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Property investing and SMSFs - The facts · The Money Puzzle

0:09
Speaker 1: Hello and welcome to the Australians Money Puzzle podcast. I'm
0:12
Speaker 1: James Kirby, the Wealth elsher at the Australian and welcome
0:15
Speaker 1: aboard everybody. Something maybe perhaps of an improved tempo for
0:20
Speaker 1: property investors this last few weeks, just a few signals,
0:23
Speaker 1: you know, better clearance rates for a start, rentals again
0:27
Speaker 1: tightening up, which is bad news for everybody except people
0:30
Speaker 1: who are owners of rental property, which are of course investors.
0:33
Speaker 1: And those figures they do seem to be tightening up
0:35
Speaker 1: again after a softness over Midsummer. Financing costs looking like
0:40
Speaker 1: they will improve going forward, so a lot of people
0:45
Speaker 1: are examining again, of course, the possibilities the structures in
0:48
Speaker 1: which they can own property and become property investors. Now
0:52
Speaker 1: there's a big debate out there all the time about
0:54
Speaker 1: whether you should use your super for owning a home
0:58
Speaker 1: or whatever. That's just sort of a general debate for everybody,
1:03
Speaker 1: and it assumes people are in big super but active investors.
1:07
Speaker 1: I mean, if you are a serious active investor then
1:10
Speaker 1: in property then there comes a point where you're going
1:12
Speaker 1: to have to assess, at the very least sales managed
1:15
Speaker 1: super fund and should you have one. If you had one,
1:18
Speaker 1: how would you approach property? There's pros and cons and
1:21
Speaker 1: I want to cover that today. The ideal person to
1:23
Speaker 1: talk to about this as someone who's across both worlds.
1:27
Speaker 1: If you like super and property regular on the show,
1:30
Speaker 1: it's Stuart Weams a pro solution. Hi Stewart, how are you.
1:33
Speaker 2: I'm really well, James. Thanks for having back on the show.
1:35
Speaker 2: Always enjoy being a guest.
1:37
Speaker 1: Great to have you on the show. I was looking
1:39
Speaker 1: at some of the work you were doing around SMSFS
1:44
Speaker 1: and you mentioned just in case our listeners don't know
1:47
Speaker 1: and they should know. Just to spell it out, folks,
1:49
Speaker 1: if you have a self managed super fund, then you
1:52
Speaker 1: can do all sorts of things that you can't do
1:54
Speaker 1: if you have a convention of super fund. And one
1:56
Speaker 1: of the more interesting parts definitely is property. Now you
2:01
Speaker 1: can have what they call direct property, which is the
2:03
Speaker 1: old fashion thing where if you own a business, for instance,
2:05
Speaker 1: your fund could own the office that you're in and
2:08
Speaker 1: then you can rent from your fund. Beautiful arrangement. I
2:11
Speaker 1: wish I had a business to do that. I don't.
2:13
Speaker 1: There was a time I could have done it. I
2:14
Speaker 1: should have. Then more commonly, you can two ways into property. Right,
2:19
Speaker 1: you can just buy a property. Now, you can just
2:21
Speaker 1: buy one for your fund. You could perhaps if you
2:24
Speaker 1: have piles of one, you could just buy one and
2:26
Speaker 1: put it in the fund. More commonly, you would get
2:28
Speaker 1: a mortgage, and you get a special mortgage and you
2:31
Speaker 1: pay a lot more than everybody else for that. And
2:34
Speaker 1: there's another way which Stewart had reminded me of, and
2:39
Speaker 1: you can co invest. You can joint venture with your
2:43
Speaker 1: own super fund and buy property. They're really intriguing, But
2:47
Speaker 1: then there's also a dangerous site here where not super
2:52
Speaker 1: promoters per se, but property promoters really push SMSF opportunities
2:58
Speaker 1: for property on the wrong people. Posture is that we
3:00
Speaker 1: want to kind of we want to put this down
3:02
Speaker 1: for us. We want to first we want to explore this,
3:04
Speaker 1: but we want to warn our listeners. First of all,
3:08
Speaker 1: what's wrong with this sort of scene. Would you explain
3:11
Speaker 1: the perennial problem of smsf's been abused basically by the
3:16
Speaker 1: worst sort of property spooker.
3:20
Speaker 2: Yeah, it's a pot of money there that property sprewkers
3:23
Speaker 2: hope to get access to to go and obviously sell property.
3:27
Speaker 2: And the big lure for people is potentially avoiding paying
3:31
Speaker 2: any capital gains tax. And we know that if we're
3:34
Speaker 2: going to invest in property and hold it for many years,
3:36
Speaker 2: hopefully ever many decades, that hopefully, if we make the
3:40
Speaker 2: right decision, we're going to crystallize a large capital gain.
3:44
Speaker 2: And so this dangling of this carrot to say, well,
3:47
Speaker 2: if you're in a self manage superfund, then you convert
3:51
Speaker 2: into pension phase, and all the members in that super
3:53
Speaker 2: fund a pension phase and the transfer balance cap you
3:57
Speaker 2: go and sell that property. You're not going to pay
3:59
Speaker 2: any capital g That sounds like a tremendous idea and
4:04
Speaker 2: I'm not totally against it. I think we just need
4:06
Speaker 2: to make a fully informed decision because there's always two
4:09
Speaker 2: sides to every coin, and so that's the benefit associated
4:13
Speaker 2: with borrowing to invest in a self managed superfund in property,
4:18
Speaker 2: but there are some negatives too, And so what I
4:20
Speaker 2: wanted to do is sit down and work out and
4:22
Speaker 2: prepare a financial analysis using an internal rate of return,
4:26
Speaker 2: which we spoke about back on the twelfth of November
4:29
Speaker 2: on this podcast.
4:30
Speaker 1: You're so organized, Stewart, November, I barely remember November.
4:34
Speaker 2: True, I barely remember the twelfth of Februar. If I'm
4:37
Speaker 2: going to be really honest, So if listeners need a refresh,
4:40
Speaker 2: they should go back and listen to that episode. So
4:42
Speaker 2: that's the positive is no capital gains tax potentially, But
4:47
Speaker 2: there are three negatives associated with investing in property inside
4:51
Speaker 2: a self managed superfund. The first one is lower gearing rate,
4:55
Speaker 2: so we can typically borrow somewhere between seventeen eighty percent,
4:59
Speaker 2: which means we need to contribute some cash into the property,
5:02
Speaker 2: whereas if we invest outside we can, and we've got
5:05
Speaker 2: equity other property, we don't actually have to put a
5:08
Speaker 2: cent of our own cash in, and that helps the
5:11
Speaker 2: internal rate of return because I'm putting less money into
5:13
Speaker 2: this asset, hopefully still achieving the same return. The big one, though, James,
5:19
Speaker 2: is much much lower negative gearing benefits. So as we know,
5:24
Speaker 2: Super pays at a flat rate of fifteen percent on
5:27
Speaker 2: all income, whereas the highest marginal tax rate outside super
5:32
Speaker 2: is forty seven percent, three times more than three times
5:35
Speaker 2: side super.
5:35
Speaker 1: Just three times, so the negative gearing is three times
5:38
Speaker 1: more attractive. Put simply, if you buy a property outside,
5:42
Speaker 1: if you invest in property as a person as an individual,
5:46
Speaker 1: as opposed to using your self manage super fun, I
5:49
Speaker 1: just want to rewind the tap just before we go
5:51
Speaker 1: too deep into it. I just want to explain to
5:53
Speaker 1: listeners who are not familiar at all, if you like,
5:56
Speaker 1: with the whole thing. So the two it seems to
5:59
Speaker 1: me still that there's two types of people who use
6:02
Speaker 1: an SMSF for property. There's the investor who is effectively
6:07
Speaker 1: Dey Factors sophisticated. By that, I mean that they have
6:12
Speaker 1: they started in an SMSF for all the right reasons.
6:15
Speaker 1: They want to be an active investor, They want to diversify,
6:19
Speaker 1: and they want to sort of exploit the opportunities that
6:21
Speaker 1: are there for self managed super funds for people who
6:25
Speaker 1: take the time and make the effort to use them.
6:29
Speaker 1: That person perhaps then has a diversification. They have shares,
6:33
Speaker 1: and they have fixed interest, and they have alternative assets,
6:38
Speaker 1: and they have this if you can imagine a pie chart, folks,
6:41
Speaker 1: and you can imagine it's split up into various segments,
6:44
Speaker 1: and there's a segment missing, which is property. Right. So
6:46
Speaker 1: they then will say, I also want to have property
6:49
Speaker 1: in the mix, and they decide in a competent fashion
6:53
Speaker 1: how they choose their property. The property is included in
6:56
Speaker 1: the super fund, and there's a long term plan. That's
6:59
Speaker 1: the ideal with the absolute wrong way is the person
7:04
Speaker 1: who never thought they'd have a self managed super fund
7:06
Speaker 1: in any event, who may not have enough money to
7:10
Speaker 1: run one in fashion that it's effective, that the fees
7:14
Speaker 1: are okay. But they were approached by someone who said,
7:20
Speaker 1: there's a great opportunity here, and you could buy this
7:23
Speaker 1: apartment in this you know, delightful apartment complex, which is
7:26
Speaker 1: one of an endless number of complexes that are being
7:29
Speaker 1: built in this area where and they were never going
7:31
Speaker 1: to make any money, but somebody will say here's your chance.
7:34
Speaker 1: And the person will say I don't have I don't
7:36
Speaker 1: have that sort of money, and the promoter of the
7:40
Speaker 1: property would say, oh you do. Actually, all you have
7:43
Speaker 1: to do is join the club, sort of join the elite.
7:46
Speaker 1: This is how they pitched this. They say, you know,
7:48
Speaker 1: you can hit the big time here. This is what
7:50
Speaker 1: wealthy people do. You start an SMSF and you buy
7:53
Speaker 1: this property. I've seen, I've saved, I'd like, I think
7:57
Speaker 1: some people from going down that avenue. So I just
8:00
Speaker 1: want to put that on the desk if you like.
8:03
Speaker 1: First of all, foreveryone to think about this is a
8:06
Speaker 1: conversation between Stuart and I, and we we're making certain
8:09
Speaker 1: assumptions and we're going to explore the opportunities for the
8:15
Speaker 1: active investor to use a self managed super fund for property.
8:19
Speaker 1: But the ground rules here are that it's part of
8:23
Speaker 1: a diversified portfolio and that you know what you're doing
8:28
Speaker 1: with your fund rather than coming into the wrong door.
8:32
Speaker 1: There's no rules against it. Isn't not the problem really?
8:35
Speaker 1: These little scandals every other day there's miserable little scandals
8:38
Speaker 1: we see all the time about people who are basically
8:41
Speaker 1: duped by property sprukerus which seems to be a uniquely
8:45
Speaker 1: Australian term by the way, sp or UI k e
8:48
Speaker 1: R s in the Macquarie dictionary. I don't know if
8:50
Speaker 1: it's in anything else, but we know what we're talking about,
8:52
Speaker 1: that sort of thing. So let's assume everyone's now clear
8:55
Speaker 1: on that and they understand what we're saying. So can
8:59
Speaker 1: I ask you very of a question. If I have
9:02
Speaker 1: an SMSF and I'm thinking of putting property into it,
9:07
Speaker 1: is there a proportion of my fund that I should
9:09
Speaker 1: portion to property? Is there? Is it? Because thinking about
9:12
Speaker 1: property is you can't buy a bit, you can't buy
9:15
Speaker 1: ten grand worth of an apartment or fifty grands worth
9:18
Speaker 1: of us buy the property or not by the property.
9:20
Speaker 1: So how do you deal with that lumpy nature of
9:23
Speaker 1: the acid?
9:25
Speaker 2: Yeah, I mean you hit the nail on the head, James.
9:27
Speaker 2: It's the difference between being sold a product and being
9:30
Speaker 2: given advice, and unfortunately a lot of people sort of
9:33
Speaker 2: confuse the two and we need to be really wary,
9:37
Speaker 2: which is kind of the reason why I did the work,
9:39
Speaker 2: because you know that saving capital gains tax sounds like
9:43
Speaker 2: a fantastic idea, and I would be dumb if I
9:46
Speaker 2: didn't investigate something like that. But just to sort of summarize,
9:50
Speaker 2: the less the lower gearing much much lower negative gearing benefits,
9:55
Speaker 2: and the higher interest rates that you're paying inside super
9:59
Speaker 2: negate one hundred per the capital gains tax saving. So
10:02
Speaker 2: actually you are no better off.
10:05
Speaker 1: They do they? You mean? On average? Yeah?
10:08
Speaker 2: On average? Yeah? Just I mean when you look at
10:10
Speaker 2: the average how an average property sort of behaves, why.
10:13
Speaker 1: Would you do it at all?
10:14
Speaker 2: Why would you do it?
10:15
Speaker 1: So you're a gett?
10:16
Speaker 2: Are you exactly right? Not for everyone? You know, I
10:20
Speaker 2: think it would suit some people, and it sort of
10:22
Speaker 2: comes it's a roundabout way to sort of answer your question, James,
10:26
Speaker 2: I would say that I wouldn't want the equity in
10:30
Speaker 2: the property, So that's the amount of cash that I'm
10:32
Speaker 2: contributing to the property to really be more than fifty
10:36
Speaker 2: percent of the superfund.
10:38
Speaker 1: Sure one property fifty percent of a fund is a
10:40
Speaker 1: high concentration, isn't it It is.
10:43
Speaker 2: Yeah, it's a very high concentration, and I would want
10:45
Speaker 2: it to be much less than that if I'm close
10:47
Speaker 2: to retirement, of course, but I'm really talking about people
10:50
Speaker 2: that have a bit of a runway through to retirement.
10:53
Speaker 2: The problem is a lot of these spookers, as we
10:56
Speaker 2: like to call them, it's targeting younger people, which means
11:01
Speaker 2: that the it'll end up putting all their super in
11:04
Speaker 2: this particular property asset, or at least most of it.
11:07
Speaker 2: And the argument might be, well, if you're in your
11:09
Speaker 2: thirties and you can't access super into your sixty you
11:12
Speaker 2: got three decades. Surely buying a property and holding it
11:15
Speaker 2: for three decades is going to work out well. And
11:18
Speaker 2: my answer would be yes, But you know why am
11:21
Speaker 2: I doing inside a self managed super fund? Because if
11:23
Speaker 2: I'm thirty, I want to have the flexibility and control
11:26
Speaker 2: of that asset and maybe even utilize the equity in
11:30
Speaker 2: that property to leverage further or to upgrade my home,
11:33
Speaker 2: do lots of different things that might happen over the
11:35
Speaker 2: next thirty years, which I can't do if it's trapped
11:38
Speaker 2: inside Super. And then the other argument might be go, well,
11:41
Speaker 2: then you're got to pay capital gains tax, and my
11:43
Speaker 2: argument would be, yeah, but I'm going to get the
11:45
Speaker 2: negative gearing benefits. I'll play a lower interest rate and
11:48
Speaker 2: I can have a higher rate of gearing outside Super,
11:51
Speaker 2: So I am against it. I guess in general terms.
11:55
Speaker 1: The only flow theoretical flaw in your approach is my SMSF.
11:59
Speaker 1: If I thought you wouldn't have any property, we don't
12:01
Speaker 1: have property trust, but it wouldn't have any direct real
12:04
Speaker 1: bricks and mortars property. Isn't that a hole in the
12:07
Speaker 1: pocket if you like.
12:09
Speaker 2: Well, I think most people would be well served by
12:11
Speaker 2: investing in both property and shares. And then so then
12:14
Speaker 2: it's just a question of ownership structure. And as a
12:16
Speaker 2: general rule, I like to have my clients hold property
12:19
Speaker 2: outside super, and if we're going to invest in shares,
12:22
Speaker 2: we tend to do that inside Super. And so I'm
12:25
Speaker 2: not saying don't go into property. I'm just saying I
12:28
Speaker 2: think a balanced approach to asset classes makes sense for
12:32
Speaker 2: most people. It's really just then about the ownership structure.
12:35
Speaker 2: And again let's return to why this is so popular today.
12:40
Speaker 2: It's really driven by people trying to sell property to
12:43
Speaker 2: people that can The only way they can afford it
12:46
Speaker 2: is if they do is do it inside their self
12:48
Speaker 2: managed super fun So.
12:49
Speaker 1: I think we take a break, but we will before
12:51
Speaker 1: we end conclude this discussion about smsfs and the opportunities
12:57
Speaker 1: and property. We will explore a hybrid if you like,
13:02
Speaker 1: which can suit some people and it means using your fund,
13:06
Speaker 1: but it also means being able to access the negative gearing.
13:09
Speaker 1: It's co investing. We'll come back to that in a moment.
13:12
Speaker 1: Very interesting. Hello, welcome back to the Australian's Money Puzzle podcast,
13:24
Speaker 1: James Kirby with Stuart Weems. Now, folks, before we put
13:29
Speaker 1: the idea of property being held inside a self man
13:33
Speaker 1: of superfund to one side, there's a very interesting arrangement
13:37
Speaker 1: you can do. It's called co investing with your super fund.
13:40
Speaker 1: I did it myself early days. My accountant had no
13:43
Speaker 1: idea what I was trying to do when I did this,
13:46
Speaker 1: but he learned and it worked. So this is Stuart,
13:50
Speaker 1: tell me if I get any of this wrong. Very simply,
13:52
Speaker 1: you have a self managed super fund and you Jack
13:56
Speaker 1: or Jill, you do a joint venture with that super
13:59
Speaker 1: fun fund to buy a property. You co own it
14:03
Speaker 1: inside a unit trust. Your super fund takes no risk
14:07
Speaker 1: on this basically, that is, it has no leverage. It
14:10
Speaker 1: simply puts in equity. Make it really simple. There's a
14:12
Speaker 1: five hundred thousand dollar apartment. The super fund puts in
14:16
Speaker 1: one hundred thousand, and you, the individual, puts in four hundred.
14:20
Speaker 1: You own four fifths. The super fund owns one fifth.
14:23
Speaker 1: This is how it works. Then you pay all the
14:25
Speaker 1: bills and you do all the borrowing cost goes to you,
14:29
Speaker 1: so you get the negative gearing. Look, I think it's
14:32
Speaker 1: pretty good. The only flaw part from trying to explain
14:35
Speaker 1: to accountants that it's legal is that it's a job
14:39
Speaker 1: that it's always that someday someone's going to have to
14:43
Speaker 1: do a deal. In other words, either you have to
14:47
Speaker 1: buy it from the fund or the fund has to
14:49
Speaker 1: buy it from you. In my case, I actually I
14:53
Speaker 1: bought out of the fund and then sold property. But
14:56
Speaker 1: explain if you were to listeners, what's this called. Is
14:59
Speaker 1: it common? Do you reckon commended? And as its best?
15:01
Speaker 1: How does it work?
15:02
Speaker 2: It's not common, you know, it's a more complex arrangement.
15:06
Speaker 2: But I guess the thing that I was thinking about
15:08
Speaker 2: why it might suit kind of where we are in
15:11
Speaker 2: the interest rate cycle is that obviously, with credit tightening
15:14
Speaker 2: that's been happening since twenty seventeen and now with much
15:18
Speaker 2: higher interest rates relative to the previous decade, the capacity,
15:23
Speaker 2: everyone's investment capacity is compressed. And so the problem with that,
15:28
Speaker 2: and that's why obviously we've seen locations like Adelaide and
15:31
Speaker 2: Perth do so well because relative value was much higher.
15:34
Speaker 2: I think that's evaporating a little bit now, but it
15:37
Speaker 2: certainly was going back a couple of years ago. And
15:39
Speaker 2: so the concern then is that people go, Okay, I'm
15:42
Speaker 2: going to go invest in property, They go and speak
15:44
Speaker 2: to their mortgage broker, they realize they can't borrow as
15:46
Speaker 2: much as they thought, and then they end up sort
15:49
Speaker 2: of compromising either on location or type of property and
15:52
Speaker 2: so forth, and in the long run there's a cost
15:54
Speaker 2: associated with that. So the way I was thinking about
15:57
Speaker 2: it was that if you were let's call it set
16:00
Speaker 2: rich income poorse so you had a lot of equity
16:02
Speaker 2: and property outside super but you didn't have the boring
16:05
Speaker 2: capacity that you desired or the cash flow that you
16:07
Speaker 2: desired to service that boring capacity. Well, this could be
16:10
Speaker 2: a good solution. And the main reason you would do
16:14
Speaker 2: it is you would implement this solution is so that
16:17
Speaker 2: you could level up on quality. You know that if
16:19
Speaker 2: you didn't, if you didn't implement a co investing strategy,
16:22
Speaker 2: that you would have to compromise on quality. And of
16:24
Speaker 2: course we wouldn't want to do that, so we would
16:26
Speaker 2: implement it. And you're right, James, you know it's not forever.
16:29
Speaker 2: You could say, well, I'm going to use some of
16:31
Speaker 2: my super and then five years down the track, when
16:34
Speaker 2: i you know, the kids are in school and my
16:37
Speaker 2: spouse is back at work or whatever it is, I'm
16:40
Speaker 2: going to buy that portion back off the super fund again.
16:43
Speaker 1: And you get evaluation basically don't you just buy it
16:46
Speaker 1: at market value? And you say, well, one fifth of
16:48
Speaker 1: that apartment is still on by the fund, so I'm
16:50
Speaker 1: going to buy out the fund and then you transfer
16:53
Speaker 1: the money into the fund. It's all entirely legit, it's
16:57
Speaker 1: but I think it's good. I think it's a lot better.
17:01
Speaker 1: There's someone who wants to get into property who can't
17:05
Speaker 1: get a deposit, so hell of a lot than people
17:08
Speaker 1: who go off and start an SMSF just to do
17:11
Speaker 1: a property. But it assumes it does assume the person
17:14
Speaker 1: already has an SMSF, doesn't the structure, and it assumes
17:17
Speaker 1: they understand how it all works.
17:21
Speaker 2: Yeah, it does. But also the other thing I like
17:23
Speaker 2: about it, James, is not permanent, like you can say, Okay, well,
17:26
Speaker 2: I'm gonna I'm going to revert back to the traditional
17:29
Speaker 2: sort of method of investing my super I'm just using
17:32
Speaker 2: this as an interim measure to sort of ride through
17:34
Speaker 2: this sort of boring capressed boring capacity situation and not
17:38
Speaker 2: compromise on the quality of the asset. But there's some
17:42
Speaker 2: complexities with it, so of course people should go off
17:44
Speaker 2: and get some good quality advice, make sure it's set
17:46
Speaker 2: up correctly, all those sorts of things. But it's one
17:49
Speaker 2: of the things that we should keep in the back
17:50
Speaker 2: of our mind that's worth at least considering for some people.
17:54
Speaker 2: As I said, the quality of your asset will determine
17:57
Speaker 2: your future returns, So quality is really important thing to focus.
18:01
Speaker 1: I don't nothing actually went wrong at any point, but
18:05
Speaker 1: is there apart from the fact that sooner or later,
18:08
Speaker 1: as I said, because all joint ventures you know, as
18:10
Speaker 1: they say, if you start a joint venture, you want
18:12
Speaker 1: to think about how it ends. But apart from that,
18:14
Speaker 1: is there any other flaw or trap that this co
18:20
Speaker 1: investing structure could create.
18:23
Speaker 2: Look, it's not ideal from a purely from a super
18:26
Speaker 2: perspective because it's investing on an on an ungeared basis,
18:30
Speaker 2: and so its returns will be the net rental income,
18:34
Speaker 2: which isn't going to be a huge in percentage huge
18:36
Speaker 2: amount percentage terms, and the future capital growth of that asset,
18:40
Speaker 2: which you know is a bit of an unknown. So
18:43
Speaker 2: I think if in isolation, if you said, should my
18:45
Speaker 2: super fun do this, you know they're probably a better
18:49
Speaker 2: alternatives investment alternatives. But if you look at it from
18:53
Speaker 2: a total portfolio level, so you know that super is
18:56
Speaker 2: one of my assets, well then I think it has merit.
18:59
Speaker 2: And the other down side is just the cost and complexity.
19:02
Speaker 2: Of course, you've got to set up a self marie
19:03
Speaker 2: super fund. If you don't have one, run it and
19:05
Speaker 2: then you've got to deal with all the transactional sort
19:07
Speaker 2: of stuff. So I'm not going to sit here and
19:10
Speaker 2: pretend it's not a super simple structure. But again it
19:16
Speaker 2: still has still could have merit for some people.
19:18
Speaker 1: Is there any resistance inside the banking system to it.
19:22
Speaker 2: Well, that's the challenge is you can't use the actual
19:25
Speaker 2: the property that you're co investing with your super fun
19:28
Speaker 2: as security. So you've got to have You've got to
19:31
Speaker 2: have equity and other property. So in your example of
19:35
Speaker 2: the individual buying four hundred thousand of a five hundred
19:38
Speaker 2: thousand dollars property, I would need to borrow that four
19:40
Speaker 2: hundred thousand dollars against my home or another investment property.
19:44
Speaker 2: That property remains ungeared, so the lender doesn't really need
19:47
Speaker 2: to worry about the arrangement so much. But you do
19:50
Speaker 2: need to have equity in existing property and make it work.
19:53
Speaker 1: Yeah, so rock bottom folks probably on your home and
19:57
Speaker 1: it wouldn't want to be already more too heavily all right,
20:02
Speaker 1: but very interesting, worth knowing, worth exploring. Okay, we have
20:05
Speaker 1: some great questions and I want to get onto them
20:07
Speaker 1: quite quickly, so we will do that right now. After
20:10
Speaker 1: the break Hello, Welcome back to the Australian's Money Pozsan podcast.
20:18
Speaker 1: I'm James Kirby with Stuart Whims of pro Solution, regular
20:20
Speaker 1: contributor of course to the Australian's Worth section. So let's
20:25
Speaker 1: go with the first question for Bob. Would you like
20:28
Speaker 1: to read that one? Stuart?
20:31
Speaker 2: Sure? Yeah, So Bob writes, my wife and I got
20:33
Speaker 2: married early last year. We are both in our forties
20:37
Speaker 2: and we both have independent businesses. My wife needs to
20:40
Speaker 2: be in the city for work and I need to
20:42
Speaker 2: be in the country. We see each other on weekends.
20:45
Speaker 2: I have a house in the country that I've lived
20:47
Speaker 2: in and owned for fifteen years, but we're looking at
20:49
Speaker 2: buying a house in the city together with the same
20:52
Speaker 2: working and living arrangements. What are the tax implications. Can
20:56
Speaker 2: my wife claim the city house as are primary residents
20:59
Speaker 2: and me can claim that my house in the country
21:01
Speaker 2: is my primary residence. I want to avoid being hit
21:05
Speaker 2: with a CGT bill on either of property properties if
21:08
Speaker 2: we sell them.
21:09
Speaker 1: Yes, it's very interesting. Remember this is not advice. This
21:12
Speaker 1: is information only for all the Bobs out there who
21:15
Speaker 1: have the complexities of living in two places. I've been
21:18
Speaker 1: intrigued to hear what the answer is. I think I
21:20
Speaker 1: know what the answer is, but I'm not sure what's
21:22
Speaker 1: the answer.
21:23
Speaker 2: The answer is James that if you have a spouse
21:26
Speaker 2: or de facto that you can only claim one main residence.
21:29
Speaker 2: But it is possible that Bob, for example, can claim
21:33
Speaker 2: fifty percent of the country house as his main residence
21:37
Speaker 2: and his spouse can claim fifty percent of the city dwelling,
21:41
Speaker 2: although that probably is an ideal, which I'll get to
21:43
Speaker 2: in a second. The other thing Bob needs to think about,
21:46
Speaker 2: so I guess the short answer is he's going to
21:48
Speaker 2: have to choose which of those assets is to enjoy
21:52
Speaker 2: the main residence exemption. The other thing he needs to
21:55
Speaker 2: think about they need to think about is land tax.
21:58
Speaker 2: Now we're not sure which date bobber is in, so
22:01
Speaker 2: that land tax is a state based tax. You'd have
22:03
Speaker 2: to check the rules, but that would be another consideration.
22:06
Speaker 2: I'd be thinking about not only capital gains tax, but
22:09
Speaker 2: if I'm not going to claim, if one of them
22:11
Speaker 2: is not going to be my main residence, I need
22:14
Speaker 2: to think about the land tax consequences as well. So
22:17
Speaker 2: I mean, if the country property had a lot of
22:19
Speaker 2: land value, for instance, maybe you want that one to
22:22
Speaker 2: be your main residence to avoid the land tax. But essentially,
22:27
Speaker 2: I think in Bob's situation, what I would try to
22:29
Speaker 2: do is pick which property you'll most likely to sell
22:32
Speaker 2: in the future. And so if I read between the lines,
22:35
Speaker 2: maybe if the wife needs to be in the city
22:38
Speaker 2: just for work, possibly they might sell that asset when
22:41
Speaker 2: the wife retires. In that case, I would claim the
22:44
Speaker 2: city property as their main residence, so that down the
22:48
Speaker 2: line when I go and sell, and I'm not going
22:50
Speaker 2: to pay any capital gains tax on the basis that
22:53
Speaker 2: maybe if you plan to reside in the country house
22:56
Speaker 2: for forever, for as long as you can, you know
22:59
Speaker 2: you're not going to pay potentially not going to pay
23:01
Speaker 2: any capital gains tax, although your state will eventually.
23:05
Speaker 1: So A key point for listeners is the primary residence
23:09
Speaker 1: doesn't have to be the one you live in the most.
23:12
Speaker 1: It's the one you for tax purposes, you just must
23:15
Speaker 1: declare one as the primary, but it doesn't have to
23:18
Speaker 1: be the one you're in six days out of seven.
23:20
Speaker 1: Is that true?
23:21
Speaker 2: You've got to be careful though that. I mean that
23:23
Speaker 2: is true from a capital gains tax perspective, but land
23:27
Speaker 2: tax can be different.
23:28
Speaker 1: And again yes, now, but the point I'm making is
23:30
Speaker 1: that the primary resident doesn't have to be the one
23:32
Speaker 1: you live in the most. No one cares about that.
23:34
Speaker 1: Is that actually accurate? It's correct? Okay, right, so keep
23:37
Speaker 1: that in mind. I hope that's useful to you, Bob,
23:40
Speaker 1: and best of look with it all. That sounds like
23:42
Speaker 1: a nice lifestyle, doesn't it. Swinging in the city. I'd
23:45
Speaker 1: like to do that, okay, Charles. I love the podcast.
23:48
Speaker 1: I have listened to every episode. Thank you, Charles. I
23:51
Speaker 1: get that sometimes and it's lovely to see. Regarding your
23:54
Speaker 1: podcast regard discussing bank of Mom and Dad long agreements.
23:58
Speaker 1: In my experience, the key reason for structuring these agreements
24:01
Speaker 1: in a commercial manner and enforcing them is to protect
24:04
Speaker 1: the funds in the event of a relationship breakdown. If
24:07
Speaker 1: the money is given as a gift, it becomes part
24:10
Speaker 1: of the couple's marital assets and maybe divided accordingly. However,
24:14
Speaker 1: if it is documented as a properly enforced loan with
24:17
Speaker 1: commercial terms, it remains a liability to other than an acid,
24:20
Speaker 1: reducing the risk of it being included in a properly settlement. Yes,
24:24
Speaker 1: thank you for spelling that out. So clearly, Charles, I
24:27
Speaker 1: suppose I got a little bit distracted on this bank
24:29
Speaker 1: of mom and dad think on the basis that even
24:32
Speaker 1: if you had a loan, you'd never enforce it. This
24:35
Speaker 1: is making the very apt point that this is really
24:40
Speaker 1: where it all comes to the crunch and these agreements,
24:42
Speaker 1: that if you had one and then the couple broke up,
24:46
Speaker 1: and let's say it broke up badly and it was
24:48
Speaker 1: a bad, messy divorce as they call it, and it
24:51
Speaker 1: was the case that there was a push by the
24:56
Speaker 1: family who had given the gift to protect that asset,
24:59
Speaker 1: then they could and mount a case to do so
25:02
Speaker 1: much more strongly if there was a long agreement. Yes,
25:05
Speaker 1: so thanks for that child. It's very I imagine, a
25:09
Speaker 1: very accurate call on the whole thing.
25:13
Speaker 2: I'll just add to that, James. One of the other
25:15
Speaker 2: approaches you could take, it's a gift with strings attached.
25:20
Speaker 1: These are also easy to talk about in theory. These
25:22
Speaker 1: are also easy to talk about the theories you sit
25:24
Speaker 1: down with your and also trying to do this.
25:26
Speaker 2: Yes, well, the downside is in this sort of gift
25:29
Speaker 2: arrange with the loan arrangement, which some of my clients
25:31
Speaker 2: have done, is that you've got to be really careful
25:34
Speaker 2: to make sure that both parties, your child and their
25:37
Speaker 2: spouse understand it is a genuine loan that maybe one
25:41
Speaker 2: day you'll call upon it, because the argument could be made, look,
25:44
Speaker 2: it's not really alone. The parents never intended to call
25:48
Speaker 2: upon it. So a better approach, a much safer approach,
25:52
Speaker 2: is to say to your child, I'm going to give
25:54
Speaker 2: you half a million dollars whatever it might be the gift,
25:58
Speaker 2: but if you are into a relationship, you must arrange
26:03
Speaker 2: a binding financial agreement. And if you're an arrangement now,
26:07
Speaker 2: if you're in a relationship now, you must do it now,
26:09
Speaker 2: and the parents can pay for it because it's expensive.
26:13
Speaker 2: But that would be then as far as I understand,
26:16
Speaker 2: a water tight way of ensuring that capital is protected,
26:20
Speaker 2: and the binding financial agreement would say exactly.
26:22
Speaker 1: That it's a property pre nup exactly right, Yep, with
26:27
Speaker 1: all the cultural complications such agreements involve. Ok, but thank
26:32
Speaker 1: you for that extra idea. It's perfectly smart. I don't
26:35
Speaker 1: know if it's any easier in real life. Stewart, Okay,
26:38
Speaker 1: what is the next one? Andrew has something to say?
26:41
Speaker 1: Do you want to read that one?
26:42
Speaker 2: Yeah? And Andrew writes a little bit overd you, but
26:45
Speaker 2: thank you for a cracker of a summer series, solid
26:48
Speaker 2: guests and great content delivered frequently. I have successfully encouraged
26:52
Speaker 2: three friends to subscribe to the podcast so that your
26:55
Speaker 2: general information can have a positive impact on their lives.
26:58
Speaker 1: How about that you like that because you were part
27:00
Speaker 1: of the summer.
27:01
Speaker 2: Soon, Andrew Smith. It sounds like a really smart guy.
27:05
Speaker 1: And thank you, Andrew. And of course I subscribe to
27:09
Speaker 1: the podcast is free folks, so don't worry about subscribing,
27:12
Speaker 1: just just listen or download. But at one point I
27:15
Speaker 1: do want to make about that I this year, that
27:18
Speaker 1: is we're now in February, during the summer break. This year,
27:22
Speaker 1: what I did was a series of outlooks of the
27:26
Speaker 1: year ahead, and of course Stewart here was part of
27:29
Speaker 1: that because he did the property outlook the previous year.
27:32
Speaker 1: I tried something entirely different, which was I did a
27:35
Speaker 1: series of what I thought was like summer ideas, so
27:38
Speaker 1: that they were less kind of hard nose finance and
27:42
Speaker 1: more what you might do with your money, how to
27:44
Speaker 1: spend it basically. So we did something on collecting wine,
27:48
Speaker 1: we did something on collecting classic cars, that was an
27:52
Speaker 1: interesting sort of exercise as well. What I'm trying to
27:55
Speaker 1: say is i'd have to know what you prefer. Let
27:58
Speaker 1: us know because it's your show and I'm wide open
28:01
Speaker 1: to your ideas. So let us know, folks in the email. Okay, now,
28:06
Speaker 1: Mark final question. If you have an investment property, then
28:09
Speaker 1: the interest payments on the investment loan or tax deductible. However,
28:13
Speaker 1: if you redraw to pay for something that is not
28:16
Speaker 1: an investment, then you can't claim that portion of the interest. True, Mark,
28:21
Speaker 1: So he says, is the reverse true for a home loan.
28:24
Speaker 1: If someone is to redraw their home loan to buy investments,
28:27
Speaker 1: can they claim that portion of the interest? Yeah, clever, Mark,
28:34
Speaker 1: And I noticed so many of our listeners think like this.
28:39
Speaker 1: They kick the ball around and say, if you can
28:40
Speaker 1: do this, can you do that? Often it would logically
28:45
Speaker 1: be so, but it's not the case. What's the story
28:47
Speaker 1: with Mark's proposal? Yes?
28:50
Speaker 2: So, Mark's asking if he read drew a certain amount
28:54
Speaker 2: at if he's homelan, so he's non tax reductible home
28:56
Speaker 2: loan and say invested in a ATFS, would that portion
29:01
Speaker 2: of the loan that attracts interests? Would that interest be
29:04
Speaker 2: tax deductible, and the answer is yes.
29:06
Speaker 1: But all of the tax implications would also be portioned
29:09
Speaker 1: to abortion portion, right, that's the I want to make
29:12
Speaker 1: that clear.
29:12
Speaker 2: So the one hundred thousand that attracts an interest, if
29:15
Speaker 2: it's six percent, six thousand dollars a year, six thousand
29:18
Speaker 2: will be tax deductible. The rest of the interest, of
29:20
Speaker 2: course in that loan will be not tax deductible. But
29:24
Speaker 2: it's a really good question because what Mark and all
29:26
Speaker 2: the listeners need to understand is that if you go
29:30
Speaker 2: to make a repayment against the loan that has mixed
29:34
Speaker 2: purposes in it. So in mark situation, some investment and
29:37
Speaker 2: some home you must apportion the repayment proportionately across those purposes.
29:44
Speaker 2: So then of course Mark's going to go to want
29:46
Speaker 2: to repay his home loan, but he can't do that.
29:49
Speaker 2: He's got to repay, you know, a portion of the
29:51
Speaker 2: one hundred thousand used for ETFs, and then a portion
29:54
Speaker 2: goes to the rest of the home loan. And that's
29:56
Speaker 2: why you must must never ever mix purposes in a loan.
29:59
Speaker 2: So so if you have a deductible and non deductible
30:04
Speaker 2: and even from investment perspective, because you lose the flexibility
30:08
Speaker 2: to choose which part of the loan you want to
30:11
Speaker 2: or you're able to repay.
30:12
Speaker 1: And to put it very simply, doesn't he dilute the
30:15
Speaker 1: capital against tax exemption that was there all the time
30:18
Speaker 1: on the will as well? I wan't that hit him
30:20
Speaker 1: in the long term. The dea goes to sell the house,
30:21
Speaker 1: this little exercise on the side will come back to
30:24
Speaker 1: buy it, won't it.
30:25
Speaker 2: No, it won't change the main residence exemption because the
30:28
Speaker 2: actual asset doesn't change. And you can borrow against a
30:31
Speaker 2: home for investment purposes. That's not going to That's fine,
30:34
Speaker 2: that's fine. It's really just about the ability to repay. Now,
30:39
Speaker 2: what most banks can do is later to split out
30:41
Speaker 2: a loan so he can approach his bank. If he's
30:43
Speaker 2: got one hundred thousand of redraw, he could split that
30:45
Speaker 2: into two accounts, and that's relatively easy to do for
30:48
Speaker 2: most banks, and so you don't need to refinance or
30:51
Speaker 2: muck around or do anything like that. That would be
30:53
Speaker 2: a much cleaner way of doing something like that. But
30:56
Speaker 2: absolutely you can use you can use that equity in
30:59
Speaker 2: your home to invest.
31:02
Speaker 1: I suppose the problem for Marker and all the marks
31:04
Speaker 1: out there is you don't know, you know, when you
31:06
Speaker 1: take out the mortgage at the start, you don't know
31:08
Speaker 1: whether you're going to what how much you're going to
31:11
Speaker 1: happen to play with. You might be supposed you heard
31:13
Speaker 1: Annie and so a split loan, he'd have to make
31:16
Speaker 1: the decision. Cool if you like, that's what the split is.
31:20
Speaker 1: When he doesn't really know what the split will be.
31:23
Speaker 2: No, so you can only do it sort of down
31:25
Speaker 2: the track or at the time when you want to
31:27
Speaker 2: make those investments. And the other complication is, you know,
31:30
Speaker 2: you've got to speak to your registered tax agent about
31:33
Speaker 2: these things. Not all mortgage brokers and particularly bankers will
31:37
Speaker 2: know about this. Most bankers go, oh, yeah, that's fine,
31:39
Speaker 2: that's tax seductible. But don't take tax advice from a
31:42
Speaker 2: mortgage broker or a banker. So you need to take
31:45
Speaker 2: it from a registered tax agent. But it's a really
31:47
Speaker 2: great question because understanding kind of the how loans and
31:53
Speaker 2: tax operate together a critical I mean, you know, you
31:56
Speaker 2: don't want to compromise a tax reduction, of course, and
32:00
Speaker 2: so making sure you set it up in the correct way.
32:02
Speaker 2: He's going to make sure that you're going to benefit.
32:05
Speaker 1: From that very good. There were a great batch of
32:08
Speaker 1: questions really terrific. Thanks everybody, and thanks Stewart for coming
32:12
Speaker 1: on the show today. Good to have you, Stewart, Thanks
32:15
Speaker 1: very much.
32:15
Speaker 2: They were great questions, Yeah they.
32:17
Speaker 1: Weren't they all right, keep them rolling, folks. You know
32:19
Speaker 1: the email address the money puzzle at the Australian dot
32:23
Speaker 1: com dot au. Today's show was produced as always by
32:26
Speaker 1: Leah Samuel Glue. What you've seen