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Paying tax to borrow more

Paying tax to borrow more

I often encourage the self-employed clients to pay more tax. When you are self-employed, it’s more or less the norm that some personal expenses can be written off from the business, or if there is some cash income such as if you run takeaways or bakeries. This applies especially if you work from home, in which case your house becomes your office. In fact, the more tax you pay, the more income a bank will recognise, and guess what, more funds you can borrow from the bank to invest. For me, that’s property.

I’ve calculated that for every $3,000 tax you pay, you are able to increase your borrowing by around 100k. If you have the choice to give away $3000 and receive 100k, would you do it? With 100k, you could purchase a 500k property (LVR 80%). Consider also that by rule of thumb the property value in Auckland doubles in 10 years. That means your net worth would increase by 500k in 10 years by paying $3,000. Don’t you think this is a good deal?

~Lucia

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