There are plenty of ways to minimise your tax – if you’re rich, that is.
The wealthy and powerful have always had an advantage over the average wage earner when it comes to avoiding the tax man. They can find creative ways to work their riches through companies, trusts and overseas accounts, while workers get slugged as soon as they get handed their pay packet.
Michael Bearman, a Melbourne barrister with over 25 years’ experience in tax law, says the system is naturally biased to collect levies from the people it’s easiest to extract them from.
“The reason wealthy individuals can arrange their affairs to pay less tax than ordinary wage earners is because we have a tax on income. We don’t have a tax on wealth,” he said.
Project Wickenby has in recent years targeted several high-profile Australians, such as music mogul Glenn Wheatley and actor Paul Hogan, for tax evasion.
Despite these efforts, however, the wealthy still pay comparatively low taxes. What are the strategies that they use? And can you use them too?
✖ Tax havens
Until recently, a nifty way to hide money from the tax man was to squirrel it away overseas.
We’ve all heard about Swiss bank accounts. Israel, Vanuatu and a host of other tax havens are also popular destinations for these hidden funds.
But the Australian Tax Office (ATO) is cracking down on these shadowy schemes, which can be illegal.
“Australia currently has in place 100 information sharing agreements, many with low-tax countries,” said an ATO spokesperson.
So, while this strategy was always out of reach of the average employee, it’s also getting harder for the rich.
Professor Rick Krever, head of the Department of Business Law and Taxation at Monash University, said the ATO was making progress in cracking down on people who funnel their funds offshore.
“We’re catching some of those people. Some of them are hard to catch, but we’re doing as well as most countries,” he said.
✖ Discretionary trusts
By far the most popular way for wealthy Australians to reduce their tax is to put their wealth into a discretionary trust. The money is then split between each member of their family.
“Much of the wealth of the high-net worth individuals in this country is held through corporate structures at the bottom of discretionary trusts,” said Mr Bearman.
Usually, family members with the lowest tax rate – usually the children – end up getting the bigger payouts.
But this method only works if you own your own business or earn your money in some form other than a salary.
Chris Morcom, director of Hewison Private Wealth, says it’s out of reach for most regular wage earners – although some tradies can take advantage of it.
“If you’re a builder and you can run your building business through a trust or a company, that sort of structuring might allow you to distribute some of your profit through to other family members,” he said.
“It’s not going to help blue collar workers because a salary earner pays tax on their salary, and so that’s deducted at source.”
✖ Lying about your capital gains
This strategy involves “cynically manipulating what’s capital and income” on your tax return, according to Mr Bearman.
Paying capital gains tax (CGT) instead of income tax can be preferable because you only pay CGT on half of your profits if you have held an asset, like a home or shares, for longer than 12 months.
So to manipulate the system you could consistently buy, renovate and re-sell your family home every few years, while declaring the profit you make as a capital gain rather than as income from a business. Do this for too long and you are likely to fall foul of the ATO.
Again, this illegal method is skewed towards the rich, as they are much more likely to be able to earn income from assets instead of wages.
“The richer you are, the more of your income is only half taxed. It’s a peculiar way of having a progressive tax system,” said Professor Krever.
✖ Straight up cheating
The most stupid way to avoid paying tax has got to be failing to lodge a tax return.
Surprisingly, many smart and wealthy Australians have been caught out doing just that.
Barrister Matthew Stirling was recently hauled into court and suspended from practice for not lodging returns for eight years.
Clearly, that’s one strategy to avoid.
✔ Negative Gearing
Negative gearing is “a stock standard minimisation technique used by many ordinary people,” according to Mr Bearman.
It involves borrowing money to buy an asset, such as a rental property, and then claiming a tax deduction for the interest charged on the loan. This drags down the amount you pay in tax, while your asset (hopefully) increases in value over time.
For many average Australians, negative gearing allows them to enter the property market and build their investment portfolio.
“Australia’s housing industry is really dependent on negative gearing, and that’s not at all limited to wealthy people,” said Mr Bearman.
But only the wealthiest can afford to use negative gearing to its full potential.
“The ultimate tax avoidance strategy is of course to buy and never sell,” said Mr Bearman.
“I know quite a few very wealthy people whose families have been doing that for generations – just continually acquiring, never disposing, with enormous portfolios.
“A PAYG earner will probably never find themselves, unless they really scrimp and save, in a position where they can continually keep borrowing.”
✔ Voluntary contributions
The only other strategy readily available to an ordinary wage earner is to salary sacrifice into superannuation.
Voluntary contributions are taxed at 15 per cent on the way into the superannuation fund, whereas an employee on the average yearly wage of around $70,000 will pay 32.5 per cent tax on the upper portion of this income.
“It’s a way of putting more money into superannuation without it costing you the full whack, and it saves you a bit of tax on the way through,” said Mr Morcom.
But keep in mind that there are limits on how much income you can shift into your super.