The Biggest Mistakes I have seen in 29 Years of tax practice

I have seen many mistakes clients have made in taxation, work and investment decisions. The measure of a mistake is obviously its cost. That said, the cost of a mistake is not always obvious. I have made a list of the things I believe are the worst mistakes, and perhaps surprisingly they have little to do with filling out a tax form.
Firstly and possible the most fundamental: Don’t make decisions based on tax. Financial decisions need to be made based on the best outcome. If you make decisions based on the tax outcome, you are most likely choosing to lose money. Advertised tax schemes are typically based on loss making projects. Many are targeted to higher income clients, especially FIFO taxpayers. There is nothing clever about that because losing money is easy. Why would you pay money to get someone to help you lose money?

Surprisingly, I see clients disappointed that their refund is smaller than their tax deduction. Their expectation is that the tax system will completely cover their loss. If you spend money on a business, property or tax deduction, the tax system will never give you all of your costs back. The amount you spend on Tax deductions does not equal the tax refund. The tax refund of any deductible payment or loss can be anything from zero to just under half of what was spent so you will always be out of pocket.

Gearing an asset, be it property or shares, is a great way of investing. The asset acquired is financed allowing for a larger investment than the investor could make with their own money. Hence it is “Geared”. Negative Gearing is where the ongoing costs of the investment exceeds the income. Where there is a loss, there MIGHT be a tax benefit. Over Gearing occurs where the investor’s income drops so low that there is no tax benefit. There is little point to this Over Gearing as there is no tax benefit and it can cause investors to lose everything. Once a bank has foreclosed, you won’t be able to claim any losses carried forward and finance will be difficult for many years to come. The cost of this period of lost opportunity is immeasurable.

The most frustrating lost tax benefit I see is also a common one. I see many clients who have owned their own home and diligently paid down the mortgage. As the years pass and the family grows, a new more expensive home is purchased and the old one kept as an investment. Typically this results in a large non-deductible private debt, however with better planning, the interest could have been claimed against income. By using Mortgage Offsets rather than paying down debt, the interest can still be deducted when the funds are re -drawn. Mortgage offsets are different to re-draw facilities as the tax benefit will still be lost. Mortgage offsets offer far more tax planning options.

Don’t be a Share Trader. Periodically I have clients who take up share trading to supplement or even replace their income. Income from trading is taxable at normal rates and trading losses can be deducted from other income in most cases. Share Trading should be distinguished form Share Investing. The basic difference is volume and frequency. I could give many sad examples, however I will just state this; if you take up share trading you will lose money and you may not get a tax deduction for it. I do have many clients who have made money by investing in good quality shares and enjoy tax paid dividends. I do not have ONE client who has made money trading shares and many have losses carried forward that may never be claimed for tax.
I have said earlier “don’t make your investment decisions based on tax”, however don’t seek tax advice too late. After the investment choice is made; after the money is gone; after the bank has made a demand; or after the contract has been signed, it may be too late to ask what you should do to get the best tax outcome. Once you have signed the deal we may not be able to make changes to take advantage of any tax benefits. Most tax structures need to be set up in advance to be effective.

Lastly, but by no means least, ask the right questions of your advisor. How many years’ experience? What are your qualifications? Can you provide a referral? Don’t only ask how much does it cost to get my tax done? The biggest cost of any professional service might come from poor advice, not from the price. The benefit of getting your structure or finances correct will far outweigh the price of the service.