56 Pay No Tax on a Million Dollar Income
Couldn’t help but be drawn to this article in The West Australian this week regarding how Australian taxpayers pay no tax on a million dollar income! I suspect the headline will have caught the attention of many others too.I will confess, my initial expectation was that the article would be a sensationalist beat up about supposed “tax dodgers” and “the rich”. How our tax system is unfair and just there to penalise the working class. I was pleased to learn this was not the case, for the most part. The article actually for the most part produced (presumably accurate) facts from the Australian Tax Office (“ATO”) with only relatively subtle hints of bias and comment. Nevertheless I have no doubt it will have created one (or maybe even both) of two strong reactions from many readers …i) Its unfair “the rich” get to make all this money and pay no tax, and/orii) Why can’t I earn similar amounts of income AND pay little to no tax?So I wanted to make some comments in relation to both of those, likely common and understandable, reactions …
It’s unfair that you can pay no tax on a million dollar income
There is no magical trick or silver bullet that I know of that can just reduce your tax without you earning the right to that tax saving or otherwise paying for it. Presuming of course you are doing nothing illegal.The article gives some clues as to how the income was generated by many of the individuals and why they paid limited tax on that income.More than half of the 56 individuals are indicated as earning capital gains. It should be no secret to any of you that capital gains in Australia are generally taxed in a more generous way (ie. less tax is paid on them) then ordinary income. The primary reason being that Governments are incentivising individuals to save and to invest and to take risks and to innovate. And the fruits of those activities, if they work as planned, generally result in capitals gains.In particular, a capital gain earned from a passive investment (ie. on shares in a company) are generally 50% tax free if the investment was held for at least 12 months. This incentivises individuals to invest in companies who are building businesses, employing people, developing new technologies and products and who are helping to grow the Australian economy. The reward to the investor for providing the money to the company allowing them to undertake these activities (and for bearing the risk the money may not come back) is concessional tax treatment. This also incentivises individuals to save and invest for their own future, rather than spending all they earn and relying on the Government when their income ceases (ie. due to loss of employment, illness or accident or of course retirement).Further, and potentially even more relevant in the case of the individuals in question, is the fact that capital gains earned on active assets (ie. on businesses owned and operated by the individuals in some form) are even more generously taxed with the potential for a capital gain on the sale of a business or business related assets being entirely tax free (if you get the right advice and structure your business correctly)! Again, this incentivises individuals to start their own businesses, to employ people themselves, to develop their own new technologies and products and to directly assist in growing and improving the Australian economy and overall standard of living.There are other legitimate, legal, and for me totally reasonable and fair, methods of reducing your tax bill. But in pretty much all cases, you have to earn the right to the deduction in some way.
How can I pay no tax on a million dollar income?
For those of you who see such a head line and think, I want that to be me, here is how you do it …You take action!You either start investing or you start your own business (or better yet do both)!And if you don’t have the money to do either of these right now, you start the process of working hard (this may take many forms) to earn it, and then save it, so that you can start!I realise that answer probably raises more questions than it answers (how do I save the money, where do I invest, how do I start a business, what business do I start), but it is still the upfront one and only answer for the majority of people who feel they are not earning enough, who do not have the wealth they want, nor live the lifestyle they desire.You have to take action to commence building your own wealth, doing it properly, doing it with expert help (because there is no way any of us have all the answers, no matter how clever we think we are) and making the choice to improve your life and get ahead!Here’s hoping you choose to take action. Good luck!P.S. The article is reproduced via Yahoo7 News here.