Optimistic Tax Schemes Need More Than Ho Ho
Newcastle Herald
Monday May 15, 2000
IN the same way that tinsel and fairy lights appearing on pine trees announce it's Christmas and the end of the calender year, prospectuses for tax-driven investment schemes appearing on my desk announce it's tax time and the end of the financial year.
But as June 30 approaches there's no big bloke with a red suit chuckling Yo Ho Ho, which is a pity, because if you put your money into some of these sparkling financial baubles you'll need all the help you can find, including Santa's, to get a decent return.
These investment schemes usually promise outstanding longer term returns, coupled with short term, indeed immediate, tax write-offs while the venture is in the establishment phase.
Most significantly, these immediate tax write-offs can be used to reduce your tax liability in the current financial year - which is a key selling point.
Now, there is normally nothing intrinsically wrong with the products at the heart of these investment schemes.
They may be wildflowers, farmed prawns, yabbies, pine plantations, or feature films, which, in the right hands and circumstances, can generate good returns.
What is wrong is that many of the schemes are put together by, to put it politely, `city financiers', whose main interest is in raising money for a fee.
How, in theory, do the schemes work? Normally, the investor purchases a share in a venture in the form of one or more monetary units. Each unit may be worth one thousand dollars, five thousand dollars, or something similar.
There are a finite number of units for sale. The venture is often a start-up operation. The proceeds from the sale of the units are designed to fund its establishment.
Let's take the theoretical example of a cut flower venture, based on some new exotic species, the proposed next big thing.
Financial projections for the first two or three years will show a loss while the plants are still too young to bear commercial quantities of flowers. During this stage the investor generates ongoing tax losses to be offset against other assessable income. So far so good - if you don't mind making losses, that is.
Projections show that the flower plantation will generate positive cash flows from year four when the plants have reached maturity. From years five through to fifteen the money will supposedly roll in.
However, the odds are this won't happen.
The plants may be decimated by disease or adverse weather, the markets may be harder to crack than originally thought, the management may be incompetent or even downright crooked. Any number of things can go wrong, and with many agricultural investment ventures, particularly raising some new product - they invariably do!
The fact is the majority of tax-driven investment schemes simply don't deliver the highly optimistic results they promise. Investors all too often end up taking a bath, and no matter how you dress them up, tax deductible losses are still just that, losses.
The trick is not to get into an end-of-financial-year panic about paying too much tax, and then jumping into one of these schemes primarily because it promises immediate and ongoing tax deductions - which incidentally, the tax office may ultimately disallow!
Only ever invest if you're confident of achieving good final returns, and treat any tax breaks you may get along the way as a bonus. Certainly, never invest for tax reasons alone.
* Paul Clitheroe is a director of Ipac Securities, a leading financial planning firm. You can contact Ipac in Newcastle on 4952 1921.
`The majority of tax driven investment schemes simply don't deliver the highly optimistic results they promise.'
© 2000 Newcastle Herald