Tax planning is an important consideration as we head towards June 30.
It’s common to see people borrow this year’s investment and pre-pay next year’s interest cost. They want a tax deduction for the investment (for example for agricultural investment schemes) and for the total interest cost for as little impact on their personal cash flow.
Sadly I have often seen people grab at various tax incentivised investments only to see the investment itself fail.
If the investment falls over, any loans you have taken out still have to be repaid, unless there was some inbuilt protection mechanism.
The investments cost real money and if they do fail the only advantage you will have retained are the tax concessions.
Beware of tax incentives
This was the sad state of affairs for Mark and Lorrell Jamieson, who successfully sued Westpac Bank in the Queensland Supreme Court for dodgy financial planning advice.
There is no denying this case certainly involved poor advice. But their case had another important aspect as well – the desire to reduce income by investing in tax schemes.
Over a number of years, the Jamiesons had invested in Great Southern agricultural investment schemes. They did this via an adviser, formerly licensed through a large non-bank financial advice firm.
In 2007, they acted upon advice provided by a Westpac planner to put money into a whizz-bang Macquarie Bank product. To gain any tax advantage, the Jamiesons had to borrow a multi-million dollar amount from Macquarie and pre-pay the 2008 financial year interest.
The product failed – the precise reasons aren’t discussed in the case’s written judgement – but the Court accepted that the GFC was the primary cause.
The Jamiesons had sought damages to restore them to the position as if no borrowing had taken place, however, they were required to revise their damages, as the Court said they would have used the amount to make an alternative investment instead.
Both parties appealed this decision to the Queensland Court of Appeal and both failed.
My simple advice – tax concessions are good and there’s nothing wrong with chasing them. But they shouldn’t be the main reason you invest in anything.
SMSF individual trustees show their value
I’m a big advocate for SMSFs having corporate trustees. But sometimes having this type of trustee structure might not be your best option.
In February 2015, I mentioned a 2013 Victorian Supreme Court case that enabled an SMSF to avoid having to refund contributions made with borrowed money. You can read that article here [1].
The SMSF initially had individual trustees but changed to corporate trustees not long before the business involved in the case failed.
The bank involved – Macquarie Bank – wasn’t happy with the initial judgement and appealed to the Victorian Court of Appeal. Earlier this year, The Chief Justice of the Victorian Supreme Court agreed with the original decision.
However, the other two judges hearing the appeal, overturned that decision in March and said the SMSF trustee must repay the money.
Interestingly, one of those judges said that if the SMSF’s trustees had remained as individual trustees then it was likely that the money wouldn’t have had to be repaid. The key reason here was the ignorance of the transactions and their structure by the super fund’s other trustees.
Some businesses borrow to make super contributions for their employees. Not many people borrow money to make personal super contributions (as had partly occurred in this case).
However, if you are thinking about doing this, then perhaps you might want to have individual trustees for your fund and make sure that any other trustees your SMSF has don’t know much, if anything, about the borrowing and the super contributions.
Then if you have financial trouble, you might not have to hand the money contributed to super back!
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.