Get involved in creative life assurance products to avoid paying tax and you could face the taxman investigating all your financial transactions, warns Deputy Minister of Finance, Gill Marcus, in an interview with Personal Finance.
The warning comes on the heels of the voluntary suspension last week by life assurance companies of what are termed "blackhole" policies.
The policies are designed around a loophole in legislation which can be used to reduce taxation liabilities.
Although the life assurance companies have stopped selling the "blackhole" products Marcus says this does not mean that the tax authorities will not continue to take a close look at people who have invested in the products.
Close examination
People who buy the products should ask "who will bear the tax liability if the products are found to be illegal?"
"People who go into these schemes with the intent of not paying tax should not moan if the Receiver of Revenue then places all their transactions under examination," Marcus says.
And the close examination of the financial affairs of individuals using the products to avoid tax could go on for 10 years or more.
Marcus says the policies are one of a number of questionable practices, which although legal, are not ethical.
Marcus says that apart from the blackhole products she has also asked the Financial Services Board and the Commissioner of Inland Revenue to investigate other tax avoidance schemes which she believes sail close to the wind. They include:
* The mushrooming market in what are termed secondhand policies. The secondhand market has evolved from the often poor surrender values given to policyholders who need their savings urgently before the contract period of the policy has expired. Depending on the remaining period of the policy a better value can be obtained on the secondhand market.
The policies are bought by individuals who use the shortened maturity period of less than five years to avoid tax penalties; and
* The use of "dummy" policies. These policies are set up virtually in name only as an empty shell, using the blackhole principle and then "sold" at a later date to people wanting to circumvent the tax limitation period of five years.
Marcus also warns that unless financial services companies clean up their act and start putting ethics into the development of investment products they may well face tough compliance regulations.
Marcus says the government will prefer to go the route of self-regulation, but if the companies continue to market dubious products that not only threaten consumers but also sail close to the wind on tax issues there will be no choice but to take the course of statutory regulation.
Marcus says she is concerned that some of the dubious products being sold transfer all risk from institutions to the consumer.
Consumers have to be given proper protection against unethical products.
Marcus says she is pleased the life assurance companies have decided to suspend the products after her talks with the Life Offices Association last week. She says she has held discussions with commercial banks about questionable practices designed to circumvent taxation.