SFIs – A positively geared investment in Self Managed Super Funds

“SFIs – A positively geared investment in Self Managed Super Funds” is by Macquarie Warrants and Structured Products (warrant issuer) – March 2006

With the growth in Self Managed Super Funds (SMSFs), financial planners and investors are continuing to focus on the equity market to boost long term portfolio performance.  Adding shares to a SMSF allows the fund to benefit from capital growth, regular income streams and tax benefits through franking credits.  While shares have traditionally been the investment vehicle of choice in SMSFs, Self Funding Instalments (SFIs) have become a popular alternative by adding further value to the fund.

What are SFIs?

Self Funding Instalments are an ASX listed investment that allows your clients to buy shares, listed property trust and Exchange Traded Funds on a part payment basis.  Paying approximately 50% of the share price upfront, the remaining balance represents a loan which is due at a future date, generally up to 10 years.  Unlike other forms of borrowing this is an optional loan that carries no risk to the client.

SFIs are similar to other forms of instalments where you benefit from any capital appreciation and dividends (and franking credits) just as if you had purchased the shares outright.  However, SFIs have some additional features which make them appealing for SMSFs:

  • Pay a portion upfront with NO further ongoing payments for up to 10 years. A set and forget strategy
  • Interest (prepaid up to 12 months) and future prepaid interest components are added to the loan on an annual basis, generally June 30.  This is referred to as the Annual Interest Date.
  • Dividends are retained by the issuer and reinvested back into the SFI repaying the outstanding loan. 

The objective of a self fund instalment is to achieve a positively geared investment where the dividends paid outstrip the interest charged, therefore paying off the loan over time.

Extracting the benefits of Franking Credits

While the dividends are reinvested back into the loan, the franking credits continue to flow through to the client.  In a SMSF this can be used to create an ‘earnings and contribution shelter’, which potentially reduces the tax liability to the fund on a yearly basis.  The following case study illustrates how this works and the benefit of SFIs in a SMSF.

Case Study: Using SFIs in a Self Managed Super Fund

  • Peter and Jane have a SMSF and expect to retire in 20 years
  • They make regular contributions to their SMSF of around $50,000 per year and are looking for ways to reduce the contributions tax as well as generate better investment returns
  • They have a long term investment time horizon and are comfortable with gearing conservatively into blue chip shares.
  • Peter and Jane receive advice from their financial planner to purchase ANZ shares.  This was based on the expected long term performance and attractive fully franked dividends
  • The following table compares the outcome of investing $50,000 in ANZSMU versus ANZ shares.

  Buy ANZ Shares     Buy  ANZSMUs     Calculations  
Investment $50,000 $50,000  
Price# $25.69 $12.69 Primary market price
Investment comm
Units purchased 1,946 3,939 Investment / Price
Dollar exposure to ANZ $50,000 $101,193 No. of units x ANZ Share Price
Forecast Dividend   
Income ($1.20 DPS)  		 $2,335.30 $4,726.80 Units x Forecast Dividends
Forecast Franking
Credits (100%)		 $1,000.80 $2,025.77 Dividends x 3/7
Gross Taxable Income $3,336.00 $6,752.57 Income + Franking Credits
Potential Deductions N/A $4,017.78 Assume 12 monthsinterest
Taxable Income $3,336.00 $2,734.79 Income - Deductions 
Tax payable (15%) $500.40 $410.22 Taxable Income x 15%
Excess franking credits $500.40 $1,615.55 Franking credits - Tax Payable
Contribution & Earnings
Shelter		 $3,336.00 $10,770.35 Excess / 15%

* Based on Macquarie Research Equities forecast dividends as at 13.01.06
# Based on secondary market pricing using ANZ share price of $24.52 on 13.01.06

  • Investing $50,000 in ANZSMUs allowed Peter and Jane to gain exposure to $94,156.80 of ANZ with no ongoing future payments
  • The ANZSMU investment will generate $1,534.63 in excess franking credits on an annual basis
  • This means Peter and Jane can make a contribution of $10,230.86 into their SMSF without having to pay 15% contribution tax

How to implement this strategy

  • Download the current copy of the SFI PDS from an issuers website and print the ‘Cash Application Form’.  See Warrant Issuer contact list
  • Select which share holding(s) you wish to convert into SFIs
  • Complete the ‘Cash Application form’ and send it to the Warrant Issuer

Please note that to include SFIs in Self Managed Super Funds this must be reflected within your investment mandate
 
For more information on this strategy and Self Funding Instalments call Macquarie on 1800 080 010 or email warrants@macquarie.com.au.

About Macquarie Bank (Warrant and Structured Products Issuer)

Macquarie Bank has established itself as the market leader in the Warrants and Structured Products market for over 15 years.  As the inaugural issuer of the first ASX listed warrant in 1991, Macquarie's long standing presence in the market has allowed it to continue to innovate new and exciting products for a variety of investor groups. 

Macquarie's highlights include; developing the ever popular instalment warrant in 1998 and the first ASX listed Capital Guaranteed product (Capital Plus) in 1999.  In recent years Macquarie has continued to innovate launching the first Self Funding Instalment in 2003 and the new Income Instalments in 2006.

The philosophy of Macquarie is to provide a strong commitment to our clients and continue to lift the benchmark in product innovation.

Macquarie Bank offers a range services for both advisers and retail investors.  We have a number of email subscriptions that provide free research notes, seminars and educational tips.

Disclaimer

Macquarie Self Funding Instalments are offered by Macquarie Bank Limited (ABN 46 008 583 542). Applications may only be made on receipt of the Application Form attached to the relevant Product Disclosure Statement (PDS). Copies of the PDS may be obtained free of charge from Macquarie Bank on the above contact points and available when he Instalments are offered. Macquarie Bank has not taken account of your objectives, financial situation or needs. We recommend you obtain financial , legal and taxation advice before making any financial investment decision. Macquarie will receive remuneration from the issue of the Self Funding Instalments by way of the holders put option and the loan between 0 %- 3%. Macquarie will pay commission to introducing advisers (including related entities of Macquarie). The amount of remuneration and commission are more fully described in the PDS. In relation to the incorporation of past performance, it must be remembered that past performance is not a reliable indication of future performance.