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Be Careful of End of Financial Year Tax Investment Schemes

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It is that time of year when investment schemes are heavily promoted on their tax effectiveness. In the past, many people have been disappointed with the outcome of such investments. If you are ever approached by a promoter of investment schemes or are considering the merits of different schemes always seek professional advice.

The old saying always applies – “If the investment you are considering sounds too good to be true it probably is.”

Always be wary of the following statements:

  • even if the investment doesn’t go ahead you'll still make a profit from your tax refund
  • you don’t need any credit or asset checks, we’ll lend you the money
  • you’ll only have to pay back the money from the profits of the investment
  • don’t worry about asking the Tax Office if it’s OK – we have a ruling (or an opinion from a Queen’s Counsel, QC, etc)
  • there’s no risk
  • you’re guaranteed to get your money back in a few years
  • while the scheme is legal, the tax man doesn't like it and that’s why all the meetings and transactions are off shore, or
  • we can get you access to your superannuation now, no need to retire or worry about the usual rules.

If you see any of the above:

  • ask the promoter of the investment whether they have a product ruling from the Tax Office for the project
  • if the answer is yes, ask for a copy of the product ruling and read it, or have an independent tax professional read it and explain how it applies to you
  • if the answer is no, consider whether or not you should participate
  • consult a tax expert who is not involved in promoting the investment.

The following features could also be regarded as warnings. These become apparent when you check the proposed investment carefully:

  • arrangements which are contrived and artificial in their method of execution
  • little or no real underlying business or purpose.
  • the significance of the claimed tax benefit in realising an economic return
  • the contrived transfer of a tax benefit.
  • limited or non-recourse funding associated with a round-robin flow of funds
  • little cash outlay associated with borrowing funds under a capitalising debt facility
  • mechanisms for winding up or exiting an arrangement before net income is generated for investor
  • assumptions, including ‘blue sky’ projections, that can lead to seemingly excessive valuations of assets resulting in inflated deduction claims use of tax exempt entities, eg charities to wash income, and transactions involving tax havens.

Every year the financial media runs stories on investment schemes that have gone bad. That is not to say that all investment schemes are ‘dodgy’. However, good tax planning should involve the advice from your tax adviser.

If you are considering your tax planning options, please consult this office.

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