Tax driven investment products have and will always be an easy sell. Accountants love recommending these products to clients looking for ways to pay less tax.
If your reason for investing in a product is to save tax then you are not investing but being sold a product, which will cost you money.
There are many of these type of investments all are geared to make plenty of money for the provider while feeding off your desire to reduce your tax bill. Below is a list of just a few common ones:
- Agricultural products such as trees, almonds and almost anything, which they can grow. The idea is that you get a large up front deduction for the cost of planting etc and then when they sell the product you make the income. This gives you a tax deduction now and taxable income in years to come. The problem is that most of these products fail to achieve the growth you were initially advised. Avoid these types of products. Do not fool yourself into thinking that this is an investment.
- Capital guarantee products, the bases of these products is that there is no down side because your investment capital is guarantee. The down side comes in two forms, the high interest rate you pay and the costs of the options you have to take out to guarantee the capital. Sure the interest is deductable this year but the option is not. Generally these products is written over shares, so if you truly believe in the company you are investing in why do you need a guarantee. This product is structured to make money for the bank issuing it, through interest and the options trade.
- Negative Gearing is any product which provides a tax loss now on the promise of a future capital gain. Losing money to save tax makes no sense at all, again if tax is the main goal then this is a poor choice. Gearing is one method in creating wealth but at some point the investment needs to be positively geared. This means that the loan needs to be paid down. Interest only loans should always be avoided unless they are for a short term purpose (6-12 months).
Tax is part of the investment puzzle and while it is important to ensure that you do not pay too much, tax effective investments are not part of the puzzle. The best ways to reduce your tax expense is through the way you structure you financial life.
Structure is all about protecting your nest egg and limiting the amount of tax you pay. You can use structures such as super, trusts and companies to achieve these goals.
Talk to your Financial Adviser about what is best for you.