The start of June typically brings a mad scramble to get together receipts, bank statements and payment summaries. It’s also the time of year when tax-driven investments are heavily promoted, often with promises of solid tax savings coupled with little or no risk, and high returns. It’s a combination that sounds appealing but unless you are very careful, these so-called investments could cost you dearly.
There is nothing wrong with looking at legitimate ways to minimise your tax bill. For most of us that involves keeping good records of investments, holding onto receipts for work-related expenses, and speaking with a reputable tax agent – preferably long before 30 June rolls around.
Minimising tax is very different from tax avoidance, which is an attempt to dodge your tax obligations. Tax-based investments often fall into the avoidance category, and if you tip your money into one of these schemes you risk getting a bill for the tax you’ve been trying to avoid plus stiff penalties and interest charges.
Some tax-based investments do come with Tax Office rulings. These set out how an investor’s tax bill is likely to be impacted by the investment. The trouble is, it can be very difficult to pick the legitimate investments from those that are designed purely to make money for the promoters, and the spivs behind these schemes can spin a very convincing story.
There are some important warning signs that you could be dealing with a dodgy tax scheme. A common feature to watch for is a ‘zero risk guarantee’. All investments have some degree of risk attached, and any claims that an investment is risk free should be regarded with an extremely large dose of skepticism.
Also be on the lookout for investment structures that are unreasonably complex. None of us like to admit we don’t understand how something works, but if you can’t easily explain to another person how a tax-based investment will make money for you, it’s a fair bet it’s designed to make the promoter rich – and leave you out of pocket.
Another warning sign is a sense of urgency from the person flogging the investment. It’s all part of the marketing spin designed to get you to sign up on the spot. Sure, the end of the financial year is just around the corner but never let yourself be rushed into any investment decision.
If you do come across investments promising significant tax savings, seek independent advice from someone completely unassociated with the investment or its promoter. The Tax Office or your tax agent can tell you if the advertised tax savings are legitimate.
For more on tax-driven investments, visit the government’s Money Smart website, or take a look at the Tax Office booklet “Understanding Tax Effective Investments”, which you can download from www.ato.gov.au – click on “Investments aren’t always as they seem”.