Am I Paying Too Much Tax?
Imagine that your tax affairs are arranged neatly as pieces on a chessboard. Are you just starting out in the game, awaiting your first move? Is your business already well established in the game, and looking for a better position? Perhaps you are nearing the end-game, with retirement in sight, and looking for that final exit strategy.
THE CHESSBOARD AND THE TAX MAN
Our tax system is not unlike the game of chess. Based on a set of rules common to all players (taxpayers), and involving different pieces (individuals, companies, trusts, superfunds) that move in their own unique way, there is an infinite combination of outcomes for every taxpayer. The objective of the game is simple: maximise your wealth within the rules of the game, given your unique circumstances.
A really good accountant, like a Grandmaster in chess, sees your tax affairs as pieces on a chessboard. Playing the game within the rules, the Grandmaster accountant applies his expertise to your unique set of circumstances and helps position you to save tax, create wealth, and strengthen your overall financial position.
As in chess, a careful understanding of the rules and the unique pieces on the board can give rise to a body of knowledge that can be applied as Strategy. Some Strategies, like negative gearing, are more commonly used than others. This is because Strategies can only be applied as and when your own circumstances allow. Nonetheless, Strategies are always present, though they are often hidden in plain sight.
Broadly speaking, strategies are possible because our tax system uses different tax rates, which are then applied to income once per tax year. Let’s look at each of these below.
Tax rates apply differently to every ‘entity’. Companies are taxed at a flat 30%. Superfunds, 15%. Trusts distribute their profits to someone else, or risk being taxed at a flat 49%. Partnerships don’t pay tax at all; instead, each ‘partner’ (be it company, trust, individual, etc.) pays tax on its share of partnership profit. Individuals (be you sole trader, or a wage earner) pay tax at ‘marginal rates’, where the tax rate for each ‘block’ of income gets its own tax rate, of 0%, then 19%, 34.5%, up to 49% on the block of income above $180,000. Understanding the way each of these entities is taxed, and the way they relate to each other, gives rise to opportunities through careful tax planning. Good advice on the best ‘entity’ through which to arrange your tax affairs, coupled with appropriate strategies, can make all the difference in achieving amazing wealth outcomes.
Strategies also exist because for the vast majority of us, our income is added up and taxed every financial year (ending June 30). As we are taxed at marginal rates, it is far better to smooth our income over a number of years to ensure we avoid the higher tax rates and make the most of the lower tax rates. As an example, $180k taxed in a single year cops $55k tax, while no income the following year gives rise to no tax. If you were to spread that $180k evenly over two years, you’d pay $23k tax each year ($46k all up), a saving of $9k. Strategies that delay (or bring forward) income are invaluable in saving tax and creating wealth.
READY TO MAKE A MOVE?
Your own circumstances are as unique as any game of chess ever played. The extent to which tax rules and strategies will apply to you will therefore vary accordingly. New opportunities continually arise (and disappear) because the rules underpinning our tax system are constantly changing.
So speak to your Grandmaster accountant today. With some timely expert advice, you can move yourself into an unbeatable position.
Allan is a Tax Specialist with 15 years’ experience helping clients create wealth.