Investment-savvy business people know there’s much, much more to building a satisfactory investment portfolio than just knowing a bit about psychology and the three basic asset types. (Equity, bonds and cash).
A really smart investment advisor will consider the timing of acquisitions and carefully analyse the underlying agreements to try and remove volatility.
Tax planning goes hand in hand with investment portfolio choices. The tax effect of all major purchases needs to be carefully considered against the backdrop of rising taxable income over time and the repayment of tax-deductible, interest-generating loans.
Choose your investments wisely
The one common denominator when looking at taxable passive, income-earning investments is that the assets that underpin these income streams will need maintenance and refurbishment.
Tax-free returns, such as dividend flows, are generally realised after the company that declares the dividend has already made the necessary inputs to keep its capital base healthy.
In a sense, investing in equities is more passive because you should be able to rely on the company’s leadership to take whatever steps will make the company profitable over the
longer term. Such investments can almost be said to think for themselves. Clever investors can get much more for much less, if they include taxable income-generating assets in their portfolios. If a financial institution partners with the investor in the purchase, this is known as “gearing”.
Equities of course are normally bought with cold hard cash, but passive investments, like real estate, ships or aircraft might be bought with a view to their ability to float – that is, change value – based upon the US dollar, for their capital appreciation potential or both.
Banks lend money on good capital-appreciating assets and even aircraft can be financed fairly easily.
Peter O’Halloran is head of tax at BDO, Gaborone. Call 00267 390 2779 or email [email protected] with the heading “Farmer’s Weekly tax issues”.
