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Byron Shire
August 15, 2022

A taxing dilemma

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Charles MacFarland, Suffolk Park

In the current Echo (January 29), Hans Lovejoy has an editorial about making the rich pay their fair share of taxes. I agree with the spirit of the article, as indeed would many very rich men, notably Warren Buffet, but I believe it reveals a common misunderstanding about taxes.

The problem is that income taxes are paid on salaries if you are an employee, whereas they are paid on profits if you own a business. Salaries are easy to determine; profits are not.

If you have a job, it’s pretty easy to know your income – it’s just the total amount your employer pays you. But if you run a business, it’s much harder for the tax office (and you) to know what your profits are.

Suppose you run a documentary video business, for example. You fly to Brazil to make a video about the rainforest, and you keep careful records of all your expenses – airfare, hotel bills, food, etc. Then you fly to Europe to market your video, once again keeping careful records of your expenses.

Eventually you are paid a big chunk of cash for your video, but you are not taxed on that, because that’s not your profit. Your profit is the chunk minus all the above expenses, plus the cost of your cameras, editing, voice-over guy, music, etc.

You only pay taxes on your profit, which may not be much. Of course, you’ve had a nice trip to Brazil, and another to Europe, plus owning a spiffy camera, etc. People on wages would have to pay for things like that with after-tax dollars.

Robert Kiyosaki expresses it neatly in his book Rich Dad, Poor Dad. If you have a job, you pay taxes first, and get to spend what’s left over. If you own a business, you spend your money first, and pay taxes on what’s left over.

The message is clear: if you possibly can, run your own business. Your business can pay for many things. Kiyosaki gives an example when he asks his ‘rich dad’ how he can afford his beautiful home right on the beach. The answer is, ‘I can’t afford it, but my business can’.

Please don’t misunderstand: I’m not saying that business owners are necessarily corrupt. It would be unfair to tax the videomaker on the whole chunk of cash he gets for his video, because he does have to pay many expenses to create it.

The problem is inherent in the nature of income tax. If you run a business, it really is hard to be genuine about what your profits are.

Some business expenses may be suspect, and the tax office can try to close these loopholes, but there are so many ways to spend money, and so many legitimate expenses, that the quest is futile.

Meanwhile, as long as you depend on a job for your money, you’re a sitting duck for income tax.

 


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1 COMMENT

  1. Spot on.

    Solution… Refuse to work 40 hours per week for money and only work 40 hours per week on a volunteer unpaid basis (as I do and manage to be happy).

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