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Advisers beware as tax time nears

IT’S that time of the year again — the time of year that advisers dread the most.

As we approach the end of the financial year and start to think about the prospect of another tax return and similar issues, we also brace ourselves for the inevitable rush of tax driven products that rarely, if ever, have any investment fundamentals attached to them.

This year will be no different with one notable exception — some products will have a binding tax ruling issued by the Australian Taxation Office.

The ATO has undertaken to issue rulings for those products that make application.

The number of products requesting ruling has far exceeded the expectation of the ATO and delays in providing the rulings have lengthened considerably.

But be warned: the tax ruling tells you nothing of the efficacy of the product as an investment.

It is merely a view on the tax deductibility or rebatability of certain of the expenses that would be incurred on the project.

In any sensible analysis of these projects and products, while the tax issues may be important they must not override the investment fundamentals that must be examined with a great deal of caution.

Most of these projects are based upon agricultural ventures.

Unfortunately, projects involved in the agricultural arena carry with them a greater deal of risk than most other sectors.

In analysing the projects, investors need to be aware that last year the ATO disallowed approximately 12,000 claims for deduction from three or four projects.

Therefore, the prospect of a similar fate is real. This makes the risk of the tax deduction as real as the risk of failure of the venture.

There are a number of principles and tenets that need to be borne in mind when examining these projects:

• Does the project have a history of performance of any note?

• Who are the promoters of the venture? Do they have the relevant experience to undertake such a project?

• Does the project involve a new technology or primary product? These projects naturally carry an even greater risk

• Is there a relationship between the promoters and management companies appointed to provide services to the project?

• If an adviser is recommending the project, ask them if they are investing themselves?

• What are the projected returns for the investment?

• What guarantees are in place?

• Most importantly, is there a binding tax ruling from the ATO in the prospectus?

At the end of the day, investors must not enter into any project unless they are absolutely satisfied it survives the stringent tests that any other investment must pass before being included in a person’s portfolio.

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