What's more important? Minimising tax or building wealth?

Tax is most people’s largest lifetime expense! Therefore, it is not difficult to understand how taking proactive steps to minimise your taxes can produce significant financial benefits. Different taxes will impact you at different stages of life depending on the wealth you have accumulated i.e. types of investments, amounts and ownership structures used.The common mistake that people make is that they are too short-term focused. That is, they focus on reducing taxes immediately, with little regard for the longer-term repercussions. Instead, it is prudent to employ a more balanced approach. There are four main taxes you need to consider.Income taxObviously, whilst you are working, income tax is a significant expense. Therefore, looking for ways to reduce your income tax expense is very important. There are several strategies that we can draw upon such as negative gearing, super contributions, shifting income and deductions between spouses in different tax brackets, tax-effective business income structures and so on.Future expected changes in employment income also need to be considered.It is also important to consider what your tax position might be in the future too, particularly in retirement. It might be great for one spouse to own all the investments assets prior to retirement (to enjoy the best negative gearing savings) but that might result in a very uneconomical distribution of taxable income in retirement.Finally, there is a common theme of income tax brackets flattening around the world with the top rate of tax in both the US and UK being under 40%. Therefore, it doesn’t make sense to be too convoluted with your tax planning/allocations as a small change in rules might eliminate any expected savings.Capital gains tax (CGT)You may need to sell investment assets at some point to reduce/repay debt or fund retirement. After all, you can’t take them with you when you die! Assuming you have been an Australian tax resident for the entire time you have owned the investment (and have owned it for more than 12 months), you should be entitled to the 50% CGT discount. This means that your effective CGT tax rate will be a maximum of 23.5% of the total net gain (being 50% of the highest marginal rate of 47%).If you invest in quality assets and hold them for a long period of time, any capital gain is likely to be considerable (in dollar terms). Therefore, the ability to share such a gain with other taxpayers (e.g. via family trust distributions) would save a reasonable amount of money. Tax payable on a $1 million gross capital gain in one taxpayers name would amount to $235,000. However, if you could share this gain equally across four taxpayers (e.g. you, your spouse and your retired parents), the total tax payable reduces to approximately $145,000 (or 14.5%) resulting in a $90,000 saving.If your financial plan includes divesting of assets at some point, you need to consider the tax outcomes.Land taxLand tax is payable if you own land (other than your home) that exceeds the tax-free threshold, which is different for each state in Australia. It is an insidious tax as it tends to be minimal when you first invest in property and then becomes more expensive at a time when you need to minimise your outgoings… i.e. in retirement.The tax-free thresholds are per individual so, from a pure land tax perspective, you and your spouse are better off owning one property each – if you own two properties, for example.Land tax rates between states vary significantly. Also, most states levy a higher rate of tax for property owned by a discretionary (family) trust. To illustrate this, the table below (reproduced from page 148 of my book, Investopoly) illustrates the different land tax liaMy new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at [email protected]. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.