I am sure many of you have heard or read about this before, but until recently I never understood the true meaning of what exactly does it mean by inflation being an invisible tax and why governments love it.
Best to explain with an example.
Suppose you decide to buy a piece of land for investment purposes. The land costs you $100k and you hold it for 10 years. During the 10 years the land only manages to increase in value in line with inflation which averaged around 3.5%pa for the past 10 years.
Sale price after 10 years: $141,060 approx
Sale commission 2%: $2820 approx
Gross profit: $38,240
Taxable profit after CGT Discount (50%): $19,120
Tax on taxable income (30% rate): $5,736
Net profit: $32,504
Your investment return: 2.85%
Your real return: -0.65%
Even though on paper you think you have made a profit but in reality you have reduced your purchasing power by 0.65% pa for 10 years due to the inflation tax you have to pay on your investments which in reality were just keeping up with inflation.
Moral of the story is always look for investments with real returns (aka inflation adjusted returns). The longer you hold the asset (buy and hold) the lesser the impact of inflation tax will be on your investment returns.
Cheers,
Oracle.
Best to explain with an example.
Suppose you decide to buy a piece of land for investment purposes. The land costs you $100k and you hold it for 10 years. During the 10 years the land only manages to increase in value in line with inflation which averaged around 3.5%pa for the past 10 years.
Sale price after 10 years: $141,060 approx
Sale commission 2%: $2820 approx
Gross profit: $38,240
Taxable profit after CGT Discount (50%): $19,120
Tax on taxable income (30% rate): $5,736
Net profit: $32,504
Your investment return: 2.85%
Your real return: -0.65%
Even though on paper you think you have made a profit but in reality you have reduced your purchasing power by 0.65% pa for 10 years due to the inflation tax you have to pay on your investments which in reality were just keeping up with inflation.
Moral of the story is always look for investments with real returns (aka inflation adjusted returns). The longer you hold the asset (buy and hold) the lesser the impact of inflation tax will be on your investment returns.
Cheers,
Oracle.