Winter 2008

Take advantage of the potential benefits when you prepay

Prepay your margin lending interest before June 30 and add up the benefits.

Interest rates steady (for now) and oil continues to rise

BT's Chief Economist Chris Caton on the outlook for interest rates and petrol prices.

How can prepaying margin loan interest save you money?

Find out how prepaying the interest on your margin loan can be a tax-effective strategy.

BT does not lend your securities to other institutions

With a BT Margin Lending agreement you retain beneficial ownership and we don’t lend your assets to other institutions.

Take advantage of the potential benefits when you prepay

04/06/2008

With the end of financial year less than four weeks away, now is the time to prepay up to 12 months interest on your BT Margin Loan. By paying next year’s interest before June 30, you may be able to take advantage of the following benefits:

• Lock in a great rate to protect against rising interest rates
  By choosing to prepay the interest on your margin loan, you can lock in an interest rate that protects you from any interest rate rises that may occur in the next 12 months.
  
  
• Potential tax deductions
  Prepay before June 30 this year and you may be able to claim the cost of up to 12 months interest as a tax deduction in the current tax year, provided you maintain the margin loan for the period over which your have prepaid your interest.
  
  
• Easier cash flow management
  By prepaying now, you won’t need to worry about making any interest payments on your margin loan until this time next year – provided you keep your loan balance at or below the prepaid loan balance. This means you can plan and manage your cash flow more effectively.

To take advantage of these potential benefits, find out how you can prepay the interest on your margin loan with BT.

Like to know more?

Want to know about other potential tax and investment strategies? Westpac and BT have developed a guide to practical equity investment solutions, including:

• The benefits of a regular gearing plan with your BT Margin Loan
• How you can build your portfolio and avoid margin calls
• How using a Self Managed Account can give you more control over your investments.

For your free copy of “Tax and investment strategies in times of volatility” speak to your financial adviser or order a copy online (opens Westpac website in a new window).

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 their interpretation. Your individual situation may differ and you should seek independent professional tax advice on any taxation matters.

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 and needs.

Interest rates steady (for now) and oil continues to rise

04/06/2008

Well the Budget has come and gone, and not much is different. Share markets rose again in May, although not by much, and the US economy continued to send off mixed signals, thus enabling both the optimists and pessimists to maintain their views. I continue to think that there is worse economic news to come from the US, which will be a challenge for share markets.

The outlook for interest rates

Not much has changed on this front in the past month. The Q1 GDP accounts confirmed that the Australian economy has already slowed in 2008, but this is not (yet?) a problem. If we are to dent inflation, then the economy needs to grow at less than trend (probably 3-3.5%) for some time and, in particular, the unemployment rate is probably going to drift upwards. Bear in mind, too, that there are two massive sources of stimulus about to hit the Australian economy in the form of the personal income tax cuts and the huge boost to coal and iron ore prices, which is itself worth about 3% of GDP.

A long way from a rate cut

The June quarter CPI should again be ugly, both in headline and underlying terms, but the RBA should be able to argue that we’ve hit the peak (of at least 4.5%) in this episode, which will mean that it doesn’t have to raise rates further. But we are a long way from a rate cut.

Despite the protestations of some who should know better (including several ex-RBA officials), we cannot afford to be complacent about this outburst of inflation. Some time ago, central banks decided that economies functioned best if inflation were low and stable. Alan Greenspan had one of the best definitions of low inflation; it’s low enough when consumers, wage earners and businesses don’t take it into account in their decisions. We’re not there at present! The RBA’s forecast has inflation above the target range for the next two years, indicating that it will keep policy tight, but does not intend to tighten so much that inflation is improved quickly but at the cost of serious damage to the economy.

So assume interest rates stay where they are. And given that credit-market conditions have improved at least slightly, the banks are unlikely to raise the variable rate further of their own volition.

Oil prices: lower, not higher

The continued rise in oil prices was a feature of the month. At end-April, a barrel of West Texas Intermediate cost $116; in late May this price hit $135. Oil prices have doubled in little more than a year. There are those who ascribe all of the rise to “fundamentals” (that is, supply and demand), and there are fanciful forecasts out there that the price may hit $200 per barrel in relatively short order. Count me among the sceptics. Those who claim the price rise is all justified by fundamentals need to be able to identify exactly which fundamentals have changed so much in the past year. Did we not know a year ago that demand in the developing world was likely to continue to rise? Has there been any massive reassessment of the future supply of oil?

If (at least some of) the price rise is not due to fundamentals, then the next move may well be downwards. My personal view is that oil will trade at $100 per barrel before it trades at $150. This, incidentally, is the same forecast that I gave my audiences a year ago.

If oil prices are to retreat, then they will soon begin to dampen inflation, although we have not yet seen the peak effect on overall inflation of the rise to date. The rise in oil prices has, of course, reduced the real income of consumers. In the US, consumer spending is growing more slowly than at any time in the past 16 years, and “working families” are complaining vociferously about petrol prices in Australia, leading both sides of politics to look for means of alleviating the pain. If I am correct, and oil prices do fall, then this latest outbreak of “bad economics” will be halted before it can do too much damage.

Petrol tax: higher, not lower

Am I the only one who thinks that our politicians should be engaged in weightier matters than ensuring that everyone is free to drive the Tarago at the lowest possible cost? I don’t expect to win many friends by saying so, but we should be taxing petrol more than we are, rather than less.

The consumption of petrol is taxed in every developed country that I am aware of, and for good reason. First, there is an enormous amount of public infrastructure associated with petrol consumption. Why shouldn’t petrol users pay for that? Second, unlike most goods and services that we consume, the consumption of petrol imposes costs on others, mainly in the form of environmental damage and congestion. If petrol is untaxed, then we will use more of it than is socially optimal.

In Australia, this tax burden is relatively small; I am aware of just two developed nations, the United States and Canada, that impose a lower tax burden. One can imagine that the present outburst of rampant populism on this issue could well lead to the “quarantining” of petrol when Australia gets serious about reducing carbon emissions. Were this to occur, greater cutbacks will need to be made elsewhere, and the consumer will suffer, with electricity prices, for example, being far higher than otherwise.

Petrol prices: not as bad as we think?

There is a further consideration. The “burden” of the increased cost of petrol is commonly exaggerated by stories of how many dollars it takes to fill the family car (imagine that, a problem exaggerated by the media!). The chart shows the ratio of consumer spending on gasoline to total personal income. It shows that, as of the December quarter last year, this ratio was 2.8%. Data for 2008 are not yet available, but this share is still likely to be little more than 3%. Note that the share was higher for almost the whole time from the onset of OPEC II until early 1987.

Petrol spending as a share of personal income

How can this possibly be true, given that the pump price is so high and, as I showed last month, the price of petrol relative to total consumer prices is at a record high, and about 30% higher than it was in the early-to-mid-80s? There are two main reasons. First, cars are more fuel-efficient than they used to be. Second, in the past 20+ years, our real incomes have risen, but we have not increased the distance that we drive nearly so much.

How can prepaying margin loan interest save you money?

04/06/2008

Unsure of how prepaying the interest on a margin loan can be a tax-effective strategy? Here’s just one example of how prepayment before June 30 can save money at tax time.

Robert has an investment portfolio of $180,000 with a borrowed amount (margin loan) of $90,000. On March 1, he decides to prepay 12 months of interest on his margin loan instead of paying the interest at the variable rate at the end of each month.

By prepaying next year’s interest in advance, Robert is able to claim a full 12 months interest in the current financial year (March 2008 to February 2009). If Robert was to pay his interest one month at a time, he would only be able to claim 4 months variable interest in the current financial year (March 2008 to June 2008).

As you can see in the table above, by choosing to prepay, not only does Robert lock in an interest rate for the next 12 months, he’s also more than $2,000 better off than if he'd chosen to pay his interest one month at a time¹.

For more information

To find out more about prepaying the interest on your margin loan and how it can work for you, contact your financial adviser or call BT Margin Lending on 1800 816 222.

¹ Assumptions
Results are net of tax and borrowings with no change to the prepaid loan balance. Variable interest rate 10.65% pa non-compounding, prepaid interest rate 10.10% pa. Capital growth of 4.5% pa and distribution yield of 4.0% pa. Income Tax Rate including Medicare Levy 41.5%. Margin loan drawn down 1 March. Portfolio is geared at 50%. This example is for illustrative purposes only and should not be relied upon as an indication or prediction of future results.

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 their interpretation. Your individual situation may differ and you should seek independent professional tax advice on any taxation matters.

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 and needs.

Getting a prepaid margin loan interest quote is easy with BT

04/06/2008

Prepaying the interest on your margin loan is easy with BT’s online Margin Loan Prepaid Interest Calculator.

Calculate your prepaid interest quote online

Follow the steps below to calculate your prepayment quote online:

1. Log into BT Online (opens a new window) to access your margin lending account (if you don’t have a password, call BT Margin Lending on 1800 816 222)
2. Select the BT Margin Loan you wish to prepay the interest on
3. Select the ‘prepaid calculator’ on the left-hand menu and follow the prompts to generate a quote.

Submit the quote to BT Margin Lending

Once you’ve checked your quote, you can submit it online immediately or save it as a PDF file and submit it to BT through the methods listed below.

Email:      prepayinterest.marginlending@btfinancialgroup.com
                Include the following text in the body of your email:
                "I accept the attached quote for prepaying the interest on my margin loan.”

Fax:        sign and fax quote to (02) 9274 5782

Mail:       sign and mail quote to GPO Box 3917, Sydney NSW 2001

Choose a payment option

You’ll need to ensure the payment for your prepaid interest quote is received by 12.00 midday on the day the quote is due. You can use any of the following payment options:

• available funds margin loan (not available for Absolute Investment Loans) – log on to BT Online to review your funds available
• BPAY® - allow two working days for these funds to be received in your account
• cheque – payable to “BT Margin Lending” with your Margin Loan account number on the reverse of the cheque
• direct debit from a nominated account – you need to complete and signed a Direct Debit Request form (PDF 80KB) to give BT permission to debit a nominated bank account
• direct credit to BT
• Cash Management Trust (not available for Absolute Investment Loans) – if you hold units in the BT Fund
• compounding interest on your margin loan (not available for Absolute Investment Loans).

Things you should know before you prepay your interest

Before you decide to prepay your interest, you may want to talk to your financial planner to see if it suits your own personal circumstances.

Here are some things you should consider:

• minimum prepaid loan balance is $20,000
• prepaid interest cannot be cancelled or refunded
• terms available for prepaid interest are 3, 6, 9 and 12 months
• You can request a quote for fixed interest paid monthly in arrears (as an alternative to paying the interest amount in advance or prepaying) by calling BT Margin Lending on 1800 816 222.

For more information, view our FAQs about prepaying your margin loan interest with BT.

BT does not lend your securities to other institutions

04/06/2008

If you’ve kept an eye on the financial press recently, you may have noticed some commentary around margin lending agreements, like those offered by BT, and securities lending agreements, offered by other companies.

In short, there are two key differences:

• With our margin lending agreement you retain beneficial ownership.
  The good news for BT margin loan investors is that when you borrow to invest with BT, you retain beneficial ownership of the shares and managed funds that make up your margin lending portfolio.
  
  
• We don’t lend your assets to other institutions.
  The other significant difference is that unlike a securities lending agreement, a margin lending agreement with BT means we don’t lend your assets to any other institution.

All BT margin loans are based on margin lending agreements and not securities lending agreements.

BT Margin Lending does hold a mortgage over the assets you have lodged against your margin loan. If you are faced with a margin call or a default on your loan, BT does have the right to sell some or all of the securities in your portfolio.

If you’d like to know more about margin calls and how to manage them, visit our margin lending section.