Your editor mentioned in yesterday’s Money Morning that talk of tax efficient investments brought back memories of one of the first things we ever learned about investing.
We can – almost – remember it as though it was yesterday. Sat in a room in a building at London Wall as the pinstripes passed by on the pavement outside, the instructor warned that buying an investment based purely on its tax effectiveness was one of the best ways to lose money.
It’s a message we’ve never forgotten.
History is littered with investments that will give you a great “tax break.” Unfortunately, “littered” is an appropriate word. Because most of them are rubbish.
It doesn’t surprise us that Timbercorp and Great Southern have bitten the dust. They’ve gone the same way as structured investments. Investments that were based almost entirely on their “unique” or “novel” tax structure and an uncanny ability to load-up on a bucket load of debt.
We wrote some time ago that the Macquarie Model of structured investments was dead. The collapse of these plantation investments should hammer another nail in the coffin.
But on reflection we’ve probably overstated it when we’ve said they are dead. More like undead.
Because if one thing is guaranteed, within the next two years a new form of exciting structured investment will be born. And of course, this time it will be different. I’ll have more on that another day.
So back to tax effective or tax efficient investments, and their link to Superannuation. Yes, there is a link.
That so many investors get suckered in to these kind of investments shouldn’t be surprising. Typically because those peddling the investments are most likely to come from a tax background. That’s right, I’m talking about accountants.
You see, unless an accountant holds an Australian Financial Services Licence (AFSL) or is an authorised representative, then they are unable to give financial advice. Unless…
Unless the advice they are giving is related to a tax matter.
Then you’ll find them extol the virtues of putting “just a few grand” into a particular investment due to the tax benefit.
Now, as you’ll have noticed from reading Money Morning, we’re all for minimising tax, but that doesn’t mean investing in just anything that has a favourable tax treatment.
And as we approach tax time, chances are you’ve already received brochures or phone calls or emails from your accountant informing you of the latest investment that helps to minimise tax. If you’ve already invested in something like Great Southern or Timbercorp then it’s too late, but next time your accountant offers any type of financial advice, say “thanks, but no thanks.”
By all means ask your accountant how a particular investment is treated under the tax rules, but under no circumstances should you take out an investment on your accountant’s advice. There’s a 99.9% chance that they are more interested in the tax structure of the investment rather than the ability of the investment to make money.
Remember the H&R Block ads? That gives you an idea how excited accountants get about tax structures.
But don’t think the financial planners get off the hook easily either. There are plenty that would have found the lure of a 8% or 10% upfront commission too much to resist.
Which brings us neatly on to Superannuation. Following last week’s Money Morning that suggested you shouldn’t put another dollar in super your editor received a certain amount of ‘feedback’ from some in the finance industry.
It included an observation that Super was “just a tax structure” and that you can invest in shares or managed funds or other investments just as you would outside of super.
With that we have no argument. We simply make the point that there is nothing you can do about the 9% contribution your employer makes. That can’t stop, it’s law. Your employer has to pay it.
However, salary sacrificing additional amounts into super would be absolute madness at the moment.
Especially as there is absolutely no guarantee that you will ever see a dollar of that money. It’s easy to forget that for most Australians superannuation has only been around for about a dozen years at the current 9% contribution level. And it has barely been in existence at all for much longer than that – for most employees anyway.
Therefore it is not too outrageous to suggest that given the right opportunity, the government could easily legislate to recover all or part of the $1 trillion currently held in private superannuation funds in return for a “new and improved” state pension.
And in this new age of reliance on government handouts the timing couldn’t be better.
But even if things don’t get that far, there is still the very real possibility that the current superannuation structure will be changed beyond all recognition within the next couple of years.
How?
Simple, thanks to a combination of infrastructure spending, government debt, industry super funds, and the Future Fund…
I’ll have more tomorrow on how the creation of a multi-billion (possibly trillion) dollar Australian sovereign fund will mean the end of superannuation as we know it, and how you will need to plan for your retirement outside of the superannuation structure.
Other Stuff on the Markets
The S&P/ASX200 gained 2.19% yesterday following the strong lead from Wall Street, while overnight the Dow Jones Industrial Average gain back a small amount of the previous day’s gains, dropping by 29 points. Meanwhile the FTSE100 added 0.81%.
The price of gold in Australian dollars slid back to trade at $1,194.46 this morning, while in US Dollars it is trading at USD$925.35.
The Aussie dollar continues to strengthen versus the USD, trading this morning at USD$0.7734 and JPY74.31.
Crude oil settled at USD$60.10 in New York. It’s continuing to trade in line with expectations for a global economic recovery.
For yesterday’s biggest movers on the market click here…
And today on the economic calendar we have the Westpac Consumer Confidence number, and in the US tonight the minutes from the last Federal Open Markets Committee is released.
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