Benefits of Instalment Warrants

Don’t let the $25K contributions cap spoil your retirement plans. Westpac Instalment Warrants (SFIs) are one of the few eligible geared equity investments for self-managed super funds (SMSFs).

Being strategic about your super can help you build the savings you need for the retirement you want. Self-Funding Instalments (SFIs) provide one way to overcome the limitations of the $25,000 contributions cap and make the most of your SMSF super contributions.

Andrew’s super challenge

Andrew is 45 years old. He manages his super, with his adviser, through his SMSF. The maximum amount Andrew can contribute to his SMSF at the concessional tax rate of 15% is $25,000 a year. He is concerned that this limitation may force him to postpone some of the plans he has for his life after work.

How to get more out of his super contributions

Once the 15% contributions tax ($3,750) has been paid, there is $21,250 left to invest. Andrew, in his role as Trustee of the SMSF, decides to invest in Australian shares. Andrew and his financial adviser think that shares in the Commonwealth Bank of Australia (CBA) have good growth and dividend prospects over the medium term so he decides to invest the contributions in CBA shares in his SMSF.

Andrew, as Trustee of the SMSF, has the option of:

  • Investing directly in CBA shares, giving a $21,250 exposure; or
  • Increasing exposure to around $28,812 by investing in a Westpac SFI over CBA shares.

The benefits of using Westpac SFIs

  • After-tax contributions of $21,250 can be used to create $28,812 exposure to CBA shares.
  • The additional exposure has the potential to generate excess returns if the CBA share price rises.
  • The expected dividends will be used to reduce the loan amount (the SFI’s second instalment).
  • As the annual interest cost ($443) is lower than the forecast dividend yield ($1,397), the investment can be self-funding.
  • By increasing the expected franking credits by $158 each year, the tax payable can potentially be reduced.  

The table below provides a summary of the outcomes for Year 1*. 

Year 1 Comparison Buy CBA Shares (CBA) Buy CBA SFI's (CBASWG1)
Investment Amount $21,250 $21,250
Security Price (1)  $74.45 $54.83 (2)
Number of Securities 285 387
Share Exposure $21,218 $28,812
Forecast divident income p.a.* $1,029 $1,397 (3)
Forecast franking credits p.a.* $441 $599 (3)
Forecast taxable income p.a. $1,470 $1,996
Potential interest deductions p.a. (4) $0 $617
Tax payable at SMSF tax rate of 15% nil nil
Forecast excess franking credits $220 $392

1 Prices sourced from Bloomberg and IRESS on 13 August 2013. CBASWG was geared at 50% at commencement and expires on 30 June 2016. 

2 The first instalment includes prepaid interest for Year 1 and the cost of protection for the life of the loan.

3 Dividends are used to pay down the second instalment so whilst they form part of assessable income, they are not received by the investor.

4 Initial Interest Rate applicable on the Loan Amount for the SFI is 5.17% p.a. – this amount may vary. The RBA indicator lending rate for standard variable housing loans plus 100 basis points (7.20% as of July 2013) has been used to determine the deductible interest amount.

* This example (including the Forecast dividend income p.a. and Forecast franking credits p.a.) is for illustrative purposes only and uses rates and figures that we have selected to demonstrate how the product works. It cannot be relied upon as any indication of the outcomes of the investment. Past performance is not a reliable indicator of future performance. The following assumptions also apply: the SMSF has absolute beneficial ownership of the securities and there is no bare trust; there are no corporate actions during the holding period of the SFI by the SMSF; any contribution by Andrew for the second instalment, maturity payment etc could count towards the contributions cap; Andrew has no other superannuation contributions other than the $25,000 contribution above; adviser service fees and brokerage costs have been excluded from this analysis. Individuals earning more than $300,000 will have an additional 15% tax on deductible superannuation contributions.

With Westpac SFIs you can:

  • Build a portfolio of shares and ETFs for less initial outlay.
  • Use a conservative gearing strategy to accelerate your returns without margin calls or the need for a credit assessment.
  • Enjoy the benefits of direct share ownership including the potential for capital growth, dividends and franking credits.
  • Access a low maintenance investment. There are no annual payments to make as interest (offset by any dividends) is added to the loan amount each year.
  • Buy and sell SFIs on the ASX.

But you can’t ignore the risks

  • If the price of the underlying security falls, the price of the SFI will generally fall. Gearing can magnify losses as well as gains.
  • The interest that Westpac capitalises to the loan may be higher than the dividends received from the underlying securities, causing the loan amount to increase.
  • Any rise in interest rates will increase the amount added to the loan as interest.
  • Tax legislation may change and affect any tax benefits or obligations.

These are not all the benefits and risks of investing in Westpac SFIs. For more information please see the SFI Product Disclosure Statement.

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