1. Planning Strategies for Thirtysomethings Andrew Lawless and Paul Sarkis Technical Managers, MLC 22 nd November 2006

2. Important information This information has been prepared by MLC Limited (ABN 90 000 000 402) 105 - 153 Miller Street, North Sydney NSW 2060, a member of the National group. This information was produced as an information service and without assuming a duty of care. This information is for adviser use only. It contains general information only. It does not constitute financial advice and should not be relied upon as a substitute for financial or professional advice. In preparing this information, MLC Limited did not take into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, a person needs to consider (with or without the advice or assistance of an adviser) whether this information is appropriate to their needs, objectives and circumstances. The information in this presentation is based on our interpretation of relevant laws as at 1 November 2006 and is subject to change. No responsibility is taken for persons acting on the information provided. Persons doing so, do so at their own risk.

3. Agenda Should cashflow always be used to reduce inefficient debt? Does gearing actually work? How does gearing compare to salary sacrifice? Planning strategies for young families

4. Meet the ‘thirty somethings’ Aged 30 to 45 Over 4 million people in segment Nearly 1 million have household incomes over $100k Two-thirds of segment own home or have mortgage

5. Surplus cashflow 31.5% 41.5% 46.5% Marginal tax rate 11.3% 13.2% 14.5% Pre-tax return required Home loan interest rate 7.75% pa Too simplistic, ignores:  franking credits  discounted capital gains  ‘strategy-specific’ benefits Break-even point is likely to be a lot lower

6. Brendan (age 40) pays tax at 41.5% Home loan is $250,000 (P&I) Interest rate is 7.75% pa Repayments are $2,052 per month (20 year term) Extra $200 per month in disposable income Case study Surplus cashflow

7. 1. Pay $200 p.m. into mortgage, then invest surplus cashflow in unit trust 2. Invest $200 p.m. in unit trust 3. Invest $200 p.m. in super as undeducted contribution 4. Invest $342 p.m. (pre-tax) in super as salary sacrifice 5. Invest $400 p.m. in unit trust using instalment gearing (ie $200 own funds plus $200 borrowed funds) 6. Invest $600 p.m. in unit trust using instalment gearing (ie $200 own funds plus $400 borrowed funds) Brendan is considering six options... Surplus cashflow

8. Unit trust and super invested in Australian shares Investment return is 8.5% pa (split 3% income and 5.5% growth) Franking level on income is 75% Interest on instalment loan is 7.75% pa 20 year comparison Assumptions Surplus cashflow

9. Results (after 20 years) 4. Super - salary sacrifice 3. Super - undeducted 20 years $180,361 $124,131 2. Unit trust (only) 1. Loan then unit trust Option 20 years 16 yrs, 4 months Mortgage repaid $104,315 $112,500 Invest value MTR 41.5% $123,39320 years 5. Instalment gearing (50% geared) For geared investment, where interest payments exceed investment income and tax savings, a portion of investment is sold to cover shortfall. Otherwise excess investment income and tax savings reinvested. All figures after income tax, CGT (including discounting) and repayment of all borrowings. $142,47120 years 6. Instalment gearing (67% geared) $179,78120 years 7. Lump sum gearing $130,315 Invest value MTR 31.5% $154,031 $124,131 $111,904 $113,896 $148,726 $184,282 Surplus cashflow

10. The bottom line? Numbers vary depending on assumptions Paying off mortgage may be better if client:  is risk averse and prefers ‘guaranteed’ return  doesn’t want to lock-up money in super (preservation)  isn’t comfortable with gearing However, using surplus cashflow to reduce inefficient debt is not always the best option Surplus cashflow

11. “I have never, repeat never, had any client or … fund manager reveal factually to me that gearing into the sharemarkets has been beneficial enough to warrant the … risks taken. The challenge is there for you to prove me wrong.” Does gearing actually work?

12. Modelling Modelled gearing using historical returns since 1910 Australian equities only Index returns No allowance for fees or active management Assumed current tax rules apply throughout entire period (eg current corporate and marginal tax rates)

13. Data source Some tables and charts use data presented in DMS Data Module offered through the Ibbotson Associates’ software program EnCorr Based on copyrighted books by Dimson, Marsh, and Staunton, Triumph of the Optimists, Princeton University Press, (c) 2002, and Global Investment Returns Yearbook 2003, ABN AMRO/London Business School (c) 2003. All rights reserved Used with permission Does gearing actually work?

14. Gearing strategy: $100,000 own capital, plus $100,000 borrowed (ie 50% geared) No gearing: $100,000 own capital Investment loan interest is cash rate plus 250 bp Marginal tax rate 41.5% Income franked at 75% A portion of investments are withdrawn to repay loan and CGT on amount withdrawn Lump sum gearing Assumptions

15. Value added - 5 years Sources: MLC and data from DMS Data Module offered through the Ibbotson Associates’ software program EnCorr Lump sum gearing added value 74% of the time

16. Lump sum gearing added value 81% of the time Value added - 10 years Sources: MLC and data from DMS Data Module offered through the Ibbotson Associates’ software program EnCorr

17. Lump sum gearing added value 90% of the time Value added - 20 years Sources: MLC and data from DMS Data Module offered through the Ibbotson Associates’ software program EnCorr

18. Hurdle rates % of times gearing outperformed non-gearing (in real terms) by more than 20% 50% geared45% 5 years 58% 10 years20 years 71% 67% geared59%72%79% 50% geared, interest rate 1% pa higher 41%53%65% Sources: MLC and data from DMS Data Module offered through the Ibbotson Associates’ software program EnCorr

19. Assumptions As per previous analysis, except:  Instalment gearing strategy: invest $10,000 own capital pa, plus $10,000 borrowed money pa (ie 50% geared)  Non-geared investment plan: invest $10,000 own capital pa Instalment gearing % of times gearing outperformed non-gearing (in real terms) by more than 0% 50% geared 70% 5 years 85% 10 years20 years 86% Sources: MLC and data from DMS Data Module offered through the Ibbotson Associates’ software program EnCorr

20. How can you enhance gearing? Own funds (low income earner) and borrowed funds (higher income earner) Higher yield (lower income earner) and lower yield (higher income earner) Reinvest after-tax income in lower income earners name Minimise CGT (eg get lower income earner to sell assets to pay- off loan)

21. Assumptions As per previous analysis, except:  Salary sacrifice strategy: pre-tax contribution of $17,094 pa (equivalent to $10,000 after-tax at MTR of 41.5%)  Instalment gearing strategy: invest $10,000 own capital pa, plus $10,000 borrowed money pa (ie 50% geared)  Investments are cashed out and figures are after CGT (including discounting) and repayment of loan (for instalment gearing) Salary sacrifice

22. % of times salary sacrifice outperformed instalment gearing (in real terms) by 0% or more 50% geared New super rules 99% 5 years 100% 10 years20 years 100% 80% geared51%45%47% Sources: MLC and data from DMS Data Module offered through the Ibbotson Associates’ software program EnCorr Hurdle rates

23. % of times salary sacrifice outperformed instalment gearing (in real terms) by 20% or more 50% geared New super rules 95% 5 years 100% 10 years20 years 100% 80% geared32%29%34% Sources: MLC and data from DMS Data Module offered through the Ibbotson Associates’ software program EnCorr

24. Planning strategies for young families

25. Government benefits Replaces ‘baby bonus’ Tax free lump sum Must be claimed within 26 weeks of birth Maternity payment Currently* From 1/7/2008* $4,100 $5,000 NOT MEANS TESTED * Indexed in line with CPI in March and September each year

26. Claim 20% offset for birth related expenses above $1,500 pa Obstetrician’s cost now refunded through Medicare safety net –80% above certain thresholds Out of pocket medical expenses Government benefits

27. Family tax benefit part A Benefit pa Combined Income pa $88,622 INCOME TEST ONLY (Couple Combined) Government benefits

28. Source: SMH 12/08/2005 Government benefits Family tax benefit part B

29. * Payment based on age of youngest child ^ Shade out at 20 cents per $1 # Effective from 20/9/2006 Max. benefit Shade-out^ Child* < 5 $3,467 $4,234 - $21,572 # Child* > 5 $2,511 $4,234 - $16,790 # INCOME TEST ONLY (Secondary Earner) Government benefits Family tax benefit part B

30. Jack earns $80,000 pa Jill now on maternity leave after birth of first child Benefit Amount Maternity payment $4,100 FTB part A $1,829 FTB part B $3,467 Total $9,396 Government benefits

31. Must be approved or registered care No income test for min. benefit* of $11.93 per week Shade out for maximum benefit^ of $148 per week - Combined income of $98,348 (1 child) * Based on 24 hours of care ^ Based on 50 hours of care Child care benefit INCOME TEST ONLY (But not for min benefit) Government benefits

32. Must be in receipt of Child Care Benefit 30% offset for out-of-pocket expenses (up to $4,000) One year lag in payment Child care tax offset NOT MEANS TESTED Government benefits

33. Strategies for broken work patterns

34. Sell an asset, minimise CGT, re-invest proceeds Ways to minimise risk of Part IVA –Wait to re-enter the market –Purchase different asset –Invest ‘as trustee for’ child (or in child’s name) Broken work patterns ‘Refresh’ the CGT cost base

35. Transfer ownership to spouse or child (where available) outside deferral period Achieved by completing ‘Standard Transfer Form’ No stamp duty payable Income and gains taxed in hands of lower income earner Employee share schemes Broken work patterns

36. Co-contribution (when returning to work) CGT offset strategy (when not returning to work) Contribution splitting Superannuation strategies Broken work patterns

37. Consider impact on benefits and entitlements? Strategy Refresh cost base CGT offset FTB part A FTB part B Child care benefit Could reduce… Gearing (own money to LI spouse) Share scheme transfer (LI spouse) FTB part B Broken work patterns

38. Other advice opportunities Debt reduction Salary packaging Investing for children Insurance Estate planning

39. Support tools

40. Questions?