The Situation

Mark sold an asset making a capital gain for tax purposes of $60,000 with no discounts applying to this amount.  Mark is a high-income earner and is faced with paying tax of $29,100 ($60,000*0.485) on the capital gain of $60,000.  Mark also wants to increase his exposure to the equity markets.

Action Taken

Mark's financial planner recommends Mark apply for a Westpac Protected Equity Loan Plus (PEL Plus) to put himself in a position to benefit from potential income and growth in a portfolio of ASX listed shares whilst using the potential interest deductions to reduce his tax liability.  Mark believes that he will be able to fully utilise the same level of interest deductions at least for the next five years and can successfully manage the interest payment obligations.

In June 2006 Mark applies for a 5 year Westpac PEL Plus to the value of $577,500 over ANZ, WES and TLS (based on an indicative interest rate of 12.67% p.a.).  Mark is entitled to potential interest deductions of $62,178.  Westpac has obtained an ATO Product Ruling for the Westpac PEL Plus, PR 2004/15* which states that for a 5 year loan, the ATO allows an investor to deduct the lower of the Reserve Bank Bulletin Indicator Lending Rate for Personal Unsecured Loans (currently set at 11.90% p.a.) and 85% of the total interest charged by Westpac under the PEL Plus.  This equates to a potential yearly deduction of $62,178.  This amount is sufficient enough to offset the $60,000 Capital Gain in the current financial year.

Where there is a difference between the interest charged on the PEL Plus and potential interest deductions claimed by Mark, PR 2004/15* advises that this difference should be treated as part of the cost the put Option (being the capital protection feature in the Westpac PEL Plus).  The difference is not deductible for tax purposes.

Portfolio for PEL Plus

Underlying Stock Name	Underlying Stock Code	Investment Amount	Interest Rate per Stock
ANZ Banking Group	ANZ	$192,500	11.50%
Wesfarmers	WES	$192,500	13.15%
Telstra	TLS	$192,500	13.35%
		$577,500	12.67%

Summary Position

Assessable Income in question	$60,000
Tax Liability at Marginal Tax Rate 48.5%	$29,100
Individual Tax Rate	48.5%
Westpac PEL Plus Loan	$577,500
Interest Rate	12.67% p.a.
Term	5 years
Deductibility of Interest (%)	85%
Interest cost for prepayment in 2005	$73,150
Deductibility Amount for interest prepayment	$62,178

The Cost Comparison and benefits of Westpac PEL Plus

If Mark decided not to use the Westpac PEL Plus but simply paid the tax due on the $60,000 Capital Gain, his liability would be $29,100 at a tax rate of 48.5%.

The indicative after tax cost of the Westpac PEL Plus for Mark's loan for the 2006 tax year is approximately $17,179.  This is calculated by taking into consideration Mark's marginal tax rate, the interest cost and associated potential allowable deductions, and indicative potential dividends and franking credits.

The analysis indicates that Mark is approximately $11,921 in front each year if he takes out a Westpac Protected Equity Loan as opposed to simply paying the tax due on the assessable income.  Mark also has a $577,500 portfolio of ASX listed shares, which have the potential to provide capital growth with the comfort of knowing if any of the shares have lost value over the term of the loan, then mark can simply transfer the parcel to Westpac in discharge of his loan.

Further, if the shares are held for more than 12 months then Mark will be entitled to the concessional CGT discount of 50%.

You should consider the Westpac PEL Plus as an investment that can provide a beneficial outcome to many clients faced with tax issues and looking for an equity based investment.

To implement this strategy, simply contact your Financial Planner or Westpac on 1800 990 107.

Important information
Westpac Banking Corporation ABN 33 007 457 141, AFSL 233714 (“Westpac”) is the issuer of the Westpac Protected Equity Loan Plus (“PEL Plus). A product disclosure statement (“PDS”) is available for the Westpac PEL Plus. A copy of the Westpac PEL Plus PDS and a copy of Westpac’s Financial Services Guide can be obtained by calling 1800 990 107 or visiting www.westpac.com.au/structuredinvestments. You should obtain and consider the PDS before deciding whether to acquire, continue to hold or dispose of the Westpac PEL Plus.  This information is of a general nature and does not constitute any recommendation, tax or investment advice as to the suitability of PEL Plus.  This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. The information in this newsletter is factual only. It does not constitute financial product advice. Before acting on this information you should seek independent financial advice to determine its appropriateness to your objectives, financial situation and needs.  The taxation position described is a general statement only and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation. Westpac financial planners are not qualified to give tax advice. The individual situation of investors may differ and investors should seek independent professional tax advice on any taxation matters.  The projections given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the projections are based are reasonable, the projections may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these projections.  Information current as at 26 April 2006.