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The Peter Clyne Memorial Lecture.
This article appeared in The Sydney Business Review on 15 June, 1995
Everyone hates paying tax. Of course, we like roads, bridges, railways, schools, hospitals, universities, armies, police, national parks, pensions, drought and flood relief (sometimes both at the same time), fire services and all the other things that taxes pay for. It's just the tax we hate, and with the end of June coming up fast it's time to do something positive to minimise your pain. As a service, I have gathered advice from various reputable sources into the one place so that you don't have to shop around.
First up, negative gear into property. What happens here is you borrow money to buy an investment property, but you have to be sure that the rental income is less than the interest you have to pay to the bank. This way, more goes out than comes in. This may sound crazy, but the losses are deductible, so you save tax. The more you lose, the more tax you save. Simple, isn't it?
Next, negative gear into shares. You borrow money to buy shares, but the dividends have to be less than the interest. This is much simpler than property as no lawyers are required, but as their fees are deductible as well as the interest, the tax savings might not be as good because you spend less. If the shares fall in value, you may be able to save more tax by selling them at a loss.
For the brave, who don't mind high risk for high returns, we can negative gear into futures contracts. Here the interest rates are higher and there are no returns (don't tell the tax man or he may not allow the deduction). In fact there is the prospect of large losses which can be used to save more tax in the future. The shareholders of Barings Limited are ecstatic at the amount of UK and Singapore company tax which the company will save over the next century or so.
The problem with all these is that the deductions don't start flowing until the losses come in. This can be fixed simply, by paying the interest in advance. This is how it works. You borrow, say, $100,000 from someone. You look for a high interest rate (to maximise deductions), so assume 20% per year. You pay the first year's interest before the 30th June. This gives you $20,000 deduction for this financial year. Easy. Then you invest $80,000, which will bring in less than the full $100,000 so your losses will be even greater next year. An even bigger deduction could be gained for a business by buying $80,000 worth of, say, fax paper and claiming the full $100,000 this year. It just gets better, doesn't it?
All of these are a bit complicated and there is not much time to arrange loans, so I have decided to make a sacrifice on your behalf by volunteering to pay your tax for you. All you have to do is to send me a cheque for the estimated taxable income of your business. Please attach a business card or "with compliments" slip. I will send you an invoice, dated before 30 June and marked paid , as soon as the cheque has cleared. Your business will not have to pay any tax, and you will have the added benefit of not having to worry about accounting for dividend imputation.
I had a terrific investment a few years ago in an avocado plantation combined with prawn aquaculture. Luckily, the project failed because groundwater flooded the shaft in our thousand island dressing mine. We made a bundle on the tax losses, but not as much as we made on the film Seafood Salad Days, which lost millions.
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