MACQUARIE EQUITY LEVER ADVISER PRESENTATION

Transcription

1 MACQUARIE EQUITY LEVER ADVISER PRESENTATION

2 Important information This information is current as at July This information has been prepared by Macquarie Bank Limited ABN , AFSL (Macquarie) as issuer of Macquarie Equity Lever (Equity Lever) and is current as at July It is provided for the use of licensed financial advisers only. In no circumstances is it to be used by a potential investor for the purpose of making a decision about a financial product or class of products. This information has been prepared for general information purposes only, without taking into account any potential investors personal objectives, financial situation or needs. Before acting on this general advice, an adviser must consider its appropriateness for a potential investor having regard to the potential investor's own financial objectives, financial situation and needs. An offer to acquire a new Equity Lever Facility and Instalment Receipts under that Facility is made in the Macquarie Equity Lever Combined Product Disclosure Statement and Financial Services Guide dated 1 February 2011 and the Short form PDS dated 1 February 2011 (collectively the '2011 PDSs'). An offer to acquire Instalment Receipts under an Equity Lever Facility issued before 1 February 2011 is made in the Macquarie Equity Lever Combined Product Disclosure Statement and Financial Services Guide (FSG) dated 14 March 2008, and the Supplementary Product Disclosure Statement dated 14 May 2008 (collectively 'the 2008 PDS'), as updated on the website macquarie.com.au/equitylever. In deciding whether to acquire or continue to hold an investment in an Instalment Receipt through an Equity Lever Facility, an investor should obtain a copy of the relevant PDSs together with any updates on the website macquarie.com.au/equitylever and consider their contents. All potential investors should also obtain financial, legal and taxation advice before making any decision about whether to acquire an Instalment Receipt. The 2011 PDSs and the 2008 PDS are available at 1 Martin Place, Sydney or by phoning The Instalment Receipts Deed dated 20 March 2008, as amended, also contains Equity Lever terms and conditions and a copy can be viewed at 1 Martin Place, Sydney NSW Macquarie or its associates, officers or employees may have interests in the financial products referred to in this information by acting in various roles including as investment banker, underwriter or dealer, holder of principal positions, broker, lender or adviser. Macquarie or its associates may receive fees, brokerage or commissions for acting in these capacities. In addition, Macquarie or its associates, officers or employees may buy or sell the financial products as principal or agent and as such may effect transactions which are not consistent with any recommendations in the information. Investments in Instalment Receipts are not deposits with or liabilities of Macquarie Bank Limited, or of any entity in the Macquarie Group, and are subject to investment risk, including possible delays in repayment and loss of income and capital invested. Neither of Macquarie Bank Limited nor any other member of the Macquarie Group guarantees any particular rate of return or the performance of the Instalment Receipts, nor do they guarantee the repayment of capital from the Instalment Receipts. Macquarie does not give, nor does it purport to give any taxation advice. The taxation discussion in this document is based on current laws, anticipated legislation and Commonwealth announcements at the time of writing. Those laws and the level of taxation may change. The application of taxation law to each investor depends on that investor s individual circumstances. Accordingly, investors should seek independent professional advice on taxation implications before making any investment decisions. You may contact Macquarie in In this information a reference to Macquarie Group shall be a reference to Macquarie Group Limited and its related bodies corporate. Capitalised terms which are not otherwise defined shall have the meaning given to them in the 2011 PDS. Macquarie Group 2

3 Agenda The SMSF industry an overview Available types of leverage for SMSFs About Equity Lever Key benefits How does Equity Lever work? Current market opportunities take advantage with Equity Lever Franking credits why they are valuable for SMSFs Risk management Class Super partnership benefits for Equity Lever advisers Fees and costs Who might Equity Lever be suitable for? Case studies 3

4 The SMSF industry - an overview More than 442,000 SMSFs in Australia $416 billion in assets - the largest superannuation industry segment Average size of SMSF funds is approximately $900,000 Over 32,000 new SMSFs established in financial year to 30 June 2011 Cash and term deposits - over $115 billion of all assets (28 per cent). Source: Australian Taxation Office (ATO) March 2012 SMSF Statistical Report. 4

5 Equities within SMSFs Listed shares represent one third of total assets in SMSFs ($132 billion) Over $115 billion in SMSFs is invested in cash - opportunity to invest into other assets Potential benefits of leveraging into equities within a SMSF include: enhanced income and franking credits portfolio diversification liquidity capitalise on current opportunity within equities market. 11% Other 11% 14% Cash and term deposits 27% Listed Shares 34% Source: ATO March 2012 SMSF Statistical Report. 5

6 Available types of leverage for SMSFs

7 Background to using leverage in the SMSF Historically borrowing prohibited (albeit very limited number of exceptions) Instalment warrant borrowing exception introduced in 2007 allowed SMSF borrowing for investment purposes subject to certain criteria being satisfied New legislation introduced in July 2010 Limited Recourse Borrowing Arrangements applies to arrangements entered into on or after 7 July 2010 Allowance of grandfathering of existing arrangements if entered into prior to 7 July 2010, unless: re-financed or sufficiently changed on or after 7 July 2010 New rules, generally more restrictive Note, there are investment options available which do not involve a borrowing as regulated under the Superannuation Industry (Supervision) Act 1993 (SIS Act). Note: Simple re-negotiation of existing loan (eg extending term) not likely to trigger new rules. Conversely, re-financing, material changes to terms and conditions are likely to trigger such an event. 7

8 SMSF limited recourse lending general 8

9 Types of leveraged products for SMSFs Feature Instalment warrants Self funding instalments Unlisted instalment receipts Limited recourse No protection fee Gearing unable to exceed maximum LVR Flexible leverage Access to dividends and franking credits Portfolio investment Listed and tradeable Choice of interest rate options No margin calls 9

10 Introducing Equity Lever

11 About Equity Lever Equity Lever provides investors, including SMSFs 1, with accelerated exposure to Australian and international equity markets using Instalment Receipts as the source of leverage. Investors have the opportunity to build a low-cost, diversified portfolio of blue-chip Australian shares with access to dividends and franking credits and control over leverage. Build a diversified portfolio of blue-chip Australian shares and access international markets over 75 ASX-listed shares pre-selected portfolios created by Macquarie Research Equities Exchange Traded Funds and Listed Investment Companies One of the few solutions available for SMSFs that can enhance growth and income potential in a tax efficient way Innovative offering to the Australian market. 1. Trustees of superannuation funds who propose to invest through a Macquarie Equity Lever Facility should be aware of their obligations to formulate and implement an appropriate investment strategy that has regard to the whole of the circumstances of their fund and to act in the best interests of members of the fund. 11

12 Key benefits Build a diversified portfolio of Australian shares at current discounted levels Flexible leverage from zero to 50 per cent 1 re-enter the market, build exposure conservatively Earn dividends and access franking credits 2 and capital growth Limited time 0.20% pa discount on the variable interest rate 3 Low cost with no ongoing fees 4 Leverage to valuation ratio calculated at a portfolio level greater control and better risk management Offset tax payable or receive a tax refund 2 Interest is capitalised and may be tax deductible 5 No SMSF audit report required to apply low administration burden Establish a facility today and invest in the sharemarket when opportunities arise. 1. The maximum permitted leverage for each underlying security may be varied by Macquarie if reasonably necessary to protect Macquarie s rights. 2. Subject to the investor s eligibility to claim franking credits and the investor s own circumstances. 3. All new Facilities established from 23 July to 30 September 2012 will receive a 20 basis point reduction off the headline variable interest rate for one year to 30 September The variable interest rate is advertised on the Equity Lever website. 4. Except when investors buy, sell or transfer an Instalment Receipt or a direct debit is dishonoured. 5. The capital protected borrowing rules apply to the product. Consequently, interest may be deductible up to the Reserve Bank of Australia benchmark rate, being the indicator lending rate for standard variable housing loans plus 100 basis points (currently 7.85% pa) for June

13 How does Equity Lever work? Franking credits are passed back to the SMSF SMSF investor Cash holdings Interest is capitalised monthly with interest deductibility benefits for the SMSF SMSF contribution $20k Macquarie contribution up to $20k Dividends can be passed back to the SMSF or directed to reduce the Outstanding Instalment Balances 1 Equity Lever Instalment Receipts established for $40k - Selected ASX-listed securities - Listed Investment Companies - Exchange Traded Funds SMSF investor can choose to pay down the Outstanding Instalment Balance of the Instalment Receipts, or close out holdings at any time 1. Dividends are used to reduce the Outstanding Instalment Balances unless the aggregate of the Outstanding Instalment Balances on all the investor s Instalment Receipts is less than 40 per cent of the value of the underlying securities. In this case, the investor can choose to use this income as a source of cash for further investing. 13

14 How does Equity Lever work? Equity Lever gives investors control to make all the key choices Initial investment Equity Lever Instalment Receipts - allows investor to purchase underlying securities in two instalments: First Instalment: initial investor contribution Final Instalment: remaining investor contribution At the time of purchase, investors are issued with one Instalment Receipt for each underlying security under each Instalment Receipt, investors pay the First Instalment (a percentage of the purchase price of the underlying security) out of their own funds Underlying securities are held on investor s behalf by a Security Trustee until the Outstanding Instalment Balance (Final Instalment + Capitalised Interest - dividends applied against this balance) is paid off Investment is limited recourse No embedded put option or protection fees typically, lower interest costs and no break costs (except for fixed rate break costs). Investor has control to select: the underlying securities The First Instalment (minimum $20,000) the desired level of leverage (up to a current maximum of 50 per cent) the type of Interest Rate fixed or variable. 14

15 How does Equity Lever work? Throughout the term Throughout the term: interest accrues on the Outstanding Instalment Balance this interest is capitalised and may be tax deductible 1 dividends are earned and investors may be eligible to receive franking credits 2 excess franking credits may be used to offset other SMSF tax liabilities or refunded to the SMSF 3 Instalment Acceleration Events may occur At any time, investors can adjust the level of leverage, or re-balance their portfolio by buying and selling Instalment Receipts. 1. The capital protected borrowing rules apply to the product. Consequently, interest may be deductible up to the Reserve Bank of Australia benchmark rate, being the indicator lending rate for standard variable housing loans plus 100 basis points (currently 7.85% pa) for June Subject to the investor s eligibility to claim franking credits and the investor s own circumstances. 3. Dividends are used to reduce the Outstanding Instalment Balance, unless the balance is less than 40 per cent of the value of the underlying securities, In this case, investors can choose to use this income as a source of cash for further investing. 15

16 How does Equity Lever work? Early exit Investors can exit their investment at any time Investors have the choice to: make an Early Instalment Payment investors take ownership of the shares in their name request Early Closure investors receive the residual proceeds (less brokerage) in cash There are no break costs (except for fixed rate loans). 16

17 Current market opportunities take advantage with Equity Lever Generate income through dividend yields with Equity Lever Current attractive dividend yields for top ASX-listed companies with 100 per cent franking. Ticker Company name Dividend yield* NAB National Australia Bank Limited 7.93% 100% WBC Westpac Banking Corporation 7.42% 100% TLS Telstra Corporation Limited 7.22% 100% ANZ Australian and New Zealand Banking Group Limited 6.38% 100% CBA Commonwealth Bank of Australia 6.01% 100% WES Wesfarmers Limited 5.41% 100% WOW Woolworths Limited 4.87% 100% BHP BHP Billiton Limited 3.77% 100% WPL Woodside Petroleum Limited 3.18% 100% RIO Rio Tinto Limited 2.77% 100% * based on twelve month Macquarie Research Equities forecasts as at 17 July 2012 Franking* 17

18 Franking credits why they are valuable to SMSFs Franking credits represent a credit for tax paid of up to 30 per cent on company profits before distributing dividends Post-tax return of the investment increases when franked dividends are paid < tax payable: use to offset tax > tax payable: refund to investor Equity Lever provides SMSFs with the opportunity to earn dividends, therefore benefit from franking credits 1 SMSFs long term investment timeframes represent a significant opportunity to earn franking credits Franking credits may be especially valuable to SMSFs in pension phase due to favourable tax treatment. 1. Subject to investor s eligibility to claim franking credits and the investor s own circumstances. 18

19 Risk management Conservative leverage + strong risk management framework Conservative levels of leverage only zero to 50 per cent 1 market must fall considerably to trigger an Instalment Acceleration Event Market Value of Underlying Portfolio Total Completion Payments Current Facility LVR $100,000 $50,000 50% 23% $100,000 $45,000 45% 31% $100,000 $40,000 40% 38% $100,000 $35,000 35% 46% Leverage to valuation ratio calculated at portfolio level greater control and better risk management well-performing stocks offset poor performing stocks reduces chance of Instalment Acceleration Event Necessary fall in Market Value of Underlying Portfolio 2 Daily management of portfolio leverage 15 per cent buffer protects against small market fluctuations Instalment Acceleration Event activated when buffer exceeded (ie leverage up to 65 per cent 3 ) If this event occurs investors will be required to reduce their Current Facility LVR by five per cent by providing more cash or closing out some Instalment Receipts. 1. The maximum permitted leverage for each underlying security may be varied by Macquarie if reasonably necessary to protect Macquarie s rights. 2. Assumes the Facility LVR is 50 per cent and the Buffer is 15 per cent. 3. Based on all underlying securities in the portfolio being approved for a 50 per cent LVR which is currently the case, but can vary. 19

20 Equity Lever now available on Class Super Daily electronic data feeds of Equity Lever investor data are now available through Class Super Class Super is a comprehensive online SMSF administration solution for advisers, accountants, administrators, auditors, trustees and tax agents Allows users to cater for all administration and reporting needs of their SMSF clients Gain consolidated access to: reporting and tax lodgement administration and accounting compliance and audit Integrate your clients Equity Lever positions with their other SMSF holdings, including: Automated Stock Holdings Automated Cash Management Trust Holdings To find out more about Class Super and how you can benefit, contact your Macquarie Specialist Investments Distribution Manager. Please note: Subject to investor s authority being received, authorising their Equity Lever data to be provided. 20

21 Fees and costs Limited time 0.20% pa discount on the variable interest rate 1 Discounted variable, monthly in arrears Interest Rate currently 8.90 % pa Issuance Fee the greater of 0.20 per cent of the Purchase/Sale Price of the Underlying Securities, and $50 Adviser Investment/Closure Brokerage paid to the adviser as commission Contribution Fee = nil Withdrawal Fee = nil 2 Termination Fee = nil 2 Management Costs = nil Service Fees = nil Trust vetting fee = nil Straightforward application via the Product Disclosure Statement (PDS) costs and complexities of establishing a DIY instalment can be avoided. 1. All new Facilities established from 23 July 2012 to 30 September 2012 will receive a 20 basis point reduction off the headline variable interest rate for one year to 30 September The variable interest rate is advertised on the Equity Lever website. 2. Break costs may apply on fixed rate Instalment Receipts. 21

22 May be suitable for Equity Lever may be an ideal investment for a wide range of investors, including SMSFs, who: are currently overweight in cash and concerned that their portfolio has low exposure to potential sharemarket returns are looking to re-enter the market and have control to build a diversified share portfolio with flexible levels of leverage are seeking enhanced exposure to the benefits of potential capital growth, dividends and franking credits wish to establish a facility to invest in the sharemarket when opportunities arise. 22

23 Risks The risk: of leverage magnifying losses that the underlying securities selected will perform poorly over time, decreasing the value of the instalment receipts and possibly requiring the sale of the underlying securities, or an early repayment of the amounts owing of a rise in interest rates that the value of the underlying securities may not increase sufficiently to cover all interest and other amounts paid of Macquarie or the Security Trustee not performing their obligations under the Instalment Receipts that the completion date of the Equity Lever Instalment Receipts may be brought forward in a number of circumstances that investors may not be able to specify the time and price they wish to buy or sell their underlying securities of a change in tax or superannuation laws. Before making an investment decision, investors should read Section 4, 'Risks', of the PDS for more detailed information. 23

24 Case studies

25 Case study leveraged versus unleveraged investment 25

26 Case study: Leveraged versus unleveraged investment Important note This sample case study is provided for the use of licensed financial advisers only and may not be reproduced or distributed to any other persons. It shows two of many possible investment strategies available to an investor and is provided for illustrative purposes only without taking into account any potential investors personal objectives, financial situation or needs. Financial advisers should form their own views about the case study and the applicability of the information (if any) to their clients objectives, financial situation and needs The case study and the assumptions or figures contained in it are purely hypothetical. They do not represent actual or potential returns, estimates, projections or forecasts for an investment in Instalment Receipts through Equity Lever. The assumptions made may have a material effect on returns. The actual performance of an investment in Instalment Receipts through Equity Lever will depend on the Underlying Securities selected, future economic conditions, future taxation laws and the individual circumstances of that investor. Whilst Macquarie has taken reasonable care in producing this information, subsequent changes in circumstances may occur at any time and may impact on the accuracy of the assumptions made. Some of the assumptions may be based on information obtained from third parties which may not have been checked or verified. Neither Macquarie nor any other Macquarie Group company, or any of their officers, employees or gives any representation or warranty as to the accuracy or completeness of this information nor does any of them accept any liability for loss or damage arising in anyway from the use of these case studies. Please note that the two options are not comparing similar products with similar benefits and risks. Instead, the two options below have different benefits and different risk profiles, which financial advisers should be aware of and take into account when advising their clients. 26

27 Case study: Leveraged versus unleveraged investment John and Anna John and Anna are both 50 years old and are trustees of their SMSF with a $400,000 cash balance The SMSF is invested across a range of asset classes including fixed interest, however John and Anna wish to increase their equity exposure via a diversified portfolio of stocks The SMSF s investment strategy and fund s deed provisions include the ability to invest in equities and employ leverage The SMSF invests around $250,000 into a portfolio of Australian equities, committing around $150,000 of cash and leveraging 40 per cent through Equity Lever The investment through Equity Lever over 10 years assumes: 6% pa compound share price and dividend growth 4% pa dividend yield 75% pa franking variable Interest Rate of 9.95% pa Issuance Fee/Sale Brokerage of 0.2 per cent Capital Gains Tax (CGT) discount of 33.3 per cent SMSF tax rate of 15 per cent all interest is capitalised to the Outstanding Instalment Balance, all dividends are applied to reduce the Outstanding Instalment Balance, and no Instalment Acceleration Events occur over the term. 27

28 Case study: Leveraged versus unleveraged investment How does Equity Lever compare? Leveraged Unleveraged Underlying Security value purchased $249,969 $150,000 - brokerage/fees ($1,395) ($837) + dividends $131,792 $79,085 + franking credits 42,362 $25,420 - interest ($89,679) $0 - final instalment ($99,969) $0 + capital growth in portfolio $197,687 $118,627 - CGT liability ($18,111) ($11,779) + net tax refundable (payable), net of franking credits Final value of investment, net of cashflows, tax and CGT liability $27,413 $9,744 $397,707 $344,840 28

29 Portfolio value Case study: Leveraged versus unleveraged investment Comparison of leveraged vs unleveraged portfolio value $400,000 $350,000 Leveraged portfolio value* $300,000 $250,000 $200,000 $150,000 $100,000 Unleveraged portfolio value $50,000 $0 Investment time horizon *Value includes capital growth, net of outstanding balance. 29

30 Case study generating returns through dividends in a flat market 30

31 Case study: Generating returns through dividends in a flat market Important note This sample case study is provided for the use of licensed financial advisers only and may not be reproduced or distributed to any other persons. It has been prepared for general information purposes only, without taking into account any potential investors personal objectives, financial situation or needs. The case study and the assumptions or figures contained in it are purely hypothetical. They do not represent actual or potential returns, estimates, projections or forecasts for an investment in Instalment Receipts through Equity Lever. The actual performance of an investment in Instalment Receipts through Equity Lever will depend on the Underlying Securities selected, future economic conditions, future taxation laws and the individual circumstances of that investor. Whilst this sample case study shows the results for an investment in certain securities it is not intended to be an endorsement or recommendation of those securities or a particular investment strategy. Investors are responsible for determining their own investment strategy including the appropriate level of diversification for their investments. Whilst Macquarie has taken reasonable care in producing this information, subsequent changes in circumstances may occur at any time and may impact on the accuracy of the assumptions made. Some of the assumptions may be based on information obtained from third parties which may not have been checked or verified. Neither Macquarie nor any other Macquarie Group company, or any of their officers, employees or gives any representation or warranty as to the accuracy or completeness of this information nor does any of them accept any liability for loss or damage arising in anyway from the use of these case studies. In the case study example, negative capital growth of 7.83% pa or worse would result in a better return for an investor under the Term Deposit investment than in the Instalment Receipt investment. 31

32 Case study: Generating returns through dividends in a flat market Situation Tan is 54 years old and is the sole corporate trustee for her single-member SMSF Tan s SMSF has $1 million in assets and is currently invested with a 50 per cent allocation in cash, earning 4.50% pa Tan is concerned that cash rates may be lowered, and therefore wishes to invest in selected Australian equities offering a higher dividend yield than cash Tan is prepared to hold a high dividend portfolio for a term of seven years, and is prepared to invest on the assumption that the underlying share portfolio achieves zero capital growth Tan decides to switch $250,000 of the cash holdings to gain exposure to high yielding Australian equities with a Leverage to Valuation Ration (LVR) of 40 per cent The assessable income for Tan s SMSF is 15 per cent. 32

33 Case study: Generating returns through dividends in a flat market Additional assumptions Total Investment Amount of $250,000 Total First Instalment amount of $246,914 Adviser Investment Brokerage of $2,083 Issuance Fees of $833 Investment of equal weights in NAB, WBC, MTS, TLS at closing prices on 25 July 2012 Stock NAB WBC MTS TLS Weighting 25% 25% 25% 25% Closing Price Equity Lever Interest Rate is 8.90% pa (assumed constant over term) 1 Interest deductibility of 7.85% pa (assumed constant over term) 2 Capital growth in share portfolio of zero over the term At the end of term, Tan makes the Completion Payments and takes legal ownership of the Underlying Securities. 1. All interest is capitalised, all dividends are applied to reduce the total Outstanding Instalment Balance for all Instalment Receipts, and no Instalment Acceleration Events occur over the term. 2. The capital protected borrowing rules apply to the product. Consequently, interest may be deductible up to the Reserve Bank of Australia benchmark rate, being the indicator lending rate for standard variable housing loans plus 100 basis points (currently 7.85% pa) for June

34 Case study: Generating returns through dividends in a flat market Portfolio diversification The move from cash into equities has further diversified Tan s SMSF investment portfolio. 1.4m Tan's investment portfolio - inception 1.2m 1.0m Without Equity Lever With Equity Lever $ 412 k 0.8m $ 500 k Equities 0.6m $ 250 k Cash 0.4m Property 0.2m $ 500 k $ 500 k 0m 34

35 Case study: Generating returns through dividends in a flat market Equity Lever share portfolio dividend and franking credit assumptions 1 Financial Year ending: 30-Jun Jun Jun Jun Jun Jun Jun-19 National Australia Bank Limited NAB WBC MTS TLS Dividends $1.88 $1.96 $2.04 $2.12 $2.20 $2.24 $2.24 Franking Level 100% 100% 100% 100% 100% 100% 100% Westpac Banking Corporation Dividends $1.67 $1.69 $1.73 $1.77 $1.81 $1.83 $1.83 Franking Level 100% 100% 100% 100% 100% 100% 100% Metcash Limited Dividends $0.28 $0.27 $0.28 $0.28 $0.28 $0.28 $0.28 Franking Level 100% 100% 100% 100% 100% 100% 100% Telstra Corporation Limited Dividends $0.28 $0.31 $0.35 $0.36 $0.36 $0.36 $0.36 Franking Level 100% 100% 100% 100% 100% 100% 100% 1. Dividend assumptions to 30 June 2018 are based on Macquarie Research Equities forecasts as at 25 July 2012 and are assumed flat thereafter. They may not reflect the actual dividends paid. 35

36 Case study: Generating returns through dividends in a flat market Cashflow 30-Jun Jun Jun Jun Jun Jun Jun-19 Pre-tax Cashflow ($) Distributions Received 32,179 33,088 34,996 35,789 36,318 36,583 36,583 Interest Paid 1 (13,795) (12,049) (10,011) (7,681) (5,028) (2,115) (50) Pre-Tax Benefit / (Cost) 18,384 21,039 24,985 28,109 31,290 34,467 36,533 Tax Calculation ($) Distribution Received 32,179 33,088 34,996 35,789 36,318 36,583 36,583 Franking Credits 13,791 14,181 14,998 15,338 15,565 15,678 15,678 Deductible Interest (12,106) (10,574) (8,785) (6,739) (4,411) (1,854) (44) Taxable Gain / (Loss) 33,863 36,695 41,209 44,389 47,472 50,407 52,217 Tax Refund / 15% (5,079) (5,504) (6,181) (6,658) (7,121) (7,561) (7,833) Franking Credits 13,791 14,181 14,998 15,338 15,565 15,678 15,678 Net Tax Refund / (Payment) $8,711 $8,676 $8,817 8,680 8,444 8,117 7,846 Post-tax Cashflow ($) Pre-Tax Benefit / (Cost) 18,384 21,039 24,985 28,109 31,290 34,467 36,533 plus: Net Tax Refund / (Payment) 8,711 8,676 8,817 8,680 8,444 8,117 7,846 After-Tax Benefit / (Cost) 27,095 29,715 33,802 36,789 39,734 42,585 44, This is the total annual interest amount an investor is required to pay out of their own funds. 36

37 Case study: Generating returns through dividends in a flat market Total Outstanding Instalment Balance for all Instalment Receipts $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 30-Jun Jun Jun Jun Jun Jun Jun Jun-19 $164,589 $146,206 $125,167 $100,182 $72,074 $40,784 $6,316-37

38 Case study: Generating returns through dividends in a flat market Cashflow summary Investment is cashflow positive within the first year Tan pays off her Outstanding Instalment Balance for all of her Instalment Receipts with excess dividends throughout the term Reduces the total balance to zero in the final year Excess franking credits can be used to offset tax payable, including super contributions tax, or to generate a tax refund Over the entire term, total dividends received exceed interest expense by $194,806 Total dividends received: $245,535 Total interest expense: $50,729 Tan is $171,973 better off in comparison to leaving her assets in a cash deposit Cumulative net after-tax holding benefit from Equity Lever investment: $254,098 based on zero capital growth from Tan s portfolio Cumulative after-tax holding benefit from cash deposit: $75,127 based on $250,000 earning 4.50% pa over seven years. 38

39 Optimising super contributions and dollar cost averaging

40 Case study: Optimising super contributions and dollar cost averaging Important note This sample case study is provided for the use of licensed financial advisers only and may not be reproduced or distributed to any other persons. It has been prepared for general information purposes only, without taking into account any potential investors personal objectives, financial situation or needs. The case study and the assumptions or figures contained in it are purely hypothetical. They do not represent actual or potential returns, estimates, projections or forecasts for an investment in Instalment Receipts through Equity Lever. The actual performance of an investment in Instalment Receipts through Equity Lever will depend on the Underlying Securities selected, future economic conditions, future taxation laws and the individual circumstances of that investor. Whilst this sample case study shows the results for an investment in certain securities it is not intended to be an endorsement or recommendation of those securities or a particular investment strategy. Investors are responsible for determining their own investment strategy including the appropriate level of diversification for their investments. Whilst Macquarie has taken reasonable care in producing this information, subsequent changes in circumstances may occur at any time and may impact on the accuracy of the assumptions made. Some of the assumptions may be based on information obtained from third parties which may not have been checked or verified. Neither Macquarie nor any other Macquarie Group company, or any of their officers, employees or gives any representation or warranty as to the accuracy or completeness of this information nor does any of them accept any liability for loss or damage arising in anyway from the use of these case studies. In the case study example, negative capital growth of 25.14% pa or worse would result in a greater loss in the leveraged investment than under the direct unleveraged investment. 40

41 Case study: Optimising super contributions and dollar cost averaging Situation Frank is 55 years old, is self employed and is the sole trustee for his $250,000 single-member SMSF With his current SMSF balance and recent reductions to concessional super contributions from $50,000 to $25,000 per year, Frank is concerned that he may struggle to accumulate sufficient funds for his retirement. Frank also has $150,000 outside his SMSF Additionally, Frank has the majority of his super invested in low-risk assets, and wants to increase diversification by investing into equities Although Frank wishes to increase his equity exposure, his adviser is concerned that equity markets may still experience some level of volatility Frank s adviser recommends that Frank establish a Macquarie Equity Lever Facility and regularly invest his super contributions throughout the year. By doing this, Frank can: increase the size of his SMSF portfolio through leverage increase portfolio diversification reduce the impact of volatile prices by averaging the price he pays for equities over time improve the tax effectiveness of his income Frank s adviser wants to compare the investment s performance via Frank s SMSF to the performance of a direct investment, equal to the concessional super contribution, had Frank decided to invest in his individual capacity. 41

42 Case study: Optimising super contributions and dollar cost averaging Assumptions Frank contributes $25,000 of concessional super contributions each year for five years into his Equity Lever Facility: this equates to $21,250 per year, after taking into account the 15 per cent super contributions tax includes Equity Lever adviser brokerage of $230 and an Issuance Fee of $84 for each yearly contribution 50 per cent leverage and investment in the Income Plus (6 Stock) Portfolio on Closing Prices as at 25 July 2012 Stock WBC CBA ANZ TAH WDC TCL Allocation 25% 20% 15% 15% 15% 10% Variable Equity Lever Interest Rate of 8.90% pa (assumed constant over term) 1 Interest deductibility of 7.85% pa (assumed constant over term) 2 Capital growth of +4% pa in a positive growth scenario, and -4% pa in a negative growth scenario Frank makes a Completion Payment and takes legal ownership and immediately sells the Underlying Securities after five years, when he is in retirement phase Frank s employment and investment income is taxed at his marginal tax rate of 38.5 per cent, while income generated by Frank s SMSF is taxed at 15 per cent Dividends are based on Macquarie Research Equities forecasts as at 25 July All interest is capitalised, all dividends are applied to reduce the total Outstanding Instalment Balance for all Instalment Receipts, and no Instalment Acceleration Events occur over the term. 2. The capital protected borrowing rules apply to the product. Consequently, interest may be deductible up to the Reserve Bank of Australia benchmark rate, being the indicator lending rate for standard variable housing loans plus 100 basis points (currently 7.85% pa) for June

43 Case study: Optimising super contributions and dollar cost averaging By the numbers Equity Lever Contributions Contribution 1 Contribution 2 Contribution 3 Contribution 4 Contribution 5 Yearly Contributions ($) 1-Jul-12 1-Jul-13 1-Jul-14 1-Jul-15 1-Jul-16 1-Jul-17 First Instalments 20,936 20,936 20,936 20,936 20,936 - Published Instalment Receipt LVR 50% 50% 50% 50% 50% - Purchase Price 41,807 41,791 41,836 41,790 41,810 - Additional Final Instalments 20,871 20,855 20,899 20,854 20,874 - Equity Lever Portfolio Total Outstanding Instalment Balances ($) FY FY FY FY FY FY Opening Outstanding Instalment Balances - 19,987 39,134 57,104 73,522 88,248 Additional Final Instalments (on 1 July) 20,871 20,855 20,899 20,854 20,874 - New Outstanding Instalment Balances (on 1 July) 20,871 40,842 60,033 77,958 94,395 88,248 less Distributions Received 2,696 5,255 8,125 11,175 14,251 - plus Interest Paid 1,812 3,548 5,196 6,739 8, Ending Outstanding Instalment Balances (at 30 June) 19,987 39,134 57,104 73,522 88,248 88,269 Tax ($) Franking Credits 939 1,789 2,743 3,722 4,674 - Net Tax Refund 633 1,199 1,796 2,375 2,

44 Case study: Optimising super contributions and dollar cost averaging Underlying Portfolio Value versus Outstanding Instalment Balances 250, , , , ,629 Net equity 135, ,000 88,682 88,269 73,522 50,000 57,104 43,480 39,134 19, Jun Jun Jun Jun Jun - 17 Total Market Security Value Outstanding Instalment Balances Assuming a 4% pa growth rate, the investor s net equity increases at an increasing rate over time. 44

45 Case study: Optimising super contributions and dollar cost averaging Comparison As a result of the 15 per cent concessional tax rate, over five years Frank has been able to invest $106,250 into the Equity Lever portfolio through super contributions, compared to $76,875 had he chosen to invest directly in the portfolio Frank is able to optimise wealth accumulation by taking advantage of leverage and franking credits in a tax efficient manner this holds true even when there is -4% pa growth in the portfolio. Investment amount (over five years) ($) Equity Lever Direct Investment Gross Income available for investment 125, ,000 Super Contributions Tax/Income Tax (18,750) (37,500) Total cash available for investment 106,250 76,875 Total amount available for investment in portfolio (net of fees) 209,034 76,875 Performance (over five years) Equity Lever Direct Investment Growth rate -4.00% pa +4.00% pa -4.00% pa +4.00% pa Value of Underlying Portfolio 185, ,522 67,757 86,141 Adviser Closure Brokerage on disposal (371) (471) (136) (172) Outstanding Instalment Balances to be paid (82,947) (88,269) - - Capital Gains Tax on sale of securities 2,879 (2,134) 1,388 (1,364) Surplus dividends ,959 11,624 Net tax refundable (payable) 9,468 8,908 (3,054) (2,735) Value of portfolio equity at maturity net of holding costs 114, ,556 78,915 93,494 Performance Comparison +35, ,062 45

46 Case study: Optimising super contributions and dollar cost averaging Potential benefits Over the five year term, Frank s Equity Lever Facility is net cash flow positive dividends of $41,503 are used to reduce the Outstanding Instalment Balances interest of $25,419 is capitalised onto the Outstanding Instalment Balances Frank generates tax credits of $13,867, which can be used to offset other tax payable within his super fund or received as a tax refund Frank has benefited from: the possibility of a positive after-tax investment return, even if there is a moderate fall in the value of this portfolio over the term optimising his SMSF contributions through leverage, despite the cap placed on concessional super contributions improved tax efficiency of his SMSF by taking advantage of the 15 per cent concessional tax rate reducing the impact of volatile prices by averaging the price he pays for the equities over time franked dividends providing a positive after-tax cash flow within Equity Lever increased portfolio diversification having to repay the Outstanding Instalment Balances only once he has reached retirement age. 46

47 How we can help you Local and dedicated Distribution Managers to support your business Visit macquarie.com.au/equityleveradviser, where you will find: wide range of marketing collateral adviser calculator approved list of ASX-listed securities and pre-selected portfolios Access to GearUp a secure online portal that allows you and your clients to monitor their investment at any time Adviser and client seminars Client Service Team: Ph: E: structuredinvestments@macquarie.com 47