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Edition 341 – Pay Tax: Get Wealthy

When I hear business owners complaining about paying tax, I tend to reply with:
“I like paying tax!”

Once their jaw picks up off the ground, after questioning whether I’m mad or not, they ask me to clarify my statement. It’s at this point I tend to get all excited in front of a whiteboard and demonstrate how paying tax actually builds your wealth. You see.

  1. A company pays 25% tax in Australia. As an example, if a company has profit of $400K, it will pay $100K in tax.
  2. That leaves $300K of your own funds to invest, inside or outside the business.
  3. The $400K of profit, on a goodwill valuation of 2 to 5 times, means your business is worth between $800K and $2.0m.
  4. When the bank looks to lend you money, they look at your profit and your goodwill valuation and may lend up to 2/3 of the valuation – so anywhere between $520K and $1.3m.
  5. When you combine the funds you have in the business after tax ($300K) and the potential borrowing (between $520K and $1.3m), you have an investment capacity of between $820K and $1.6m.
  6. Even if you invest that money and it only ever makes that money back over the life of the investment, you’ve earned a return on the tax paid in a single year of between 8 and 16 times.

Now, all of this is possible only because you are paying tax. If you’re not paying tax.

  1. Your profit is zero.
  2. Your tax bill is zero.
  3. You have zero funds left over to invest.
  4. A goodwill valuation of 2 to 5 times the profit of zero is still…!
  5. The bank won’t lend to you, because you have no profit, the business is worth nothing and you’re deemed to be a credit risk they’re not willing to take on.
  6. You have nothing to invest – either of your own money or with borrowed funds.

So, by paying tax of $100K in one year, you create wealth, build a future for yourself and your family and have a lifestyle that you not only desire, but can afford to fund.

From a social aspect, paying tax means you contribute towards building our country, support a first class health system, help those in need, establish infrastructure and continue to improve Australia’s status as having one of the highest standards of living in the world.

So, now we’ve cleared all that up, can you see why paying tax makes you wealthy?

This Week’s Tip

“Pay Tax: Get Wealthy – for everyone’s sake!”