Gain leveraged exposure to certain ASX-listed securities of your choice

The Background

Joe is 46 years of age and earns $150,000 pa. He has a Self Managed Superannuation Fund (SMSF) with an account balance of $200,000 of which half is held in cash. Given the current market conditions, Joe believes the market is providing good value and would like to know how he can best utilise the surplus cash in his super fund.

The Solution

Joe came to Utopia Financial Services and we recommended that he use Instalment Receipts to purchase ASX listed securities within his SMSF.

Instalment Receipts allow investors to purchase certain ASX-listed securities in two or more instalment payments. By investing in Instalment Receipts, Joe is able to leverage his exposure to the performance of a particular underlying security by paying only a portion of the purchase price upfront. During the term of the investment, Joe’s super fund is entitled to all capital growth as well as rights and entitlements to ordinary dividends, income distributions and franking credits on the underlying securities. Ordinary income distributions are directed to reduce the outstanding instalment balance on the Instalment Receipts.

Joe decides to use his $100,000 surplus cash to purchase $200,000 worth of ASX listed securities.

The Results

Instalment Receipts offer a significant advantage from both the excess dividends and franking credits that can be offset against taxable superannuation contributions, and additional capital growth from the increased exposure to the underlying securities through leverage. This is best demonstrated by an example that shows how this can work within a SMSF.

Through the use of Instalment Receipts, Joe is able to generate an enhanced capital growth and increase his dividend yield from his super fund. The high level of franking credits has eliminated any tax payable by his SMSF and has resulted in a tax refund of $37,905 over the term of the investment.

At expiry, based on the assumed capital growth rate of 7.9%p.a. the outstanding instalment balance is $99,868 and the value of the investments, after paying out the instalment, for Joe’s SMSF is $376,762, compared to a non-leveraged portfolio of $283,426.

Assumptions:

• The investment complies with the Fund’s investment strategy
• Estimated income yield is 4.8% pa (fully franked)
• Capital growth of 7.9% pa (based on the average return from the All Ordinaries from December 1967 – 2007)
• Investment is held for the full 10 year term.
• Variable interest rate is 10.70% pa and assumed to be constant for the entire investment period.
• Interest expense is 88% tax deductible, (9.45% / 10.70%).
• Investments will be held after maturity and therefore capital gains tax has not been calculated at maturity.