US entrepreneur Warren Buffet says he only pays 17.4% of his income in tax. While the US has a lower top tax rate than ours, it’s safe to say that very few super-rich Australians are paying anywhere near our 45% top tax rate, so how can you join their ranks?
The Australian Tax Office describes a highly-wealthy person as an Australian resident who controls more than $30 million in net wealth. Does that aptly describe your current financial profile? If so, you’re in the company of our wealthiest citizens, Gina Rinehart, Andrew Forrest, James Packer, Frank Lowy...
If you’re still working your way towards becoming a member of the super-rich club, that doesn’t stop you from using some of their strategies and structures to keep the Tax Man away from your kitty.
Here are some examples.
1. Become a philanthropist
Resident colourful entrepreneur Dick Smith says our super rich should either be forced to pay more tax or give more to charity. Donations to genuine registered charities are fully tax deductible and are an excellent way to reduce your taxable income whilst teaching your younger family members about the importance of giving.
The amount of tax you save will depend on how much you can afford to give in any one financial year but the generosity of the rich and famous is not all about altruism so if they can give to get rid of excess income, so can you.
If you are a small business person and you operate as a sole trader or partnership, there can be definite advantages to incorporating and becoming a private company. Australia’s corporate tax rate is currently 30% as opposed to 45% for the top personal marginal tax rate. If your business is earning more than $180,000 per year, there’s a strong argument you would be better off incorporated.
You need to get some expert advice to determine the exact structure that is best for your business and additional costs associated with running an incorporated entity, such as audits and other compliance requirements need to be taken into consideration.
3. Shelter income in a private trust
Family trusts are usually set up as discretionary trusts, which give the trustee control over how income is distributed. This mechanism can be used to avoid income tax in certain years because the trustee can simply decide not to distribute income to beneficiaries. Some loopholes have been closed up. For example, it’s not longer possible for a trustee to shelter income by creating an entitlement to a private company but not paying it and then paying the amount to an individual shareholder of that company without declaring it as a taxable dividend.
The rules are complex, seek advice before starting a family or discretionary trust but they are still used to great success by many people.
4. Stack up your super
Salary sacrificing into super can substantially reduce your taxable income and boost your retirement savings. If you preserve your super until age 60 any income your then draw down is tax-free. You can salary sacrifice up to $25,000 per year if you are younger than 50 or up to $50,000 if you are 50 or more.
5. Send your money offshore
accounts are becoming easier to open and operate so you can potentially use tax havens just as effectively as any extra-wealthy person. If you don’t think you have adequate cash to do business with a bank in Luxembourg, Switzerland or the Cayman Islands, Forbes Magazine says new tax havens are emerging that are much closer to home: consider Hong Kong and Singapore.
6. Live in exile
The Australian Taxation Office had to wait for Paul Hogan’s mother to pass away before they could nab him for alleged under-payment of taxation so if you’re truly determined to pay less tax than Gina, James and Twiggy, perhaps it’s time to take an extended vacation in LA.
-- By Jackie Pearson
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