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Common ground

IT was billed as a showdown but there ended up being a surprising amount of common ground between those chosen to debate Tax Effective Investments: Are they Worth the Risk?

While leading lawyer Frank Wilson and financial adviser Suresh Rajan agreed to disagree on whether or not investors should be tempted by these heavily promoted investments, they did seem to share a view on who should consider them in the first place.

Both our experts believed that, if anyone was going to make such an investment, they should be well into the top tax bracket, willing to take a risk, and definitely do their homework.

Controversy rages around this style of investment, usually promoted by prospectus through financial advisers, accountants or the mass media.

Somewhere around 30,000 investors have had their deductions challenged by the tax office and, if test cases now under way fail, some people face financial ruin from the prospect of paying back tax, plus penalties, plus hefty interest bills.

But a great deal of the political damage which has been inflicted on the Federal Government over this issue harks back to investment decisions made several years ago, under a very different set of circumstances.

Some of the 93 people who came to witness the debate were investors or advisers who promoted such products in the past. Some of these were disappointed that the debate failed to provide much consolation for their woes.

Mr Wilson, who represents about 10,000 aggrieved investors, was adamant that they will beat the Australian Taxation Office’s challenge to deductions, estimated to reach upward of $500 million.

But he also eschewed the structures of many of the investments which he is now defending, claiming that, while they are legal and offer legitimate tax deductions, the round-robin funding and limited recourse loans of the day risked leaving invest-ments under-capitalised.

“That was before June 30, 1998,” Mr Wilson said.

The existing suite of tax-effective investments, under the product ruling regime could no longer use such financing devices, he said.

With the risk of losing money on the failure of an investment came the responsibility of investors to do their research before committing their money, even if half of this would be returned virtually immediately through a tax deduction.

This was the purpose of the debate. To argue the merits and pitfalls of this style of investment, one which is marketed heavily at this time of year, under current market conditions, not to prejudge what the courts will find as they examine products such as Budplan and others.

The debate was sparked by Mr Rajan’s column in Business News in April, when he wrote that he had recommended against such products for years.

Many readers took umbrage at his tone, particularly stung by his perceived defence of the tax office, which they accuse of acting in a heavy-handed manner.

At the debate, Mr Rajan remained unyielding regarding the value of these investments. As far as he was concerned, avoiding tax was not a legitimate reason to make an investment.

But he did agree that, if someone was to go into such an investment, they would want a return commensurate with the long-term risk of such a venture, probably around 20 per cent.

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