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NEWS - PLANNING
How to cut your tax
4/5/2004
As the 2003-04 financial year swings into its final quarter, smart investors will be reviewing their finances for tax planning and tax management opportunities, well in advance of the annual income tax reckoning that June 30 brings.
This year, these reviews will be conducted against a backdrop of the distractions that a federal election can bring as both sides of the political divide compete to win votes with tax promises.
Labor has pledged to lower the superannuation contributions tax in its first term in office. For the government, on top of numerous superannuation tax changes, general income tax is expected to feature prominently in the coming May federal budget, with the betting on cuts in personal tax rates.
In the interim and beyond, perhaps right up until voting day, tax changes and speculation about tax initiatives will feature prominently as competing politicians jockey for an election advantage.
But the smart money will do its best to ignore this and concentrate on the job at hand. Whatever the politicians come up with, it is probably not going make much difference to the current financial year.
Getting in early is the new thing in tax planning. Only three or four years ago, the final fortnight before June 30 was frantic as many accountants and financial planners scrambled to present their high-income clients with the tempting details of various tax minimisation schemes.
These days, while the last 14 business days can still be busy, tax planning is a more controlled activity and tax management an ongoing rather than a last minute affair. And with three quarters of the financial year gone, now is a good time to examine your finances. Your initial examination does not need to be terribly detailed but it should identify personal tax quandaries so that there is plenty of time to explore opportunities and come up with sensible strategies to deal with them.
The first thing to do when setting out on tax planning is to get an idea of what your tax position would be if you decided to do nothing, recommends John Randall, a tax and superannuation partner in Sydney with Deloitte Touche Tohmatsu. This exercise will serve two purposes. It will identify whether it is worth doing any tax planning at all. Where it is, it will get you started early enough to seriously consider the opportunities.
The initial examination should extrapolate a likely end-of-year financial and tax position as well as likely available cash flow with which to pursue different strategies. "If you don't have the cash either to make investments or to prepay interest on an investment where this is the major requirement, there is no point in worrying about tax strategies," Randall says bluntly.
Many strategies require time, such as that involved in assessing the commercial viability of various investment schemes that offer a tax carrot, in particular agricultural schemes. Or reviewing an existing investment portfolio and matching out capital gains and losses in more than just a random fashion.
Or establishing a capital-protected blue-chip share portfolio and taking advantage of tax deductible loan arrangements organised by promoters. This strategy is to limit the risk associated with these investment arrangements to the pre-paid interest on the loans. "If you pursue any of these strategies you could easily put three months of time to quite good use," says Randall.
Another option is to make an effective contribution to superannuation, after thoroughly thinking through any potential super surcharges.
"For some people the preferred strategy is making the maximum age-based contribution to super," says tax expert Gordon Cooper, the principal of Sydney-based Cooper & Co. But you have to have the cash to do this, and where you don't, it takes time to sell enough assets to get the funds to make tax-deductible contributions to super.
As far as year-end tax planning is concerned, says Cooper, the commercial demise of mass marketed tax schemes between 1990 and 2000 has had a major impact on the use of these investments as last-minute tax solutions.
"While there are certainly not as many, there are still people who are interested in some sort of scheme," he says.
But the big difference now compared with five or six years ago is that they avoid schemes that don't have an Australian Taxation Office product ruling. These rulings provide the comfort that, so long as the scheme promoter implements the arrangement in the way outlined in the ruling, the tax consequences should be reasonably certain.
As many have also discovered, tax is not the only issue when it comes to mass-marketed schemes. A lot of the arrangements, particularly those established more than five years ago, have disappointed their supporters by not stacking up commercially. This means research must be done to assess particular schemes for their commercial viability. This can be either an individual exercise or more likely an investor will need to obtain access, generally through a financial planner, to research reports by organisations that evaluate the commercial aspects of the schemes.
According to Paul Brassil, a tax partner with PricewaterhouseCoopers, while ATO product rulings can provide tax certainty they can't offer certainty when it comes to investment viability. Commercial analysis of various schemes must be independently assessed. In addition, the tax side of product rulings has not been foolproof.
"We have come across situations where promoters have not carried out the scheme in the way outlined in the ruling," Brassil says. Whether they are agricultural ventures like grape- or olive-growing, or financial ventures like derivative-based structured investments, or capital-protected investment arrangements, the crucial issue from an investor perspective is to research and understand the underlying activities. If you don't understand them, it is important to get advice from someone who does.
For a do-it-yourself investor, investments you don't understand should be avoided. "If it is a grape-growing scheme or some other primary production - all of which can be legitimate businesses - if you have no knowledge of the wine industry, how can you assess whether it will make money for you?" Brassil says.
He says the major mistake investors have made with regard to year-end tax schemes is simply to write a cheque to obtain a tax deduction. "History is littered with those who have taken this approach and gone after tax deductions without thinking of the ramifications," he says.
There are many who still regret such decisions years later. "It's the old story that even if you get the taxman to pay for half of the cost through a tax deduction, you will still lose money if the scheme isn't a commercial success," Brassil says.
Reproduced from the Australian Financial Review - 5 April 2004
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