Dish me an Installment Warrant - Super Funds can now borrow

In the past few months, much of the chatter and commentary about super has been about Installment warrants and how to get as much gearing as possible in super. By now, everyone who is someone, in SMSF industry, has said or written something about Sec 67 (4A) - the new exemption on borrowing for super funds.

How much money is invested though your super account is a very important issue, as gearing bonanza basically means a very handsome and fat pension beginning. The motivator for such frenzied interest in property installment warrants is that it promises pouring new (borrowed) money in SMSF, which will deliver you a huge tax-free pot of gold when you retire, provided property beats inflation in future, as it has in the past.

No CGT on sale of investment property + no tax on future salary sacrifice + Tax free super benefit once you are over 60 -  seems all too good to be true, but there's more, the real cake is tax free income of super fund earnings when the SMSF is in pension phase. This fact never seems to get the attention it deserves, which beats paying income tax on assets which are outside of super. Literarily, days of Negative Gearing are over and "Super-Gearing" is the magic word.

When you retire, you have two options - either to cash out your super and invest outside super or start an income stream. With no maximum withdrawal limit allowed in new account based pension, taking 100% of balance of account as an income stream equates to taking a lump sum.

Under the new pensions, it will no longer be tempting to want to grab the bundle of cash that has been locked away (preserved) for years and invest outside of super. Further, since RBL's are gone, there is no limit on how much a person can accumulate for retirement and take out tax free once over 60.

Taking your money out of super should no longer be the most tax-effective decision, unless any income outside super from super balance is below the joint couple tax free threshold - remember, if you are over 65 you are also entitled to Senior Australian Tax Offset along with low income rebate taking joint tax free income for a couple up to $38,000 outside super.

If you are an advisor and your clients are in Negative Gearing situation with assets such as shares, managed funds or property, you should be advising them to sell these assets and invest with installment warrant gearing capability within super. With the result, that funding for any negative comes from salary sacrifice, which otherwise would be taxable in clients hands. Your clients may be allowed to keep their own home as the only other asset outside super - as no capital gain tax is paid on sale, before or after death.

But how long these tax advantages will last is anybody's guess. One would assume, as long as the labor government budget is in surplus it is unlikely that they will tinker with super. However, in times of global recession, when corporate profits are down, anything is possible, including taxing super incomes paying an income stream, otherwise, no sensible government should upset grey voters.

If the writer was over 60, he would sleep, every night with all fingers and legs crossed. Because, It's all too unbelievably good!

How to dish out an Installment Warrant

All major professional bodies have run seminars explaining to their members "what is an installment warrant" and how to install the structure for your clients. 

But the big question on everyone lips is "who is lending the money on non-recourse loan". Four such lenders were exposed in a newspaper article in Sydney Morning Herald recently, of which two take personal guarantees from SMSF members for repayment of loan.

Personal guarantees from members is considered by ATO to be contrary to the intent of the exception mentioned in subsection 67(4A) of the SIS Act - as the exception only applies to limited recourse borrowings; a personal guarantee may result in recourse being made to the other assets of the SMSF, to read other objections raised in ATO Tax Alert TA 2008/05 click here.

Other two lenders offer low LVR's and one of them may only lend for commercial property.

It seems, lending to SMSF will end up to be a big business (if Hon. Nick Sherry allows it - after the budget), as many major lenders are coming up (waiting for budget) with new products. Some of the characteristics of this new form of lending offering :

• Minimum loan amount will be $250K.
• Lenders will offer borrowing IW structure (bear trust) for free.
• There will be 1%  (or more) entry fee for the structure.
• Lender will insist that SMSF deed be amended by a new clause - ensuring that SMSF can borrow and charge "beneficial assets" owned by them.
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If the new labor government decides not to disallow this new structure in the first budget -  it seems that IW in SMSF is here to stay - however, this will cause some

major issues, such as :-

1. Amendment to the trust deeds before purchasing assets with an Installment  warrant;

2. Train our accountants to correctly record for installment warrants in SMSF books of accounts;

3. Train our SMSF auditors to correctly audit  SMSFs with an Installment Warrant.

On 2^nd above watch out for next newsletter on correct accounting and tax treatment of installment warrant loan.

FIRST TRUST DEED  FREE