Never start a financial plan only for tax purpose

From time to time we have clients coming in to set up a financial plan to deduct their personal tax, whether it is about setting up income protection insurance or starting to invest in property. “Why do you wish to have such a plan?” we ask. “To deduct my tax, I am paying too much tax…” client answered. Wait…. but the purpose of starting a financial plan should never be only for tax deduction, instead, it should be either protect your wealth or build your wealth.

For example, people set up an income protection plan to protect their most valuable asset in life, their income earning ability, which should be the main reason of doing this job, the premium being tax deductible merely makes having such insurance plan more feasible. Same reason, if you invest into an asset, a residential property or a share portfolio, your reason should be expecting the asset will grow in value in long term and also it may at the same time generate you some income on the regular basis, for example the rent or dividends. Negative gearing should never be the reason of investing in any asset at the first place, it is only a side benefit provided the asset will grow in value in the future.

Any tax deduction or negative gearing is based on that you have to spend first, the money you spend would be definitely greater than the tax you claim back later. It is like, say you will get 3 dollars back when you spend 10 dollars, so you still end up with 7 dollars less in your pocket. But if one day you can sell the stuff you bought today for $20, then it will make the purchase worthwhile. Otherwise it will not make sense.

So if someone says to you that you should start doing something to deduct your tax, he is very much likely just wanting to sell you his stuff, which in most cases probably will be for his best interest, not yours.