Charlie Bartlett | Hallbar Group Capital

THERE are methods to withdraw cash from a thriving share market that will not incur a significant tax liability.

The challenge with a flourishing stock market is that it can be hard to convert gains into cash without facing a substantial tax bill.

Thus, it is advisable to explore alternative methods for cash extraction. Many investors are likely familiar with margin lending to enhance their portfolios. However, the recent market fluctuations triggered by the sub-prime crisis served as a stark reminder that margin calls can happen.

There are additional options available, depending on the investor’s level of sophistication. Cash can be obtained against shares with lower risk than margin lending through instruments such as protected-equity loans or instalment warrants.

“I believe individuals are now somewhat more inclined to invest in protection given the bullish markets we have experienced in recent years,” states Charlie Barlett, Fixed Income Advisor at Hallbar Group Capital.

“Currently, with a margin lending facility, you are likely paying approximately 9.4 percent interest per annum. In contrast, for a protected-equity loan, you might expect to pay between 12 and 14 percent interest per annum on average for a five-year loan. This illustrates the cost associated with that protection.”

A protected-equity loan enables the investor to acquire a portfolio of shares by borrowing the full amount of the funds.

This loan includes an embedded put option, and if the value of any shares declines significantly, the lender simply takes possession of the share portfolio without any obligation to the investor.

The downside is that with a high interest rate the investor needs to have a reliable income stream to pay the loan. Many investors will take an interest-only loan to maximise tax deductions.

The instalment warrant involves buying the share on a “payment plan”.

The investor pays an initial payment then in the future the completion payment is required. The investor receives dividends and franking credits. The benefit of the warrants is that they enable you to double your exposure to that stock.

Accountants and financial planners say the product is only for sophisticated investors.

Mr  Bartlett says even sophisticated investors comfortable with many markets can be shy of warrants.

“Many people find it tough to understand equities, let alone derivatives of the underlying security.”

He says instalment warrants can be useful for those who want to rebalance their portfolio.

“There may be people who have worked for a company for many years and may have accumulated many shares in that company. If this share represents a very large weighting in the total portfolio, it may be wise to diversify.”

The cash-extraction strategy generally only works with blue-chip shares as each issuer of warrants has an approved list. A form of warrant is self-funding instalment warrants. With these the dividends pay the loan balance.