Self-Funding Instalments - Have your cake and eat it too!

Warrants article for Adviser Services Update – 24 March 2006
By Westpac

Many financial advisers deal with investors holding a portfolio of one or two different shares and, for one reason or another, the investor does not want to touch the shareholding.  Often, these shares have appreciated in value and selling them to release cash may crystallize a capital gains tax (CGT) event.  Typically, these "favourite" shares are in large Australian companies, such as BHP Billiton (BHP), Commonwealth Bank (CBA), Woolworths Ltd (WOW) or Telstra (TLS).  Often, investors are also looking for further diversification in this type of concentrated portfolio.

Westpac Self-Funding Instalments (SFI) offers an opportunity for investors to extract cash from their shares for other investments whilst maintaining exposure to the existing share holdings.

SFI are a way to purchase shares by making two payments over time.  The First Payment includes a partial payment for the underlying shares.  The outstanding value of the shares is a limited recourse loan from Westpac to the investor, meaning it is not obligatory the loan be repaid.  Protection of the loan amount is obtained via put options purchased over the underlying shares.  This gives investors the ability to walk away from the investment if the value of the shares falls below the loan amount.  Investors can purchase Instalments by making the First Payment, after which they will enjoy many of the benefits of share ownership, including capital growth, dividends, which are automatically used to reduce the loan, and potentially franking credits and interest deductions.

Investors, other than self managed super fund (SMSF) trustees can also purchase SFI by applying existing holdings of fully paid shares to Westpac, in exchange for the equivalent number of SFI.  Investors also receive a Cash Back Amount equal to the loan associated with the SFI less interest and put option fees.

By holding the SFI, investors maintain many of the benefits of ownership associated with their existing share holding, plus extract cash from the holding which can then be used for other investments.  Thus, they allow investors to 'have their cake and eat it too”.

Example

Sarah holds 20,000 St. George Bank (SGB) shares, currently trading at $29.27 (a $585,400 investment).  She wants to maintain her exposure to SGB, however, lacks the cash to diversify.

To release cash from these shares, Sarah converts her 20,000 SGB shares into Westpac SFIs.  Details of this transaction are set out in the table below.

ASX SFI Code SGBSWZ
Share Price $29.27
First Payment $15.37
Completion Payment $14.70
Loan to Valuation Ratio (LVR)** 50.2%

Prices as at 6/03/2006
** LVR is calculated as Completion Payment divided by the share price

Outcome
Sarah extracts $278,000 from the market whilst maintaining her exposure to the SGB shares (without having to pay capital gains tax).

The cash back amount per SFI is calculated as follows:-       

Completion Payment $14.70
Interest (until 30 June 09) ($0.35)
Put Option Fee (until 30 June 09) ($0.45)
Cash Back Amount $13.90

And then multiplied by the number of shares to obtain a total cash back amount

In this case $13.90 x 20,000 = $278,000.

How to Apply

Investors can apply for Westpac SFI using their existing shares by completing the Securityholder Application Form section in the relevant PDS.  In doing so they remain the beneficial owner of the underlying shares so there is no CGT event and they continue to receive potential franking credits.  In addition, SFIs provide investors with a geared equity investment free of margin calls or regular payments.  This is due to the 'self-funding' feature that automatically applies dividends paid by the underlying shares to pay for the interest and loan amount associated with the SFI.

Available over 40 shares and listed unit trusts, SFIs are an effective way to gain diversification, maintain expose to shares with growth potential, and obtain potential interest deductions.

Call 1800 990 107 to find out more about Westpac Self-Funding Instalments.

Important Information
Westpac Banking Corporation ABN 33 007 457 141 ("Westpac") is the issuer of the Westpac Self-Funding Instalments ("SFI"). A product disclosure statement ("PDS ") is available for the SFI.  A copy of the SFI PDS and a copy of Westpac's Financial Services Guide can be obtained by calling 1800 990 107 or visiting www.westpac.com.au/structuredinvestments. You should obtain and consider the PDS before deciding whether to acquire, continue to hold or dispose of the SFI.
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness having regard to your objectives, financial situation or needs.
The taxation position described is a general statement only and should only be used as a guide.  It does not constitute tax advice and is based on current tax laws and their interpretation.  Westpac financial planners are not qualified to give tax advice.  The individual situation of investors may differ and investors should seek independent professional tax advice on any taxation matters.
Information for trustees of SMSF.  In certain circumstances, under guidelines issued by the Australian Prudential Regulation Authority and Australian Tax Office (the "Super Regulators), Instalments can be an eligible investment for self-managed superannuation funds when acquired using a Cash Application or on market.  However, trustees of super funds should read the guidelines before deciding to invest.  Under the law, superannuation fund investors are subject to restrictions on the types of investments they can make and activities they can undertake, including restrictions on borrowing and charging their assets. The Super Regulators require trustees of superannuation funds to consider an investment in the context of the superannuation fund's particular investment strategy and to ensure they are familiar with the risks involved in investing in Instalments, have appropriate risk management procedures in place prior to making the investment and disclose to members the details of the fund's investment strategy. Superannuation fund trustees will need to ensure that they have the power to acquire Instalments or other derivatives, ensure they have sufficient liquidity in the superannuation fund to pay the Completion Payment, or have an investment strategy in place that contemplates the superannuation fund electing not to make the Completion Payment, and therefore not acquiring the underlying Security
The information is current as at 6 March 2006.