They say there’s only two things certain in life: death and taxes. Make that one now! I dive in here with big picture advice on how to live with tax minimisation at the core of your business and personal structure, learning from what the smart, rich, big guys do, then inverting it. Trusts. And specifically Charitable Trusts. I lean on decades of not paying tax, practically (all done legally I hasten to add), and the big picture coming from my understanding of human nature and biblical instruction (aka wisdom). Enjoy!
Death & Taxes
Yeah well . . . what can you say about them both? We spend all our life trying to avoid ’em both don’t we? Truth is that most of us try to cheat on both of them if we’re honest! We’ll pretend that there is no Creator and that millions of years ago there was a big bang and suddenly we sort of popped up in what the boffins call the “Cambrian Explosion” and, well here we are. God is a fabrication and the Devil doesn’t exist and there is no accountability, sort of thing! Jesus? Well you’re just another f*ing religious nutter [enter your pet peeve here].
And we all love to pay our taxes don’t we? Never slipping in an extra dodgy receipt here or there or fudging things even just a tiny wee bit (only when we think it can’t be found eh?).
Now the Christians who read this will all no doubt raise their arms up and say, “False accusation, Nisi!” I pay my fair dues, then trot off to vote for their least un-favourite crook at the next elections, bleat about the result when it comes in, as it is usually the opposite of what they wanted. Then they will cowtail to the very powers that they vested into the corrupt leaders they (and their deluded neighbours) voted into power, and they will then pay all their taxes “because they are good citizens” after all, at least according to their world-view. When I lived up there the oh so sweet Samoans all taught me a two-letter word for all this nonsense, “It’s BS, Nisi!”
There is however another way of looking at things . . . perhaps, just perhaps, maybe there is a Creator, who created good, and mankind rebelled against His authority and went his own way, maybe, just maybe thinking that it was better, and the he (not He) was smarter? And perhaps, just maybe if we turn back to what the Creator asked us to do, things may work out better off? Maybe?
I’m in this latter camp. I see design so that gives me a Designer. Jesus lived and died and then rose again. I know this and the Lord that I know, love and serve tells me to use my brain; to have faith, not fear; to trust Him and that His claim to have an exclusive lien on the truth has been well proven to me over and over and over in many decades of studying, listening and at least trying to do things His way. If God calls democracy for what it is, self-worship, then so do I. If He prohibits the practice of usury and all Legal Tender systems out there settle with the BIS (Bank of International Settlements) (that’s true) which is an effective monopoly (and it is) and they all base their currencies on the same system (which they do) then this will inevitably usher in a global currency. Hmmmmm! That’s my kinda talk.
If the Good Book teaches us to always say it like it is (you know, like where your word is your bond kinda thing) then your personal reputation should be worth something, so that if YOU, yes, you, back a currency with your own labours or assets or (heaven forbid) your word, then it may be a little more dependable than the global currency based on immorality – perhaps, maybe?
Sheesh that’s a lot of perhaps’, ‘ifs’, ‘but’s and ‘maybe’s, so let’s get into it . . .
The Maths of Making More
When all boiled down, the art of making money is to make more of it – either by printing it, stealing it or trading it. “What’s the difference?” I hear you ask facetiously! Another way to achieve the same goal is to spend less of it.
Mathematically this is represented thus, if Income (A) less Expenses (B) equates to Profit (C) [i.e. A-B=C] then either (A+x)-B<C (i.e. More Income equates to more profit) or what many people tend to forget (especially when dealing with structuring their tax affairs), less expenditure equates to more Profit i.e. A-(B-x)<C.
If this explanation doesn’t grab you, think of it like this . . . if you are living from week to week, just work out what your living costs are and deduct that from your income. That’s your savings or what we call “discretionary income”. Now to get more money to spend (increasing our discretionary income) we can either get more by way of theft, a raise or working harder or more) OR we can get rid of a expense, or two or three.
Imagine that a rich benefactor comes long and pays all your expenses. A rich uncle dies and instead of bequeathing you a lump sum, he sets up a trust to pay all your bills. Don’t laugh – it happens!
Suddenly your discretionary income is 100% of your total income (no bills) and “Yippee!” you say, “I’m rich!”
Of course most of us will change our lifestyle accordingly but that is a secondary matter. The primary one is that your focus has gone from HAVING to go to work to simply WANTING to. Now if your work gives you the buzz you seek – great! Keep working and save or spend, invest or gift your excess money as you want to – the point is that A-B=C and this rule always applies.
Trust, Trusts & Charitable Trusts
Years ago, actually decades ago the New Zealand government raised the flag of doing away with trust laws. “It’s all a tax dodge!” or “It’s only for the rich!’ or “It’s not fair on the rest of us!” were the sentiments used to justify this consideration. At the time I spoke to a few rich people about this controversy and my mind was put at rest. “Relax Dennis”, they all said. “The laws will never change to outlaw trusts!”
My questioning brought a range of replies but summarised could be put succinctly, “Because they [they politicians] all have them!”
Knowing what I did about the uber rich at that time (it was the time of Fay, Richwhite, Goodman, Fielder & Watties) I knew enough of them well enough to know their taxation was minimal, even as their personal wealth soared. Their social contribution was usually in inverse proportion to their noise, thus I knew that the quiet Catholic from Motueka Pat Goodman‘s personal wealth was wisely spread about, but that even the likes of the ‘no-longer Sir Ronald’ Brierley ‘Boys’ did create social benefit arising from their boardroom antics!
But it was only really when I studied their conduct in the uses of trusts that I truly understood the value of retaining value in an entity that remained separate from the donors and beneficiaries. This three-way triad, where a trustee operated in a trust for a beneficiary is the core requirement of understanding how to do it, if the minimisation of taxation is your goal. One party does one part of the work. Another presents their role somewhere somehow (usually dishonestly) to the punter or to the public who usually but not always ends up paying through the nose. Depending on how this structure is used determines who gets what benefit.
In a personal situation most trusts are family trusts where an older person wishes their wealth to remain in tact (tax free) for the benefit of their successors. The beneficiaries gain by receipt of the family jewels managed by the trustee(s) on their behalf. This is now common where taxation is minimised if not eliminated upon the older person’s death.
In a government/business relationship (politely and technically called facism) the government owns the business either outright in more authoritarian jurisdictions or indirectly through public-private partnerships or by way of license which pays royalties back to the government. Taxation and profit incentives abound but why a government owned entity needs to pay tax can only be seen for what it is in the former example. Tax benefit schemes therefore abound in private-public partnerships.
One of the examples I use when teaching this subject is the solar panel market and how it developed over the years. In the early days, Germany produced the bulk of the solar panels and while they were good they were too pricey for mass marketing. As China ramped up its production the per-unit cost fell to a level that brought about an increased passion and demand for alternative energy items. The Chinese government subsidised the manufacture of solar panels (they actually owned the production capacity), producing an item below cost for most of the world – most importantly the German manufacturers who of course quickly went out of business. Effectively the Chinese [little as in non-powerful] people funded their countries world dominance in this market that continued for a decade and more, even to this day to some degree.
This triad of entities all working together – the government, a business or producer, and an end-user or consumer is the basic business model of trusts. We are using a third party to achieve a given goal a) personal enrichment at the expense of the public purse; b) government benefit (such as market share, as with the shift from expensive high quality German-made solar panels to cheaper government subsidised Chinese panels, or c) social benefit…
Taxation & Charitable Trusts
Gaining some form of social benefit is a very common form of goodwill. When you smile at a customer in a business you are telling the customer that they are valuable, and the benefit to the business is that the customer is more likely to return – good for business. Same thing with a boy or a girl. A girl would/could/or does give a man her body in return for affection, loyalty, fatherhood and so on. You give your coppers to the Sallies because they present themselves effectively with the good that they do in the community. Social enterprises combine the business side of things, trading for a profit but with social benefit of some sort a goal. Community or ownership can facilitate this but there a a gazillion ways of skinning this cat.
Taxation too is widely seen as going to a community cause, and be this in a local sense to the local community through rates to cover council initiatives like gardens, public facilities, localised roading, signage, libraries and so on or to the wider central-government provided facilities through taxes, like the facilitation of trade, transport, education, health and so on.
Now the problem that many people have (especially those with a conscience) is that the very concept of taxation minimising comes across as either rebellious (we are out to get the system) or it can be seen as a great way to be selfish – to get rather than to take. Both of these assumptions can be wrong. As with many things the structure CAN indeed be used by people out to deprive the system of its rightful taxation. It can also be used by those angry and out to get the system (and by natural association those within it) but the Charitable Structure itself is ethically neutral.
A charitable trust can obtain tax-free status (we call a part of this “Donee Status”) in which all income to the trust is tax-free. This has benefit to the donor by getting tax rebates, but it also helps the Charitable Trust obviously with no tax liabilities.
It is important for people with ethical concerns to realise how this actually works, because what the government is actually saying here (and they are dead right) is that they trust you to create social benefit more than they can, therefore “We trust you to use the funds that would normally come to us by way of taxation more wisely, or at least as wisely as we would have”.
Have you ever known for example a little old lady wanting to help the young people with something, say a public seat outside the toilets, or a Christmas party for the poor to refuse help when asked at the door for help on the basis that the government would do a better job of it? Nah! It’s the other way round nine times out of ten. By offering a Charitable Trust a tax rebate what the government is saying is, “Go for it!! Sure you gotta get your legal structure correct. You have to get your financials right but yeah, go for it team!! Create some benefit somewhere out there and we’re behind you. No tax!”
As with all things it is the application of this structure that is the proof of the pudding. How we manage out personal affairs to interface with this Charitable Trust structure is the key. More on this later.
A Charitable purpose CAN be an equivalent to the Sallies where the worker bees slave away all day giving their labour for nothing to help the poor, but it does not have to be. The definition of Charitable in English Law has been well defined way back to the Queen Bee who initiated it and it has been tweaked a little but has remained in tact. Political and advocacy is a little tricky but charity (for the poor) is definitely in. So too is the religious and education.
It’s not a simple thin getting our trust deed perfect but the key points being our purpose or our goals MUST be right and from day one.
If you want to improve the shooting skills of a given community for example it is no good setting up a charitable trust trying to sell guns from the centre of town. Equally if you set up a club with a shooting range – this may not be a charitable purpose and may never qualify but if your goal is to train and you establish and run a program – theory and practical and you need to sell weapons and provide club-type services in order to train and upskill then that could easily become a chartiable purpose from which all income is tax-free.
Everybody has their own costs to living. Lifestyle, debt, personal desires and life circumstances all affect this but the government recognises that some of us need (or want) less and some of us need more. Most CT structures allow for some reasonable personal income from the CT. The important point is that this is agreed by the trustees (or their trusted employees or delegates) and that it is no more than commercial rates (i.e. FMV – Fair Market Value). Auditors will look into the operations of this closely, especially if there appears to be fraud or misrepresentation occurring.
I’ll assume that most readers are ‘straight’.
The challenge then is to find a way to work within the rules so that we maximise our returns using the CT system. Now, again this can be a million different ways for a million different situations but if you need a set of new wheels and it is reasonable that the CT needs you to get to work, then if the CT can justify it, the CT can (and should by rights) pay for it. If you need to get out and about and zip around doing stuff, then how the *** is the CT going to get this done if your wheels are not reliable or about to die?
If there are donors out there who believe in your cause and will support you and are willing to help you, then this is most assuredly your happy day. You can get the CT to get you your new wheels and even pay your petrol too if you are smart. There are rules of course (like shared use and FBT and so on) but the principle here is that somebody has determined that the CT needs something and has the wherewithal to get it or do it. They have done it and now you can benefit personally from the CT’s purposes and resources.
Now let’s look at cross-pollination a tricky one ethically, and legally. Why do you think that Chemists locate their premises next door to or near a Doctor’s Surgery? The Chemists I know would LOVE to have a Doctor as a tenant! Why? Cross pollination. If you own a vehicle service and you wanted to train the best of the local boys into the mechanical trade, would it not make sense to locate the training right next door, or close to your own workshop? How many young men all keen to get ahead in life can you handle as you put them all through your grueling training programme that requires them to do a few voluntary hours of work each week getting some real-life experiences? Why do companies sponsor things? Apart from the obvious profits from sales, they could want something else, like for example the cross-pollination of the best sports people coming through their business training programmes.
So too with the use of a business associated with a CT. As long as you ring-fence the two sufficiently to comply with tax legislation and ethical concerns you can most certainly run a business that cross-pollinates with a (your) CT. The challenge is to be creative enough to gain benefit, but pragmatic or realistic enough to use the systems of the day to your benefit.
Balance this nicely and within the law and in due course with your creativity and you could even get to a position where you are living free. Engineer this so that you pass on with dignity; having completed your allotted task; nothing in the bank and you too are akin to the Master!