Annually around June 30 investors who wish to build equity portfolios will look to do so in a tax effective way.  The Westpac Protected Equity Loan Plus (PEL Plus) is a popular investment that may achieve both goals simultaneously.  In June each year individual investors are able to pre pay 12 months of interest for the following financial year and generally obtain the deduction in the financial year in which it is paid.   Sadly many of these investors and their financial planners organise their affairs too late and miss out on setting up their PEL Plus portfolio before 30 June 2006.


Of course, there is a strong case for setting up a share portfolio under the PEL Plus in other months in the calendar year, and there can still be tax benefits in doing so.  One reason behind this is the ability for individual investors to maximise potential interest deductions and manage cash flows through the use of the flexible interest payment structures offered by the PEL Plus.  Investors have the ability to switch their interest payment frequency in June from monthly in arrears to prepaying interest annually in advance.  This means that if a PEL Plus was set up in July the investor has the ability, through the flexibility of the interest payment frequency, to be entitled to 24 months worth of interest deductions in the first financial year of the PEL Plus investment.

This flexibility allows investors to manage their investment cash flows and the timing and extent of interest deductions, as illustrated in the example below.

Example

Scenario:
Sarah, who is paying tax at the highest marginal tax rate, receives a bonus in late February from her employer of $30,000.  Sarah has decided she will work until July 2006 and then leave her current employment to take a 6-month overseas holiday before returning to Australia in January 2007.  Because of her professional skills, which are in high demand Sarah and her financial planner have no fears that she will not be able to find excellent employment shortly after her return to Australia.  Sarah would also like to build her long-term wealth through exposure to Australian shares.

Solution:
Using the flexible interest payment options offered under the PEL Plus, Sarah is able to implement an investment strategy that would allow her to generate allowable deductions in the financial years when they can be utilised, in addition to managing her cash flows over the 3-year PEL Plus loan term she selected.  The size of the PEL Plus Sarah takes out will be determined by, amongst other things, her ability to make interest payments and the potential optimum level of allowable deductions she would be likely to receive under the PEL Plus.

Sarah can take the following steps to manage her potential cash flows and interest deductions:

1. As Sarah has received a bonus, she could firstly apply for a PEL Plus at the beginning of March 2006 and make initial interest payments monthly in arrears.

In June 2006, Sarah could then switch her payment frequency and prepay 12 months worth of interest in advance, i.e. prepay interest for the 2006/2007 financial year.  As a result, Sarah can potentially obtain 16 months worth of allowable interest deductions for the financial year 2005/2006.  She would not have to pay interest for the 2006/2007 financial year, while she is travelling and not deriving income.

2. In June 2007 Sarah could then instruct Westpac to change the interest payments for the 2007/2008 financial year back to monthly in arrears once Sarah is back at work.  As a result Sarah would be able to pay interest out of her monthly salary and may be entitled to at least 12 months worth of interest deductions in the 2007/2008 financial year (please refer to the ATO Product Ruling 2004/15* for guidance around the deductibility of interest under the Westpac PEL Plus).

What's more, with the Westpac PEL Plus there are no margin calls throughout the life of the loan so Sarah will not be required to make any unplanned payments.

In this example, Sarah is able to use the flexibility of structuring the interest payments under the PEL Plus to effectively manage her cash flows and potentially enhance the allowable deductions generated by this investment.  In addition, under the PEL Plus, she will benefit from all the ordinary dividends and potential franking credits associated with the shares in her portfolio. These amounts will be used under the loan to reduce the balance of the loan.  Sarah can also enjoy all upside in the portfolio without suffering any of the losses incurred by individual shares thanks to the full capital protection offered under the PEL Plus at maturity.

For more information please call 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.  *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 PDS 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 can be obtained by calling Westpac on 1800 990 107. 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 3 May 2006.