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My attitude towards tax is not over friendly, but to be honest I’m happy to pay my share so long as I’m making plenty.
Not everyone, however, is as calm as I am about the subject. Remember how the late Kerry Packer tore strips off a Senate media enquiry he was called before and on the question of tax evasion famously said: I am not evading tax in any way, shape or form. Now of course I am minimizing my tax and if anybody in this country doesn't minimize their tax they want their heads read because as a government I can tell you you're not spending it that well that we should be donating extra.
A rallying cry for those strong enough to stand up to the ATO, but over the years, many people have approached me and asked how can they use property investment to minimise their tax obligations.
Well, in honour of the fighting spirit so famously encapsulated in Kerry Packer, here’s my answer.
Yes, of course, it is possible to minimise your tax, possibly even down to zero, using real estate investment. But there are a few caveats.
First of all, you need someone in your corner who really understands tax law because in any fight with the ATO you're going to lose - even if the judgement goes in your favour. My reason for saying that is because getting involved in any prolonged battle with the ATO takes an enormous emotional toll and while you're busy fighting them you're not busy growing your business so avoid as best you can making a declaration of war against the ATO. Any struggle with a large Government department is an unfair battle, not unlike getting involved in a tag team wrestling match except you're alone in your corner and your opponent has an endless stream of wrestlers to tag so you're always facing a fresh opponent.
The other thing to remember is the large Government department is not fighting with its money but is being funded by the overly generous Australian Taxpayer while your hands are going deeper and deeper into your pockets.
The maths would dictate it is a simple formula if you want to use real estate to help you pay no tax. All you have to do is make sure your real estate investments lose enough money to balance out what you made in your other ventures. But what's the sense of that? No, for any successful business person, tax avoidance is not only illegal but impossible. Tax minimisation, however, is almost your corporate responsibility and means you pay the least amount of tax your legally obliged to pay and the way to use real estate to achieve that outcome is to invest in properties that have strong capital growth potential and minimum cash flow outcomes. The cash flow appeal of an investment property is measured as a percentage of rent against the value of a property. A $200,000 property, for instance, might attract an annual rental return of $20,000 or 10%. But a million dollar property is more likely to attract a top rental of $1000 a week or $50,000 a year, giving a return of 5%. However, when the houses have doubled in price after 10 years, the $200,000 house returns $200,000 and the million dollar property returns that much again. Investors need to weigh the 10% return from one against the million dollar reward of the other and decide for themselves which scenario suits their position better. There's no doubt, however, the 5% return delivers a more favourable tax outcome over the investment period depending, of course, on your personal circumstances. However, I tend to take the approach that if I'm paying a lot of tax it means I'm making a lot of money.
It will be interesting to see what the Australian Government does in relation to Apple, which last financial year paid less than 2% of its earnings in tax (1.82% to be exact). And this was how it did it. One company made the goods in China and sold it to another company in Ireland (which has a very low tax threshold). The Irish based company then marked up the goods 39% and sold it to its Australian outlets that sold them to Australians at virtually cost price so the company made almost no money and, as a result, paid almost no tax. What's obvious to Blind Freddy is that all three companies, in China, Ireland and Australia are all Apple even though they've been set up as individual entities.