End of year strategies and opportunities

Who is presenting, where are they from?Date?

2012

2

What is gearing ?

Borrowing money to invest

Not all gearing is negative

Gearing increases profits but also increases losses

Gearing is not a short-term strategy

Cash flow effects are very important

3

How it works?

Non-Geared Geared

Capital $10,000.00 $10,000.00

Loan $30,000.00

Share portfolio value $10,000.00 $40,000.00

3% Dividends $300.00 $1,200.00

100% Franking $128.57 $514.29

Interest deduction $2,700.00

Taxable income $428.57 -$985.71

Tax paid/saved 46.5% MTR $199.29 -$458.36

Franking credits/refund $128.57 $514.29

Net tax paid/saved $70.71 -$972.64

4% Growth $400.00 $1,600.00

Net investment after loan $10,629.29 $11,072.64

Net return before CGT 6.29% 10.73%

4

You can gear into …

Investment

Deductible interest?

Yes No

Property Not vacant land

Super contributions

Insurance bonds

Property trusts

Growth trusts If income producing

Direct shares If income producing

Friendly society bond

International share fund

Equity imputation fund

Cash/fixed interest products

Films

Primary production schemes

5

Lets take Gary and Jill for example

Gary and Jill aged 45

Would like to set up a savings strategy that will help them make the most of the money they have to invest

They have an initial lump sum of $5,000 to invest

They also can afford to invest $250 p.m.

What might be the results if they geared these funds

6

Geared savings vs non-geared savings

Non-Geared Savings

Geared Savings

Initial Investment $5,000 $10,000 ($5,000 own funds + $5,000 loan)

Monthly Savings $250 $500($250 own funds + $250 loan)

Values after 10 years

Total Contribution $35,000 $35,000

Investment Value* $50,557 $101,113

Total Value Net Value* $50,557 $66,113

* Assumes 3% pa income 100% franked, 4% pa growth return, 7.5% pa loan interest. Tax on income at 46.5%. CGT deferred. Tax and interest paid from investment income.

7

The results after ten years

A geared savings plan may positively impact potential returns when compared to a non-geared savings plan over a five-year period.

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

0 1 2 3 4 5 6 7 8 9 10Years

Ungeared Investment Geared Investment

8

The positives and negatives of gearing as a strategy

Positives Negatives

Gain control of a greater amount of assets Increased volatility

Increase the return on your investment Increased risk– ability to make interest payments– ability to meet margin calls– risk of total loss

Increase size of portfolio - potential for greater diversification

Decreased liquidity

Tax deductions on interest Potential increased capital gains tax

Tax credits (shares and property)

9

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