Macquarie Geared Equities Investment plus

Features

Tailor your own protected investment portfolio

If your clients want to take advantage of potential investment gains by using a limited recourse loan, consider the Macquarie Geared Equities Investment plus (GEI plus). With GEI plus, your clients can borrow to invest in over 50 ASX listed securities and certain unlisted managed funds with the benefit of having their loan principal protected.

This means at maturity your client's unprofitable GEI Securities may be disposed of on their behalf to repay the portion of the original Loan Amount referable to those securities and they will have no further obligations in relation to that portion of their loan. Your client will also receive the full benefit for any of the GEI Securities that have increased in value after the repayment of their Loan Amount and associated costs.

GEI plus at a glance

Some key features of GEI plus are outlined below. Before investing in the Macquarie Geared Equities Investment plus, it is important that investors read and understand the terms and investment risks set out in the GEI plus Brochure dated 2 March 2011.

As well as protecting your client's Loan Amount, GEI plus offers a range of other features.

100% finance

100 per cent of the funds for acquiring the investments is borrowed from Macquarie through a limited recourse interest only loan, so there is no need for your clients to contribute any initial capital or make any principal repayments during the loan term.²

Wide investment choice

With GEI plus, your clients can select their own portfolio from more than 50 ASX listed securities and certain unlisted managed funds, or they can choose to invest in a pre-selected portfolio. Go to the Tools tab to download and view the Approved List of Securities and the pre-selected portfolios.

No offsetting of gains and losses

Your client's gains from their profitable GEI Securities are not offset by any losses from any "unprofitable" GEI Securities, which means their potential overall return is increased.

No margin calls

Your clients will not be required to make additional payments as a result of a fall in the value of their GEI Securities.

Potential tax efficiencies

Your client's loan interest may be deductible up to applicable "benchmark rate", which is the Reserve Bank of Australia (RBA) Indicator Lending Rate for Standard Variable Housing Loans plus 100 basis points. For more information refer to Tax information.

Interest rates

Your client's interest rate will depend upon a number of factors including your client's choice of:

• The GEI Securities to be included in their GEI plus portfolio
• Loan term and
• Interest payment option.

Risks

Some key risks of an investment in GEI plus include:

• Performance risk: the value of the GEI Securities chosen may go down by a material amount, even over a short period of time. Investing in highly volatile conditions implies a greater level of risk of poor investment performance than an investment in a more stable market
• Borrowing to invest: by using a GEI plus Facility to invest in chosen GEI Securities, the investment is leveraged. Leverage will magnify gains and losses on your client's investment compared to an unleveraged direct holding of an ASX listed security or units in an unlisted managed fund. Your client should not invest using a GEI plus Facility unless you are comfortable with the risks of investing using leverage
• Breakeven risk: there is a material risk that money could be lost on your client's GEI plus Facility. That is, the total value of their returns at maturity (if any) and Distributions from their GEI Securities throughout the term of their loan (if any) could be less than their total interest payments and other costs (including break costs), and could be zero. In this case, your clients will have lost the amount of interest and costs they have paid.
• Early termination risk: your client's GEI plus Facility may be terminated by Macquarie early in certain circumstances, for example where they fail to pay any amount due under the Facility. Also, they may choose to terminate their GEI plus Facility early. In either case, they will still receive the benefit of the limited recourse nature of your loan. However they will need to pay any break costs, interest charges, fees and other costs that may apply. Break costs associated with early termination of your Facility may be significant
• Interest rate risk: there is a risk that the interest rate applicable to your client's Facility may rise. If this happens the cost of servicing their GEI plus Facility will also increase and there will be a greater risk that their interest costs may exceed their returns
• Liquidity risk: there is a risk that your client's ability to close out their GEI plus Facility early or to sell their GEI Securities may be limited due to a lack of liquidity for their GEI Securities. Depending on the circumstances, this may result in all or part of their loan being terminated early or their loan term being extended. In this case they will be required to continue to pay interest.

Tools

GEI plus Brochure and Application for Finance Form

GEI plus flyer

Approved List of Securities

Pre-selected portfolios

Securities Selection Form

Macquarie Equities Limited's best execution obligations

Please refer below for the link to Product Disclosure Statements for unlisted managed funds currently on the Approved List of Securities:

• MSI Cash Trust
• BlackRock Global Allocation Fund (Aust) (Class D Units)
• Vanguard Index Australian Shares Fund
• Vanguard Hedged International Shares Fund

Frequently asked questions

Who can open a GEI plus?

What's the loan term?

What's the minimum Loan Amount?

What interest rate do your clients pay?

What GEI Securities can your clients invest in?

What if your clients already own ASX listed securities?

How are GEI Securities acquired?

What happens with Distributions and franking credits?

What happens with Corporate Actions?

Can your client prepay their interest?

Can your client take out an Interest Prepayment Loan?

When do your clients receive statements?

What happens at the end of your clients loan term?

What happens to the GEI Securities that are "unprofitable"?

What if your client wants to close their GEI plus early?

Tax information

The following information is general and not specific to your client's particular circumstances. We strongly recommend your clients discuss this with their taxation adviser.

In order to provide your clients with certainty regarding the tax treatment of interest paid on the Macquarie Geared Equities Investment plus (GEI plus), the ATO has issued various Product Rulings in relation to the GEI plus since the product was first offered. Your client may therefore be able to rely on a Product Ruling issued by the ATO where they entered into the GEI plus during the "period of application" (ie, the period from the issue of the ruling until its withdrawal) of one of these Product Rulings. Investors can generally continue to rely on a Product Ruling even after its withdrawal where they entered into the GEI plus during the Product Ruling's period of application.

The Product Rulings are only binding on the Commissioner of Taxation if your client's investment through the GEI plus is implemented in the specific manner provided in the applicable Product Ruling and the assumptions set out in that Product Ruling are satisfied. The Product Ruling is only a ruling on the application of taxation law and is in no way expressly or impliedly a guarantee or endorsement of the commercial viability of the GEI plus, of the soundness or otherwise of the GEI plus as an investment, or of the reasonableness or commerciality of any fees charged in connection with the GEI plus.

The Product Rulings specify how much of the GEI plus interest payments can be claimed as a tax deduction for "eligible investors" (i.e. those investors who, having regard to their personal circumstances, can rely on a particular Product Ruling). The table below assists your clients to identify which Product Ruling potentially applies to them and enables them to download the Product Rulings.

For those investors who may not be able to rely on a Product Ruling, please see "What is my level of tax deductibility?" below for a guideline as to how your client's interest deductibility should be calculated.

We recommend that investors visit the Australian Taxation Office's website for further details of how capital protected products and borrowings are treated.

* PR 2011/5 was updated on 5 October 2011 with an addendum (PR 2011/5A1) to reflect the change to the benchmark rate from the RBA’s Indicator Lending Rate for Personal Unsecured Loans to the RBA’s Indicator Lending Rate for Standard Variable Housing Loans plus 100 basis points. Please note that the update to PR 2011/5 does not affect previously issued Product Rulings.

How much of my interest is deductible?

The amount of your client's GEI plus interest payments that is deductible will depend on when they applied for their GEI plus, their loan term and whether they are paying a fixed or variable interest rate. Your client should refer to the applicable Product Ruling for further details.

Generally, if your clients entered into their GEI plus on or after 9.30pm on 16 April 2003 but before 1 July 2007, they can claim a deduction for their interest up to the lower of:

• the Reserve Bank of Australia's Indicator Rate for Personal Unsecured Loans - Fixed or Variable (whichever is applicable) or
• 85 per cent of the interest rate (for five year loans), 82.5 per cent of the interest rate (for four year loans), 80 percent of the interest rate (for three year loans), 72.5 per cent of the interest rate (for two year loans) or 60 per cent of the interest rate (for one year loans).

Generally, if your clients entered into the GEI plus on or after 1 July 2007, they should be entitled to a deduction for the amount of interest payable on their GEI plus, less any amount that is reasonably attributable to the cost of capital protection. The amount that is reasonably attributable to capital protection is currently calculated in the following way:

1. Calculate the total costs your clients incur under or in respect of the GEI plus for the income year, ignoring amounts that are not in substance for capital protection or interest
2. Apply the Reserve Bank of Australia's Indicator Rate for Variable Personal Unsecured Loans to your client's loan amount under the GEI plus:
   • If your client's borrowing is at a fixed rate for some or all of the loan term, your clients would apply the Indicator Variable Interest Rate at the time the first of the amounts in Step 1 was incurred for the term, or that part of the term, or
   • If your client's borrowing is at a variable rate for some or all of the loan term, your client would apply the average of the Indicator Variable Interest Rates during the term, or part of the term.
3. Where the amount under Step 1 exceeds the amount under Step 2, the excess is attributed to the cost of capital protection for the income year. If the securities your clients purchased using their GEI plus are held on capital account, the excess would be a capital cost and will not be deductible.

Legislation was passed in June 2011 which changed the benchmark rate applicable to those investors who entered into the GEI plus on or after 7.30pm on 13 May 2008. As a result of this change, the amount that is reasonably attributable to capital protection for those investors will be calculated in the following way:

1. Calculate the total costs your clients incur under or in respect of the GEI plus for the income year, ignoring amounts that are not in substance for capital protection or interest
2. Apply the Reserve Bank of Australia's Indicator Lending Rate for Standard Variable Housing Loans plus 100 basis points to your client's loan amount under the GEI plus:
   • If your client's borrowing is at a fixed rate for some or all of the loan term, your clients would apply the Indicator Variable Interest Rate at the time the first of the amounts in Step 1 was incurred for the term, or that part of the term, or
   • If your client's borrowing is at a variable rate for some or all of the loan term, your clients would apply the average of the Indicator Variable Interest Rates during the term, or part of the term.
3. Where the amount under Step 1 exceeds the amount under Step 2, the excess is attributed to the capital protection for the income year. If the securities your clients purchased using their GEI plus are held on capital account, the excess is a capital cost and will not be deductible.

The Reserve Bank of Australia's Indicator Lending Rate for Standard Variable Housing Loans plus 100 basis points will also apply from 1 July 2013 to any investors who entered into the GEI plus on or after 1 July 2007 whose loan is still in existence on 1 July 2013.

If as a result of the change to the benchmark rate your client is required to amend their income tax return, they have until 29 June 2013 to do so.

Please visit the Australian Taxation Office's website for further details of how capital protected products and borrowings are treated.

What are the Reserve Bank of Australia's Indicator Rates?

The applicable Reserve Bank of Australia's Indicator Rate used to determine the deductibility of interest on your client's GEI plus will generally depend on when your clients entered into the GEI plus.

If your clients entered the GEI plus before 1 July 2007 and the interest rate on your client's GEI plus is variable, use the Reserve Bank of Australia's Indicator Rate for Variable Personal Unsecured Loans. If the interest rate on your client's GEI plus is fixed, use the Reserve Bank of Australia's Indicator Rate for Fixed Personal Unsecured Loans.

If your clients entered the GEI plus on or after 1 July 2007, use the Reserve Bank of Australia's Indicator Rate for Variable Personal Unsecured Loans.

If your clients entered the GEI plus on or after 7.30pm 13 May 2008 use the Reserve Bank of Australia's Indicator Lending Rate for Standard Variable Housing Loans (plus 100 basis points).

The Reserve Bank of Australia publishes the monthly Indicator Rates six to eight weeks after the end of the applicable calendar month. Current Indicator Rates are available on the Reserve Bank of Australia's website www.rba.gov.au