Capital Protected Investments are a very effective way to legally reduce your tax whilst gaining some exposure to equity markets. There are a number of different types of Capital Protected Investments and each has different features and carries different risks. Importantly, the tax benefit from this investment is available to both those in business and those who have an income primarily from a salary.
Many of our clients have used these products effectively over a number of years to help achieve their financial objectives. As these investments are classed as Financial Products, it is imperative that you seek sound financial advice from a licensed financial planner familiar with these offerings before adding one of these products to your investment portfolio.
Amongst the many available investments, one example currently available is the Flexi 100 Trust offered by Macquarie. We have used this product to provide a real life demonstration of these investment options.
Flexi 100 Trust – Features
1. Provides exposure to an equity based investment (either Australian Shares, International Shares or a combination of both) funded by a loan rather than a large capital injection.
2. Offers the opportunity to create a tax deduction this financial year as a key feature is the prepayment of interest before 30 June
3. The product is structured so that the investor is not exposed to any downward market returns due to a capital guarantee feature
4. This product has NO margin calls
5. At each twelve month anniversary an income distribution is payable to the investor which is then used to offset in part the following year’s interest payment – as such this reduces the annual outlay
6. Should the investor wish to exit the investment due to a change in market conditions or personal circumstances they can do so under the “walk away” option on a quarterly basis
7. There is no need for the loan to be secured by any personal assets. Macquarie provide the loan to the investor using no personal security beyond the investment itself.
8. Opportunity for an investor with a large property bias to obtain some diversification in their investment profile through an exposure to shares
9. The absolute maximum exposure to loss is the interest and borrowing costs net of any tax benefits – there is no exposure to loss in value of the underlying assets
10. The investment has been issued an Product Ruling PR 2013/16 by the Australian Taxation Office which confirms that the interest is tax deductible
11. The product is fully compliant with the Limited Recourse Borrowing requirements to be an acceptable investment for SMSFs
12. The investment period is 3.5 years or 5.5 years depending upon the preferred investment category
Who would add Flexi 100 Trust to their investment portfolio?
Flexi 100 Trust certainly is not appropriate for all taxpayers . It can suit a wide range of investors including SMSFs and individuals who want some or all of the following benefits and outcomes:
• to borrow to gain enhanced growth exposure to investment opportunities
• flexibility to exit the investment early should their circumstances or market conditions change
• to deal with potential tax issues such as Capital Gains on the disposal of property or shares
• to deal with potential tax issues resulting from additional profits in the tax year
• an investment with a low capital outlay relative to the investment value
• portfolio diversification
• to re-balance some equity holdings into a protected investment
Case Study – Flexi 100 Trust
Let’s say the following are the underlying assumptions:
• The investor borrow $100,000 to invest
• The interest rate payable is 6.40% per annum
• The chosen investment is the Australian Equity Focus (a basket of 20 equally weighed shares listed on the Australian Stock Exchange invested on a 3.5 year term)
• The borrowing cost is 2% upfront
If the shares growth is 0% or actually falls during this period the maximum exposure of the investor is $15,194 net of any tax benefits. So, for a taxpayer who’s income is between $80,000 and $180,000 – based upon current tax rates the tax benefit over the investment period would be $5,926 leaving a maximum financial risk over the three year term of $9,268 for exposure to $100,000 share investment during that time.
If the annual growth was 8% per annum for each share over that same period, the capital return at the conclusion of the 3.5 year investment period would be in the vicinity of $30,000. Any gains of course will attract tax in the same way that a capital gain on selling a property attracts tax.
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