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What is a TIC Property Instalment Warrant and how does it work?(top)
TIC Property Instalment Warrants are a simple and potentially tax-efficient way for investors, including Self Managed Super Funds (“SMSFs”), to leverage an investment in the direct residential or commercial property of their choice. A TIC Property Instalment Warrant allows you or your SMSF to acquire a Property with a part-payment at the outset, as little as 25% plus the normal property acquisition costs. You then have the right - but not the obligation - to pay off the remainder of the fixed Purchase Price either at the maturity of the warrant, which may be up to 30 years, or earlier if you want.
At the outset, you fund at least 25% of the purchase price and the remainder is provided through a limited recourse loan arranged by TIC. The loan is secured only against the underlying Property, meaning you are not personally liable for the Loan and that the other assets of your fund are not at risk and the Loan. Importantly, this loan will not impact on your personal borrowing capacity. The structure conforms to the requirements of the Superannuation Industry (Supervision) Act 1993 (“the SIS Act”), making it a legitimate way for SMSF investors to use investment gearing (i.e.: borrowed money) to fund the property investment of their choice.
With a TIC Property Instalment Warrant your SMSF gets the full benefits of property ownership, including all the rental income and capital growth, without having to pay the full purchase price up-front.
What is the minimum needed to invest using a TIC Property Instalment Warrant? What is so different about a property warrant?(top)
This depends on the price of the property you’ve selected and some other factors such as whether the property is residential or commercial. But, generally, your SMSF will need to pay at least 25% of the purchase price plus stamp duty (where applicable), plus the usual costs of property acquisition like conveyancing, building inspections and so on.
What is so different about a property warrant?(top)
There is nothing unusual about paying off an asset in Instalments. In some ways it is similar to the concepts of hire purchase or lay-by both of which have been around for hundreds of years. What is new is that until September 2007, Self Managed Superannuation Funds were prohibited from borrowing. Now, the legislation has been modified – Instalment warrants for property and other assets are now a legitimate investment for your SMSF.
Can the initial Instalment be greater than 25%?(top)
Yes, 25% is the minimum required. You can contribute as much initial equity as you want.
Can I purchase the property of my choice with the TIC Property Instalment Warrant?(top)
Generally, yes. We are happy to consider any residential or commercial property, and in the case of commercial property it can even be a property you already own in your personal name (sorry, but you can't do this with residential property as it’s not allowed under the superannuation legislation). That said, the normal rules of borrowing money from the bank apply – the property will be independently valued by the Lender and must meet the Lender’s approval.
Is there a minimum percentage of the purchase price required to be paid each year?(top)
No. After paying the first Instalment, provided the Loan continues to be serviced, the SMSF can defer making any further Instalments of the purchase price until the Completion Date of your Warrant.
What are the terms and rates of the Loan?(top)
These will depend on the loan structure you request. Investors have options for Interest Only or Principal and Interest, Fixed Rates of Variable Rates. When you apply for conditional approval you tell us the loan type you are after and we provide you with an obligation free set of terms and rates.
Is the interest on my loan tax deductible? Is this superannuation investment approved by the ATO?(top)
Your Loan should be treated exactly as normal, and the interest should therefore be tax deductible for your SMSF.
Can the balance of the purchase price be paid at any time?(top)
Yes. However, just like a normal loan, depending on the terms of your Loan there may be a break cost for doing this.
What if the super fund does not want to continue to pay Instalments or the loan? Can it walk away? (top)
Yes. Our Property Instalment Warrants are designed to be flexible. At each anniversary of the Loan the Warrant Holder may choose to:
- Pay the next year’s Annual Loan Interest in advance (if applicable) and Annual Warrant Fees. In this case the warrant remains in place to the next Annual Anniversary Date;
- Pay the interest (if applicable) AND repay part of the Loan: in addition to paying Annual Interest, the Warrant Holder may also elect to repay part of the Loan by making an Interim Instalment Payment (which may incur break costs). In this case, the warrant remains in place to the next Annual Anniversary Date;
- Pay the Final Instalment Payment: the Loan is repaid, the mortgage extinguished, the Security Trustee delivers legal title to the Property to the Warrant Holder and the Warrant is cancelled upon transfer of Title. No capital gains tax is payable on this transfer;
- Do nothing: if the Warrant Holder chooses to make no further payments, the Property will be sold by the Security Trustee, the Loan and outstanding costs (including the re-marketing fee, if applicable) will be paid and any surplus will be paid to the Warrant Holder.
At the Completion Date the Warrant Holder may choose to:
- Pay the Final Instalment Payment: the Loan is repaid, the mortgage extinguished, the Security Trustee delivers legal title to the Property to the Warrant Holder and the Warrant is cancelled upon transfer of Title. No capital gains tax is payable on this transfer;
- Do nothing: if the Warrant Holder chooses to make no further payments the Property will be sold by the Security Trustee the Property will be sold by the Security Trustee, the Loan and outstanding costs (including the re-marketing fee, if applicable) will be paid and any surplus will be paid to the Warrant Holder.
What happens if the super fund terminates the Warrant? Does it forfeit all the payments it has made up until then?(top)
No. If the Warrant is terminated, the property will be then be sold by the Trustee and the super fund is entitled to receive the sale proceeds, less the following:
selling costs, plus a fee of 1% of the gross proceeds
outstanding and accrued holding costs and loan charges
the outstanding balance of the purchase price
Therefore, if the property has increased in value, the super fund will benefit from that capital growth.
But what if the property has lost value?(top)
If the property has lost value, the amounts referred to in question 12 will be deducted from the proceeds of sale. In this scenario there may still be a shortfall however there is no recourse to the super fund or its members for any shortfall that exceeds the sale proceeds.
Will other assets within the super fund be at risk?(top)
No. Neither the Lender, Trustee, nor TIC have any access to the super fund ’s other assets. Neither the super fund, its trustees, nor its members are liable for any losses. Recourse is limited to the property purchased with Warrant.
If the property value goes up, do I have to pay any more?(top)
No, the original purchase price stands. Regardless of how long you have the Warrant in place, the price does not change. The super fund gets all of the benefit of any capital growth without having to pay the full purchase price up front.
What happens at the Completion Date?(top)
At the Completion Date (which is normally the same date as Loan Term, which could be up to 30 years) the full amount of the outstanding balance of the purchase price becomes payable. If any outstanding balance is not paid at that time, the warrant is terminated, with the consequences as outlined above regarding termination. Any capital growth (after fees and charges) will go to the super fund.
When does my super fund get the title to the property?(top)
Title passes to the super fund when the full purchase price has been paid.
Can the super fund sell the property to me at some stage after final payment has been made?(top)
Yes, provided you pay market price. In certain circumstances, the sale could be tax free. You should consult your financial advisor to find out more about this.
Can I live in the property while the Warrant is in place?(top)
No. There are strict rules governing super funds that prevent members (or relatives of members) of a super fund from living in the super fund ’s property, even if they are paying full market rent. This applies to residential property. The rules (or the exceptions to them) are different for commercial property, where your business can be the tenant of a property held via a warrant in your SMSF.
After I retire, can I take the property out of the fund as payment of my benefits?(top)
Yes, there are ways that you can take the property as payment of your benefits and you may be able to do this without triggering any tax liability. You should consult your financial adviser to find out more information about this.
Is superannuation a good environment in which to purchase investment property? (top)
The answer to that will depend on the circumstances of each individual. But, as a general statement, superannuation can be an excellent vehicle for purchasing property due to the current laws governing DIY or SMSF super funds. Here are some of the benefits of buying property within a superannuation fund:
- Maximum 10% capital gains tax on sale of property if held for at least 12 months and potentially nil if sold in pension phase,
- Maximum of 15% tax on rental income,
- Tax deductible principal repayments – you could effectively receive a tax deduction (via salary sacrifice) for principal loan repayments (which you cannot normally do)
- Reduced contributions tax – the interest costs are tax deductible and can potentially reduce the 15% contributions tax to nil; and
- Tax effective retirement – if you are over 60 there is nil tax on withdrawals or pension earnings.
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