Beware tax-driven schemes
IT is that time of year when my in-tray starts to overflow with brochures for tax-driven investments.
These schemes typically promise healthy long-term returns with the added appeal of immediate tax deductions.
But scratch the surface and you’ll find some of these investments are little more than an opportunity for shysters to separate you from your money.
Tax perks should never be the main draw card of any investment.
That’s why my general advice on tax schemes is like the old saying about exercise, that is, if you feel like becoming involved, lie down until the feeling goes away.
The schemes I’m referring to come in a variety of shapes and sizes.
They may involve agribusinesses like yabby farms or pine plantations.
Or they can involve so-called mortgage management plans, where the promoter offers to make your home loan repayments tax deductible by using your home equity as a source of funding for other purposes.
In fact there’s no end to the variety of tax-driven schemes that promoters can dream up.
That’s why it’s important to recognise the warning signs that indicate a dodgy tax scheme.
The Tax Office says a key feature to be suspicious of are zero risk guarantees.
All investments, even cash, come with some degree of risk.
Be very wary if you come across an investment that doesn’t come with a product disclosure statement or prospectus, or if you’re referred to a particular adviser or expert claiming to have specialist knowledge about the arrangement and its promised tax benefits.
Note, too, many tax-driven schemes feature some sort of mechanism that makes it easier to fund your investment.
In particular, watch out for non-recourse loans that claim no repayment is necessary even if the investment goes bad.
The chief selling point of tax-based schemes is the promoter’s claim of an immediate tax write off, which can be used to reduce your tax liability in the current financial year.
The problem is that the tax perks may not be approved by the Tax Office, and this could land you in serious hot water with the tax man.
Along with the prospect of losing the money you’ve invested, you could face a tax bill for deductions that have been disallowed as well as penalties for underpayment of tax.
Many tax-driven schemes are extremely complex, so it’s good to see that the Tax Office has produced a booklet entitled ‘Understanding Tax Effective Investments’.
It’s designed to provide simple guidelines on what to look out for – and what to do if you’ve already tipped money into one of these schemes.
You can download a copy for free from www.ato.gov.au.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.