Index:

1) Intro

2) How to make money with cost segregation in Australia

3) How to make money with depreciation in Australia

4) How do the rich avoid taxes in Australia?

5) Learn more

Good Morning!

Have you ever wondered how successful billionaires like Elon Musk and Jeff Bezos pay so little in taxes?

In 2018, Mr. Musk paid nothing in taxes. Hehe…

Basically, the highest income earners know how to finesse the tax system, and most of the time you can take advantage of the EXACT same things as them!

What they’re doing is rarely illegal.

So,

If you wanna pay less tax, avoid it altogether some day and start building financial assets for yourself and your family, read on.

We’re ALL affected by tax, so it’s best that we start understanding it.

How to Make Money with Cost Segregation in Australia

When you own ANY kind of investment property, you can save a LOT on taxes.

Get a quantity surveyor into your rental property to separate all its tangible elements like furniture and air conditioning, carpet and ovens and stuff, and create a depreciation schedule.

This will allow you to record a loss on your property because of the amount that these physical assets have depreciated, a loss that you can subtract from your total taxable income when tax-time comes.

If you have any deductions left, you can roll them onto the next year and so-0n.

If you WERE to sell the property some day, you’d pay capital gains tax on the total value of the house at that time minus capital gain post-depreciation.

For example, if you initially bought the rental property for $1,000,000 and 5 years later it appreciated to $2,000,000 AND you’d pocketed and rolled over $600,000 in depreciations over those years, you’d do these two things:

1) $1,000,000 - $600,000 = $400,000 gain.

2) $2,000,000 total property value - $400,000 gain = $1.6 million taxable income.

So obviously this is a lot to pay taxes on, so really you’ve just deferred taxes and are facing a depreciation re-capture upon selling.

However, this is where something called a 1031 exchange comes in.

Except it’s only available in the US, not in Australia.

So what the rich in the US do is roll their property’s equity over into a new, similar property and continue to “defer” the taxes, rather than “avoid” them.

This is how many rich families maintain their wealth over generations; they defer taxes indefinitely and NEVER fully convert their investments into cash.

This is also the main reason you might hear someone tell you (or maybe you haven’t heard this) that you SHOULDN’T pay off your mortgage.

Because the people that actually invest in assets like businesses and rental properties are able to avoid paying any Capital Gains Tax as well as pay for their personal living expenses by borrowing money against the value of those businesses or the equity in those rental properties.

Now I know I said that you CAN’T use this beneficial thing called a 1031 exchange in Australia…

But you’ve still got options.

By investing in rental property, you can save taxes forever by doing these things:

1) Asking a quantity surveyor to give you a depreciation schedule on the different assets inside the place.

2) Utilise Temporary Full Expensing to quickly and significantly reduce your taxable income so that you can put MORE money toward more rental properties, your existing ones or even toward businesses or market investments.

3) Slowly build equity and cashflow overtime that you can use to borrow more money for more properties or businesses which can all be used as collateral to pay for your living expenses with debt later on.

4) Never sell these assets.

I’ll explain what “Temporary Full Expensing is in the next point.

Basically, for those in Australia, instead of a 1031 exchange, you just straight up don’t ever sell the properties to avoid any Capital Gains Tax.

Although, there’ll still be property taxes, but if you’re in a positive cashflow and have made your tenants pay for these taxes, you’re all good!

Do it like the rich do.

How to Make Money with Depreciation in Australia

Parts of a property can be individually analysed to conclude a useful life or “Effective Life” for each asset inside, such as maybe 10 years for the carpet.

However, the depreciable elements MUST be brand new before you can depreciate them.

And the actual building, such as the walls and infrastructure, could potentially be depreciated up to 40 years for residential properties at a rate of 2.5% of the total original cost to build the property.

This is possible for any individual property investor.

You can claim depreciation on a property who’s construction started after 15th September 1987.

And any renovations after 27 February 1992 can be FULLY depreciable for 40 years at 2.5% also.

To determine JUST how much of a property is eligible for depreciation, take the total value of your investment property, subtract the value of the land and you’ve got the value of the physical house and its depreciable assets.

Divide this number by 40 (years) and that’s the maximum amount that you can deduct every single year.

But keep in mind, you can only claim deductions for the period in which the property was actually RENTED out to a tenant or available for rent, but empty.

By getting a quantity surveyor in to look at the property, you can separate every little depreciable asset within the property and find the REAL “Effective Life” of them, which will almost always be shorter than the default.

However, by using something called “Temporary Full Expensing” (TFE) or what’s really just “accelerated depreciation”, any asset used for business purposes under either a small business or a large corporation that meets the Australian Tax Office’s (ATO) criteria, can be FULLY depreciated in the first year of use or installation.

To take advantage of this, you must be a business owner and the rental property needs to be somehow related to your business or the scale of your rental property investments must constitute a business.

Check out the details here.

This is also where a good accountant comes in, which I’ll talk about later.

* Sidenote: Deductions on the property that you LIVE in are very difficult; the idea I’m sharing is pretty much just for investment properties, which I first talked about in my last post.

As a small business owner, you can use TFE to offset the tax on your “passive” or business income.

Moreover, you can carry this depreciation forward each year to reduce your future taxable income, such as the cashflow from your rental properties.

Because these deductions, when applied to your income, make it LOOK like you’ve lost money and have made no cashflow, when you’ve actually made money.

For example, if you’re earning $8000/year in cashflow and claimed a total deduction over 10 years of $80,000, you can can minimise that cashflow “on paper” down to $0 and pay no taxes on the property for those 10 years.

(80,000/10 = $8000 tax reduction per year to cover your $8000 in received cashflow)

In this imaginative example, you could receive the $80,000 all in ONE year, rather than gradually over the 10 years.

This is arguably better than if you received it 10 years from now, because you’re able to avoid the opportunity cost of having less capital now.

You have more investable money at your disposal, which you can put back into more real estate, into your existing properties or into your business.

Which helps you build more assets, which you can use to borrow more money from the banks (to make more money) and EVENTUALLY borrow against the equity or value in these assets in order to pay for your personal expenses.

And you pay off the interest on these loans with the cashflow from these same assets.

There’s definitely some intricacies in there, but that’s pretty much it.

In this point, I focused on property because that’s the most relevant thing when discussing the strategies of the wealthy.

But you can very easily use Temporary Full Expensing for your small business, whatever it is.

To take advantage of this, you’d find out whether you’re eligible for TFE.

Then apply.

Hire a great quantity surveyor to create depreciation schedules on your properties and expand.

Hire a great accountant to help you make the best use of TFE and find maximum deductions in your business.

Don’t ever sell these assets.

How do the Rich Avoid Taxes in Australia?

These aren’t crazy strategies when compared to the previous two, but they’re simple and they work.

Besides cost segregation and its accompanying accelerated depreciation or Temporary Full Expensing in Australia as two HUGE ways that wealthy people avoid paying taxes indefinitely or record no taxable income, what’re some more standard ways that you can probably save tax in Australia?

You could invest through your super.

Because you can CHOOSE where your Super’s invested.

For example, if someone earning over $18,200/year, that would mean that they pay a rate of 19% tax on their taxable income all the way up to 45%.

If that person sold their shares in their lovely VAS and VGS index funds (I like these), they’d pay that rate in Capital Gains Tax.

While if they invested in those two funds THROUGH their Super, they’d only pay 15% tax.

So especially if you want to save for retirement, and don’t want to put your money toward real estate or businesses, you COULD save substantial tax over time by investing through your Super.

But make sure you CHOOSE where your money’s invested.

Go to your personal super fund and check this out.

Now, another method of saving tax that rich people use:

Rich people do what we ALL can do, hire EXTREMELY specialised accountants.

Hire a brilliant CPA (Certified Public Accountant), especially if you’re a small business owner.

Whatever you pay them will likely pay for itself, due to the amount of deductions they’ll find for you as long as you’ve kept appropriate records of stuff you’ve bought or money you’ve spent on your car and other expenses.

Now, there are some very specific and subjective tax advantages that you can use in Australia, but it’s too dependent on your circumstances to cover.

Here are some videos that explain them well.

• https://www.youtube.com/watch?v=yAQFlFyWhSU

• https://www.youtube.com/watch?v=H1tiTFO7WLA

• https://youtu.be/H1tiTFO7WLA

Basically, bring some of these up with your CPA and see if they’re viable for you.

The last strategy is using the Capital Gains Tax (CGT) discount available after holding an asset for more than 12 months.

If you hold certain stocks or an INVESTMENT (rental) property for over 12 months, you pay 50% less CGT, which is fantastic.

If you wanted to simply defer some of your taxes over time or forever, you could do the most low-stress thing possible - invest in index funds.

If you’re in diversified, dividend-paying ETF’s, you shouldn’t need to ever sell and will receive increasingly more dividends as you invest more over time.

These dividends will be paid to you tax-free.

Wow.

That’s it!

Now, actually BUILDING wealth, personal-fulfilment and psychological freedom that makes you say “wow, I’ve come a long way and my life’s pretty good”, requires that you spend your time on building businesses, softwares, offering services and/or investing in real estate.

Which all require consistent education and the willingness to try stuff until you see success.

That’s what I’m all about, so subscribe to the Peaky Pines Email Community if you want to receive weekly information that you can use to progress your life in some way, as well as a community of people who want to do the same.

Disclaimer: None of this is financial advice, it’s merely my personal point of view on the topic of taxes, since it’s something that affects us all.

Any points that interest you, if relevant, you can mention to a financial advisor or your CPA.

References:

https://www.bbc.com/news/business-57383869

https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/general-depreciation-rules---capital-allowances/effective-life-of-an-asset/

https://www.youtube.com/watch?v=YNJr-MP3TOA

https://www.quora.com/How-do-rich-people-evade-taxes

https://www.quora.com/What-is-an-example-of-an-accelerated-depreciation-method