Westpac Self-Funding Instalments

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1 Westpac Self-Funding Instalments PRESENTER- Jeremy Dean 22 July 2011

2 Please note Westpac Banking Corporation ABN , AFSL ( Westpac ) is the issuer of Westpac Self-Funding Instalments ( SFI ) Product Disclosure Statement dated 1 February 2011 ( PDS ). The information contained in this presentation has been derived from sources believed to be accurate. Although we have made every reasonable effort to ensure the information is free from error, neither Westpac nor any other company in the Westpac Group of companies warrant the accuracy, adequacy or completeness of the information, or otherwise endorse it in any way. Worked examples are included for illustrative purposes only and not intended to be indicative of the likely performance of the underlying securities or SFI pricing. This presentation does not constitute an offer, or a solicitation of an offer, to subscribe for or purchase any securities or other financial instrument; is not an invitation to invest; is not an offer for finance; does not constitute an offer, inducement or solicitation to enter a legally binding contract; and is not to be construed as an indication or prediction of future results. You should consider the PDS before making any decision to invest. Westpac has not taken into consideration the financial situation, investment objectives or particular needs of any particular investor and recommends that investors consider its appropriateness and seek independent advice before acting on this Information. Any reference to taxation matters 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 and its 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. This information is current as at 6 July 2011 and remains subject to change without notice.

3 Agenda. Introduction to instalment warrants Westpac Self-Funding Instalments (SFIs) SMSFs and SFIs Case studies

4 What are instalment warrants? Instalments allow investors to purchase ASX listed securities such as shares and ETFs in two part payments or instalments The first instalment payment, equal to the warrant purchase price, is made upfront The investor is entitled to all dividends and franking credits after the initial payment. Depending on the instalment warrant type, dividends are not paid out in cash but automatically applied to reduce the second instalment Payment of the second instalment is optional. It represents a limited recourse loan from the warrant issuer Issued by banks with varying time periods of less than 1 year to 10 years Can be purchased through a primary application or bought and sold on ASX like any listed security Eligible for use within SMSFs

5 Types of instalment warrants. Vanilla instalments Holders receive dividends/distributions as cash in hand. Shorter term. Rolling instalments Series of vanilla instalments with annual reset of gearing level. Self Funding Instalments (SFIs) - Dividends/distributions remain with the issuer and are automatically applied to reduce the loan amount Traditional type SFIs (Westpac, Citi) Stop-loss type SFIs (RBS) Rolling SFIs (UBS)

6 Terminology. First Payment = First instalment = Purchase price Completion Payment = Loan Amount = Second instalment = Second payment

7 Pricing a Westpac SFI. Example Initial Interest Amount ($1.00) Initial Interest Amount includes Prepaid Interest until next 30 June Cost of limited recourse feature paid for the term First Payment $6.00 Capital contribution $5.00 $10 share Loan Amount $5.00 Loan Amount $5.00

8 During the term. Dividend adjustments and interest capitalisation are handled by the issuer. No further cash payments required. Holder is entitled to franking credits and interest deductions and must account for dividend income in their tax return. July 2011 LOAN AMOUNT $10.00 DIVIDEND $0.40 LOAN AMOUNT $9.60 DIVIDEND $ June 2012 LOAN AMOUNT $9.20 INTEREST $0.75 LOAN AMOUNT $9.95 DIVIDEND $0.45 LOAN AMOUNT $9.50

9 At maturity. At maturity holders of instalment warrants generally have the following options: 1. Roll holdings into a new series and extend term (if offered). No CGT event. 2. Pay the second instalment ( make the Completion Payment ) and receive fully paid underlying security. No CGT event. 3. Do nothing. Issuer will sell underlying security, repay loan and pay out any excess to holder. CGT event.

10 Acquiring Westpac SFIs. Primary market (application Form in PDS): No brokerage AML checks may be required Pricing generally only after application monies have been received Secondary market Broker will require investor to sign a warrant agreement form Trades exceeding current Ask Volume best arranged over the phone

11 SMSFs and SFIs. About 70% of Westpac SFIs are bought by SMSFs Margin loans are not allowed Concessional contributions are capped Age Maximum concessional contribution p.a. < 50 years $25, years 74 years $50,000 According to SPAA/Russell, 50% of SMSF trustees would have contributed $72,704 p.a. on average ($15.1bn total) Many SMSFs need to accelerate growth to meet retirement needs 20% of SMSF trustees are not on track to achieve their retirement income

12 Case study Benefits of franking credits in an SMSF. Case study: Using excess franking credits in a SMSF for details of assumptions refer to Westpac SFI brochure on westpac.com.au/sfi Invest directly in CBA shares Buy CBASWG SFIs Investment amount $100,000 $100,000 Purchase price $50 $29 Share exposure 2,000 3,448 Dollar exposure to shares $100,000 $172,400 Forecast dividend income pa $5,800 $9,999 Forecast franking credits pa $2,485 $4,285 Interest deductions $0.00 $6,465 Taxable income pa $8,285 $7,819 Income tax payable by SMSF $1,242 $1,172 Excess franking credits $1,243 $3,113 Concessional contributions that can be offset with excess franking credits $8,286 $20,753

13 Case study Cash extraction strategy. Existing shareholdings are converted into SFIs over those shares and applicants receive a cashback amount. Conversion does not trigger a CGT event. Cashback can be used for business or investment purposes (excluding residential property). Note: This strategy is not allowable within Self Managed Super Funds.

14 Case study Cash extraction strategy. Applicant holds 1,000 BHP shares in their personal portfolio and chooses to convert them into BHPSWG SFIs issued by Westpac via a Securityholder Application. BHP shares are trading at $46.38, BHPSWG is priced at $29.52 Investor 1,000 BHP shares 1,000 BHPSWG SFIs + $16,860 cash back Westpac Use $16,860 cash back for business and/or investment purposes (excluding residential property)

15 Adviser service. Ability to receive an upfront commission of up to 2.2% (incl GST) and trailing commission of up to 0.275% (incl GST) of the loan amount with your client s agreement. A borrowing fee is added to the first instalment if commissions are payable. Price lock-in over the phone for approved dealer groups. Self Funding Instalments are available through WRAP accounts. Dedicated service line for any queries

16 Sources. Intimate with Self-Managed Superannuation, SPAA and Russell Investments, survey of SMSF trustees and advisers October-December 2010, Rismark: Investment Trends, April 2010 Self Managed Super Fund: Investor Report, Financial Review Professional Education- SMSF Borrowing Education Program, 2010

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