A wealth expert has explained how minimizing taxes – rather than saving – is the key to getting rich.
Brett Warren, national director of real estate investment group Metropole, said hoarding cash is a flawed strategy for building wealth.
“It’s virtually impossible to grow your wealth by chasing cash flow,” he said.
This is because the interest earned on bank savings must be declared to the Australian Taxation Office. If you put that money into other assets, you’ll get tax credits instead.
An investor who has put the same money into stocks or real estate and held it for at least a year is eligible for a 50 percent capital gains tax credit.
A wealth expert has explained how minimizing taxes rather than saving is the main way to get rich
“You can’t bail your way to wealth and building cash flow is more a matter of taking two steps forward and one step back thanks to taxes,” Mr Warren said.
“If you focus on building cash flow, you’re just going to be taxed and that’s going to hold you back.”
An alternative to putting money in the bank is to take out a mortgage to purchase an investment property.
A middle-income earner with a salary of $67,600 who sold a piece of land and made a profit of $67,600 only had to report $33,800 in taxes.
Because of the CGT tax benefit, this investor would declare a taxable income of $101,400 for the year and remain within the 32.5 percent marginal tax band.
But if the same person’s salary were to double from $67,600 to $135,200, that worker would move into the 37 percent marginal tax bracket, which applies to those earning $120,000 to $180,000.
Mr. Warren said taxes are more likely to eat away at a big wage increase.
“I would say the vast majority of us don’t need more cash flow,” he said.
“It’ll probably just push you into a higher tax bracket and you’ll lose half of that in taxes.”
Bank interest must also be declared on an individual’s taxable income for the year.
But if the same money had been used to buy shares that were later sold, a person would be entitled to a capital gains tax credit if held for twelve months or more.
Mr Warren said the wealthy understood the importance of diversifying their asset base so they could reinvest capital gains to create more wealth later – known as a compounding effect.
“That’s what the rich understand,” he said.
Money invested in a rental property or shares entitles a person to a 50 per cent rebate on capital gains tax if he or she sells at a profit after owning the property for at least a year (pictured is a Sydney house built in 2014 is being auctioned and that would be worth much more now)
Brett Warren, the national director of real estate investment group Metropole, said more cash is a flawed strategy for building wealth
“They want to build their asset base, they don’t want to chase cash flow.
“They’re building their asset base, substantially enough to create cash flow, and sure, they may be taxed on that, but it doesn’t hinder or slow them down in their efforts to build wealth.”
Stock markets have also continued to rise since US Federal Reserve Chairman Jerome Powell suggested in mid-December that rate hikes in the world’s largest economy were over as inflation fell faster than expected.
The benchmark S&P/ASX200 on the Australian Securities Exchange has risen 11.9 percent since the end of October, from 6,772.9 points to 7,579.8 points on Thursday.
Mr. Warren argued that risk-driven assets are a better way to build wealth quickly than leaving it in the bank.
“Select high-growth assets that will appreciate more quickly and create wealth, so you can ultimately live off cash flow,” he said.
