End-of-year, tax-deductible snake oil is still snake oil

The End Of the Financial Year is a dangerous time, as the seduction of a tax deduction can lead to costly mistakes.

EOFY … it’s Christmas for accountants, brokers and all manner of product sellers. But the End Of the Financial Year is actually a dangerous time for investors, as the seduction of a tax deduction can lead to costly mistakes.

Certainly, it makes sense to prepare through the year to optimise taxes. But more recently the aggressive marketing of EOFY ideas needs to be taken with caution.

Product pushers

Just recently I listened to an extended radio interview with an insurance agent who extolled the opportunity of buying “tax deductible income protection insurance” before June 30, since it can be used to offset against your annual income. That’s true — and it’s also true that income protection insurance is often not necessary for many people, it’s very expensive by any measure and its terms need to be read very carefully. In other words, this is typical of the least impressive EOFY campaigns — at its worst it could lead investors to spend money they didn’t need to spend to get a tax deduction … do the maths.

In a very similar vein stockbrokers will implore their clients to assess their share portfolio and take advantage of the tax year by selling their loss-making shares before June 30 so that losses may be offset against investment gains. In many cases shares that are most obviously struggling will be those getting a blizzard of negative attention: bank stocks fit that description just now. But selling shares should never be a tax consideration — how many times over the years have you heard “sell” calls from brokers and over time how often has it made sense for the long-term retail shareholder to sell? Take a look at the long-term share price in today’s graphic above.

Perhaps the most abused EOFY tactic of all is the potential to prepay interest and take the deduction in the current financial year.

This is the time of year investors get “special invitations” to seminars on this issue and the evidence is compelling that the only guaranteed winners in these situations are the advisers and brokers who get the revenue that has been eluding them all year.

What’s the panic?

This year the hot issue would have to be advice that suggests you should move “fast” before the new rules in superannuation come into effect: but should you?

First, the vast majority of the new rules in super do not come into effect until July 1 2017, more than a year away. The only ruling that may affect you immediately is the lifetime cap on post-tax contributions, which is meant to start from 2007.

Second, not all the rules will go through as planned — a lot depends on the outcome of the election. Even if the Liberal Party is to win, it must get the laws in relation to all superannuation changes passed. If rules such as the lifetime super cap do not go through as planned then major fin­ancial moves by private investors may have been unnecessary.

Next financial year, starting next month, looms as a new phase in the EOFY saga when the government’s start-up tax breaks kick off. As always the scheme is mounted with the best of intentions, just like MIS agricultural schemes 10 years ago or special tax exemptions for movie making and wineries before that.

Under the terms of the scheme any investor in a start-up company is entitled to an instant 20 per cent tax offset and a 10-year capital gains tax exemption — the scheme has been described as “one of the most generous in the world”.

From a nation-building point of view these schemes have their advantages, from an individual investment point of view they have the capacity to be downright dangerous. How many small businesses become successful large businesses? How many start-ups actually make it — ­especially in the high-speed technology sector?

This time next year the marketing campaigns around the tax breaks for start-ups will be everywhere, but will these earnest investors ever make money? Some venture capitalists have privately questioned the wisdom of bringing in unsophisticated investors into what is after all a very sophisticated area.

But that’s next year’s problem — for this year, take the EOFY hype with a pinch of salt.