Instalment warrant market opens up

Banks issuing instalment warrants have been given scope to develop a much wider product range following a tax amendment that clarifies the position of superannuation funds investing in derivative products.

Tax Laws Amendment (2007 Measures No 4) Bill 2007, which was passed in the House of Representatives this week, establishes the ability of super funds to use warrants to provide a form of gearing for any asset a fund could buy directly.

Equity instalment warrants have been popular with trustees of self-managed superannuation funds because they introduce a form of gearing into funds that are otherwise prohibited from borrowing.

There has always been some uncertainty about the eligibility of such investments, given the ban on borrowing, and last year APRA said super funds investing in instalment warrants were actually borrowing.

The Treasurer responded by saying this was not the intention of the Superannuation Industry Supervision Act. The Tax Law Amendment passed this week was drafted to fix the problem.

The superannuation policy adviser at CPA Australia, Michael Davison, said in the past advisers would tell their client to limit their investment in warrants to equity warrants. But the amendment states that the underlying asset can be anything that a fund trustee would be allowed to hold directly.

Big instalment warrant issuers, including Macquarie Bank and Westpac, will be reviewing their options.