Margin loans, warrants at record levels
Mainstream borrowing-to-invest loans are fast replacing older-style exotic tax-effective investments for taxpayers this year, with margin lenders and warrant issuers expecting to write record business in the lead-up to June 30.
ATO crackdowns on tax schemes have driven this exponential growth in geared stockmarket investments. The ATO has failed to date in its attempts to challenge geared equity investments.
Total margin loans taken out by retail investors soared to new heights in 2002 and end-of-year sales are expected to boost loans to $10 billion, as investors seek to maximise tax deductions by prepaying interest. The biggest margin lenders say that their growth has come at the expense of schemes targeted recently by the ATO. Macquarie Bank's Scott Young expects end-of-year sales to jump 100 per cent, saying that investors want tax certainty and advisers want certainty for clients.
The best-selling margin loans are capital protected, which are growing at 39 per cent across the industry, and are outstripping traditional margin loans, despite interest rates as high as 23 per cent. And unless the ATO is successful in an imminent High Court appeal, the tax effectiveness of capital protected loans may be further enhanced.
But financial planners have warned investors to compare after-tax returns with the high cost of investing in capital protected loans. Myles Cronin of Investment Taxation Specialists says that accepting investment risk gives you a better result, and if you need to contract out of the risk, the cost of insurance may be so high you shouldn't be in the stockmarket.