A wealth expert has explained how minimising tax – rather than saving – is the key to getting rich.
Brett Warren, the national director of property investment group Metropole, said hoarding cash was a flawed strategy for building wealth.
‘It’s virtually impossible to grow your wealth by chasing cash flow,’ he said.
That’s because interest earned on bank savings has to be declared to the n Taxation Office. Plunging that money into other assets brings tax discounts instead.
An investor who plunged the same money into shares or property, and held it for at least a year, is eligible for a 50 per cent capital gains tax discount.
A wealth expert has explained how minimising tax instead of saving is the key way to get rich
‘You cannot save your way to wealth and building cash flow is more a case of taking two steps forward and one step backward thanks to tax,’ Mr Warren said.
‘If you focus on building cash flow, you’re only going to get taxed and it’s going to hold you back.’
One alternative to keeping money in the bank is getting a mortgage to buy an investment property.
A middle-income earner on a $67,600 salary who sold a block of land and made a $67,600 profit would only have to declare $33,800 on tax.
Because of the CGT tax break, this investor would be declaring a $101,400 taxable income for that year and stay within the 32.5 per cent marginal tax bracket.
But if the same individual’s salary doubled from $67,600 to $135,200, this worker would move into the 37 per cent marginal tax bracket, which applies for those earning $120,000 to $180,000.
Mr Warren said tax was more likely to eat away a big pay rise.
‘I would argue that the vast majority of us do not need more cash flow,’ he said.
‘It will likely just push you up into a higher tax bracket and you will lose half of it to tax.’
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 which were later sold, someone would be entitled to a capital gains tax discount if they were held for 12 months or more.
Mr Warren said the wealthy understood the importance of diversifying their asset base so they could reinvest the capital gains to create more wealth later – known as a compounding effect.
‘That’s what the wealthy understand,’ he said.
Money invested in a rental property or shares entitles someone to a 50 per cent capital gains tax discount if they sold for a profit after owning the asset for at least a year (pictured is a Sydney house up for auction in 2014 that would now be worth a lot more now)
Brett Warren, the national director of property investment group Metropole, said have more cash was a flawed strategy for building wealth
‘They look to build their asset base, they don’t look to chase cash flow.
‘They build their asset base, substantial enough where they can create cash flow and sure, they may get taxed on that, but it doesn’t hamper or slow them down they’re trying to build wealth.’
Share markets have also continued rallying since US Federal Reserve chairman Jerome Powell in mid-December suggested the rate hikes in the world’s biggest economy were over as inflation fell faster than expected.
The benchmark S&P/ASX200 on the n Securities Exchange has surged by 11.9 per cent since the end of October, rising from 6,772.9 points to 7,579.8 points as of Thursday.
Mr Warren argued have risk-driven assets was a better way to build wealth quickly rather than leaving it in the bank.
‘Select high-growth assets that are going to grow in value faster and create wealth so you can live off cash flow eventually,’ he said.