The Clock And Compass Theory At Tax Time

For some, the run-up to end of Financial Year feels like two or three weeks of rip, bust and tear. It can best be described by what I call ‘The Clock and Compass Theory’.

It kind of goes like this.

Imagine you wake up one Saturday morning and make a snap decision to drive from Sydney to Brisbane for the weekend. You estimate it’s a twelve hour trip so you find the nearest highway and get cracking. It’s 8am when you leave and your first goal is to reach Newcastle by 11am.

But as the clock strikes eleven you find yourself staring straight at Parliament House…you’re in Canberra!

What on Earth happened?

The clock became more important than the compass. You didn’t have time to get the exact directions because you had to get moving.

Investors often do the same thing, especially around tax time. They become so focused on the vehicle they forget about the map. It’s easy to do.

Here are some typical examples:
•    A couple rush to buy an investment property (50/50) only to learn later on they should have put a higher percentage of the property in the higher income earners name.
•    A policy holder puts their life insurance policy inside super for cashflow purposes without considering the tax consequences if a claim is made, which can be significant!
•    An investor borrows money to purchase an asset but can’t claim the interest because it is non-income producing.
•    A blended family writes a will without a Testamentary Trust leaving the estate exposed and easy to contest.
•    A superannuant buys a property inside their SMSF using a limited recourse loan and then learns afterwards it’s a breach of ATO laws to renovate it.

The relationship between investments, super, insurance and tax is a tricky one. When you pick up one end of the stick you pick up the other. Every cause has an effect.

Sometimes knowing what not to do is more important than knowing what to do. In any event, the compass should still come before the clock.

Seems obvious doesn’t it? It is until the clock is all that’s obvious.

Have a great weekend!

Adam

Back paddock – Speaking of getting things right, “should you say fill the form in or fill the form out?”

And should you say, “similar to or similar from?”