Dodgy schemes can come back to bite you
The brochure Don't take the bait is also available in Portable Document Format to download [PDF 320 KB].
Protecting yourself from tax schemes
Promoters of some tax planning arrangements are simply fishing for your money - their bait is the promise of high investment returns and generous tax breaks.
Take the bait, and you could be the one that's bitten. You could lose your money and you might have to pay back any missing tax, plus interest and penalties.
The following information can help you determine whether an arrangement is genuine tax planning or a tax avoidance scheme.
Tempting bait
It can sometimes be hard to tell a good investment from a bad one. Promoters can come with convincing sales pitches, and it can be difficult to tell if you're getting sound advice. It can be confusing, with promoters offering you big tax deductions, especially towards the end of the financial year.
These are a few lines that you should be wary of:
- 'There are no risks. We guarantee the returns.'
- 'You don't need credit or asset checks. We'll lend you the money.'
- 'Even if the investment doesn't go ahead, you'll still make a profit from your tax refund.'
- 'There's no need to ask the Australian Taxation Office if it's okay.'
- 'You can get up to 100% tax deductions.'
- 'A top lawyer or accountant has looked at the investment and they think it's great.'
- 'We'll put your money in a tax-free overseas account.'
- 'You can run your business through your own offshore company.'
- 'Trust us, the ATO is okay with it.'
- 'It is complex, but you don't need to understand it, we will look after everything for you.'
Some of the arrangements you might be offered and which you should check thoroughly are:
- putting your money in an offshore tax haven
- gaining early access to your superannuation funds
- investments funded by loans that you don't have to pay back
- claiming inflated deductions for donation of goods to charity.
There are many more arrangements that may seem legitimate. However, anything that sounds too good to be true probably is - that's why it's important to investigate before you invest.
The following case studies provide examples of tax schemes.
In this arrangement, a promoter claims they can 'unlock' your superannuation (super) before you reach your retirement age.
The promoter arranges for you to roll over your super into a self-managed superannuation fund (SMSF). This might sound tempting to anyone wanting to use the money for personal expenses, such as a holiday or car.
The promoter withdraws the amount from the SMSF and pays it to you, minus their fee. This is a scheme because gaining early access to super is illegal (except in very limited circumstances).
Anyone entering this type of arrangement could face prosecution, pay extra tax and penalties, and lose money to the promoter for their fee, which in some instances has been as high as 30% of the super savings.
In this example, a promoter claims they can make your home loan interest payments tax deductible.
Using a unit trust, the scheme promoter sets you up to borrow funds to purchase a property. You then live in the property and pay rent to the unit trust at market rates, which the trust declares as taxable income.
The trust claims associated expenses and interest charges as deductions against the rental income and you claim a tax deduction for the interest payments on the borrowing.
Seems like a win-win situation. However, this is actually a tax scheme because it involves getting a tax benefit from borrowings for private expenses - your home. You would not be entitled to claim the interest payments as deductions, and you risk having to pay penalties and interest.
Before you commit to any investment, make sure you have answered the following questions:
You should get independent advice to make sure the investment is sound, including any potential tax savings - this is particularly important for overly complex arrangements. The person selling you the investment is not an independent adviser. Remember: because our tax system is based on self-assessment, you are responsible for your tax return, even if it is prepared by your tax agent.
People who offer financial products and advice must work for a business that holds an Australian financial service licence, issued by the Australian Securities & Investments Commission (ASIC). To check licence details free with ASIC:
As a potential investor, by law, you must be given either a product disclosure statement or a prospectus. If you don't get a current product disclosure statement or prospectus, you should advise ASIC by:
Many tax-effective investments have an Australian Taxation Office (ATO) product ruling. A product ruling provides you with legally binding assurance that the tax deductions set out in the ruling will be available, provided the arrangement is carried out as described in the product ruling. To find out if the arrangement has a ruling, contact us or an independent tax adviser.
Our alerts provide warnings about some of the tax scheme arrangements you might be offered.
If you believe you're involved in a tax scheme, you should contact us on 1800 177 006. You can ask for an amendment to your income tax assessment. By making this voluntary disclosure, you may be entitled to a reduction in penalties.
There are laws in place to deter promoters of tax avoidance schemes. These laws carry harsh penalties.
If you have concerns about a promoter or a tax scheme, call our Schemes Hotline anonymously on 1800 177 006.
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For more information about tax schemes and how to protect yourself from unscrupulous promoters, refer to:
To obtain free printed copies of our publications or for more information:
You can also get other independent advice from:
- ASIC - provides information about investing and financial products, as well as posting warnings about known tax schemes and investigating unlicensed financial advisers. Visit the ASIC website at www.moneysmart.gov.au
- Australian Competition and Consumer Commission (ACCC) - provides warnings about known investment scams through the SCAMwatch website at www.scamwatch.gov.au
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Last Modified: Wednesday, 1 August 2012