Many governments use income tax rebates as a way to encourage people to invest in various financial products or start businesses. While there are many great reasons for offering the tax rebates it does not always make sense to hold onto an investment or stay in business strictly for the tax advantages.
1. Pension funds allow people to put their pre-tax money into an investment fund for their retirement. For example, in South Africa one can withdraw a specific lump sum from their pension fund at retirement and not have to pay any tax. The remaining balance is then paid out on a monthly basis (aka: an annuity) and incurs tax.
Many people believe the tax-free withdrawal is a great reason to invest their money in a pension fund, and the government uses them to entice people to save for their futures.
2. To aid in supplementing pension fund savings many people also use retirement annuities which are post-tax investments. Governments generally offer tax rebates on annual contributions to retirement annuities.
Many people's retirement annuities will not show a positive performance but they will still investment in them because of the tax benefits.
3. Investing in buy-to-let properties is a great way to build one's wealth but sometimes people only buy properties for the tax rebates involved.
They believe taking a financial loss on their rental will benefit them by allowing them to pay less in personal income tax. Yet, if your asset is losing you money on a yearly basis it should not be held onto.
4. The government often uses tax rebates to encourage people to start their own business. For example, the company tax rate in South Africa is 28% while personal income tax is 40%. If you strictly look at the equation from a tax perspective it would be extremely beneficial to conduct business as a corporation.
Be honest with yourself and decide whether you want to pay the government income tax or receive a tax payment from the government.
When deciding which investments you should choose or if you should continue running your business it is important to remember that you pay tax only if you make a profit which is a good thing. If you are holding onto assets that are losing you money just because of the tax benefits you are losing money.
An investment should make you a profit and you should be clear on your goals when choosing your investments. Do not hold onto an investment for the tax compensation.
Ensure that the assets you choose to invest in or hold onto as going to make you a profit and a return - not in tax.
Income tax rebates should be treated as a value-add, not as a primary tool to make important business decisions.