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Ben Kingsley Blog post by Ben Kingsley

Tax Structures and Tax Avoidance | What you should know?

Hi, Ben Kingsley here with another How to Session. Today I want to talk about tax and tax structures, and potentially tax avoidance. Now tax avoidance is illegal in this country so it’s important to understand what you can and can’t do around tax. In the property investment industry, there are a lot of property spruikers out there, and some of the way, in which they entice you, and attract you to listen to them is to talk about some of these secret or hidden ways to be more tax effective than not. And it’s really important to understand that.

In addition to that, they may potentially convince you to make the tax strategy as the primary reason you’re investing in property. Now that’s just crazy. If you listen to our other How to Sessions or any of our podcasts; you will hear us say that you should never invest in property for tax reasons only. And if it is the dominant purpose that you’re doing it, well then, that’s tax avoidance, so it’s really important to understand what I’m talking about here.

Now, what are some of the things that we see out there? You know, complex structures about setting trusts up or buying and selling internal asset – all of these types of thing. You’re going to see these populous opinions around the new age or the next way to do it. At the moment, the big one is around paying off your home loan and raising the amount of interest or debt that you’re holding onto your investment properties. It’s almost a tax strategy that they’re sort of promoting out there.

I’ve reached out to the ATO to talk about this because it does concern me when I see these types of strategies being promoted.

We have got results from the past we can look back and see some of the cases. If you’re not familiar, have a look at the Hart case which went right to the high court and ultimately the tax office won the discussion around what it was – a tax scheme promoted and a tax effective scheme so the avoidance piece was successfully upheld, which meant that the client obviously had to pay or lose the tax advantages possible. Now it’s really important to understand that because I’m starting to see more and more of these and with the property market booming so well, more and more of these tax schemes are being promoted and that’s just a warning to you in this how-to session.

So, what do we do about this?

Well, we go and speak to a professional tax agent. Tax is a regulatory environment and you need to speak to someone who is qualified so go and speak to a good, qualified accountant who may have lots of property investment experience. And again, you don’t want to push the envelope too hard. Everything within the letter of the law. Explain your circumstances. Maybe, just maybe a trust structure could be effective for you if you’re looking for asset protection. But also understand that the more complex the structure, the more cost it’s going to be for you. In other words, maintaining your tax returns each year is going to cost you a lot more if you’ve got all of these complex structures. Some of them work for some people, but the majority are best to stay away from those complex structures and do the right thing. I mean, ultimately with any type of tax, we want to be paying tax because it means we’re actually earning an income. Negative gearing is a perfect example. It is only a moment in time. It’s not a strategy, ok so in the earlier days yes it may be effective; but it’s not the reason we invest. We invest for long term returns and some passive income coming off that.

It’s important to understand when you’re looking at tax, go get some professional advice. Make sure that you understand the risk reward around how you’re setting up your structures, and the ongoing costs associated with those, because I get annoyed when I see all the tactics these spruikers out there trying to get a position in the market, trying to say this is the next best thing and that it’s a secret structure. You know, that’s all rubbish. Go and speak to an ethical and experienced tax practitioner and you will get the best results. Thanks for watching.

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