What is the ideal entrepreneurial salary?

The public bleating continues in the least entrepreneurial nation on Earth.

If anybody is serious about building an operating business in Australia, they would know the rules on the small company concessional tax rate of 25%.

You do need to be serious about business to qualify for that 5% tax discount.

You need to make at least a whopping 20% of your corporate turnover from operating activity. How brutal? Your cash box has to do something!

Let us compare that with the progressive income tax rate in Australia.

See the ATO web page: Base rate entity company tax rate.

Q: At what precise taxable income in Australia does the all in effective tax rate equate to 25% of taxable income.

A: The precise taxable income where the all-in effective tax rate equates to exactly 25% is $131,600. At this specific level of taxable income, your total combined liability for income tax and the Medicare Levy totals $32,900, which represents exactly a quarter of your earnings.

The Exact Formula Verification

That was Gemini, the LLM.

I could work out the answer myself, but this was faster and proves a salient point.

Anybody with a pulse can work out the following:

Any real entrepreneur worth their salt can enjoy a tax rate of 25% on wealth accumulation up to a breakpoint of $50M per annum income, provided they can live on $131,600 per annum.

Judging by the outpouring of public grief, many aspirational Australian entrepreneurs have a lifestyle that cannot stomach living off $131,600 per annum for as long as it might take them to build a business that turns over $50M per annum, at 25% tax.

I believe these people in everything that they say.

I would not back them.

Not with one dime.

The Cash Box Strategy

Some folks have trouble with the concept of an operating business.

Here is one that will work...

Raise $10 for every $1 of your own capital you invest in the market.

Set a hurdle rate of return of 6% per annum.

Take no fee but 20% out-performance.

Invest all money in the Vanguard Total World Stock ETF- NYSE: VT (MER: 0.06%).

Post this shingle:

Unlike most funds, we promise to never give your money to a fund manager who is not properly supervised. Sure, we hire a portfolio manager, and he costs $400,000 per annum. However, this is a necessary overhead. We have a dog, whose purpose is to stop the portfolio manager from doing anything but buy Vanguard Total World Stock ETF: VT, whenever you send us money. He also feeds the dog. When the ATO auditor arrives, the PM makes the tea.

That business plan qualifies you for the 25% tax rate on an operating business. 

It does something. 

The portfolio manager feeds a dog who cannot type "BUY VT".

Apologies to Warren Buffet, but I am over this public bleating.

With that allocation you would have beaten about 85% of global equity managers over the past ten years. 

With that business plan, you will make money and pay only 25% tax.

Conclusion

The loss of a 50% CGT discount is personally irritating to me.

However, so are lots of folks taking subsidized loans to price real estate out of reach.

The situation got to be ridiculous, and Jim Chalmers did the right thing.

We will all pay for it, but I cannot abide this nonsense about damage to entrepreneurship.

Entrepreneurs are seriously damaged by high land prices, high rents, high wages to pay for rents and high interest rates to offset the price inflation created by the preceding.

These measures are painful but will prove good for the economy.

That is how I see it.

Photo by Victor G on Unsplash