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A Better Way To Think About Tax

A Better Way To Think About Tax

how to think about tax

“When someone describes themselves as a taxpayer, they’re about to be an asshole”
– Demetri Martin

I am not an accountant, this is not professional financial advice.
Instead, this is more “How to not be an idiot when it comes to tax”

There are two types of idiot when it comes to tax:
1. People who complain about having to pay any form of tax.
2. People who are proudly ignorant of how tax works.
I bet you know people in each of these categories.

The quote that changed my perspective came from Paul Steele;
“You want to pay lots of tax, but no more than necessary”
This took me a while to understand, because it sounds like a contradiction.
It’s not.
These are two views that seem to be opposites but are the best way to think about tax.

Firstly, if you’re paying a lot of tax, it means things must be going pretty well.
For me to pay $1 million in tax next year, I’d have to earn at least $2.3 million.
That’s still a great year, I walk away with $1.3 million in my pocket.
I would love to pay a lot of tax next year, because it correlates with my own wealth increasing.

Simultaneously, this money goes towards Australia’s systems, like our schools and hospitals.
While every industry has their scandals, I am extremely grateful for the country I’m in, and having spent quite some time overseas, there’s nowhere else I would prefer to live.
If I can earn $1.3 million for me and $1 million for Australia, great.

how to pay the right amount of tax

Secondly, there is a “correct” amount of tax that each person should pay.
It might vary based on your complex situations, but you can be sure that there is a number that represents how much of your income is due in tax.
That means there are three options;
Either you pay the correct amount, or you cheat and pay too little, or you’re a fool and pay too much.
Given that I don’t want to cheat, I’m not particularly fond of paying too much, there’s an incentive for me to pay the right amount.

Hence, you want to pay lots of tax, but no more than necessary.

That brings us to our two flavours of idiot.
Please don’t be the kind of person who twists themselves into thinking that they are immune from paying tax.
Your clever rationale doesn’t change the law, and when you say it out loud people think you’re a jerk.

Please don’t be the kind of person who is wilfully ignorant about their tax situation.
By understanding how tax works you can save yourself a lot of pain – and a lot of money.
It’s not cool to be a moron when it comes to something that everyone should comprehend.

That’s the stick, here’s the carrot:
Imagine a part time job that paid you $200 per hour.
Nothing gross or demeaning, just boring admin work.
Would you spend your weekend doing that job?

What if this admin job could save you $200 per hour?
Still a yes?

Learning about tax

That job exists, it’s called “Learning about tax” and it can be done whenever you like.
If you apply yourself for 5 hours, you’ll probably save $1,000.
That’s $200 per hour back in your pocket.
I won’t pretend that it’s riveting, just reminding you that it’s boring and lucrative.
Better yet, the younger you are, the more rewarding it becomes.

It’s worth learning:
·      How the system works
·      What your tax return means
·      What counts as an expense (I promise you’ll be surprised)
·      How to keep and file receipts
·      Which donations are tax deductible (and why that benefits you)

My suggestion is to start by reading articles based on your current position (e.g. uni student, sole trader, entrepreneur, etc), then make friends with an accountant.
If you run your own business, it’s worth hiring an accountant, they will save you much more than what they charge.

Finally, I recommend setting up a bank account for your tax, so that each time you get paid you can immediately put the tax aside.
That way, you avoid the Gollum problem where you view the money as “mine” and resent the government for trying to take it from you.
Tax isn’t yours, so if you keep it separate from the beginning, it won’t feel like a loss when the government collects it.
If you have your act together, you’ll get a fair bit of it back anyway.

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