Dear fellow writers. It’s great to have you back for another topic in my blog series Mastering Money for Writers. The previous months, I discussed the dreaded B-word (Budgeting). The focus of the next few posts will be the dreaded T-word—Taxes.
I wanted to begin by sharing something I’ve realised since frequenting the ATO (Australian Taxation Office) website. This realisation has sparked a shift in my mindset and consequently my approach when taxes are concerned.
Tax laws favour businesses and companies. Low-income-earners are second-best, but high-income-earners are the worse hit. To spell this out for you, people earning over $180,000 get taxed as much as 45%! This is like working 5 out of 12 months in a year for free for the government!
Perhaps some people may get triggered and be ready to rant about how unfair this is. However, in my view, there is power in this knowledge.
What I’ve come to realise is, it makes sense why companies and businesses are the ones favoured in the world of taxes. To understand why, you need to start seeing the government as a business.
In the government business, taxes are its income, while its expenses involve things like the wages of government workers, grant money, improvements to infrastructure, Centrelink/family benefit payments and so on.
What’s unique about businesses whether they are a small business or a huge corporation is, there is no ceiling to the potential income the government can make. If a business is highly profitable, it means more money the government can earn.
The thing is, the highly profitable businesses are the ones who constantly monitor their numbers and look at ways to reduce costs—including the cost of taxes. The government knows this, which is why it’s much wiser to make the rules in favour of the people you rely on most for income than make rules against them. For example, raising taxes for companies means they will just move their businesses overseas to places like Singapore and Ireland—which will result in a huge loss of income for the Aussie government.
To give you an idea of some of the tax benefits of being a company, in Australia, if you form a company (which only costs about $1000—less than the cost of most smartphones—although there is a yearly audit cost thereafter), your tax rate is capped at 30% no matter if you’re earning millions. However, the company tax rate in Singapore is a flat 17% and only 12.5% in Ireland! It’s pretty obvious why so many companies have moved their base operations to these “tax havens”.
Now, I won’t ignore the elephant in the room and acknowledge, yes, many of these huge corporations use very smart people to figure out ways to reduce their tax liability to the degree that they are and have been taken to court by the government.
The purpose of this post is not to absolve the dodgy dealings that do happen in the business world. Rather, I hope to propose a different mindset as we approach this discussion on taxes.
One thought I want to leave you with is, now that you understand the rules in the game of tax, your edge is having the vision to form your own company one day (which I hope you see isn’t that farfetched and has some perks). A good rule of thumb that I’ve learnt from my accountant who’s crunched the numbers is, the time you should form a company is when your net profit is around $70,000-80,000. If you stay a sole trader, you’ll end up paying more tax.
Also, the difference between working for someone and running a business is:
- When you work for someone, you pay tax first then at the end of the financial year, you hope and pray to get some of that tax back.
- When you run a business, you don’t pay any tax upfront, but instead, you just make money, spend as much of that money on your business as you can, and you only pay tax on the excess. The more you spend on your business, the less you pay in tax.
It’s actually quite a fun game when you see it from this perspective! So even if you may be struggling financially right now, especially after the impact of COVID19, don’t stop believing in your dreams and get excited about next month’s post on tax record keeping tips!
Important Disclaimer: As I mentioned in my introductory post, I am not a qualified Tax Agent, Accountant nor Financial Planner. So any information I share is not to be taken as financial advice. Rather, I’m just sharing useful things I’ve learnt over the years in hopes that it might help my friends live a more comfortable and financially empowered life!
P.S. If you found value in this post, please share it with others. Also, I endeavour to release a post on the last Friday of every month (sometimes pushing midnight…), so tune in next month for another instalment!