Intro – how they paid less tax in the past
One of the questions I get from people is - how can I pay less tax?
Looking at all the taxes there are these days – it seems that whenever somebody found a loophole to pay less tax– the government introduced a new set of tax laws to make sure the loophole no longer works!
So I thought I would look at all the ways that people might have avoided paying tax in the past – but are now caught under tax laws introduced in the last 20 years.
Even though you may be ‘caught’ under the tax rules – you still can sometimes save some tax – but maybe not as much as before. So some ideas will still be worth doing.
Also -after all this, I will write in a separate article some of the best ways that you can still legally reduce tax.
We will be talking a completely different language
From now on I will be talking in a language called ‘Australian Tax’. It is a different language spoken fluently by accountants, lawyers, those in business and investors (to name a few).
You might know some of the words of ‘Australian Tax’ (just like I know a few words of French). But of course just knowing the words does not mean you know what everything means. For example I might know a word or phrase in French – but even if translate the phrase into English the full extent of the phrase might be lost.
I don’t speak the language yet
If you read this article and find the information completely new– that is fine and to be expected. Australian tax is a language where you probably don’t need to know everything (particularly if you just earn a salary or wage from a job – most of this information might not apply to you).
This information is NOT complete – see www.ato.gov.au and/or a professional
This article is in very, very general terms. Each of the laws discussed have lots of ins and outs and this is NOT a summary of each set of laws. If you think something has relevance to you -please see a professional (or at the very least do a lot more reading from the Tax Office website www.ato.gov.au to understand better).
Part 1 – Investors– how they paid less tax in the past
Then: Made profits from capital assets (i.e. Bought shares for $10,000, sold them for $20,000 – no tax)
Now: Capital Gains Tax (“CGT”) (since 1985)
Summary: Capital Gains are included as income in your tax return (although individuals get a 50% discount on the capital gain if the asset is held more than 12 months).
So there is NO SUCH THING as Captial gains tax – rather Net Capital Gains taxed as income (i.e. added to taxable income and marginal income tax rates apply).
There are some exceptions to capital gains (see below re: principal place of residence) and concessions (see: selling a business) but in lots of cases if you receive an amount of money it will either be taxed as income or as a capital gain (which gets treated as income anyway although you might get the 50% discount).
How it works: You buy shares for $10,000 and sell them for $20,000.
You have made a gross capital gain of $10,000.
First: Capital Losses (in this year or previous years)
you apply any previous capital losses you have (Say you had $1,000 capital loss from 10 years ago carried forward)
Second: Concessions (like 50% discount if held more than 1 year)
You apply any concessions (for example you get a 50% discount if owned for more than 12 months)
Example above: Gross Gain $10,000
Less Capital Losses: ($1,000)
50% discount ($4,500)
Net capital gain $4,500 (included as income in your tax return)
Note capital losses are applied first against gains. Obviously this will usually result in a higher capital gain than if the discount was applied first THEN losses. Capital losses can be carried forward indefinitely (or until an individual passes away or entity wound up)