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A wealth expert has explained how minimizing taxes, rather than saving, is the key to getting rich.
Brett Warren, national director at property investment group Metropole, said hoarding cash was a flawed wealth-building strategy.
“It’s virtually impossible to grow wealth by chasing cash flow,” he said.
This is because interest earned on bank savings must be reported to the Australian Taxation Office. Investing that money in other assets generates tax discounts instead.
An investor who invested the same money in stocks or property and held it for at least a year is entitled to a 50 percent discount on capital gains tax.
A wealth expert has explained how minimizing taxes instead of saving is the key way to get rich
“You can’t save your way to wealth and generate cash flow, it’s more like taking two steps forward and one step back with taxes,” Mr. Warren said.
“If you focus on generating cash flow, you will only have to pay taxes and that will hold you back.”
An alternative to keeping money in the bank is to take out a mortgage to purchase an investment property.
A middle-income person with a salary of $67,600 who sold land and made a profit of $67,600 would only have to report $33,800 in taxes.
Due to the CGT tax exemption, this investor would report a taxable income of $101,400 for that year and would remain 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 percent marginal tax bracket, which applies to those earning between $120,000 and $180,000.
Warren said the taxes were more likely to result in a big pay rise.
“I would say the vast majority of us don’t need more cash flow,” he said.
“It’ll probably just push you into a higher tax bracket and you’ll lose half in taxes.”
Bank interest must also be reported on an individual’s taxable income during the year.
But if the same money had been used to buy shares that were then sold, someone would be entitled to a capital gains tax discount if they held them for 12 months or more.
Warren said the wealthy understood the importance of diversifying their asset base so they could reinvest capital gains to create more wealth later, known as the compounding effect.
“That’s what the rich understand,” he said.
Money invested in a rental property or shares entitles someone to a 50 percent discount on capital gains tax if they sold it for a profit after owning the asset for at least a year (in the photo shows a Sydney house auctioned in 2014 that would now be worth it). much more now)
Brett Warren, national director at property investment group Metropole, said holding more cash was a flawed wealth-building strategy.
‘They are looking to build their asset base, not look for cash flow.
“They build their asset base, substantial enough to create cash flow, and of course they may pay taxes on that, but that doesn’t hinder or stop them from trying to build wealth.”
Stock markets have also continued to rise since U.S. Federal Reserve Chairman Jerome Powell suggested in mid-December that rate hikes in the world’s largest economy were over as inflation fell faster than the expected.
The S&P/ASX200 benchmark index on the Australian Stock Exchange has risen 11.9 percent since the end of October, rising from 6,772.9 points to 7,579.8 points as of Thursday.
Warren argued that holding risk-based 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 the fastest and create wealth so you can eventually live off the cash flow,” he said.