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Geared Equity Investments: A Case Study of Tax Arbitrage Down Under

Author

Listed:
  • Charles J. Corrado

    (Department of Accounting and Finance. Private Bag 92019 University of Auckland, New Zealand.)

  • Joe Cheung

    (Department of Accounting and Finance. Private Bag 92019 University of Auckland, New Zealand.)

Abstract

Geared Equity Investment (GEI) contracts are an over-the-counter financial derivative product offered by Macquarie Bank, Ltd, to individual investors in Australia and New Zealand as a managed-risk investment in local shares carrying significant tax shield benefits. Upon issuance, a geared equity contract has three stakeholders: (1) the investor; (2) the issuer; and (3) the national tax authority. We assess the value of these contracts to each stakeholder and their support for tax arbitrage. We find that the national tax authority provides a significant subsidy to GEI contracts via tax shield benefits. These benefits support investor tax arbitrage in certain cases and issuer tax arbitrage in all cases examined.

Suggested Citation

  • Charles J. Corrado & Joe Cheung, 2003. "Geared Equity Investments: A Case Study of Tax Arbitrage Down Under," Australian Journal of Management, Australian School of Business, vol. 28(1), pages 83-96, June.
    • Handle: RePEc:sae:ausman:v:28:y:2003:i:1:p:83-96
    DOI: 10.1177/031289620302800104
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    References listed on IDEAS

    as
    1. Wood, Justin, 1997. "A simple model for pricing imputation tax credits under Australias dividend imputation tax system," Pacific-Basin Finance Journal, Elsevier, vol. 5(4), pages 465-480, September.
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    Cited by:

    1. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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