The Australian Taxation Office (ATO) has warned investors to be wary of tax schemes involving life insurance companies based in foreign tax havens. Commissioner Michael Carmody says the schemes usually involve borrowing money from an overseas bank related to the insurance company, and investing in a life insurance policy through a trust.

The aim of the schemes is to earn tax-free income from outside Australia and claim tax deductions on the interest from the loan.

Mr Carmody has spoken out against the popular schemes, saying they could break tax and foreign investment laws. “The tax office is currently finalising its view on the issues raised in this alert and will be publishing that as soon as possible,” he said.

ATO figures show about $5 billion flowed to foreign tax havens in 2001 and 2002 – about half of that to Bermuda.