In June 2004 Westpac launched its Interest Loan (IL) for the Protected Equity Loan Plus (PEL Plus) attracting strong interest amongst investors.

Normally when an investor applies for a Westpac PEL Plus, Westpac lends 100% of the investment amount to the purchase shares of their choice from the Westpac PEL Plus Term Sheet.  Investors then elect to either prepay the Westpac PEL Plus interest annually in advance monthly in arrears.

By applying for an IL, investors have the option to borrow 12 months interest on the Westpac PEL Plus.

Put simply, the IL is a fixed rate interest-only loan to fund 12 months worth of interest.  Once the loan application is accepted, investors are only required to pay the interest on the IL and then at the end of the 12-month period, the principal of the IL is due.  At the time repayment of the IL is due, investors may apply for another IL in order to pay the next year’s Westpac PEL Plus interest in advance.

Many investors see the IL as an ideal funding option if they wish to enjoy the longer-term benefits of owning leading Australian Shares for a very minimal cash outlay.

Below is an example of how the IL works for a five year, $750,000 Westpac PEL Plus where the investor has elected to borrow the first year’s interest payment through an IL.

	PEL Plus without IL	PEL Plus with IL
PEL Plus Loan Amount*	$750,000	$750,000
Interest Cost for 12 months Prepayment **	$93,750	$93,750
Interest Prepayment Loan Amount (93,750 x 7.5%)	$0	$93,750
Total Initial Funds Required	$93,750	$7,031
Potential Tax Deduction on Interest (@ 48.5%)	$38,648	$41,547
Cash Position for Client	-$55,101	$34,571
Cash Flow Difference between IL and no IL	$89,617

Source: Westpac PEL Plus calculator
* Maximum IL is currently $750,000
** The PEL Plus IL is not covered by a Product Ruling from the Australian Taxation Office (ATO). Investors need to obtain their own tax advice on the treatment of the product. However Westpac expect the ATO is likely to accept the interest on the PEL Plus IL is deductible to the same extent, and in the same manner, as interest on a Westpac PEL Plus Loan, as described in paragraphs 17(a)-(g) of Product Ruling 2004/15 which deals with taxation aspects of the PEL Plus.

With a loan of $750,000, a PEL Plus investor paying interest of 12 months in advance at a rate of 12.50% will need to pay $93,750.  If the investor takes out an IL then they will only need to pay $7,031 ($93,750 x 7.5%).  Assuming the investor is able to claim the deduction for the cost of the IL (to the same extent, and in the same manner, as interest on a PEL Plus loan, as described in paragraphs 17(a)-(g) of Product Ruling 2004/15 which deals with taxation aspects of the PEL Plus) then a client on an MTR of 48.5% has a potential tax deduction of $41,547 (($93,750+7,031*0.85)*0.485)). Thus the difference between the potential interest deduction ($41,547) and the initial cash outflow to the investor an IL is $34,571.

So for investors looking to set up a portfolio with a minimal upfront payment, the IL may be ideal for some clients and potentially provide them with a favourable cash flow scenario.

For more information, please call your Financial Planner or the Structured Equity Investments team 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 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 or 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.
Any projections given in this Newsletter 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.
ATO Product Ruling  The Product Ruling issued by the Australian Taxation Office is only a ruling on the application of the taxation law and is no way expressly or impliedly a guarantee or endorsement of the commercial viability of the Westpac PEL Plus, or the soundness or otherwise of the Westpac PEL Plus as an investment, or of the reasonableness or commerciality of any fees charged in connection with the Westpac PEL Plus. The Product Ruling is only binding on the Commissioner of Taxation if the Westpac PEL Plus is implemented in the specific manner provided in the Product Ruling. Investors should read the Product Disclosure Statement available for the Westpac PEL Plus in their entirety and seek professional advice to determine whether or not this product meets their investment needs.  Copies of the Product Ruling and Product Disclosure Statement can be obtained by calling Westpac Banking Corporation ABN 33 007 457 141 on 1800 990 107.
The information is current as at 3 May 2006.