Tax Loopholes of the Rich

TAX LOOPHOLES OF THE RICH

by Tony Melvin & Ed Chan, authors of “How to Legally Reduce Your Tax … Without Losing Any Money!” available in all good bookstores.

For more information visit www.knowledgecentre.com.au

There are only two types of tax payers; those that play the game and those that don’t.

The former we call ‘Players’, and the latter is unaffectionately labelled ‘pawns’. For many years people have turned to the advice of their accountant looking for ways to join the ranks of a ‘Player. Those that could afford the right advice, or even better, the full gamut of services from a team of experts were welcomed onto the playing field with open arms and high fives all round. Yet those lacking the necessary financial resources were left to watch the game, relegated to being a spectator and the lurking thought – “but how do they do it?”

While it may appear that we are using a metaphor to explain the complexity of the Australia tax system – the truth is we are not being metaphoric. In Australia tax is a game.

It might seem like a paradox that tax is a game, but the truth is if you don’t treat it as such you’re liable to go mad. You see, any game consists of a reward for overcoming challenges. The rewards only exist because the challenges are there – no challenge – no game – no fun.

And so it is with tax, it can be fun! Fun you say?… yes and the first step is to not take it all too seriously. The proof is contained in this fact:

You are not the only one who doesn’t know all the tax laws – nobody does.

Here’s a story which highlights this fact. Recently a large public mining company in Australia has been hit with a demand to pay back taxes and penalties totalling $1 billion. While the mining company is acting on “the best legal advice” and states “they don’t have any tax bill”, the Australian Tax office also claims to be acting on “the best legal advice” which says that “the mining giant does owe tax”. This fight will ultimately be decided in court but it’s just another example that even the “best” have no certainty on what the law actually is and how it is applied.

The complexity of our system is proof that tax has turned into a game. In the beginning, tax was something everybody tried to avoid. The government was trying through various laws to tax everybody fairly. Some people simply broke the law and they were punished accordingly. Others got smart and found loopholes. When the loopholes were over-exploited, the laws were changed to overcome the loopholes. The game for the taxpayer became “to find a loophole” and the game for the government was to “close the loophole” with more taxation laws. There you have it, it’s like a Tom and Jerry cartoon – we are playing cat and mouse. (We’ll let you decide which one is which!)

The loopholes started with favours or exemptions for business owners or investors. As large producers and contributors to the state or country’s economy, different laws provided concessions to these enterprises. Owners of such enterprises, of course, were the wealthy and although the wealthy were the original targets of tax, their cunningness allowed them to escape, relatively unaffected, leaving the rest of society to pick up the tab.

Today the game is no different. However, it seems that many have forgotten it is a game – only a few are playing. And as with all games, the more the merrier. We invite you to play. It’s legal, it’s fun, it’s rewarding, and it’s a damn sight better than kissing goodbye to nearly half your money! And as you might have heard before, it’s not about how much money you make over your lifetime, it’s about how much you keep, and how hard that money works for you.

Those that play the game of tax we call the “Players”: They are the ones who understand that it’s a game and learn how to use the tools of the game to their advantage. Those that choose not to play and continue to be affected by changes in the tax laws we call “Pawns”. The only difference between the Players and the Pawns is an understanding and application of the fundamentals.

One of the basic fundamentals is that there are only two ways to play the game of tax. You don’t play the game by dealing only in cash, and you certainly don’t do it by making less money. The way to play is:

You make tons of money and either:
1. Have a business or
2. Invest.

These are MUSTS – business owner or investor (or both). Only then does the game become playable, only then does it become fun.

If you remain an employee (and don’t invest), you remain a pawn in the game. You’re the one who feels the pinch of the government’s budgets and “New Tax Systems”. The Players don’t feel them.

Tools of the Game

One of the firsts things a Player must realise is that there are tools. Although not as apparent as a drill or a screwdriver, they are nevertheless tools that are vital to the game of tax. These are such things as structures and investing concepts. These are tools. Just because they are, to a marked degree, intangible is beside the point – there are tools and if you use them the result is far more rewarding.

What would your reaction be to a tradesman trying to cut a piece of wood in half without a saw or an axe? Imagine if this tradesman went around the neighbourhood asking people how to cut this piece of wood. Let’s say out of frustration the tradesman takes a standard household kitchen knife, the kind you use to eat your dinner with, and starts sawing! Well, he’s not going to get very far is he?

What would happen when you showed him a saw or, better still, a power saw? Boy, would he be relieved if he’d just started out. However, he might be very frustrated if he’d already toiled and strained and actually cut through the wood with a blunt knife, only to discover the job could have been done in one tenth of the time with much less effort.

And so it is with the tools of investing!

The result you’re aiming for might be asset protection or less tax or both. Speed and effectiveness are determined by your understanding and usage of structures, in combination with an evaluation of your investment or business plan. These are the tools you employ to maximise your efforts and money, just like a power saw cutting through wood.

What is a Trust?

One of tools of investing or business is the use of trust structures. The main benefit of a trust structure is that it provides flexibility. Income can be distributed to the lower income earner, assets can be protected, and wealth can be passed onto the generation with minimal fuss and little or no tax.
Trusts however come in all shapes and sizes and there is no “one-size-fits-all”. The type of trust you use depends on many factors, such as; type of assets, investment method (trading or holding), finance methods, investment income, personal income, marriage status, susceptibility to be sued – just to name a few. So be weary of anyone saying –such-and such a trust will suit all situations because they are lying.

So while it is not possible to cover every type of trust in this article we will explain what a trust is. This basic understanding is often missing and therefore trusts and their usage become unnecessarily ‘complex’.

A trust is basically an agreement or promise. A person or company agrees to hold assets for the benefit of another. The one who holds the assets is called the trustee; those who benefit are called beneficiaries.

The trustee has legal control, which is legal title only. (A person with legal control can buy and sell an asset but will never own or enjoy the benefits of ownership, such as income or usage). It’s the trustee’s name that appears on all legal documents, bank accounts, etc.

The beneficiaries are not mentioned on such documents and have beneficial ownership (allowing a person to enjoy the benefits of ownership, including; usage, income, profits etc - even though legal title is in another name.) Therefore the beneficiaries are entitled to the assets and profits of the trust.

The basic function of a trust is to separate control and ownership. The result is that asset protection is possible and profits distributed in the most tax effect way.
The part you need to get your head around is that, when you establish a trust of your own, you have both legal control and beneficial ownership. Most people don’t separate the hats, they think they are one and the same but that are not.

For example, asset protection occurs because even though legal title is in the name of Joe Bloggs, Joe is trustee for a trust and therefore doesn’t own the asset – the assets are held in trust for the beneficial owners – hence nothing can be taken from Joe because he doesn’t own it.

Ownership plays a key factor in not just asset protection but with in the tax system too. This is why a Player will endeavour to own nothing and control everything!
There are many benefits to structures such as companies and trusts and they are just one way that a Player uses the tools of the game to his or her advantage. We hope that you join in the game some time soon…