Greg Baker & Natallia Kogan Macquarie Private Wealth May 2009

1. Greg Baker & Natallia Kogan Macquarie Private Wealth May 2009

2. Important things to note Macquarie Private Wealth’s services are provided by Macquarie Equities Limited ABN 41 002 574 923 (MEL), Participant of Australian Stock Exchange Group, Australian Financial Services Licence No. 237504, Level 18, 20 Bond Street, Sydney, NSW 2000. MEL is not an authorised deposit-taking institution for the purposes of the Banking Act (Cth) 1959, and MEL’s obligations do not represent deposits or other liabilities of Macquarie Group Limited ABN 46 008 583 542. Macquarie Group Limited does not guarantee or otherwise provide assurance in respect of the obligations of MEL. This general advice has been prepared by MEL and does not take account of your objectives, financial situation or needs. Before acting on this general advice you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. 

3. Important things to note The Macquarie Group does not give, nor does it purport to give, any taxation advice. The taxation discussion in this document is based on laws current at the time of writing. Those laws and the level of taxation may change. The application of taxation laws to each investor depends on that investor’s individual circumstances. Accordingly, investors should seek independent professional advice on taxation implications before making any investment decisions.   Sample case studies are purely hypothetical and the taxation consequences for an investor will depend on the individual circumstances of that investor. The case study and examples have only been included for illustrative purposes. They have been prepared without taking account of any potential investor’s personal objectives, financial situation or needs. Any strategy discussed represents our analysis only and is based on certain assumptions, including those set out in the presentation. The assumptions may have a material affect on the results. Any forecasts in the presentation are predictive in character and therefore investors should not place undue reliance on the forecast information. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The actual results may differ substantially from the forecasts and some facts and opinions may change without notice on the basis of changing market conditions. Gearing will magnify any losses as well as gains.

4. Agenda • 2009 Federal Budget overview • The importance of structuring your assets correctly • Superannuation • Borrowing to invest (Gearing) • Prepaying deductible expenses • Alternative strategies and their consequences • Summary

5. 2009 Federal Budget Overview

6. 2009 Federal Budget Overview Note: these changes are proposals only and passage of legislation is required before becoming law. • Key changes out of the 2009 Federal Budget are: • Superannuation (effective 1 July 2009) • Concessional (deductible) superannuation contribution caps reduced: • Under age 50 – From $50,000 to $25,000 • Over age 50 – From $100,000 to $50,000 • Co-contribution temporarily reduced from 150% as follows: • 100% for 2009/10, 2010/11 & 2011/12; • 125% for 2012/13 & 2013/14; and • Post 1 July 2014 back to 150%.

7. 2009 Federal Budget Overview • Taxation • Previously legislated tax rates (2009/10 & 2010/11) unchanged. • Private Health Insurance rebate (effective 1 July 2010): • Eligibility tested based on Adjusted Taxable Income (ATI) • Nil rebate where ATI above $120,000 (singles), $240,000 couples • Age Pension (effective 20 September 2009) • Increase in Age Pension payment rates • Increase Age Pension age entitlement to age 67 (by 2023) • Employee Share Schemes (7:30pm 12 May 2009) • Taxation of discounts on share schemes in year acquired (no deferral) • Limited access to $1,000 upfront concession - ATI <$60,000 pa

8. Structuring your assets correctly • In managing your financial position, you need to consider the following: • the structure and ownership of assets; • your financial strategy; and • potential investments. • We will work with your accountant to help determine the most appropriate structures.

9. Strategies We will discuss a range of strategies and plans for the new financial year and highlight the need for appropriate advice and planning. Strategies include: • superannuation strategies; • managing capital gains; • gearing of investments; • prepaying deductible expenses; and • utilising investment solutions.

10. Superannuation

11. Utilising superannuation strategies • Tax free pension income and lump sum withdrawals for people aged 60 or more (not necessarily the case at death). • Concessionally taxed pension income for people aged 55-59. • Transition to retirement pensions allow people to access their superannuation benefits prior to commencing retirement. • Tax free lump sum or pension on death of member to spouse and other Tax Act defined dependants. • This may not be the case for adult children at death – need to seek advice. • Co-contributions available for those on lower income. • Superannuation cannot be accessed until a condition of release is met.

12. Non-concessional contributions…a super opportunity • Annual limit of $150,000 per person applies (2008/09). • People aged 64 and below have the opportunity to bring forward two years contributions and make a $450,000 contribution (2008/09), with no further after tax contribution (if any) until year 4. • Cash isn’t the only way to contribute: • cash funds, repayment of company/trust loans; • transfer of existing share portfolios; and • transfer of commercial property. N.B. Contributions above the limits are effectively taxed at the highest MTR.

13. Self employed or unsupported contributions • If you are not an employee or you meet the 10% test, you can make a tax deductible contribution to super. • 100% of the contribution is deductible up to an annual limit of $50,000 for those under age 50, or up to $100,000 for those over age 50 (2008/09 limits). N.B. Contributions above the limits are effectively taxed at the highest MTR.

14. Case study • Gary is 55 and has assessable income of $85,000 in the 2008/2009 financial year. • Gary is self employed and has no other employment relationships. • Gary sells a property in the 2008/2009 financial year that he has held for 5 years and his nominal (pre-discount) capital gain is $100,000. • With $50,000 of the proceeds he makes a concessional (deductible) contribution to super in June 2009 (2008/2009 financial year). • Gary has also sold his share portfolio of $450,000 during the 2008/2009 financial year which he had held for 3 years. This transaction resulted in a capital loss of $100,000. The $450,000 was used to purchase a new stock portfolio during the 2008/2009 financial year. • The table below illustrates the potential tax saving for Gary as a result of the contribution and capital loss.

15. Comparison The table below illustrates the tax saving for Gary in 2008/2009 as a result of the contribution and current year capital loss.

16. Salary sacrifice contributions • If you are an employee, you can consider undertaking a salary sacrifice arrangement to super, if your employer allows. • Personal income tax is not payable on the amount of contribution, however,15% contributions tax applies. Please note that you should seek advice when deciding whether or not this strategy is appropriate for you.

17. Contribution Summary • Summary of contribution limits for current year and next financial year. * Proposed limits released in the 2009 Federal Budget (not yet legislated). NB: If contribution limits are exceeded, excess is taxed at highest MTR.

18. Account based pensions • Income streams are tax free for people aged 60+. • Pension income for individuals aged 55-59 will receive a tax free amount (if applicable) and a 15% tax offset on the assessable portion. • Minimum pension amount is based on a percentage of the opening or 1 July account balance. • No maximum limit applies on pension drawn (provided the individual has met condition of release).

19. Transition to retirement (TTR) pension • Ability to access superannuation for those aged 55 & not retired, via a non-commutable income stream. • Ability to commence a non-commutable income stream to supplement any shortfall in income and/or possibly salary sacrificing the surplus to superannuation. • For people aged 60 and above whose pension is tax free, this achieves an immediate saving of up to 31.5%. • Tax savings may result from difference in earnings tax in pension phase and accumulation phase. i.e. Nil versus up to 15%. • A maximum annual payment of 10% of the capital balance applies until age 65 or some other condition of release such as ‘retirement’. Please note that you should seek advice when deciding whether or not this strategy is appropriate for you.

20. Case study - What is the end benefit? • Sandra is currently working, earns $100,000 per annum and has no other income. She has $400,000 in superannuation. • Sandra wishes to salary sacrifice $50,000 to superannuation and commence a Transition to Retirement pension (TTR) to supplement her shortfall in income ($40,000 per annum). • What are the tax savings Sandra may be able to achieve with this strategy now and in the future?

21. Case study

22. Gearing

23. Gearing • Gearing is the borrowing of money to purchase income producing assets. Interest expense related to the investment loan is potentially tax deductible. • Gearing can also be undertaken within a SMSF where certain criteria are met. • Gearing increases the potential for capital gains AND losses. • Capital protected investment lending allows you to maximise gains and minimise losses (for a price).

24. Finance options • Using the equity in your home. • Often the cheaper form of finance • But places home at greater risk • Margin lending facility. • Potentially subject to margin calls • Risk limited to assets pledged • Protected equity facility. • Interest rate is usually higher given the cost of protection • Generally lower risk than above options • Structured and internally geared investments. • Internal gearing increases risk of invested capital

25. Case study • Peter is aged 35 and currently is on a gross salary of $120,000 per annum. His living expenses are $60,000 per annum. • Surplus income is invested into a portfolio of assets with income of 3.5% pa with 35% franking and capital growth of 6.5% pa. (Return assumption over the long term). • Interest rate on the borrowings is 6.5% per annum. • All income, expense and borrowing rates are constant. 2008/2009 marginal tax rates have been used. • We have compared the following 2 scenarios: • Scenario 1 Peter adopts a $300,000 gearing strategy on 1 July 2008. Surplus income of $19,856 (in the first year) is invested at the end of the first year in a portfolio with income at 3.5% per annum (35% franked) and a growth rate of 6.5% per annum. • Scenario 2 Peter does not adopt a gearing strategy but invests his surplus income of $24,200 (in the first year) in a portfolio. Income of 3.5% per annum (35% franked) is not paid until after the end of the first year and a growth rate of 6.5% per annum is achieved.

26. Comparison - Tax The following table compares the tax savings in 2008/2009 under the 2 scenarios: The above table provides you with an indication of the potential tax savings in year 1 only. Please note that it has been assumed that any surplus income is not invested until the end of the financial year. * Allows for franking credits to be offset against tax payable.

27. Comparison – cash flow The following table compares the first year cash flow in 2008/2009 under the 2 scenarios: The above table provides you with an indication of the potential difference to net cash flow in year 1 only. Please note that it has been assumed that any surplus income is not invested until the end of the financial year. * Allows for franking credits to be offset against tax payable.

28. Comparison – NPV in 10 years The following table provides you with a comparison of the capital position over a 10 year period under the 2 scenarios: As you can see the net benefit of the strategy is $127,399 (i.e. $413,485 – $286,086). Our analysis assumes that any surplus is not available for investment until the end of the financial year. You should seek advice when deciding whether or not this strategy is appropriate for you. * Takes into account CGT assuming investments are redeemed on 30 June 2018 (10 years).

29. The following chart compares the net capital position over the next 10 years: Note: The fall in the final year value for the geared portfolio is due to the larger CGT liability given the geared portfolio has a much larger amount of unrealised capital growth.

30. Gearing in super • ‘Gearing in super’ is not a new concept • It has been common practice for many years through the use of instalments warrants and geared managed funds • Changes to legislation (September 2007) permitted a super fund to borrow if: • the asset purchased is allowed to be acquired eg. shares, property. • the asset is held on trust for the super fund by the instalment trust. • the super fund may acquire legal ownership of the asset by making one or more payments. • it does so on a limited recourse basis i.e. in the event of default, the lender has recourse to only the original asset or replacement asset.

31. Why consider a gearing in super strategy? • You need to accumulate wealth for retirement. • You have an appetite for risk. • You have a long term timeframe. • You can benefit from the tax concessions on the income and realised gains. • Your expected growth and/or income returns are high in comparison to the interest expense over time. • You are keen to benefit from reduced tax payable on capital gains i.e. assuming an asset has been held for 12 months or more, the tax payable on realised gains would be 0-10% v’s 0-23.25%* if the asset was held in your individual name. • There is no limit on the balance you can accumulate in super but contribution limits may restrict how much you can put into super. * Includes Medicare Levy

32. What are some of the risks? • Potential for capital loss, which may mean less funds to provide for your retirement. • Your capital cannot generally be accessed until you have attained preservation age (usually age 55 but depends on your current age) and you have retired. • The cashflow position within super needs to be monitored vigilantly to ensure that loan instalment repayments can be met. • The fund may be able to offset some of the instalment costs (generally interest that is incurred in producing assessable income) against assessable income of the fund. This may reduce the after tax cost of the instalment but it is not significant. • Large, single purchases of assets e.g. 1 property may lead to lack of liquidity and/or diversification within the fund.

33. Who may it suit? • Gearing in super may suit those who have; • a particular level of assets that they wish to achieve at retirement and gearing in the fund may assist with this. • high growth expectations on the geared investmentthat are well above the interest expense on the borrowings e.g. a large asset within the super fund. • a reasonable level of assets (to provide diversification & liquidity) and/or cashflow. • a desire to boost their retirement benefits over the long term.

34. Considerations • When do you need to access the capital within your super fund? • Do you have sufficient equity in your super fund to borrow? • Borrowing limits may vary. • Are further capital injections required if the debt to equity increases? • Your ability to meet the loan repayments within super (negative gearing). • If the interest expense is deductible then the after tax interest cost may not be as attractive compared with a strategy where gearing was adopted outside super. • What assets can be purchased with the borrowings? • Is the fund liquid? • Is the fund sufficiently diversified? • Are you comfortable with the risks associated with gearing & subjecting your retirement funds to the potential for further loss?

35. Prepaying deductible expenses

36. Prepaying deductible expenses • Prepayment of some deductible expenses potentially qualifies for a deduction in the current financial year. • For example, interest expense on an investment loan can be pre-paid 12 months in advance. • Some expenses such as interest expenses on investment loans can be packaged through salary. • Income protection insurance premiums are often tax deductible. You may also be able to pre-pay these expenses.

37. Alternative strategies and their consequences

38. Efficient product solutions • Essentially long term investments (10 years +): • Access to capital is restricted; • Usually involving agricultural businesses such as timber/forestry, vineyards, olives, nuts etc. • Investment is utilised towards the development of a certain asset which is then sold once developed: • Some products may have obtained an ATO Product Ruling; • Proceeds to the investor will include profits from the sale of the end product and possible capital assets that were utilised in the development (such as land).

39. Structured Products • Capital Protected products provide investors with exposure to Australian and US markets with the added security of knowing that their initial investment is 100% protected on maturity. • Opportunity to borrow to invest with the protection of a limited recourse loan and the flexibility to ‘walk away’ from the investment without incurring break costs. • 100% gearing enabling investors (including SMSFs) to invest with a low initial capital outlay and no margin calls. • Forestry Investments

40. Summary The following should be taken into consideration when deciding upon an appropriate strategy for you: • quality of the underlying investment; • whether it matches your risk profile; • your investment time frame; • whether you require access to capital; • your cash flow and the cash flow requirements of the strategy; • the need to take on further risk to increase your wealth; and • your overall objectives.

41. Contact details For further information on any of the topics discussed in this evening, please contact: Natallia Kogan – (03) 9635 8714 natallia.kogan@macquarie.com Greg Baker – (03) 9635 8583 greg.baker@macquarie.com