Gearing strategies January 2012

What is gearing ? Borrowing money to invest Not all gearing is negative Gearing increases profits but also increases losses Gearing is not a short-term strategy Cash flow effects are very important

How it works? Non-Geared Geared Capital$10, Loan $30, Share portfolio value $10, $40, % Dividends $ $1, % Franking $ $ Interest 9% $2, Taxable income $ $ Tax paid/saved 46.5% MTR $ $ Franking credits/refund $ $ Net tax paid/saved $70.71-$ % Growth $ $1, Net investment after loan $10, $11, Net return before CGT6.29%10.73%

You can gear into … Investment Deductible interest? YesNo Property Not vacant land Super contributions Insurance bonds Property trusts Growth trusts If income producing Direct shares If income producing Friendly society bond International share fund Equity imputation fund Cash/fixed interest products Films Primary production schemes

Lets take Gary and Jill for example Gary and Jill aged 45 Would like to set up a savings strategy that will help them make the most of the money they have to invest They have an initial lump sum of $5,000 to invest They also can afford to invest $250 p.m. What might be the results if they geared these funds

Geared savings vs non-geared savings Non-Geared Savings Geared Savings Initial Investment$5,000$10,000 ($5,000 own funds + $5,000 loan) Monthly Savings$250$500 ($250 own funds + $250 loan) Values after 10 years Total Contribution$35,000 Investment Value*$50,557$101,113 Total Value Net Value*$50,557$66,113 * Assumes 3% pa income 100% franked, 4% pa growth return, 7.5% pa loan interest. Tax on income at 46.5%. CGT deferred. Tax and interest paid from investment income

The results after ten years A geared savings plan may positively impact potential returns when compared to a non- geared savings plan over a five-year period.

The positives and negatives of gearing as a strategy PositivesNegatives Gain control of a greater amount of assetsIncreased volatility Increase the return on your investmentIncreased risk –ability to make interest payments –ability to meet margin calls –risk of total loss Increase size of portfolio - potential for greater diversification Decreased liquidity Tax deductions on interestPotential increased capital gains tax Tax credits (shares and property)

9 Asgard Capital Management Limited ABN , AFSL (Asgard). Information current as at 1 January This publication provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This presentation contains general information only and does not take into account your personal objectives, financial situation or needs. You should therefore consider whether information or advice contained in this presentation is appropriate to you having regard to these factors before acting on it. You should seek personalised advice from a financial adviser and your accountant before making any financial decision in relation to matters discussed in this presentation. The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. Consider our disclosure documents which include our Financial Services Guide available on © Asgard Capital Management Limited 2012.