TWO REASONS WHY TAX SHOULDN’T TAX YOU
Tax is such a hot topic that even the BEATLES sang about it. I probably get more questions about tax and tax implications than anything else.
Sometimes it seems as if people are more obsessed with NOT paying tax than they are with making money. People obsess about reducing expenses rather than increasing their income and wealth. “Penny wise, pound foolish”…
One of my mentors always used to say: “Jaco, there is one thing worse than paying tax and that is not paying tax. Rather build wealth and pay tax than not build wealth”…
That being said, a property portfolio with the right structure is probably one of the best investment vehicles to use to pay minimal taxes.
Here are two of the ways you can AVOID paying the taxman all your hard-earned money (after all, we are not in the tax EVASION business ).
In a trust, the conduit principle enables you to distribute gains (income or capital in nature) among beneficiaries. The tax calculation is then based on the beneficiaries’ tax rates and exemptions.
Thanks to the conduit principle, you often pay less income tax or capital gains tax in a trust than in any other entity. (Contrary to popular belief.)
Or financed property portfolios. Did you know that it is possible to build a huge property empire without paying a cent in tax? And this is not only applicable in South Africa but worldwide.
It is very possible to stay close to break-even, while you experience capital growth (unrealised gains) with your property portfolio. Basically, you have your rental income as income and the interest portion of the bond, levies, rates, management fees, maintenance, insurance etc. as expenses. This is one of the reasons why I like refinancing so much; it gives me access to my capital gains and is tax-free.
Note: When you play the gearing game, you need to have sufficient cash reserves (in an access/flexi-bond). You should always have at least 5-10% of your properties’ market value in cash. If not, a safe investment can become very risky, very quickly.
– Jaco Grobbelaar