About Ed ChanWe all need income to pay the rent or mortgage, to buy food and clothes; we all need income to live.
Income can be made in a number of different ways.
You can sell your time or you can buy and sell a commodity for a profit. If you sell your time then you have a job (and there’s nothing wrong with that, by the way).
If you buy and sell a commodity then you’re considered a trader.
Trading is often confused with investing because wealth can be achieved through both trading and investing. Confusing the two, however, can be disastrous. It’s a bit like trying to be a dancer in a boxing ring – the two should be kept very separate!
The word “trade” means:
The act or process of buying and selling; the exchange of goods.*
The definition of the word “invest” is:
To use money to buy something that will provide a profit or an income, or both.*
Note that the definition of investing does not mention “selling.”
Therefore the true definition of these words implies that an investor is one who accumulates and a trader exchanges items with another.
We are not comparing the two activities for the purposes of proving which is right or wrong. They both serve a purpose in society. What we’re doing is separating the two activities so you don’t get confused as to what game you are playing. You can invest in property or you can trade property.
The Australian tax system, like others around the world, treats investors and traders differently. A trader generates income which can be taxed up to 46.5%.
An investor, while they pay tax on income generated by their assets, pays no tax on the growth in value of their assets unless they sell.
Therefore the first thing to realise is:
- A trader is one who buys and sells; an investor is one who accumulates.
- Wealth for Life is a game for investors.
The main difference between a trader and an investor is what they do.
They both need to buy and often they both improve the asset somewhat to increase its value. But a trader has to sell or they make no money, whereas an investor has their assets make the money.
An investor also tends to take a long term approach and isn’t fussed about minor dips in market value. A trader, however, is often affected by sudden value changes as these immediately affect the trader’s income.
With such different viewpoints, it’s easy to see how a person can get confused about what they should be doing – buying or selling? It all depends on which game you are playing.
We all, to some degree, play both games. We trade our time in a job and invest some of our salary into our home. So while you’re playing the game of trading and investing, remember as you read through this book that it’s written for you as an investor.
Ed Chan is founder Chan and Naylor, accountants, is a leading property tax specialist and has co-authored 3 best selling books. As a seasoned property investor he shares his unique understanding of the relationship between property investment and tax. Go to www.chan-naylor.com.au
