The tax office published a fascinating article this week about how tax-avoidance schemes or
arrangements have changed since the 1970s. (Tax Avoidance: That Was Then; This Is Now).

In the 1970s and early 1980s, the tax office says thousands of people entered mass-marketed
tax schemes, "attracted by promises of guaranteed returns in the form of
inflated tax deductions". Promoters of "blatant" tax-avoidance schemes would
make "outlandish" claims about their ability to avoid tax.

Although the tax laws were tightened in 1981 to strike at tax-avoidance
schemes, more tailored, boutique tax schemes emerged, offering so-called
investments in the likes of films, franchises, research and development, and
primary production.  Again, the tax laws were tightened, this time
targeting scheme promoters.

How have today's tax schemes changed?

"...the schemes of the 21st century are no longer as blatant," comments the ATO. "The trend is
moving towards more complex arrangements, "dressed up" as specialist financial
or structured investment arrangements."

But as the tax office emphasises, the dressing up of schemes as structured investment products
can make it a challenge for taxpayers to tell the difference between legitimate
tax-minimisation arrangements and tax-avoidance schemes.

Perhaps the bottom-line for investors is not to overlook some of the most basic principles
of sound investment:

• Properly investigate any product or service before handing over your money.
• Consider gaining independent, quality professional advice.
• Assess whether an "opportunity" stands up as a sound investment in its own right - aside from its claimed tax treatment.

As the tax office concludes: "Even if you are an investor with years of experience, any
arrangement that offers substantial tax benefits should be fully investigated
before you get involved."

By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia

28th March 2012