Geared Equity Investments: Tax Arbitrage Down Under

Geared Equity Investments (GEI) are an over-the-counter product offered by Macquarie Bank, Ltd. to high-income investors in Australia and New Zealand as a managed-risk investment in local shares with a significant tax-shield benefit. Upon issuance, a geared equity contract has three stakeholders: 1) the investor, 2) the issuer, and 3) the tax authority. We measure the value of these contracts to each stakeholder and assess their support for investor tax arbitrage. Our main conclusion is that the tax-shield benefit of a GEI contract supports investor tax arbitrage in certain cases, but that most of the tax shield flows through to the issuer and the credit markets.