POWER Shares weather budget tax changes

The recent Federal Budget has crunched the tax-effectiveness of capital-protected share loans such as Protected Equity Loans (PELs).

Existing PEL users can enjoy the tax breaks for five years, but new investors can now only deduct the interest costs associated with the borrowing – not the full amount.

A big part of the interest costs relates to the cost of put options that act as insurance.

Treasurer Wayne Swan also announced a new benchmark for how much interest can be claimed with such products – 9.45% (the RBA Home Loan Reference Rate).

Alpha sought legal advice on the tax deductibility on interest costs from our adviser, Blake Dawson:

Click here for BDW Tax Summary.

Click here for BDW Tax Opinion.

The good news: the interest rate on POWER Shares is around 10.25% - so the reduction in tax effectiveness following the budget changes is minimal.

Products such as PELs that can charge up to 18% are significantly more affected.