It is the season to be wary!

By Gary Lucas of DMG Financial Planning

18 May 2010

Use of Forestry Schemes and Protected Equity investments for Tax Planning are not as simple as they seem.

As we near the end of the financial year, some organisations crank up their marketing and prey on the need to reduce our tax bills before June 30th.

Typically these are Agricultural (Forestry) Schemes and Protected Equity investments.  The strategy is to invest lots of money quickly and preferably borrow some and invest even more so you will get a large tax deduction.

The problem is that the focus is taken off the investment.  This is what the marketing spin is aimed at achieving.  The focus is all wrong.  Most attention needs to be on the investment and any tax breaks need to be seen as a bonus.  Tax cannot drive the decision.  It does need to be considered and can make investing more effective or it can impact on how it is structured, but it is a mistake to undertake an investment based purely on the tax benefits without properly considering the benefits and risks of the investment.

As we have seen recently a number of the Agricultural Schemes have simply collapsed and investors have lost the majority if not all of their funds.  Why invest in one this year with that recent history that adds to the risk?  One reason these schemes are promoted is that they are loaded with fees and commissions.  Sometimes Accountants, Solicitors and Financial Planners are paid 10% of the amount invested as a commission.  It is hard for an investor to make money when you are so far behind on the day you start investing.

Protected Equity investments are cleverly named.  The word protected is aimed at giving us comfort.  These investments can be very complicated and are rarely as simple as investing with some protection.  There are many conditions and criteria that apply for you to gain full benefits.  Again the potential returns needs to be analysed in view of the risks and costs.  Commissions, fees, a higher interest rate and complexity are the warning signs that should make you think long and hard before investing.

The lessons are simple;

  • Don't let your investment decision be driven by tax savings.
  • Understand the fees and commissions
  • Don't be rushed into an investment just because the end of the tax year is coming
  • Have a long term plan. If you have a sound long term plan you will have your house in order and won't need to be pressured each year.
  • Understand that there is no silver bullet for investing and a well diversified and constructed plan will serve you well.
  • If uncertain, get a second opinion