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Self-managed super
Buying your dream home in your DIY fund
Damien Palmer - October 17, 2007
 Just over a week ago the Tax Laws Amendment (2007 Measures No. 4) Act 2007 received Royal Assent. Now, that that probably means about as much to you as the eating habits of a Nepalese Llama. But it’s actually rather exciting… bear with me for a moment!
Buy your dream home
What if I said the range of investment choices for your SMSF has just exploded to include a whole raft of derivative products, including property instalment warrants. You can now, for example, buy your dream retirement home on the coast with an instalment warrant in your SMSF. Gradually paying it off, until you sell your main, tax-free home and move into your new dream palace. All the while paying it down in the tax-attractive super environment. The world is our oyster!
The detail – and the caveats.
It comes back to the fundamental reasons for having a self managed fund (SMSF) in the first place. Up until recently, it was about (usually) direct share investments plus choosing which retail funds you invested in. Really, it was about choice in the way you funded your retirement. It’s now about the way you want to live in your retirement, as well as the funding thereof.
That is, if you want a piece a real estate but don’t have enough super to buy outright, you can now do so using a structured financial instrument such as an instalment warrant. Over time, you buy the investment outright with additional salary sacrificing and the super guarantee.
Super can now be strategic, rather than just about money.
This is appealing for those readers who want their super fund to buy an investment property and retiring to it later. Borrowing to do so in the mean time, which until now has not been possible. The appeal is salary sacrificing into super which has greater tax benefits generally than negative gearing. You can also ‘borrow’ into super. That’s right, even though you do not have enough in super to buy the property outright, superannuation property instalment warrants are here, and available right now as of last week.
Be careful
So this must be good, right? Well maybe. Care is the imperative word. As with any property choice, buy the right property, not a property that’s a ‘super’ deal. Be aware that the promoter may be a property developer and the instalment warrant lender has a vested interest.
Be wary of all the fees and charges in any instalment warrant, such as management fees, annual reset fees, excessive interest rates, initial application costs. Don’t look at the percentages, but rather the actual amounts you have to pay.
Property warrants
Understand your liabilities. But most importantly, can you get out of the warrant if you have to? Your circumstances may change over the years. There could be heavy early exit fees, higher interest costs in the event of default, or high sale costs.
What about shares – now easier?
Shares now may be rather more complex! The options wary widely from a simple instalment warrant to self funding warrants. Choice is sometimes more confusing than just having plain vanilla. The same ‘watch out for the fine print’ rules apply. Don’t be fooled by advertising suggesting they’re easy. Understand warrant brokerage and switching costs which can wary widely.
The moral of the story is that whilst instalment warrants have a lot of appeal due to the de facto borrowing involved, don’t be distracted from the most important issues:
1. You need to buy good quality underlying investments
2. You need to buy good quality underlying investments
3. Know your super guarantee and salary sacrifice can cover the interest expense and can pay out the outstanding loan.
Other options are available such as ungeared unit trusts, and deferred settlement plans. These are simpler but not widely known about. This article focused on instalment warrants. You should consult an appropriately qualified and experienced adviser before committing your money. Understand what you want and ask your adviser to recommend the option best suited to you.
Damien Palmer is the principal of Super Outsource, and prior to this was a superannuation expert at Deloitte Touche Tohmatsu, Ernst & Young and AM Corporation.
More articles from this week's newsletter:
Analysis: Market crash signals
Markets: Local market to drop on memories of '87
Stock picks for the long haul: Mineral Resources (MIN) and The MAC Services Group (MSL)
Election: Who should win on November 24?
Smart Investing: Rewind 1987: the lessons 20 years on
Markets: US market plunges on crash anniversary
Resident Trader: How to profit from volatility - part 2
Trading: Learn from the Barings Bank rogue trader's mistakes
Stock of the week: Malachite Resources NL
Commodities: Raging oil bull feeds euphoria
Expert Panel: Trading international shares using CFDs
Superannuation: Buying your dream home in your DIY fund
Expert Panel: Why buy an instalment warrant instead of a share
Whatever your views, you can discuss this article - or any of Damien's articles - on our message board Your 2 Cents. |
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