The strategy. Nick wanted to start a share portfolio while minimising the losses from any fall in value in individual shares. While he was earning a good salary, he didn’t have much by way of savings. So he decided to use a Protected Portfolio Loan.
How he did it. Nick borrowed $100,000 for a portfolio of five Australian shares, using a Protected Portfolio Loan with a term of five years. After taking tax deductions and franking credits into account, the net cost of his loan was around 4.15% per annum, or less than $80 a week.
The result. Over the next five years, some of Nick’s stocks rose in value, while others fell:
|
|
Stock 1
|
Stock 2
|
Stock 3 |
Stock 4 |
Stock 5 |
Total |
|
Original market value |
$20,000
|
$20,000
|
$20,000 |
$20,000 |
$20,000 |
$100,000 |
|
Market value after five years |
$26,000
|
$40,000
|
$30,000 |
$14,000 |
$8,000 |
$118,000 |
|
Capital gain or loss |
30%
|
100%
|
50% |
–30% |
–60% |
18% |
Capital gain or loss with
Protected Portfolio Loan |
30%
|
100%
|
50% |
0% |
0% |
36% |
By keeping his gains and handing back his losses, Nick enjoyed double the capital gain he would have received without a Protected Portfolio Loan.
Assumptions. Loan term: 5 years • Loan amount: $100,000 • Interest rate: 12.26% per annum fixed, paid annually in advance • Dividend yield: 4.18% • Marginal tax rate: 48.5% (with Medicare levy).
A Product Disclosure Statement for Protected Portfolio Loan (PPL) issued by Commonwealth Bank of Australia ABN 48 123 123 124 is available from www.commsec.com.au and should be considered before making any decision about the product. The tax treatment of applicants for a number of features for the PPL is confirmed in a Product Ruling issued by the Australian Taxation Office (ATO). The ruling is available upon request or can be viewed on the ATO website at www.ato.gov.au
The taxation information is of a general nature only and based on current laws, rulings and their interpretation. You should consider obtaining advice before making any financial decisions.
The information on this site has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information on this site, consider the appropriateness of the information, having regards to the individual’s objectives, financial situation and needs, and, if necessary, seek appropriate professional advice.
The presence of a managed fund on this list should not be construed as a recommendation. No representation is given, warranty made or responsibility taken as to the appropriateness or performance of any of these funds.
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