Instalment warrants have carved out a niche in the Australian investment landscape, offering a unique blend of leverage, flexibility, and tax efficiency—especially for self-managed super funds (SMSFs). With regulatory changes and market dynamics evolving in 2025, understanding how instalment warrants work and where they fit in a modern portfolio is more important than ever.
What Are Instalment Warrants?
At their core, instalment warrants are a type of structured financial product that allows investors to gain exposure to shares or other assets by paying in two or more instalments, rather than the full price upfront. The initial instalment gives the investor beneficial ownership and certain rights (like dividends and franking credits), while the final payment—made at a later date—transfers full legal ownership.
- Underlying Assets: Typically ASX-listed shares, exchange-traded funds (ETFs), or property trusts.
- Leverage: Investors only need to fund a portion upfront, with the remainder often financed by a non-recourse loan embedded in the warrant structure.
- Flexibility: Investors can choose to pay the final instalment early or at maturity, or sell the warrant before maturity on the ASX.
Benefits for Investors and SMSFs
Instalment warrants remain particularly attractive for SMSFs and individual investors seeking a strategic edge in 2025:
- Access to Leverage with Limited Recourse: The non-recourse nature means that if the asset’s value falls below the loan amount, investors can walk away without further liability—mitigating risk compared to margin lending.
- Enhanced Cash Flow: Beneficial ownership from day one allows investors to receive dividends and potential franking credits, even before full payment.
- Tax Efficiency: For SMSFs, instalment warrants can allow leveraged exposure to assets without breaching borrowing restrictions under the SIS Act, provided the structure complies with current rules.
- Portfolio Diversification: With warrants available across many ASX stocks and ETFs, investors can tailor exposure to suit their risk profile and goals.
Example: An investor wanting to buy 1,000 shares of an ASX 200 company at $20 each could use an instalment warrant to pay $10,000 now, with a second $10,000 due in three years. In the meantime, they receive dividends and franking credits, with the option to sell or pay the balance at their discretion.
2025 Regulatory and Market Updates
This year has seen notable developments affecting instalment warrants, particularly for SMSF trustees and retail investors:
- ASIC Oversight: Following the 2024 review, ASIC has increased scrutiny on the marketing of structured products, ensuring clearer disclosure of risks and costs associated with instalment warrants.
- SMSF Borrowing Rules: The ATO reaffirmed that SMSFs may still use instalment warrant structures under a Limited Recourse Borrowing Arrangement (LRBA), provided they meet strict compliance requirements—such as single acquirable asset rules and arm’s-length terms.
- Interest Rate Trends: With the RBA maintaining higher rates through early 2025, the cost of the embedded loan component in new instalment warrants has risen. Investors should carefully weigh the cost of leverage against expected returns.
- Product Innovation: Several issuers have launched warrants linked to ESG-focused ETFs and new sectors, catering to changing investor preferences.
It’s crucial for investors and trustees to review updated Product Disclosure Statements (PDS) and consider the impact of recent regulatory changes before entering new instalment warrant arrangements.
Risks and Considerations
While instalment warrants offer compelling benefits, they are not without risks:
- Market Volatility: If the underlying asset falls in value, the warrant’s value may drop below the initial instalment, and investors may choose not to pay the final instalment.
- Interest and Fees: The cost of the embedded loan and any associated fees can erode returns, especially in a rising rate environment.
- Liquidity: Although listed on the ASX, some instalment warrants have lower trading volumes, which can impact exit options.
Investors should conduct thorough due diligence, including scenario analysis, and consider how instalment warrants fit within their overall investment strategy and risk tolerance.
Is an Instalment Warrant Right for You in 2025?
Instalment warrants remain a flexible, powerful tool for Australian investors—especially those managing SMSFs or seeking to amplify their equity exposure without traditional margin loans. As the regulatory landscape evolves, and with higher interest rates shaping the cost-benefit equation, it’s essential to approach these instruments with clarity and a strategic mindset. Review your goals, stay updated on product disclosures, and weigh the risks and rewards for your unique situation.
