Latest / The Money Puzzle / How to tackle the Budget’s property investment clampdown

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How to tackle the Budget’s property investment clampdown · The Money Puzzle

0:12
Speaker 1: Hello, and welcome to the Australians Money Puzzled podcast. I'm
0:15
Speaker 1: James Kirby. Welcome aboard everybody. Well, we've had a few
0:19
Speaker 1: days to digest the most important federal budget for years
0:25
Speaker 1: and it all came to pass, folks, the capital against
0:28
Speaker 1: tax crackdown, and your capital against tax is going to
0:31
Speaker 1: get higher on your property negative gearing as we know
0:34
Speaker 1: it is going to go in relation to existing homes
0:38
Speaker 1: and that is of course where most people put their
0:40
Speaker 1: money until now are clampdown on family trust which will
0:43
Speaker 1: be irrelevant and similarly an exclusion for some special disability property,
0:50
Speaker 1: which sounds like a good idea, but unfortunately we know
0:53
Speaker 1: there's a lot of uh, there's a lot of very
0:56
Speaker 1: unimpressive activity in that area. We're going to talk about.
1:00
Speaker 1: To so much to talk about. I'm going to introduce
1:02
Speaker 1: you to my guest to is, of course Stuart Means
1:06
Speaker 1: of the pro Solution Group. The perfect day to have
1:08
Speaker 1: you on. How are you, Stewart.
1:10
Speaker 2: I'm really well, James, keeping busy with answering lots of questions.
1:13
Speaker 1: As you can imagine, it turned out all those leaks
1:16
Speaker 1: that were published in the Australia and they all turned
1:17
Speaker 1: out to be true everything one of them the world.
1:22
Speaker 1: What are we just quickly for everyone, just so that
1:25
Speaker 1: everyone's dead clear and what's occurred and what we know
1:29
Speaker 1: in relation to capital gains tax? Until now, when you
1:32
Speaker 1: had a property, was you held it for more than
1:35
Speaker 1: a year? An he asked that that is, But for
1:37
Speaker 1: today's purpose, is a property, was you held it more
1:39
Speaker 1: than a year? You got a fifty percent discount on
1:41
Speaker 1: your capital gains tax. So in the budget, what has
1:46
Speaker 1: changed is that they're going back to an old inflation
1:49
Speaker 1: in the system where you get a couple of percent
1:51
Speaker 1: inflation year adjustment. It's going to be a much sharper
1:54
Speaker 1: tax regime. We've got to pay more tax in it.
1:57
Speaker 1: But some people the way it's the way it's working,
2:01
Speaker 1: it's partially grand forward. So could you just explain what
2:04
Speaker 1: that means. It means some people will in the future
2:07
Speaker 1: pay the higher effective capital gains, but some will transition
2:10
Speaker 1: and they'll have a bit that's lower and a bit
2:12
Speaker 1: that's higher. Could you explain how that works?
2:14
Speaker 2: Yeah, I mean it's going to be complex and the
2:16
Speaker 2: transition period is July twenty seven, James. The observation with
2:21
Speaker 2: the old indexation system, which we're going back to. I
2:24
Speaker 2: think the thing we need to take away is that
2:26
Speaker 2: if we own a property and we make a mistaken
2:28
Speaker 2: by a dud property and the growth isn't actually that
2:31
Speaker 2: great in that growth is in line with inflation or
2:35
Speaker 2: just a little bit above it, actually the indexation system
2:38
Speaker 2: will mean will have less of a capital gain. So
2:42
Speaker 2: those unfortunate people that they have invested in established apartments
2:45
Speaker 2: in Melbourne might have only experienced growth in line with inflation,
2:50
Speaker 2: and so that old indexation system would say there's no
2:53
Speaker 2: real gain to be taxed, whereas the old fifty percent
2:57
Speaker 2: discount system there would be a gain because there's been
3:00
Speaker 2: a nominal gain compared to what they paid for the property.
3:03
Speaker 2: So it's not it's not going to be in all
3:04
Speaker 2: circumstances that will pay higher tax. But really up until
3:08
Speaker 2: July twenty seven, will use the old fifty percent discount,
3:11
Speaker 2: and then we'll need to revalue our property and that's
3:15
Speaker 2: you don't have to, but it would be advisable to
3:17
Speaker 2: do that.
3:18
Speaker 1: Highly advisable, I imagine, yeah, yeah.
3:20
Speaker 2: Absolutely, and then any gain over and above that after
3:24
Speaker 2: one July twenty seven will be it will index that
3:29
Speaker 2: cost base. So in index the market value from there on.
3:32
Speaker 1: So the first thing we have to do with folks
3:34
Speaker 1: in a soft market, particularly in the major cities, is
3:37
Speaker 1: that there is going to be a higher tax regime
3:42
Speaker 1: in effect. And the second part of that, obviously is
3:45
Speaker 1: that if you keep the property once it's kicks in
3:48
Speaker 1: and you go to the higher regime. So now on
3:51
Speaker 1: the issue of evaluations, Stuart, very good point. Could you
3:54
Speaker 1: explain what you meant there, because obviously it seems to
3:58
Speaker 1: me what you have to do is you got to
4:00
Speaker 1: get in and value your property before the change over
4:03
Speaker 1: to ensure that you fully value the property under the
4:06
Speaker 1: more benevolent older system. But could you explain that.
4:10
Speaker 2: Yeah, that's right. So we're going to draw a line
4:12
Speaker 2: in the sand I guess James, and that's the transition
4:14
Speaker 2: period between the old fifty percent discount system and then
4:18
Speaker 2: the new old CPI system. However you want to look
4:21
Speaker 2: at it, and so we need something to use in
4:25
Speaker 2: the absence of evaluation. It seems like the ATA will
4:28
Speaker 2: tell us we'll have to apportion the holding period, you know,
4:32
Speaker 2: three July twenty seven holding period than the post July
4:35
Speaker 2: twenty seven holding period. That might work in some circumstances.
4:39
Speaker 2: I'd be saying, probably to most of my clients, no,
4:41
Speaker 2: we're going to get evaluation, and of course it would
4:44
Speaker 2: be in our best interest for that valuation needs to
4:47
Speaker 2: reflect market value, but market value can be expressed in
4:50
Speaker 2: the arrange. So the higher the value, the better where
4:52
Speaker 2: the tax outcomes we are going to be. And it
4:55
Speaker 2: really just means any growth beyond that valuation after July
4:59
Speaker 2: twenty seven and will be taxed under the old end
5:02
Speaker 2: of the new system, old system, the CPI system. So
5:05
Speaker 2: we want most of our gain I think under the
5:08
Speaker 2: old fifty percent discounts.
5:10
Speaker 1: On the old system. And if so, I'm thinking, you
5:13
Speaker 1: have this property, if you don't get it valued, you
5:17
Speaker 1: get a default valuation from the ATO. Right the terminology,
5:20
Speaker 1: there's a standard formula their use, which needless to say,
5:24
Speaker 1: is conservative formula, as it should be with the government.
5:27
Speaker 1: But by the way, the way it's going to work
5:28
Speaker 1: is it's got to be lower than the valuation you get.
5:30
Speaker 1: Almost for sure, I would think you can you just
5:33
Speaker 1: give us a little bit more clarity on that one.
5:35
Speaker 1: I mean, do you know, for instance, can you get
5:38
Speaker 1: one in April or May? Does it have to be
5:40
Speaker 1: in June? And you know, does it hold you up
5:43
Speaker 1: in any way.
5:44
Speaker 2: The valuation has to be at one July twenty seven.
5:48
Speaker 2: Probably difficult to get a valuation in advance of that date,
5:51
Speaker 2: but you could certainly get a backdated valuation. So we
5:54
Speaker 2: just did something recently for a client. Had to value
5:57
Speaker 2: the property of what it was six years ago or
5:58
Speaker 2: something like that, so you can say they go back
6:00
Speaker 2: in time. Probably can't really go forward in time in
6:03
Speaker 2: the absence of evaluation. They'll just use an apportionate method,
6:06
Speaker 2: so the amount of time you've held the asset proportionate
6:09
Speaker 2: to pre impost twenty seven. We're waiting for a bit
6:14
Speaker 2: of guidance about whether they need to be sworn valuations
6:17
Speaker 2: or whether the tax payer just needs to have evidence.
6:20
Speaker 2: In this circumstance that we just went through with the client,
6:23
Speaker 2: the ATO insisted on a sworn valuation, so I don't
6:27
Speaker 2: know if they're going to do that. Of course, you
6:28
Speaker 2: can mentione what sort of glass of work that's going
6:31
Speaker 2: to create for valuers, but there's a lot of unknowns.
6:34
Speaker 2: I think with these proposals, they're pretty massive, big changes.
6:38
Speaker 1: There's two million property owners. Let's say there's a million
6:41
Speaker 1: and a bit that active investors who are negatively gearing
6:47
Speaker 1: there's five thousand value with back to see value. How
6:51
Speaker 1: do you think that's going to work out, Stewart.
6:54
Speaker 2: I don't think it's going to work out very well, James.
6:56
Speaker 2: I think what they'll do probably is say, well, the
6:59
Speaker 2: onus is on the taxpayer to prove that was the
7:02
Speaker 2: market value at the time, and it'll be up to
7:06
Speaker 2: you know, tax agents and taxpayers to work out whether
7:08
Speaker 2: they're going to have enough evidence to support that value.
7:11
Speaker 1: Okay, but folks, it's really important stuff here. I mean,
7:15
Speaker 1: if you have an investment property, you're going to pay
7:18
Speaker 1: more tax on it than you need to if you
7:20
Speaker 1: don't get it valued. I don't know how you're going
7:21
Speaker 1: to get it valued. I don't know what the government.
7:23
Speaker 1: No one knows what the government it's planning here, whether
7:25
Speaker 1: it was intentional that this kind of looming clear looming
7:30
Speaker 1: gloss of work for valuers. As they said, the mats
7:33
Speaker 1: don't really make sense. It's five thousand practicing valuers and
7:36
Speaker 1: there's to new properties to be concluded. Okay. Now, separately,
7:42
Speaker 1: the negative gearing really matters, doesn't it, because that's fully
7:45
Speaker 1: grand for that which means, folks, you negatively gear already
7:48
Speaker 1: you are fine and you can keep doing it, but
7:51
Speaker 1: in the future you can't. They just explained that one
7:54
Speaker 1: to us Stewart.
7:55
Speaker 2: Yeah, and before we jump on the negative gearing, James
7:57
Speaker 2: Ione just finish off on cabri Gain's tax. The minimum
8:00
Speaker 2: thirty percent.
8:01
Speaker 1: Sorry crucial, Yes, thirty percent minimum introductions. It must you
8:05
Speaker 1: must pay thirty percent. Similarly with family trust you must
8:08
Speaker 1: pay thirty percent. Two new crucial minimums introduced in the budget. Yeah,
8:12
Speaker 1: we have never seen that before.
8:13
Speaker 2: Now, we've never seen that before. And I guess you know,
8:16
Speaker 2: one of the advantages of having a share portfolioes you
8:18
Speaker 2: could sell incrementally and manage the capital gains tax. One
8:21
Speaker 2: of the disadvantages of property, of course, you've got to
8:24
Speaker 2: sell it all in one hole. So hopefully, you know,
8:27
Speaker 2: property investors that have held property for many years, hopefully
8:30
Speaker 2: they're crystallizing a pretty large capital gain anyway, and so
8:34
Speaker 2: therefore if they're taxable income in that year is over
8:37
Speaker 2: two hundred thousand, they're paying thirty percent anyway. So I
8:40
Speaker 2: think for long term property investors the minimum thirty percent
8:44
Speaker 2: isn't going to probably matter that much. What does matter, though,
8:49
Speaker 2: is that when we had a client that would crystallize
8:52
Speaker 2: a large capital gain in a particular year, we would
8:55
Speaker 2: use carried forward, concessional super contributions, or any sort of
8:58
Speaker 2: other strategies to minimize their taxable income in that year.
9:02
Speaker 2: You can't do that. They're going to quarantine that capital gain.
9:05
Speaker 2: You're going to have to pay thirty percent at least
9:07
Speaker 2: on that capital gain, regardless of whatever other tax reductions
9:10
Speaker 2: you have in that year. So the tax planning around
9:13
Speaker 2: property devestment and including delaying selling a property until you're
9:18
Speaker 2: in retirement when you don't have any other taxib income,
9:22
Speaker 2: those tax planning measures are kind of out the door
9:24
Speaker 2: now if it becomes legislated, of course. And yeah, so
9:27
Speaker 2: that's that. That could move the die a little bit.
9:30
Speaker 2: But negative gearing, as you said, is the big thing.
9:33
Speaker 2: So I looked at the internal rate of return based
9:36
Speaker 2: on a set of parameters. What it is today. It's
9:38
Speaker 2: about eleven percent after tax, which is a great internal
9:41
Speaker 2: rate of return. It's generated mostly because you're getting the
9:44
Speaker 2: negative gearing benefit, you're getting the compounding capital growth, and
9:48
Speaker 2: you're very leveraged into that investment. You factor in the
9:52
Speaker 2: higher capital gains tax, the internal rate of return reduces
9:56
Speaker 2: from eleven percent to ten point four percent. About a
9:59
Speaker 2: seven percent reduction doesn't really change the economics of investing.
10:04
Speaker 2: It's not ideal, pay more tax, but it doesn't change
10:07
Speaker 2: the economics. The negative gearing is the massive one. It
10:11
Speaker 2: reduces the internal rate of return from ten point four
10:14
Speaker 2: percent to eight point four percent after tax. Huge reduction.
10:18
Speaker 2: And it makes sense, James, if I don't have the
10:20
Speaker 2: tax deduction, then to hold an investment property is going
10:24
Speaker 2: to cost me twenty to fifty percent more on an
10:27
Speaker 2: after tax basis because I'm not getting the tax deduction,
10:31
Speaker 2: but I'm not getting twenty to fifty percent more capital growth.
10:35
Speaker 2: So of course it makes sense that it really reduces
10:38
Speaker 2: the effectiveness of borrowing to invest in established property.
10:43
Speaker 1: So do you think we'll see a wave of selling
10:45
Speaker 1: of established property.
10:47
Speaker 2: No, I don't think so, because I think they'll be
10:49
Speaker 2: treated like PRECGT assets, pre eighty five assets that have
10:53
Speaker 2: been over the last few decades.
10:56
Speaker 1: We will have a big cool down in the number
10:59
Speaker 1: of lou Well, obviously they bit no one allows to
11:02
Speaker 1: go into negative gearing our established property. That's the thing
11:06
Speaker 1: I mean to be precise, By the way they're closing
11:09
Speaker 1: down the ability to negative big gear on establish property
11:13
Speaker 1: and leaving open the ability to negative the gear on
11:16
Speaker 1: new property two things. There very few people negatively gear
11:19
Speaker 1: on new property, and I don't know that would change.
11:22
Speaker 1: That's really important. But also when you look at established
11:25
Speaker 1: property to be really precise, they're not thing you can't do.
11:28
Speaker 1: If they're saying you can't put it against your salary,
11:30
Speaker 1: which is what most people do most of the time,
11:33
Speaker 1: I imagine wealthy investors can actually use the losses and
11:37
Speaker 1: put them against future profits and push their taxes out
11:39
Speaker 1: into the future. Is that true not?
11:42
Speaker 2: As I understand, any rental property losses will be quarantined,
11:45
Speaker 2: in quarantined and treated separately, much like primary production income
11:49
Speaker 2: is now. So if you've got a farm that makes
11:51
Speaker 2: a loss and they close that loophole a few decades
11:54
Speaker 2: ago and that that income is quarantined against each other,
11:58
Speaker 2: so even self employed people won't be able to do
12:01
Speaker 2: it moving forward, James, But I guess we're going to
12:04
Speaker 2: look at I know Will Hamilton on Thursday mentioned how
12:08
Speaker 2: Keating changed negative gearing only for about nine months. I
12:11
Speaker 2: think I've got to look back at that. We can
12:13
Speaker 2: look at New Zealand they quarantine or change remove negative
12:17
Speaker 2: gearing in twenty twenty one and reinstated in twenty four.
12:21
Speaker 2: So there's a bit of and you know, the Australian
12:24
Speaker 2: public voted on these policies back in sixteen with when
12:27
Speaker 2: Shorten was running to be Prime minister, and it was
12:31
Speaker 2: a hard no then. So I think as in it
12:33
Speaker 2: long term property invested. I'm not saying that we've got
12:37
Speaker 2: a crystal ball, but if we think that negative gear
12:40
Speaker 2: and be quarantined in July twenty seven and we've got
12:43
Speaker 2: election in mid twenty eight, we've got a maybe form
12:47
Speaker 2: of viewers long term investors to what extent will negative
12:50
Speaker 2: gearing be reinstated in the future. Is this a permanent change,
12:54
Speaker 2: because when you look that look at the history in
12:57
Speaker 2: New Zealand and Australia and even other countries around developed world,
13:02
Speaker 2: Australia will have the most punity of tech settings for
13:06
Speaker 2: established property investors in the developed world. It's worse than
13:11
Speaker 2: the UK, and the UK has been a bit of
13:13
Speaker 2: a case study is what not to do with property?
13:16
Speaker 1: What we might do at this point, there's a perfect
13:19
Speaker 1: challenge what may happen with the new reality that you
13:22
Speaker 1: can only negatively gear a new property I want you
13:24
Speaker 1: to listen carefully to the next part, folks, because it's
13:27
Speaker 1: something that's really changed the game. And this is our
13:29
Speaker 1: property day. So I want to get into this and
13:32
Speaker 1: we'll be back in a moment. Hello, Welcome back to
13:44
Speaker 1: The Australian's Money Past podcast. James Kirby here with Stewart Williams.
13:48
Speaker 1: We are what can I say, We are the smalls
13:51
Speaker 1: clearing perhaps to a degree after the budget and we're
13:54
Speaker 1: trying to figure out what really happened there, what difference
13:56
Speaker 1: it will make to you. So we explained about study
14:00
Speaker 1: in the first part of the show. In negative gearing officially,
14:03
Speaker 1: straight up, you can't negatively gear established property any longer.
14:09
Speaker 1: From July one, twenty twenty seven, you can negatively gear
14:12
Speaker 1: a new property. Stewart says that from an investment point
14:17
Speaker 1: of view, it greatly reduces the return on estimated return
14:22
Speaker 1: in t ate of return and what was your phrase,
14:24
Speaker 1: which return our property? Investment property? What about new property?
14:30
Speaker 1: Is their? What's that like to negatively gear of? Why
14:34
Speaker 1: don't the majority of people do us? And will that change?
14:37
Speaker 1: Do you think with these change rules there's.
14:39
Speaker 2: Going to be two big problems with these. James from
14:42
Speaker 2: an investment returns perspective, because I think we should consider
14:46
Speaker 2: future investment returns before we think about taxation consequences, because
14:51
Speaker 2: of course we need to look at it in that order,
14:52
Speaker 2: because if we don't generate returns, then taxation isn't really
14:55
Speaker 2: a concern. So from a future returns perspective, if we
14:59
Speaker 2: think about assets like a house of land package on
15:03
Speaker 2: the outskirts of a capital city, the problem with those
15:07
Speaker 2: sorts of assets is that firstly, most of the purchase
15:10
Speaker 2: prices for the improvements on that land, so the house,
15:13
Speaker 2: whereas the underlying land component, which is the bit that's
15:16
Speaker 2: really going to appreciate over time, is relatively small proportion
15:20
Speaker 2: of the purchase price. But more importantly, we're buying a
15:24
Speaker 2: location where land supply is abundant. And so what you
15:27
Speaker 2: typically find when these new land releases, and typically they
15:31
Speaker 2: go in stages. The first stage is very cheap, second
15:34
Speaker 2: stage is more expensive, and so on. And as an
15:37
Speaker 2: area becomes built out and there's a supermarket and a
15:41
Speaker 2: GP clinic and these sorts of things, the property price
15:44
Speaker 2: tends to rise to the capital city median, and then
15:48
Speaker 2: it doesn't go beyond that because why would I pay
15:50
Speaker 2: more when I can get a much cheaper asset a
15:52
Speaker 2: little bit down the road at the next land, a
15:56
Speaker 2: brand new house. So when you look at the map
16:00
Speaker 2: of them, you've got to assume, I think, a much
16:02
Speaker 2: lower capital growth rate than say, and in this city
16:05
Speaker 2: location where land is scarce and it's fixed and it's finite,
16:10
Speaker 2: and it's difficult to find new supply in that location.
16:15
Speaker 2: The other big challenge is going to be when you've
16:17
Speaker 2: got taxation treatment for two different types of assets, is
16:22
Speaker 2: to what extent will the tax benefits that are unique
16:26
Speaker 2: to that first owner be reflected in the capital value
16:30
Speaker 2: of that asset. So what I would expect is we're
16:32
Speaker 2: going to see a lot of property spookers and developers
16:36
Speaker 2: targeting investors saying you're going to get negative gearing, you're
16:39
Speaker 2: going to get the lower capital gains tax, this is
16:41
Speaker 2: how much it's going to save you, and we're just
16:44
Speaker 2: going to add a little bit onto the purchase price.
16:46
Speaker 2: The problem with that is that when you go and
16:48
Speaker 2: resell that property, the next buyer, of course, because it's
16:51
Speaker 2: an established property, won't get those tax benefits. So I
16:55
Speaker 2: think there's a lot of risk here. Notwithstanding that those
16:58
Speaker 2: assets fundamentally are as strong as established property. There's a
17:03
Speaker 2: lot of risks.
17:05
Speaker 1: Okay, I don't want to go down any deep channel fare, folks,
17:09
Speaker 1: but there's two things I just want to bounce off you.
17:11
Speaker 1: One is you're talking about sprewkers, et cetera. I see
17:15
Speaker 1: that NDIS properties and special disability properties effectually our exempt
17:21
Speaker 1: from the new rules. And I see that they are
17:25
Speaker 1: already selling themselves as great opportunities in relative channels because
17:30
Speaker 1: negative bearing has been closed down in other parts, the
17:33
Speaker 1: majority of it closed down. This area is notorious for
17:38
Speaker 1: sprukers and poor behavior, poor returns. What do you think
17:43
Speaker 1: will happen?
17:45
Speaker 2: I'm worried that a lot of investors will fall fail
17:48
Speaker 2: and fall into the trap of buying something that might
17:51
Speaker 2: look good on paper, that's sold with taxation benefits behind it,
17:55
Speaker 2: but is a fundamentally weak asset. And it happens a
17:58
Speaker 2: lot in financial service in the property sector, where there's
18:02
Speaker 2: a lot of financial engineering to make these properties, make
18:05
Speaker 2: these assets and investments and opportunities look as good as possible,
18:08
Speaker 2: particularly off the back of the theme of trying to
18:11
Speaker 2: get better taxation outcomes.
18:14
Speaker 1: Well, why is it fundamentally weak?
18:15
Speaker 2: Well, it's fundamentally weak. Because if you look at NDIS,
18:18
Speaker 2: it's fundamentally weak because the location of those properties tend
18:21
Speaker 2: to be in outlying areas, and you've got a property
18:25
Speaker 2: that's built for one specific purpose, whereas the whole point
18:29
Speaker 2: of property is you want to have multifaceted demand, James.
18:32
Speaker 2: You want to have a property that appeals to upgraders, downgraders,
18:36
Speaker 2: own occupiers, investors, that you can attract a very wide
18:41
Speaker 2: array of rental pool and that's what's going to drive
18:44
Speaker 2: value in the long run, rather than a specific use
18:46
Speaker 2: for that particular property.
18:49
Speaker 1: This is worth listening to, folks, because you will hear
18:52
Speaker 1: I think a lift in promotion of this type of property.
18:55
Speaker 1: One thing I just wanted to make clear also is
18:58
Speaker 1: that though they say these are government back to government funded,
19:02
Speaker 1: government guaranteed government, they are actually not. It doesn't work
19:06
Speaker 1: like that. They build them and then they seek approval
19:09
Speaker 1: from the government. They're not government supported property developers. That's
19:15
Speaker 1: really important I think to clarify. Okay, now on another
19:18
Speaker 1: issue altogether, perhaps at the other end of the spectrum too.
19:22
Speaker 1: One of the surprises of the budget was, in the
19:25
Speaker 1: fullness of time, it became clear that not only family
19:30
Speaker 1: trusts get hit with a new thirty percent minimum tax. Right,
19:34
Speaker 1: but testamentary discretionary trust do as well. That is the
19:37
Speaker 1: most popular form of testamentary trust. When people in their
19:41
Speaker 1: wills link their testamentary trust to distribute money in an
19:46
Speaker 1: optimum fashion to their beneficiaries in the future. Seems simple enough.
19:51
Speaker 1: The government have come in with a thirty percent minimum there,
19:53
Speaker 1: it wasn't obvious that they were doing that until in
19:57
Speaker 1: recent days. I can basically state agents were estate planners
20:01
Speaker 1: were arguing with each other last week. Whether it was
20:03
Speaker 1: or it wasn't the case. It is the case. The
20:05
Speaker 1: testamentary scratch trust is liable for this tax. So some
20:11
Speaker 1: of our own correspondence on the Australia and have made
20:13
Speaker 1: the point that there could be stamp duty hit to
20:16
Speaker 1: people that never saw coming. Have you had a look
20:19
Speaker 1: at that one, Stuart.
20:21
Speaker 2: In what regard if it goes into a testamentary trust, yes,
20:24
Speaker 2: a property.
20:25
Speaker 1: Yes, yes they have to reshuffle. If they have to
20:28
Speaker 1: reshuffle assets for tax purposes, then in Queensland I think
20:33
Speaker 1: in particular that could be stamped duty that the lidency coming.
20:36
Speaker 2: Yeah, there's two I mean, there's two attractions to a
20:38
Speaker 2: testamentary trust. Asset protection and then potential taxation benefits in
20:44
Speaker 2: that miners that receive income or capital gains from a
20:47
Speaker 2: testamentary trust to tax that adult rates, which is quite
20:51
Speaker 2: tax effective. So what we would typically do is have
20:54
Speaker 2: in the will the testamentary trust. Is the use of
20:58
Speaker 2: a testamentary trust is that discretion of the executor.
21:00
Speaker 1: One thing, just to clarify, sorry Stuart, but I need
21:03
Speaker 1: to clarify the government has said that testamentary fixed trusts
21:09
Speaker 1: are not included in this thirty percent minimum, and testamentary
21:12
Speaker 1: discretionary trusts are. That's the big one. They're the part
21:15
Speaker 1: of your one. So you might just delinearity two on
21:17
Speaker 1: that one.
21:18
Speaker 2: Yeah, So I mean a fixed trust means you've got
21:20
Speaker 2: units and you've got a fixed entitlement to whatever's in
21:22
Speaker 2: the trust. But almost always testamentary trusts are discretionary, so
21:27
Speaker 2: there wouldn't be too many fixed to that be very
21:29
Speaker 2: that'd be a very sort of specific solution, very rare.
21:33
Speaker 2: So what you want to do is have your will
21:35
Speaker 2: worded in a way that it gives you maximum flexibility.
21:38
Speaker 2: So if there is punitive tax consequences of using the
21:42
Speaker 2: testamentary trust, the executor doesn't have to do it, and
21:44
Speaker 2: they don't have to put all assets in that trust.
21:46
Speaker 2: Maybe just some assets. That'd be one way to get
21:49
Speaker 2: around it. Chains. But I think the proposed changes in
21:53
Speaker 2: respect to taxation of family trusts and testamonay trusts is
21:57
Speaker 2: at least if there's one of those changes that we're
22:00
Speaker 2: announced last Tuesday that you would say has the highest
22:03
Speaker 2: probability of not being enacted into law, that would be
22:06
Speaker 2: that one for me. You know, I think it's going
22:08
Speaker 2: to be wildly unpopular. I think I think there's a
22:11
Speaker 2: lot of negative, unintended consequences, and I think I think
22:15
Speaker 2: flat tax rates are just dumb. Like that's why we
22:19
Speaker 2: have in a marginal tax rate system, because it creates unfairness.
22:22
Speaker 2: I mean, you think about, you know, a minimum CGT rate.
22:26
Speaker 2: My sons are nineteen, they're investing in ETFs because of
22:29
Speaker 2: course they're well advised, they're gonna have to pay a
22:31
Speaker 2: minimum thirty thirty percent CGT rate. That's insane. There uni
22:36
Speaker 2: students that don't earn very much money, you want to,
22:38
Speaker 2: you know, promote them to invest is just dumb. So
22:41
Speaker 2: I don't think it's.
22:42
Speaker 1: So you reckon that there was when the day comes
22:44
Speaker 1: where they have to do the trade offs, which they
22:46
Speaker 1: were regardless of how widely supported the Greens might be
22:50
Speaker 1: of their policies in Parliament. That could be one. Okay,
22:53
Speaker 1: we'll take a break there because we've already had lots
22:55
Speaker 1: of questions from listeners. I've just selected a few, but
22:57
Speaker 1: we will do this too with them. Hello, Welcome back
23:08
Speaker 1: to The Australian's Money Puzzitive podcast. James Kirby here with
23:11
Speaker 1: Stuart Williams of the pro Solution Private Clients Group, a
23:15
Speaker 1: regular on the show. I'm very glad to have him
23:17
Speaker 1: on the show today, I can tell you because it's
23:19
Speaker 1: our first property episode after the budget and though some
23:23
Speaker 1: things are clear, there are some questions that needless to say,
23:27
Speaker 1: and you've got questions. I'm going to read out a few.
23:29
Speaker 1: They are random questions, as they are of course from
23:32
Speaker 1: our listeners. Andrew asks, I'm trying to get my head
23:35
Speaker 1: around the changes to negative gearing. If I purchase an
23:38
Speaker 1: existing property after the July one, twenty twenty seven cut
23:42
Speaker 1: off and I make a loss, I can no longer
23:45
Speaker 1: claim this against my income. Yep. Nevertheless, I understand I
23:49
Speaker 1: can carry forward a loss. That's what I said earlier
23:52
Speaker 1: in the show. You remember, so when my investment is
23:54
Speaker 1: eventually positively geared, I won't pay tax on rental income
23:58
Speaker 1: until the previous loss has first been neutralized. Is correct?
24:02
Speaker 1: Is it correct?
24:03
Speaker 2: Yes, it's correct, and it might sound good on the
24:05
Speaker 2: face of it, But rents over the last few decades
24:08
Speaker 2: in Australia have grown about four four point three percent,
24:12
Speaker 2: which makes sense, right, that's about wage inflation. So if
24:16
Speaker 2: rents grow at four point three percent, assuming that you
24:19
Speaker 2: don't make principal repayments on the loan, it'll take forty
24:24
Speaker 2: five years to eat up those carried forward losses. So yes,
24:29
Speaker 2: you get a tax benefit, but you're going to have
24:31
Speaker 2: to wait twenty years at least to you start to
24:33
Speaker 2: use that tax benefit. And it's going to take you
24:35
Speaker 2: forty five years to fully utilize that tax benefit. And
24:39
Speaker 2: we know the time value of money is pretty important.
24:43
Speaker 1: True, but kind of irrelevant that is, yes, okay, very good?
24:48
Speaker 1: All right? Now a question from a Neil Anio who
24:53
Speaker 1: has two investment properties and I feel bits of business
24:56
Speaker 1: which he mentions. He says that from his perspective that
25:00
Speaker 1: proposed change changes are quite fair because all current investors
25:05
Speaker 1: see no change to negative gearing and all capital gains
25:10
Speaker 1: until July one, twenty twenty seven. If you recall, folks,
25:13
Speaker 1: the negative gearing is fully grand fathered. The capital gainst
25:16
Speaker 1: taxes partially grand for that. So Anil says, it's only
25:20
Speaker 1: future games that are impacted. Isn't this a well balanced
25:24
Speaker 1: approach to make the transition away from these overly generous
25:27
Speaker 1: tax conversations? A point well worth covering a nail which
25:30
Speaker 1: a lot of people would say, Look, you know, negative
25:33
Speaker 1: hearing went out of control. We had this situation where
25:37
Speaker 1: people on very modest needs had multiple properties enormous state
25:42
Speaker 1: playing this very high risk game. And meanwhile, you know
25:45
Speaker 1: we have in renting vacancy rate of one percent. What
25:48
Speaker 1: do you say to that, I.
25:51
Speaker 2: Think that's fair enough. Yeah, well, cap negative gearing or
25:54
Speaker 2: do something because it's been misused at the margins. But
25:58
Speaker 2: really what we want is tax reform that produces better
26:02
Speaker 2: productivity and economic growth, not tax refort tax changes. It's
26:07
Speaker 2: not reform tax changes that create a lot of unintended consequences.
26:11
Speaker 2: And I look at my personal situation personally, it's not
26:14
Speaker 2: really going to make much of a difference to me.
26:17
Speaker 2: But my sons that are in UNI. It's going to
26:20
Speaker 2: make a big difference to them in terms of their
26:22
Speaker 2: ability to borrow, to invest in property, their ability to
26:25
Speaker 2: build wealth in the share market, these sorts of things.
26:28
Speaker 2: So I would just look at that, you know, that
26:30
Speaker 2: sort of situation, say is this really what we want?
26:33
Speaker 2: We've got a lot of unintended consequences here and it's
26:36
Speaker 2: a really poorly thought out plan. I don't think anyone
26:40
Speaker 2: that's got a lot of wealth would suggest that they're
26:44
Speaker 2: not in the position to pay more than their fair
26:46
Speaker 2: share of tax, and that's exactly what happens, so that
26:49
Speaker 2: that's fine. But I think what we want is, you know,
26:52
Speaker 2: something that still promotes Australians to invest and build their
26:58
Speaker 2: own wealth and as a result, contribute to the overall
27:01
Speaker 2: wealth of our country as well. And I don't think
27:03
Speaker 2: this is doing it.
27:04
Speaker 1: As a lot of people have said, it's got lots
27:07
Speaker 1: of mothering of incentives. Well, don't see any incentives in
27:12
Speaker 1: there all right. Finally one from Christopher good I James
27:15
Speaker 1: says Christopher from Canberra. I all just want property in
27:19
Speaker 1: Canberra my primary residence. Like many Southern Australians, I dream
27:23
Speaker 1: of locating relocation to Queensland. If I buy another house
27:27
Speaker 1: in Queensland and that becomes my primary residence, can I
27:32
Speaker 1: retain and negatively gear my current house in the act?
27:36
Speaker 1: I have a I wonder what you're going to say.
27:38
Speaker 1: I have an answer. I think what you tell me
27:41
Speaker 1: ferret By the way, philk sorry, this is never advice.
27:45
Speaker 1: This is all information only. Particularly saw this week's well
27:48
Speaker 1: they say.
27:48
Speaker 2: If the property was acquired before budget night, then yes
27:52
Speaker 2: you can natively gear it. I guess it's going to
27:54
Speaker 2: depend on the definition of acquired when they actually draft
27:57
Speaker 2: the legislation and whether they whether it's a dean disposal
28:01
Speaker 2: or change of use. You know.
28:04
Speaker 1: See, it would seem under the wording, odd properties owned
28:09
Speaker 1: as such by on the day of the budget can
28:13
Speaker 1: still be geared, and so it would seem that a
28:17
Speaker 1: person who went to another property could go back and
28:21
Speaker 1: negatively geared air first one, which would become a whole
28:24
Speaker 1: new business in itself wanted. Yep, if it's true.
28:28
Speaker 2: Yeah, I mean we've always you know, counsel clients to
28:32
Speaker 2: use offsets instead of repay loans against the properties that
28:35
Speaker 2: might end up becoming an investment property down the track.
28:38
Speaker 2: So it's certainly something to think about in terms of
28:40
Speaker 2: future use of properties and maybe even restructure loans now.
28:44
Speaker 2: I mean you won't do it now, but wait until
28:46
Speaker 2: it becomes law. But yeah, certainly there's some planning opportunities
28:49
Speaker 2: around that already.
28:51
Speaker 1: It's kind of a reverse engineering, really, isn't it. I
28:53
Speaker 1: mean you portray home, it's a home, you know, Yeah.
28:57
Speaker 2: But it could make a I mean, there's nothing to
29:00
Speaker 2: saying that it's going to make a good investment property.
29:02
Speaker 2: I don't think by definition it is. I mean there's
29:05
Speaker 2: some homes there that won't necessarily drive a lot of
29:07
Speaker 2: capital growth. But it's certainly something you think about, and
29:10
Speaker 2: it could be a unique benefit and just another reason
29:13
Speaker 2: to retain it is if you can get some negative
29:15
Speaker 2: gearing on it.
29:17
Speaker 1: Terrific, terrific show. Thank you very much, Stuart. Great to
29:21
Speaker 1: have you on today. You really did your homework, which
29:23
Speaker 1: I do appreciate. I'm sure all your clients appreciated too.
29:26
Speaker 1: That was Stuart Williams folks of the pro Solution Group.
29:30
Speaker 1: And we will do an exercise later in the week
29:33
Speaker 1: with Liam short of us well, and we will look
29:37
Speaker 1: at all things post budget, not just property, everything and
29:41
Speaker 1: there is so much to cover so forward to that.
29:43
Speaker 1: Today's show was produced by Lias Sammaglue and please do
29:46
Speaker 1: ask the questions in those questions this morning were really good.
29:49
Speaker 1: They were very insightful, particularly can I say Christopher's who
29:53
Speaker 1: must have been reading those BUDGECT measures very closely. Okay,
29:56
Speaker 1: talk to you soon
30:00
Speaker 2: Sad the Wood the comman