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

Charles Corrado and Joe Cheung
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Joe Cheung: Department of Accounting and Finance. Private Bag 92019 University of Auckland, New Zealand.

Australian Journal of Management, 2003, vol. 28, issue 1, 83-96

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.

Keywords: OPTION VALUATION; TAX ARBITRAGE; GEARED EQUITY INVESTMENTS (search for similar items in EconPapers)
Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:28:y:2003:i:1:p:83-96

DOI: 10.1177/031289620302800104

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