It's time for a review, says Leeanne Bland.
It's the same old story. Despite your best intentions to have your financial affairs well organised in good time, June 30 has crept up on you (again). It's times like these that you can be sure of one thing: the last two weeks of the financial year is not the best time to adopt any radical tax-related investment strategies.
That said, this is a good time to review your overall position, not only taxwise but in terms of your budget, your super and your investments.
Stop
Colin Lewis, the technical manager at IPAC Securities, says his ideal client is one that doesn't try to do every thing at the last minute. "People tend to panic and look at ways to minimise their tax in June."
While you are getting your finances in order for this tax year, he suggests you do yourself a favour and look at what opportunities exist for next year as well.
"It's important to budget ahead - particularly for pay-as-you-go employees. They've got to make decisions on salary sacrifice before they derive the income.
"For example, if you're going to receive a bonus, you need to decide whether you are going to take it as cash or super before you receive it."
Laura Menschik, of Millennium Financial Services, says it makes no sense to put off the inevitable. "The sooner you get your tax return done, the sooner you can plan for the new tax year.
"Often people don't lodge their returns until March or even April or May," she says. "By then there's not much time to start forward planning." A proactive tax adviser will want to start planning earlier, she says.
She recommends you look at your whole financial position - and try to do so with a fresh perspective.
Using the example of a share portfolio, she says: "You need to ask, if I were to put together a new $100,000 share portfolio of 10 or 12 stocks, would I still buy the shares that are in my current portfolio today?
"If the answer is yes, and you think the company has good long-term growth potential, then keep it, even if it has underperformed."
If the answer is no? "If you wouldn't buy it today, why would you hold on to it?" she asks.
Revive
Lewis agrees it's a good time to review investments. "We have seen so much volatility and uncertainty in the markets that it's time to draw breath," he says.
After three years of negative sharemarket returns, he understands the temptation to run, not walk, to the nearest cash shelter.
"It's easier to say than to do, but it's important to maintain discipline. If your original portfolio had a three-, five- or seven-year horizon, don't make short-term decisions," he recommends.
That said, if you're lucky enough to find yourself sitting on some capital gains, it's a good excuse to weed out the duds. Capital losses can be offset against capital gains and reduce the amount of tax that you pay.
"Losses can be carried forward, but gains have to be declared now," Lewis says.
Investors in managed funds have a few extra problems to deal with at tax time, says Menschik. "It's important to remember that the funds may pass on the capital gains for the trades done during the year. But you often don't know what they are until the financial year is already finished." Then it's too late to realise capital losses to offset against these managed funds' gains.
Another warning from Menschik comes on the topic of portfolio rebalancing. It's a popular strategy, and it's one that Menschik approaches with caution.
If you have an asset that has performed well and that you think will continue to perform well, think carefully before rebalancing and selling out, she says. "Be sure you
feel comfortable with the outcome
of that strategy."
Survive
Once you know where you are, resist the urge to invest in something that might give you a tax deduction now but may well end up being a bad investment later.
"The tax benefit should only be an ancillary benefit of any decision. Invest - first and foremost - for the sake of the investment," Lewis says.
That's not to say there aren't some legitimate schemes that make good financial sense, and that also carry attractive tax treatment. There are, says Menschik. "But they're all very long-term - sometimes 15 years."
They're not a good option for those looking for cash flow, or for those trying to plan their finances for the next five to 10 years, she says.
"Often, the long time frame [of these schemes] is not conducive to that sort of planning. People shouldn't put more than a very small amount of their portfolio into these schemes," says Menschik.
But with markets the way they are, most people don't even have that to spare.
The best strategy, she says, is sit down, look at what you have and then plan ahead for 12 months, three years, five years and 10 years.
"If in measuring your results you end up feeling dissatisfied - if, for example, you'd hoped to have $100,000 in super and find you only have $85,000 - you need to be realistic. Realise that now you start at $85,000 and look at what you need to do from here.
"I have seen desperate people do desperate things to try and catch up on lost investment earnings. They make their position worse by acting in a panic.
"Markets have gone down over the past few years, but they won't always. You need to be realistic with your goals and planning," she advises.
