Wealth Accumulation and Wealth Protection: The Australian Experience
-Dr John Lodewijks
We all seek healthy and prosperous lives in a caring and safe community of family and friends. My focus here is on how to accumulate wealth and how to protect that wealth using Australian examples. To accumulate wealth, it certainly helps to choose wealthy parents. But not all is lost if you are not so fortunate. Australia ranks highly in terms of intergenerational income mobility. Two-thirds of Australians earn more than their parents did at a similar age, especially those born in poorer families. There are many reasons for Australia being a land of opportunity, where you can succeed even if you come from a low socio-economic background. Education is a key factor and those with an undergraduate degree earn 23% more than those that have just completed high school, and 35% more than those who did not complete high school. The return on this educational investment is very high. The fields you study in majorly determine in which industries you later work, and some industry sectors are far more remunerative than others. Flexibility in terms of life-long learning, the capacity to move to higher-paying jobs, and to even change occupations places you in a good position to thrive in jobs where specific skills are in short supply, and so richly rewarded.
Higher incomes add to your wealth. For most Australians, their residential house is the major source of wealth as they do not have a large portfolio of shares or superannuation for their retirement. But the value of that housing, particularly in the capital cities, has increased spectacularly. Real home prices across Australia have climbed 150% since 2000, while real wages have climbed by less than a third. The median house price in Sydney alone is now AUD 1,473,775.
For high-net-worth individuals, their major source of wealth is not income but capital gains on investment, superannuation and share portfolios. Protecting your wealth requires sound financial planning and the assistance of tax lawyers and accountants. First, to maintain and enhance your real wealth, you need to ensure a return on your assets (minus your liabilities) in excess of the rate of inflation. Preferably you will hold assets that rise in value with inflation. Property is such an asset as are investment returns that are inflation-indexed. Further complications that can arise relate to holding assets in foreign currencies which may fluctuate wildly and need to be hedged.
The wealth-holder needs to focus on their wealth, and the addition to their wealth after tax. There are only two certainties in life – death and taxes. For the first, you need estate planning to ensure your beneficiaries are well looked after, despite your demise. For the second, there needs to be a clear distinction made between tax avoidance and tax evasion. The first is legal and the second is not, although there are some grey areas in between. Tax evasion through secretive offshore accounts were highlighted with the release of the Panama Papers in 2016 and the Pandora Papers in 2021. It was clear that leading politicians, corporate leaders, sportsmen and those from the entertainment industry had accumulated enormous wealth away from the prying eyes of the taxman. It has been estimated that about 90 per cent of wealth held offshore from its owners has not been properly declared. It is claimed that “global billionaires” have effective tax rates as low as between 0 and 0.5 per cent of their wealth, largely by using shell companies to avoid paying tax on their income. It has been reported that Australians hold more than AUD 370 billion in known foreign tax havens.
Global corporations often engage in profit shifting or transfer pricing. This is tax arbitrage that moves profits from high-tax to low-tax jurisdictions. This has prompted the signing of a 2021 agreement by more than 140 countries and territories to set a global minimum tax rate of 15 per cent for multinational corporations to curb the shifting of corporate profits to tax havens. Profit shifting may or may not be classed as legal tax avoidance. There are arguments on both sides. High-net-worth individuals in Australia use various other mechanisms to minimise their tax obligations. These include family (discretionary) trusts, transferring income flows into superannuation and realising capital gains on asset sales. All these instruments are tax advantaged.
Finally, once your personal needs are more than satisfied, and your family is well looked after through your retirement planning, there are questions to answer about what will be your legacy. How will you be remembered by your peers and community? Having tasted the fruits of success, many wealthy individuals think about disbursing some of their wealth to charities or social causes to assist those who are less fortunate. In America, wealthy alumni donors provide substantial funding to universities. Others establish or contribute to trusts, like the Gates Foundation, to establish philanthropic ventures to improve global health and education in line with the sustainable development goals of the United Nations.
Contributing to either your local or global community is one way to leave a lasting legacy that partly repays the opportunities you have had in accumulating and safeguarding your personal wealth.
About the Author
Dr John Lodewijks is the Vice President – Academic, and Professor of Economics at SP Jain Global. He is a project mentor for student in areas of economic growth and development and the Australian business environment. His works have been published in several academic journals of repute.
