A lot of property investors have been quaking in their boots over the past few weeks. They feared that the government would stop them claiming rental losses against tax on their day jobs.
Many, it would seem, invested in property simply to cut their tax bills. In fact I've been cold called more than once by companies offering to show me how to cut my taxes – and failing to mention at the first call that they're selling (overpriced in my opinion) property, not tax advice.
If the profit on your investment is solely based on the tax savings and not on the investment returns, then you set yourself up to be cut down by the government when the rules change, which is what nearly happened to those investors who were complaining loudest.
As a rule of thumb an investment sold for tax reasons is a dog. Otherwise they'd sell it for its income or capital gains potential. It's a bit of a no brainer if you ask me that you should be investing to make money, not lose it.
It's not the first time in our history, nor will it be the last time, that people have chosen investments first and foremost for their tax breaks. Investing for tax reasons often ends in tears. Just ask the investors who put their money into forestry in the 1980s and 1990s. I don't hear a lot of them saying they made a fortune out of their forestry holdings.
Having said that, it's a mistake to ignore tax consequences when investing.
Too many new investors start trading, for example, without thinking about the capital gain consequences. Sometimes they believe they can stay under the radar.
There's nothing wrong in choosing between two equivalent investments based on which has the best tax treatment. An example of that is choosing between two bank accounts offering the same interest rates and equivalent lenders. If one is a Pie and is taxed at 30c and the other isn't meaning you'd pay 38c, then it makes sense to choose the Pie option.
But tax decisions need to be made with the advice of an accountant or similar, not the advice of a salesman who wants to peddle his product. If you're investing for tax reasons you can never guarantee that the rules won't change – especially where it's widely viewed as a loophole, as LAQCs are by some. Fine if it's something you can get out of quickly. But usually the market will price in the tax changes to the investment before you get to sell, meaning that it was a pointless exercise in the first place.
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