Tax Tip 451: How do you Earn $1mil and Pay No Tax?

Yesterday the ABC News ran a story “The 60 millionaires who paid no tax and the richest and poorest postcodes revealed”, see

The 60 millionaires who paid no tax and the richest and poorest postcodes revealed

They claimed there were more than 60 taxpayers who earned more than $1mil in the 2019-2020 tax year yet paid no tax. This could be true, so how does it happen?


The article mentions they paid on average $80,000 to manage their tax affairs – lawyers and accountant fees. They also claimed on average $250,000 in litigation costs for managing their tax affairs – likely to be fighting the ATO in court.

These and other costs are costs that are deductible and reduce taxable incomes.

The other potential big deduction would be carried forward losses from previous tax years. Some of them might have been share traders who made a large loss the year before, and this loss carried forward to the 2020 tax year.

They could also be investing in high growth assets with low yields resulting in negative gearing losses which offset other incomes.

Using companies and trusts won’t come into the picture here as these taxpayers appear to have personally earned more than $1mil. They are likely to have indirectly earned a lot more in related companies and trusts with which the income doesn’t come out to them directly.


It might therefore be not too unusual for a large income to be reduced to $21,000 or less because of these allowable deductions which are likely to be one offs.

It would be more of a concern though if these same people paid no tax 2 or more years in a row.

 

fighting ATO in court is like putting a large bullseye target on self... first world problem

 

Media will report a headline...not the facts. I dont recall reading that these 60 were guilty or accused of any tax offences.

One specifc taxpayer leaps to mind. Their 50% share of business dividends were suspended in 2021. Thats $1m+ a year plus franking. Their retail business took an absolute canning and traded out when lockdowns eased (Melbourne !!) and 2021 was a disaster year with little revenue. The business enhanced its borrowings to survive. Meanwhile individuals maintained their dozen IPs with half of those not receiving rent. Then they faced legal costs to evict and safeguard their position>meanwhile ATO reviews the business which is clearly struggling and no issues are found with the $260K of jobkeeper they claimed. Jobkeeper kept their staff which did its job. And state grants also audited. They received token land tax savings. This year is a better year. 2021 was just appalling. Costs to assist in audit - tens of thousands. Thanks Big 4 accounting firm !!

Its unfair to target taxpayers and assume $1m a year will be maintained during the pandemic and they audit them when the reasons are painfully apparent. Even the ATO case officer ended up agreeing they did it tough. ATO copped it from their landlord in a major shopping centre who told the ATO "we wrote off $40,000 a MONTH for basically the complete year - Three weeks of rent out of 52 were paid at a reduced rate". Apparently ATO wanted to know why the GST was so low.

 

I think if these high wealth people felt intimidated by a government department or unfairly treated they'd have their legal team onto it right away.

 

I knew a guy who made over $5m a year from one business but cycled the income through various trusts and hobby businesses / investments. It was so complicated he argued ATO could never understand it.

After various deductions, intra group arrangements, distributions etc. He always got a refund every year. He was really proud of it and boasted.

Of course, he had accountant and lawyers help him. Being in dispute with ATO for years, doesn't worry him.

 

These sorts of statements are perhaps not true. Did he make $5mil or did the related entities make $5mil

 

He is a partner of a consulting business. He distributed that profit share to related entities

 

That would not be possible. He is possibly a director of a company where the shres are held by the trustee of a trust. partners cannot distribute profits.

 

Sometimes fact get in the way of a good story

"Made over $5m a year"....Total business entity turnover incl GST
Actual profit negligible and is any profit is retained and not paid out to shareholders in any significant way. Company has major reserves of retained earnings and a franking account that is bulging but nobody wants to pay top up tax so they dont draw dividends. ...one day....
Earns his salary as a salaried partner / profit share , salary sacrifice, Fringe benefits etc. Tax withholding exceeds tax liability = refund

 

I encounter that with clients. I recall one telling me they made over $1mil per year. Great the servicing should be good. I get the tax returns and the profit is about $32,000 and the turn over is $1mil. They then claimed their accountant was creative to get the costs down, so I asked what expense wasn't really incurred....

 

I need an accountants letter. P&L shows $909K of income and $32,000 profit, Can you provide me with a letter that says t/over is possibly $2m this year ? My accountant wont. I want to change accountants. And can we remove the liabilities for creditors and unpaid car and equipment finance ?

No, no, no

 

Have you ever seen the opposite? Client way more cashed up than they thought they were?

 

Its strange that clients usually over estimate what their properties are worth, and self employment incomes. but generally under-estimate their ability to retire. I have had many people complain about working etc and wanting to retire soon and I say that it looks like you could retire tomorrow, what are you waiting for!?

 

This headline is repeated every year when the ATO stats are released . A client once sent me a link to the article complaining he pays too much tax. I sent him a bill for $1m. That fixed his problem!

 

The other big one that I missed is Super. Super can be paid out tax free to certain people. It might be possible to get a large amount of income from super tax free too.

 

Super is THE best tax scheme.

Rate of tax is a maximum 15% (unless you breach laws) and then CGT its as low as 10% and even 0% on earnings for some who are aged 60+
You can claim a deduction at company rates or personal marginal rate and the consequence is generally always a tax benefit somewhere between 15-30%. And while you are working you can salary sacrifice to save 15-30% tax. And when your retire you can draw a tax free pension on top of other income. The low tax rates mean compound growth is a huge benefit of super.
And you can push savings into super (with some limits) and they can grow in a low rate environmnet. After retiremement you can sell down CGT asets and pay NO tax.
Any you can also access MULTIPLE pensions if you are lucky. This is limited to military and some other Govt workers usually. The downside is these are taxed but with some concessions to lighten the tax.

On death super can pass to a spouse or other imited dependents - They wont pay tax. But if you leave SOME of it to others and they may have topay around 17% tax.

In theory each taxpayer can get up to $1.7m of tax free capital gains aftre retirement...and then pay just 10% on the rest. They may even be able to move HUNDREDS of thousands of savings into super before retirement and legally AVOID tax altogether...or at least substantially reduce tax.

The above is the worst part to super. The rules can seem complex and can be confusing to grasp. But there are loads of ways to learn and get help...Provided you do it early enough..

 

If I earn 1m in rent and pay 230k expenses and 750k in interest I made a million and pay no tax.
Well according to some "award winning" journo with nfi anyways.

If it was earned with a trust, and the expenses are less, then earnings can be distributed elsewhere.

If they were earned in a company, the company can buy 20k equipment, software etc and pay zero tax.

 

From the article it seemed they were talking about personally earning $1mil and not paying tax. But that could mean $100,000 income from work plus $900,000 rent and $980,000 in property deductions

 

Here is a follow up article:

Some millionaires pay no tax. Here's how to do it

 

While looking for an old post of mine I came across this thread from 2016
millionaires who pay next to no income tax