Kaun Banega Millionaire in Aussie Land
By Manoj Abichandani

This series of articles will guide you in taking the right steps and will warn you of the steps to avoid, so that you can become a millionaire in this adopted country in a legal way.

In becoming a millionaire, we must remember that the employer, the tax office (Government which runs the country makes the tax rules) and the banks are all on the other side. The three do not want you to be a millionaire. They devise ways to somehow, keep you working for them (employer), paying tax (tax office – Government) and keep paying for their billion dollar profits (the banks).

Sometimes these three team up and work together so that we do not become millionaires. You would always hear the banks making billion dollar profits and yet sacking employees or the government forcing the employers to pay more tax (like payroll tax) resulting in employers sacking more employees to meet demand for government spending. Another angle of looking at it is that the employer will pay only 1/3 our real worth and another 1/3 is for its own fixed and variable cost and the remainder is for its profit.

Example

I know someone (say Mr. Khanna) who came to this country 10 years back after working in a bank for 5 years in India. Very smart and intelligent person. He immediately got a job in a one of the reputed bank. And like all his friends studied MBA at an Australian university and passed with flying colors and the bank awarded him with a new job paying him a $100,000 salary and his job was to write new loans for the bank. He was set a modest target of new loans of $40 Million per year.

In one of our get together Mr. Khanna informed me that he is expecting an increment in salary of $10,000 as he has reached his yearly target in only 6 months! He wanted advise on how to reduce the tax on $10,000 that he was going to get from his employer (Employer giving carrot to employee to keep working hard).

If we look at the situation more closely, and open the daily newspaper and look at the 10 year bond interest rates in the money market (where the bank gets its money) and home loan rates – we will soon find out that the bank actually makes from 1.5% to 2% difference (margin) in interest rates at which it borrows money and the rate at which lends money. Thus at 1.5% margin the bank actually made $600,000 profit on the new loans which Mr. Khanna wrote for the bank, Mr. Khanna got only $10,000 increment. Thus the employer earned $490,000 after wages to Mr. Khanna’s for his efforts!

Then comes the turn of the tax office (or the government which runs this country). On the current tax rates the tax on the first $60,000 is $15,580 and on the remainder $40,000 the tax office gets 47%, and would be almost equal partner (47% share partner) on the hard work of Mr. Khanna to earn the increment of $10,000. Oh yes, the tax man wants 47% of it for doing nothing other than writing the law that it has to be paid.

If I was to charge Mr. Khanna $4,700 for letting him stay in the same street as me, it would be termed as “hafta vasulee” and I will be packed off to jail. Oh yes there is law written for that too! Moreover, the irony is that this silent partner (the tax office) will get paid first, even before Mr. Khanna, as the rules are that tax has to be withheld at source.

On income of $110,000 the total tax paid by Mr. Khanna would be $39,000 or 35 cents in every dollar. More than 1/3rd share, that means that of the 40 hours Mr. Khanna works he works for the taxman for 14 hrs or all of Monday and most of Tuesday of every week.

After this, banks will get their turn to share Mr. Khanna’s income of whatever is left after the taxman on the balance $71,000 (110,000 income less 39,000 tax). Mr. Khanna has a home mortgage (like all migrants) and on a loan of $250,000 pays a 1.5% margin to the bank.

Morale of the story and game plan

1) To be a millionaire we need to get rid of the employer or earn what we are really worth, 2) pay reduced amount of tax, as we will see below. Paying legal amount of tax is very important as demonstrated by example below. 3) We will than try to beat the banks at their own game.

We will become millionaire, no problem, however, we will need to reach this goal with a team, we will need a plan, we will need a wealth creation financial planner and we will need a tax accountant. We will need to pay these people to make us millionaires – do not take free advise from friends – if you need the job done – we need professionals – we cannot take a chance – this is about becoming a millionaire and you are up against three very clever opponents.

These opponents have the habit of changing the rules of the game - to achieve their objectives – moving the goal posts, so to speak for example the GST, Superannuation Surcharge etc and above all to be millionaire, we will need courage. But foremost of all we will need a plan.

All of us, who want to become millionaires, would surprisingly find that only one thing does not let us become millionaires and that one thing is our negative thought. So the first thing we have to do is stop thinking negatively and if we are in company of those people who think negatively, we should avoid them. We have to think differently, we have talk differently, and we have use new words and that is the language of millionaires. Instead of saying “I can’t do that” we have to say, “how can I do that” instead of saying, “it is not possible” we have to say “how I am going to make it possible”.

Mr. Khanna can start his own bank, his own lending company; yes he can, yeah why not!

How to pay the right amount of tax and beat the banks

Example

I recently had a problem with my hot water system; all of us know how bad that is especially in the winter (Aah those long hot water showers – forgetting the one bucket baths, when going to school, in Delhi’s winter with the electric rod which is immersed in the bucket of water). This electrician (Russ short for Russell) knew exactly where the problem was and fixed it in 30 minutes and was ready to leave sooner than I could take my hot towel from the dryer.

He than asked his pet question “Do I need a tax invoice?” Wondering and trying to get out of the difficult situation, I wanted to know, what’s in it for me, if I don’t want one. Russ than started explaining that if I wanted a tax invoice it will cost me $110 and if I did not want a tax invoice the cost was fifty bucks and he is out of there and no one saw him coming in.

Gaane ka Juice

It took me some time to understand what Russ was talking about. If I wanted a tax invoice, it would be $110 for three people $50 for himself, the other $50 for his tax (ATO) as he would have to declare the income and pay tax at the rate of 49.5% (including Medicare levy and Medicare surcharge) and the balance $10 is for GST as he is now the new tax collector for the people who run this country (I can almost hear some readers saying “lagaan” by Amir Khan). And if I did not want the tax invoice he gets his fifty and like he said – he was never here.

Gaane Ka Juice second time in the machine

Being little nosey and I could not resist asking Russ which of the two options he would prefer. He said the $50 option as he does not have to write an invoice, less paperwork for him and less paperwork for his accountant and that is now the trend since GST.

By now it was clear to me that a) Russ did not have a good accountant b) he did not know anything about wealth creation c) he needs help badly. For all those who still believe that Russ should take $50 and run, probably have not tasted gaane ka rass. Well here it is.

Gaane Ka Juice final time in the machine

If Russ charges $100 for his service, he can reduce his tax from 47% to 15% by contributing to superannuation or he can reduce his taxable income by negative gearing to a reasonable percentage of say 25%.

 Then with the balance 75% (say $75,000 – Earn legal $100K and pay $25K in tax) he can use these funds to purchase an asset, which will grow in value but will give him a zero affect in income. What I mean by this is Russ could use this $75,000 and buy say a rental property by borrowing 70%. The $75,000 will become his contribution of 30%.

 Value of the rental property could be $250,000 with his contribution of $75,000 and the remainder of $175,000 could be borrowed. If the property is than rented the income derived from it would have zero effect or in other words the interest payment would offset the rental income and thus no tax would be paid on the rent received. In this scenario the only gain to Russ would be average growth in property value over the years.

 Looking at property values (depending where it is) a 6 % growth per year is very reasonable. If the property grows by 6 % the growth is of $15,000 (6% of $250,000), however his contribution is only 30% or $75,000 of the value of the property. If we calculate his real rate of return, it works out to be whopping 20% ($15,000 / $75,000). So off the $25,000 paid in tax he will recover $15,000 in the first year alone, needless to add that paying tax is the best thing to do. This way he will be able to use the banks lending policy to his benefit.

 However if Russ took $50 and ran (or say $50,000) that would be cash income and obviously as it is not taxed the banks would not recognize that income and would not lend on that income and Russ would not be able to use that money as a deposit for purchasing an income generating asset.

 For those who want gaane ka juice ka glass without bothering to know how the gaana goes in the machine, I have a nice one for you: - Two friends had to buy a new car. They both bought the same car and one (say Mr. Tej) took out a 5 year lease for a $45,000 car and paid a $10,000 upfront deposit with monthly installments of $360 per month for five years and $20,000 at the end. After five years the car was worth $20,000 the exact amount of the residual value that he owed to the finance company. Thus the total cost of owning the car was $51,600 including $5,600 for interest.

 The other friend (The great Mr. Gaana) paid a deposit of $10,000 for a unit in Queenbeyan (just out of Canberra) instead, the unit gave him rent of $90 per week with which he paid the monthly installment of the car of $360 per month, he paid the installment of the unit from his salary. After 5 years he sold the unit at a profit got all his repayments of loan back, paid off the car balance and he also got $10,000 initial deposit back. He ended up with a free car after five years and drove the car for five years for free.

Total cost of car was nil.

 Wow! I bet you readers are thinking that this is not a true story, but it is and I will charge $1 to prove it, if I get a million takers I will be millionaire too.

 Rest of the yarn’s in the next month. And don’t forget to start thinking like a millionaire, as we all will be one only if we speak the language of millionaires.

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