Tax-driven investments

The tax-driven investment area has had a lot of unscrupulous individuals and investment offerings over the years, which has unfortunately, given the industry a bad name.

Nevertheless, it is possible to find some good investment opportunities within this area – investments that not only make sense from a tax-effective point of view, but also from the viewpoint of being attractive investments in their own right.

Tax-driven investments have two components that need to be considered to ensure you won’t be left with a nasty problem down the track:

  1. The taxation issue
  2. Commercial viability

The taxation issue
Aggressive tax-oriented investments are not looked upon favourably by the Australian Tax Office (ATO). In fact, many of these investments have been the subject of scrutiny and penalty action over recent years.

As such, investments that offer substantial tax benefits should be treated with caution.

Investors should be aware that if the main reason for entering an investment scheme is to avoid tax, then under the law, the ATO has the ability to disallow the deductions at a later date.

In particular be cautious of investment schemes that offer substantial tax benefits, or involve finance offers using promissory notes, buy back schemes, or other arrangements where very little of your own money is outlaid or at risk.

Useful tip:

Make sure that any tax-driven investment you are considering has an ATO product ruling. Find out by searching on the ATO website. Product Rulings can give investors peace of mind in relation to the taxation arrangements of different investment schemes, provided the arrangements are carried out in accordance with details provided by the applicant and described in the Product Ruling.

As a word of caution: if an investment that relies on so-called ‘tax breaks’ seems too good to be true, it probably is. You could find your tax deduction disallowed and face a tax bill that includes penalty tax and interest.

For more information on the ATO’s stance and opinions on these type of investments, the ATO’s website provides some useful information –

Commercial viability
At the end of the day, every investor wants a return from their investments.

As such, whilst the taxation benefits are nice, they should not be the main motivator for entering into any investment arrangements. You should also make sure that the product you are considering is going to provide you with a suitable and justifiable return and that the manager behind the product is not only licensed, but also has relevant industry expertise.

Independent research from a reputable organisation is an excellent way to provide peace of mind about the investment merits of many of these schemes. There are several research houses that have the skills and resources to thoroughly analyse the various types of investment schemes. They conduct site visits, look at the forecasts for costs and returns to make sure they are acceptable and check out the credentials of the operators.

The list below highlights some important points you should consider when determining the investment worth of any tax-driven managed investment scheme:

  • Is there a current and registered Product Disclosure Statement with ASIC? Find out now.
  • Is the promoter of the investment scheme licensed by ASIC? Find out now.
  • Has the investment had independent research conducted, and was it favourable? This does not mean any expert opinions included in the disclosure document, but research that has been conducted by independent research houses not affiliated with the product provider with a good reputation for providing this specialist research. This can help you to get an idea of whether return projections and costs are sensible and whether the managers are experienced.
  • Have a look at the commission structure – this should be outlined in the Product Disclosure Statement. Tax-driven investments often have high commission structures that can also be tied to the number of investments sold. You should be wary of investment schemes where high levels of commission are paid to promoters (in excess of 10-20% of your total outlay).
  • Always seek independent financial and/or legal advice on particular investment schemes.

Useful tip:

Remember, many of these investments are not liquid – they lock you in for the long-term (ten years plus). So make sure you check the investment thoroughly before investing, because once you’re in there, there is generally very little opportunity to get your money back early i.e., there is no “out-clause”.