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Leveraging SMSF with SFIs

Leveraging Using Warrants
 
Warrants are issued by banks and other institutions and are traded on ASX. They are (broadly) split into trading-style and investment-style products and provide an alternative way to gain exposure to a variety of assets such as shares. In fact, warrants known as ‘instalments’ provide full exposure to the benefits of share ownership.
 
Warrants – The Benefits
  •  Diversify your exposure to the sharemarket
  •  Achieve leveraged exposure to an underlying instrument (example BHP Shares)
  •  Protect the value of your share portfolio
  • Generate an income stream through franking credits and dividends
Investing Using Self-Funded Installment Warrants
 
Investment warrants have a number of features that make them attractive and suitable for investors seeking a medium to long term exposure to an underlying asset. Investment warrants (instalments) provide capital protection, entitlements to franking credits and dividends, and potential tax benefits.   Self funding instalments (SFI’s) are a variation on the ordinary instalment structure and dividends from the underlying share are retained by the issuer in order that they reduce the loan balance of the SFI. The investor is still entitled to franking credits, which may reduce his tax liability. This, of course, is particularly important for Self Managed Super Funds.
 
Benefits of Self-Funded Installment Warrants
  • Potential ability to accelerate capital growth
  • Compares favourably to a direct share investment
  • No ongoing payments - cash flow neutral*
  • Optional second payment
  •  Increased exposure to dividend income and franking credits
  •  Potentially tax effective – (deductable interest and franking credits)
  •  Long-term self funding geared investment
  •  A leveraged investment with no margin calls
  •  Low administration
  • Can be used by Self Managed Super Funds (SMSF) seeking geared investments with low cost and low administration
Managing contributions tax within your Self Managed Super Fund (SMSF)
 
A Super fund is an excellent way to invest money for your retirement and by utilising the additional control offered by a Self Managed Super Fund (SMSF), you can make good use of the investment benefits of Super in order to help you reach your investment goals sooner.
 
Recent legislation changes relating to superannuation and proposed increasse from 9% to 12% Super Guarantee (meaning 1.8% will be tax) have increased the appeal of Super saving along with the ability for everyone to contribute.
 
SMSF Tax Management Strategy
 
If an investor is contributing funds to their SMSF, contributions tax can have a significant impact on returns, especially over the longer term. A simple way to potentially offset contributions tax and increase the number of franking credits available to your fund, while gaining long term share exposure, is the Self Funding Instalment (“SFI”).
 
There are two reasons why SFIs are a popular investment within SMSFs. Firstly, since an SMSF is taxed at 15% while company dividends (fully franked dividendes) may be franked at the company tax rate of 30%, the fund may be able to earn excess franking credits on any fully franked dividends on the underlying shares. These excess franking credits can then be used to offset earnings and tax liabilities. Additionally, the leverage effect of SFIs may increase the number of excess franking credits available to the fund. Secondly, SFI’s provide the fund with exposure to a share for a fraction of the price. 
 
As the following table illustrates, by gaining exposure to this portfolio of shares, Derek may generate $2,092.08 in excess franking credits from the fully franked dividends. The excess credits can then be used to offset the tax liability of contributing $13,947.20 to the SMSF. With Derek expecting to contribute $50,000 on a yearly basis, he would reduce his contributions tax liability significantly, from $7,500.00 to $5,407.92pa.
 
In contrast to this, investing in the SFI portfolio may accelerate the number of excess franking credits. Derek may generate $7,600.39 in excess franking credits and this may offset the tax liability on contributions up to $50,669.27. This would result in Derek reducing his contributions tax liability from $7,500.00 to zero and gaining a refund of $100.39pa.
 
Prior to investing however, Derek should be aware that there is no guarantee that the underlying shares will pay any dividends and that he may need to adjust the amount he invests accordingly.
 

To learn how to leverage your superannuation and reduce the tax on contributions using Self-Funded Installment Warrants book your FREE financial planning meeting online now or call 13000 iMoney (1300046566) and see how easy it is.

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