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Tax Types

It is important to be aware of the types of taxes you may pay and how they may affect your wealth creation.

 

Proportional Tax

Some countries tax transactions in tiers, that is at lower levels no tax is paid and as more money is earned the rate of tax paid increases. The upside is that low amounts earned are taxed less, but the downside is that the harder someone works the more they seem to be penalised. It is also complex and harder to administer, and less likely to be complied with.

Flat Tax

Some governments set a flat tax rate where every transaction it applies to is taxed at the same rate. It is simple and easy to administer but equal to all including the disadvantaged.

Income Tax

This tax is the most obvious to many people and involves your government taking a slice of the money you have earned. The upside is that this is an easy tax to collect and your government probably earns the greatest of its income from this source. The downside is it reduces the amount of money available for spending. But too much money in circulation can generate inflation. The only way to avoid this tax is to earn less, but that sort of defeats the purpose.

Withholding Tax

This is a method of collecting Income Tax where a government mandates that an employer withholds the employee's tax and pays the employee the remainder. The company forwards the tax withheld directly to the government.

Company Tax

Companies that conduct business are taxed on their net profits, that is their gross income minus allowed expenses. Companies provide jobs for everyone and thus it is best not to tax companies too highly as this can lead to lower employment levels. Companies usually pay a flat rate but this rate is typically lower than income tax rates for high income individuals. Some individuals set themselves up as companies to minimise income tax (where allowed).

Sales Tax

When a commodity is sold to an end customer a tax is levied on the sales amount. This tax is based on consumption (actual spending) and if it applies to you then you only pay this tax when you buy something. Avoiding this tax is easy, spend less, plus you will have a greater surplus, and greater savings.

Value Added Tax / Goods and Services Tax

Like sales tax this tax is levied on all purchase transactions but with one difference it is levied on all transactions and not just to the end customer. It works in the supply chain of goods and services and is levied against all transactions up to the end customer. Companies are charged the tax on purchases and can claim it back if they are not the end customer. It is more pervasive and a little more complex to administer. The end customer always gets hit with the whole tax. It is very hard to avoid, unless you are not the end customer.

Wholesale Tax

This tax is levied against company purchases at a wholesale level, that is when they buy goods which will be later on-sold to end customers. It can only be avoided if your company does not buy goods wholesale.

Payroll Tax

This tax is sometimes another name for Withholding Tax, but in this guide refers to a levy on employer's total wages expenses and is not deducted from the employee’s wages. The more total wages that are paid the more a company will pay this tax. To be fair this is usually levied if the total wages expense exceeds a specified threshold. This is seen as a tax against employment and may force a company towards casual employment. If you run a company then keep your wage levels optimised.

Services Levies

This type of tax is a direct tax on those who use a service. For example a Fire Services Levy is sometimes charged on an insurance policy, and the collected funds are used to fund the fire department. It is only avoided if you don’t use the service, although I would not recommend avoiding insurances.

Capital Gains Tax

This tax is levied on net profits made on capital assets when sold. For example a rental property may have been bought for $100,000 and sold for $200,000 a few years later. 200k – 100k = 100k profit, less 25k operating expenses the property would be taxed on the net $75k profit. Holding time and usage may affect the rate levied. To minimise this tax maximise your allowable expenses and know the thresholds, or don't sell.

Inheritance Tax

This a tax levied on money and assets inherited upon someone’s death. In some countries this is a proportional tax. Avoided if you limit the amount inherited per person below any thresholds.

Tariffs

This is a tax designed to restrict trade, and usually used to protect local industries (thus local jobs) from cheaper competition. Avoided if you don’t import the commodity affected.

Excise Tax

Where most taxes are levied on the value of the transaction, excises are levied on the volume of the transaction. Many countries levy an excise on the number of litres of petrol sold. Avoided if you don’t buy the commodity in question or stay within any thresholds.

Environmental Tax

This type of tax is levied to reduce environmental impact. For example carbon tax and pollution tax. Avoided if you don’t impact the environment.

Poll Tax

This is a tax paid on an individual regardless of status. It is a flat tax and very unpopular. Some call it a tax on being alive. The only way to avoid this tax is to move to a country that doesn’t impose it, or vote for a government that will remove it.

Property Tax (Land Tax)

This is paid on property ownership and maybe on the bare land, the building itself, improvements to the building, or a combination. This is usually a proportional tax. Avoided if you minimise the number and value of properties you own, or keep below any applicable thresholds.

Stamp Duty / Transfer Tax

This tax is levied when an asset changes hands. For example a car may change hands and the new owner must pay a tax based on the sale amount. Avoided if you don’t buy an asset or hold onto assets longer.

Wealth Tax

This is a tax levied on someone’s net worth. It is mostly a proportional tax so the more you are worth the more you pay. Avoided if you keep your net worth below the thresholds or distribute your wealth legally.