The end of financial year sees many of us looking at our taxable income to see how we can legitimately reduce the tax burden. There are a number of approaches recommended with some being totally acceptable where appropriate to your individual circumstances. The following ideas are common:
- salary sacrificing into super to reduce taxable income including capital gains
- prepaying investment loan interest payments
- making a superannuation contribution for a low income spouse
Another strategy that was more common before the GFC was to invest in agribusiness schemes which were provided friendly tax arrangements. Unfortunately many of these turned out to be poor investments and even though you could save some tax going in you lost a lot more through the failure or poor performance of the investment.
This is a key reminder for all of us that when searching for tax breaks it is crucial to weigh up the underlying investment first and then if this stacks up the tax break provides a bonus.
Unfortunately there are also promoters of a range of schemes that have gained the attention of the Australian Tax Office. The ATO have produced a handy guide - Understanding tax-effective investments - to assist tax payers determine whether a proposed approach will be allowed by the ATO. There are 16 categories mentioned including mortgage management plans, early access to super, scholarship trusts and a range of strategies around the use of trusts privately and in business.
The key message from the guide is to carefully check the credentials of the provider of the advice and seek independent guidance. The ATO suggests the alarm bells should be going off with arrangements that:
Offer zero risk guarantees
Do not have a prospectus or product disclosure statement
Refer you to a specific adviser or expert
Ask you to maintain secrecy to protect the arrangement from rival firms and discourage you from getting independent advice.
At this time of the year it is easy to rush into an arrangement that sounds brilliant and will relieve the tax burden in months ahead. If you stumble into an inappropriate scheme the penalties are great not least of which is having the attention of the ATO squarely focused on you. A circumstance that I am sure most of us would prefer not to have.