Date issued: 31 May 2007

Don’t just rely on the information contained in a glossy brochure on tax shelters, cautions CPA Australia.

Investors should thoroughly check the claims made by investment promoters because while there may be many good investments being offered, inevitably there will be a few that could cost you 'big time'.

CPA Australia Senior Tax Counsel, Garry Addison said that investors are most likely to suffer if the tax and other benefits are not what they are claimed to be, so great care should be exercised before entering into such investments.

The Australian Taxation Office (ATO) introduced arrangements in 1998 to deal with the tax aspects of schemes of this kind. As a result, promoters of a scheme are able to apply to the Tax Office for a 'Product Ruling'. The ruling can verify that the tax benefits claimed are legitimate, provided the promoters actually follow the plan set out in the prospectus.

The attractiveness of such tax shelter arrangements may also be reduced by the non-commercial loss rules that applied from 1 July 2000. These rules limit the extent to which losses from 'non-commercial activities' can be offset against other income.

To avoid restrictions on claiming losses, a business must meet one of the following requirements:

• derive assessable income of at least $20,000 per annum; or
• make a profit in three of the past five years; or
• have real property used in the business which has a value of $500,000 or more; or
• have other business assets, other than vehicles, which are valued at $100,000 or more 

The ATO now issues 'Taxpayer Alerts' as part of an initiative to warn the market of 'products' they have under risk assessment. These serve as a warning to taxpayers that such products carry an identifiable level of risk.

Mr Addison said that there are some simple steps you can take to avoid being caught out by a bad investment. These are:

Look for the product ruling
If the scheme doesn’t have a product ruling from the Tax Office, then the product is more risky than a scheme that has a ruling.

Check the commercial reality of a scheme
It is very important to look at the investment itself, apart from the tax breaks, to see if it is a good investment in its own right.

Be wary of pushy sales people
Be wary of sales people who want you to sign an agreement right away without giving you time to explore the validity of the scheme.

Be cautious of telemarketed schemes
Be cautious of schemes that are heavily promoted on TV and heavily advertised.

Beware of claims or inducements not made in writing
Assume all claims and inducements not in writing do not exist.

Beware of a return on your investment that sounds too good to be true
Claims of large financial rewards are a signal of high risk. Even some of the most experienced investors have been caught up in schemes that offer a large return on their investments, but have failed to deliver. Also remember 'if it sounds too good to be true, it probably is'.

Check to see if the scheme is covered by an ATO 'Taxpayer Alert'
Schemes in this category will clearly have a higher risk attached to them than other products.

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