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Self-managed super
Be wary of promoters - instalment warrants in SMSFs
Damien Palmer - January 7, 2008
 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 (we’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, we 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.
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 edition of CompareShares:
Stock picks: Fund Manager Stock Picks - Siemens and Standard Chartered Bank
Stocks: 2008 sector & stock outlook
Stocks: 2008 sector & stock outlook part 2 - sector and stock picks
Investing: Gangbuster returns from Aussie microcaps
Superannuation: Borrowing in a SMSF
Commodities: Still bullish on global commodities story
SMSFs: Be wary of promoters - instalment warrants in SMSFs
Markets: Wall St skids amid recession fears
Rates: Major banks may follow NAB rate rise
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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