties. Could it be they’re targeting super fund people to garner better than market prices for the property? Surely not.

A healthy skeptic might also wonder, if a property developer is involved, is it because they are looking to offload properties that aren’t perhaps ideally located. The rule of thumb, l suggest, is to make sure that at the very least you select the property to invest in, not take their ‘suggestions’.

Now to finance. The issue of a bank loan is not a small one, as the current market conditions are placing constraints and limitations on anything the banks are unfamiliar with. Whilst banks still like bricks and mortar, as soon as the loan is attached to a trust structure, and is non-recourse in nature, they may kick up a little. Get finance arranged before entering a warrant contract.

Finally, make sure a DIY super fund is the vehicle for you.

Regardless of how attractive the idea of controlling your own fund may be, it is important to remember that Superannuation is a complex area and setting up a SMSF involves a substantial commitment on your part. You need to be across all the details.

It is also vital to know what superannuation entitlements can be transferred and which may not. For example, federal government employees and employees whose super is in a defined benefit fund, will most likely not be able to move. Find out also if you can choose where to have your super contributions paid.

Investing in a super fund is a long term plan. Make sure adequate insurance is in place or contingencies planned for, such as maternity leave, redundancy, illness and so on. None of this means taking out an instalment warrant is bad, just be aware of your ongoing commitments and how and when you can get out the warrant and at what price.

So in summary, make sure that:

- Funding is going to be provided;
- The product is a financial product;
- The provider is independent;
- You can select your own property;
- Ensure you have the ability to establish your own self managed superannuation fund;
- You have at the very least $100,000 in super, and that you can transfer that superannuation to your own self managed fund;
- You have the ability to direct your future superannuation contributions to your own self managed fund; and
- Most importantly, that your future contributions will be sufficient to cover the interest costs of the warrant and that the running costs of the fund.

Property investment within super will be exciting for many. Rest assured the new year will provide a host of offerings from those happy to help us with our investment choices. Run a sharp eye over them so that you can deck your future halls.

 

[Pat]

Hi Greg,

1. The Property Instalment Warrants we will be offering our clients over the coming weeks will not be linked to any developer. The properties will have to be sourced by our clients because we do not offer financial advice. So if you want to buy a house in residential Melbourne or a unit in inner Brisbane it is up to you or your agents to source the property. Total Independence there.

2. The finance is tied into the warrant. There will be some who will offer a Debt Instalment Trust and then you can do your own sourcing of finance and that is when you will meet with resistance. If you go into the instalment warrant make sure the supplier has the finance and can quote the fees and interest rates.

3. Your warning regarding the complexity of SMSF has merit. Potential purchasers must understand their obligations, the financial requirements and their personal insurance situation. Life Insurance is claimable in Superannuation so purchasers must make sure that if they have insurance under their existing super this will need to be addressed by themselves or a financial planner before they roll into the SMSF. Also if they don't have Life Ins. or if it is outside super now would be the time to address this and if it is something that the purchaser would like then they now have a tax deductible environment for this usually private expense.

4. I would suggest that potential purchasers have a minimum of $120,000 in combined super.

5. Despite the Federal Government passing Choice of Super Laws a couple of years ago, there will still be some people who may face a strong union when attempting to direct their 9% Employer Super to their SMSF. Also some people employed in the emergency services should be checking their Super Funds for the generous Defined Benefits that some still receive.

Positives abound for those investor savvy people who want to Deck the Future Halls