What is Margin Lending?
InvestSMART has partnered with Macquarie Bank to offer a range of margin lending services. We chose Macquarie because of their breadth and depth of services, competitive pricing structures and their five star rating from independent research house CANNEX.
In the same way that property investors put down a deposit and borrow the rest, margin lending allows you to buy a significant share or managed fund portfolio with as little as a 20% deposit. This deposit can be in the form of cash, shares, managed funds and residential property or a combination of all four.
Astute investors understand that borrowing funds to invest, or 'gearing' significantly boosts the potential to create wealth though on the flip side can also enhance the losses.
Benefits of Margin Lending
Lower risk through diversification
As you have more funds to invest, you are able to spread your investments and build a better quality portfolio, thus minimising risk.
Tax efficiencies
Using a Margin Loan can also be a potentially tax-efficient strategy. This is because:
- Loan interest is generally tax deductible;
- Income received from Australian investments often provides franking credits; and
- Capital Gains Tax (CGT) liability can be deferred on existing investments by borrowing against them for new investments rather than selling them and incurring CGT.
Accelerated wealth creation
If you earn profits on a larger investment portfolio, you can build your wealth faster. Having extra funds means you can take advantage of investment opportunities as they arise, such as Initial Public Offerings. The graph below illustrates how a client with just $30,000 equity would have significantly increased their portfolio value with varying levels of gearing.
On 31st March 1998, shares in Woolworths were valued at $5.65. As of 31st March 2003, the value of Woolworths shares had risen to $12.23, and total dividends of $1.18 per share were paid over the five year period. In this example, an investor using his or her own capital would have shares and earnings at that time worth $118,673.
An investor using gearing via a Macquarie Margin Lending facility would have shares and earnings at that time (after borrowing costs are taken into account but before any tax deductions or other benefits are included) worth $168,220.
Note: This refers only to capital growth and dividends, assuming annual pre-tax capitalised borrowing costs of 7.65% p.a.. Franking credits, brokerage, stamp duty, and tax considerations are not included.
Gearing shares & managed funds in a tax efficient manner
Gaining greater investment exposure (along with any associated income, potential franking credits and capital growth) is one of the usual benefits of borrowing to invest into shares and managed funds through a Macquarie Margin Lending facility. You can usually claim your loan interest expense as a tax deduction where the loan funds are used for business or investment purposes - a deduction which can be applied against your investment earnings and other taxable income earned during the year (for example, your salary). This reduces the overall after-tax cost of your borrowings. Furthermore, any interest prepaid prior to June 30 for the next financial year can generally be claimed as a deduction in the current financial year.
Dividends & Distributions
You receive all potential dividends, franking credits and managed fund distributions as all securities are usually held directly in your name. Dividends and distributions may be credited directly to your facility. You will also receive all the usual company and fund correspondence.
Franking
Any dividends and distributions that you receive from share or unit holdings may be fully or partly "franked". That is, tax will have already been paid by the company that paid the dividend, to the extent that it was franked. This may reduce the overall tax that would otherwise have been payable on your investment income.
Capital Gains Tax
Borrowing against an existing portfolio can allow you to unlock cash without creating a Capital Gains Tax liability. This is because you do not need to sell any investments to use them as security to obtain a Margin Lending facility.
Advice
Getting professional tax and investment advice is important. We strongly urge you to consult your own professional financial adviser to determine the impact that gearing will have on your overall taxation and financial situation.
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