Once upon a time, traditional tax planning strategies involving superannuation might have sparked some interest in financial planning clients. But in a year in which most clients have seen nothing but negative returns from their funds, it may be hard to convince them to put more money into it.
High profile planner Ray Griffin argues that superannuation continues to be an attractive year-end tax planning strategy, despite low levels of returns over the past 12 months.
But whilePremium Accounting Groupchairman Simon Wu agrees that super is still one of the most tax-effective investment vehicles around, he says “the problem is that nine out of 10 investors have seen funds go down and are not keen to invest further”.
Money Management’s financial planner of the year, Robert Kiddell, also recognises the dilemma clients see themselves in.
“It is probably fair to say that there is not a lot of enthusiasm for increasing levels of debt,” he says. However, he also says: “Most of our clients can, however, see the benefit of salary sacrificing bonus payments into super at a time when many assets in the equity classes are starting to exhibit some real value again.”
Griffin agrees.
“Superannuation is by its very nature a long-term strategy,” he says. “The fact that returns are low is an opportunity to buy assets at prices lower than they were 12 and 18 months ago. This is yet another time that in years to come we will look back and say ‘What good buying it was!’ The tax deduction is simply a bonus.”
Griffin also believes negative gearing is still a worthwhile year-end strategy, but prevailing market conditions make asset selection even more critical.
“When it comes to negative gearing, the bottom line is how quickly will the investments grow in value? Asset selection is now more critical given the generally accepted outlook that we’re into an era of single digit returns. People forget that the negative in negative gearing means you’re losing money in a cash flow sense, therefore, asset growth is critical to make the strategy successful — read profitable.”
On the topic of so-called tax-effective investments, Griffin is not a huge fan of anything “too fancy or exotic”.
“Tax should always be the secondary consideration,” he says.
“Investors have to stop and ask themselves: ‘If the Government took away the tax advantages of the strategy, would I still put my money and the bank’s money into it?’ If the answer is ‘no’ then investors need go no further.”
Kiddell says that although he did not recommend any alternative investments last year, he did hold generic seminars on the topic in 2000 and 2001.
“We ran an ethical and alternate investments expo a couple of years ago where one of the highlights was a presentation on the need for baby boomers to diversify some of their investments into things like agricultural schemes, which can offer income in the longer term,” he says.
“The emphasis was to blend relatively small sums into an agricultural portfolio that could be added to each year on a savings plan type basis to provide a top-up for allocated pensions and perhaps social security in retirement.”
But Kiddell agrees with Griffin that the investment must stack up on its own, irrespective of the tax advantages it offers.
“Essentially, we have always stressed with clients that any such investment must pass muster before the tax benefits are considered,” he says.
However,Centrestone’s Robert Keavney abhors agricultural investments.
Keavney argues that what is never understood about agricultural investments is that they do not have tax advantages.
“There is an old saying: ‘Don’t invest in anything that eats or grows.’ It is a good principle and should not be forgotten simply because it is the month of June,” he says.
