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The Tax Strategies Smart Investors Are Using Post-Budget | Property Experts · The Follio Property Podcast

0:00
Treasurer Jim Chalmers and Finance Minister Katie Gallaher say the federal budget will have more new savings measures than new spending.
0:08
There's no winners, but there are definitely those that are affected more than others.
0:12
They haven't really attacked that part of the market at all.
0:16
They've really hurt the battling Australian next generation wealth.
0:19
It turns out with some of the ATO data, there's circa 70% of the negative gearing claims are individuals that have one negatively geared asset.
0:28
And then of that 70%, two thirds of those have taxable income of $80,000 or...
0:35
There's opportunities.
0:36
There just seems to be more cracks and more loopholes, and therefore the more sophisticated investors that get good advice will probably take advantage of it.
0:44
We should be banding together to explore how we can reduce tax, and that's your job, Nathan.
0:48
That's why I'm on the phone to you every day.
0:50
Is there any winners in this change from a tax perspective?
0:57
You're listening to the Folio Property Podcast.
1:00
I'm Rhys Biddle and I'm here each week with my co-host, Lachlan Delhanty.
1:04
Returning guest, Lachlan.
1:06
Haven't seen this guest for about 12 months, but we've been wanting to get him back probably since mid-May.
1:10
I see him pretty much every week, Rhys.
1:13
Particularly post-budget, trying to work out where we can and can't bend the rules.
1:17
Great Kerry Packer once said, Rhys, if you're not trying to manipulate and save on tax,
1:24
What are you doing?
1:25
And there's no better man to have in the building than Nathan Hood to try and save as much tax as we can, because the government are doing everything they can to take it all from us, Nathan.
1:36
So what's your take post-budget now in terms of, has it surprised you?
1:42
Has the dust settled, or where are we at?
1:45
I wouldn't say the dust has settled and I wouldn't have had a meeting this year with a client where there wasn't a large conversation, mostly negative, about the budget.
1:56
I think it caught everybody a bit by surprise.
1:58
Obviously, they've tried this once before and lost the unlosable election.
2:04
And so this time just lied about it and then changed the rules anyway.
2:07
So...
2:09
We'll see how things keep playing out, but right now it is thrown the business world and the investing world a little bit into chaos until we figure out what this all means.
2:18
But as an accountant, you'd be busier than ever because it's just made it extremely complicated for everyone.
2:23
So people need to pay for advice, right?
2:25
So I'm sure you're- And it's not too dissimilar to what happened to the financial planning sector.
2:30
Obviously, there was less financial planners and they made the cost of advice more expensive.
2:36
which just meant that only the people with more money could afford the good advice.
2:41
And that could be a problem we're seeing for the accounting side.
2:45
It makes it harder for the mum and dad investor to get ahead.
2:49
They're going to have to pay for advice.
2:52
And I think there's been a lot of accidental investors, those that have potentially fluked the market, because investing pre-budget was relatively simple.
2:58
But now with all the structuring to try to get, maximise your negative gearing, to try and,
3:04
increase your cash flow, where you can get debt, do you invest through a company, do you invest in your personal name?
3:09
So it's helping Superfund has been taken off the table, but speaking with you, it hasn't.
3:14
There's opportunities.
3:15
There just seems to be more cracks and more loopholes and therefore the more sophisticated investors that get good advice will probably take advantage of it and those that potentially won't go there will probably fall behind.
3:28
Yeah, definitely.
3:29
And I think you risk, without the right advice, you risk falling into the trap of, you know, the budget has said, we're going to give negative gearing and we're going to give the 50% discounts to effectively, you know, your house and land packages or newly built.
3:45
dwelling but mum and dad investors can't do a development on their own.
3:49
So they're just buying already maximised stock.
3:53
So they're either buying the outskirts, which we all know is not your market, or they're buying apartments, which, again, if you're buying an apartment because you can get negative gearing, the next buyer off you won't get that.
4:05
So what's going to happen to those markets?
4:06
And if you don't have the advice and you end up buying that stock, you'll likely end up with negative equity or very poor performance.
4:14
Who's the, like, obviously there's a lot of losers in this scenario.
4:17
You've mentioned you didn't really have many positive things to come off the back of the budget.
4:21
Is there any winners in this change from a tax perspective?
4:25
There's no winners, but there are definitely those that are affected more than others.
4:31
And unfortunately, it's not the rich that they're waving the flag over.
4:35
So the rich can do developments.
4:36
The rich don't sell.
4:38
The rich don't typically have debt.
4:39
And if they do, their LVRs are low.
4:41
So properties are positively geared or at least neutral.
4:44
So they haven't really attacked that part of the market at all.
4:48
They've really hurt the battling Australian next generation wealth.
4:54
So my first piece of wealth came from property.
4:57
I bought a property.
4:57
I got some negative gearing.
4:59
I stretched as far as I could to get my first one.
5:02
I rented that out before I could live in it.
5:03
Like all of those strategies to slowly get your first bit of wealth.
5:08
is typically property related because you can borrow with your 5% lens or 5% deposits, you can borrow 19 times your deposit.
5:17
You can't do that with any other asset.
5:19
So you can get exposure to build your wealth and that generation just can't anymore.
5:25
What about, is there a lot of misconceptions at the moment regarding some of these policies and who it's going to target the most in terms of a cohort of clients or potentially an investment level?
5:37
Is there any misconceptions out there post-budget that you've seen you've gone, that ain't correct?
5:41
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5:41
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6:00
There's a few.
6:02
So like one is obviously the waving of the flag around, you know, the wealthy property moguls.
6:06
We don't want to put a stop to all their tax perks.
6:10
The reality is those with a lot of properties, you can offset the positively gearing with the negative gearing.
6:15
So they're going to be fine or they're not going to have the debt levels.
6:19
But I was taking a bit of a, you know, a stab in the dark because the data I see from my client base is most people really only have one.
6:26
property or at best two.
6:28
And so I did some searching and it turns out with some of the ATO data, there's circa 70% of the negative gearing claims are individuals that have one negatively geared asset.
6:39
So that's a large percentage of the negative gearing in terms of volume of properties.
6:45
And then of that 70%, two thirds of those have taxable income of $80,000 or less.
6:52
So that's a large percentage of people that are not...
6:57
heavily wealthy or property moms.
6:57
That's your typical mum and dad.
6:59
That is the Australian.
7:02
Having a go.
7:02
That's a tradie.
7:03
That's someone out there just trying to get ahead in life, not on huge incomes and using property potentially as that vehicle to set up their retirement.
7:14
Correct.
7:14
So, I mean, like I said, you can only leverage against certain assets.
7:18
And you don't want to leverage hard against shares because it's volatile.
7:21
And share lending with margin loans can be high risk and you don't really want, especially your first investments, to be that kind of risk environment.
7:28
Talk us through that because-
7:29
The conversation around property versus shares goes on forever and any financial planner will be pro-shares because that's how they get paid and anyone who's involved in property will be pro-property because that's how they get paid.
7:40
So everyone's got self-interest, but as an independent, you're an accountant, talk me through the differences there, particularly around lending, because I always talk about property is a debt game, purely a debt game, where others, a financial planner will get up and I've had an argument many times to say, but you can buy shares in debt, Lachlan.
7:57
It's like, well, you don't, you idiot.
7:59
So talk me through what you do, but it's very risky.
8:02
It's very risky.
8:03
So the best way to put it is if you were just a cash player, then you would probably default to shares all the time.
8:13
So shares have no cost.
8:15
You just get a dividend.
8:17
The dividend typically comes with franking credits.
8:20
So the real yields that you get from a regular dividend, from a good blue chip, talking bank shares and the like, is probably around 7%, 8%.
8:29
And what's a yield for?
8:30
Whereas yield with property is probably netting around 2.5% because from your rent, you have to pay your upkeep of the house, you have to pay your rates and maintenance and all sorts.
8:40
So for those listening, the yield is what dividends I get on an annual basis from the property.
8:46
So if I've got a million dollar asset, be that in shares or property, you're telling me property is going to pay me about $23,000 a year in dividends versus shares can pay you up to $60,000 or $70,000.
8:57
$70,000.
8:58
So on a cash return, if it's a million dollars cash in shares and a million dollars cash in property, shares outperforms that argument.
9:05
From a cash yield perspective.
9:07
And then the growth piece, shares will typically have a more consistent growth.
9:13
Again, assuming good companies, they grow slowly over time.
9:16
Residential property typically goes through windows, like we've noticed here in WA, where all of the growth happens in five years and then it kind of stagnates for a little bit.
9:25
Over the longer term, they probably net out to be much of a muchness, but that's assuming no gearing equation in there.
9:33
Whereas with property, you typically don't see people buying properties for cash.
9:39
They have a gearing strategy to get the superior yields out of it.
9:43
And that is using, like you said before, the example of a 19 times your deposit, or for most investors, at least sort of 15, 16 times their deposit when you can gear up to 80, 90, 95% for investment properties.
9:57
So that's the conversation, right?
9:59
If I've got $100,000 in property, that $100,000, I can buy a million dollar property and call it...
10:06
10% growth over the next year, I've just made $100,000.
10:08
Just doubled my money.
10:09
Yeah, I've had 100% return on my cash.
10:11
Where in shares, if I put $100,000 into the market and it goes up by 10%, well, I've only made $10,000.
10:20
So that's the difference, right?
10:22
And that's the raw gearing uplift.
10:24
Yep.
10:24
And the negative gearing piece to it is that I'm losing money because out of my, to go back to your previous example, out of the $23,000 net rent that I receive,
10:34
I've now got debt on a million dollars and I'm having to service that debt with my $23,000, which doesn't go a long way.
10:42
And that's the negative impact to the property space.
10:45
The cynical financial planner says, well, you can gear against shares, would say, well, there's no reason why you couldn't gear up to get blue chip shares.
10:53
But margin call is an interesting conversation and people probably don't understand.
10:57
It's talking about-
10:58
Yeah, correct.
10:59
So unlike the property sector, so you get your loan with the bank and you're making your repayments, the banks will never look at you again as long as you're ticking along and making your payments.
11:07
And if anything, the banks will try to support you.
11:09
We've seen that through COVID when there could have been some margin calling.
11:12
They said, hey, you're in financial distress.
11:15
Don't worry.
11:15
We're going to give you a six-month, 12-month, 18-month interest-free period because we don't want a wave of people selling their properties and pretty much-
11:24
Flatlining the markets.
11:25
It would, yeah.
11:25
It would likely collapse the banking sector because the dominoes would start to fall if they had to value everybody's house and then margin call all the loans that are down.
11:35
Whereas the share market gets published every day.
11:38
So they know exactly what the share price is and by default the LVRs that are available per share.
11:44
So if you drop below your margin call limits, you get a knock on the door, I think you've got five days to rectify, or they will sell down for you enough of the shares to pay the loan back to its appropriate margin, which causes forced selling, which triggers more margin calls, and the effective result is that you end up losing most of your asset pool, and the share market tanks, which has...
12:09
significant flow-ons.
12:11
So that's where the best strategies are typically a combination of property and shares where you can leverage the property, even though those funds might be getting invested into the share market because then they don't revalue the margin calls because the loan's tied to the house.
12:26
Given we're talking about alternative asset classes or alternative strategies, you know, post the standard residential investing, I've got a two-part here, right?
12:36
I want Nathan to answer me first and then Lockhart to follow up with Nathan's answer.
12:40
But where do you see, so given the changes off the back of the budget, where do you see the actual opportunities from a finance side of things for investors in this current market?
12:49
In the property sector?
12:51
Correct.
12:52
So I think what we've seen is the complete changes to the capital gains environment.
12:58
Now, it's not – I wouldn't say it's the worst change in the residential space because typically holders are holding for five-year-plus periods.
13:06
But the loss of the 50% discount is going to mean people will look for other lucrative –
13:13
CGT environments.
13:14
So super is definitely one, but they've changed the borrowing rules on residential property.
13:20
Companies are a different strategy where you get a lower tax rate, but no capital gains benefits.
13:25
And the biggest one's the main residence exemptions.
13:29
So there's going to be a bias towards those three categories.
13:31
So fixing on the main residence side,
13:35
In the past, you'd buy your house and then you'd buy purpose investment properties and you try to leverage those and add value and then sell them knowing that your tax result is only half as bad as what your regular income would be.
13:47
Whereas now we think there's going to be a push towards moving your family around.
13:53
to claim the main residence exemption more frequently to get tax-free gains.
13:59
And that's probably going to be more aligned to your subdivide and retain style investments where you might buy a house, renovate it, chop off the back block, sell the front house after it's been your main residence while you're building the back one and then move into that and that becomes your next main residence and you start to make your capital gains that way.
14:19
We think those alternate strategies will start to play a big part.
14:22
And Lachlan, where do you see these alternate strategies making sense for an investor?
14:27
So from the example there that Nathan's just said, is that going to work for every investor across Australia or is it going to be separate markets that are going to perform better?
14:34
It's a very active strategy and one that personally I like because you're creating wealth through development and you pay no tax.
14:41
So what's not to like about that as a strategy?
14:44
Where we're fortunate with a lot of the listeners to this podcast and our clients, is they've typically got a portfolio of some description at the moment.
14:52
So they may have a primary place of residence already.
14:54
They may have one or two, sometimes 10 investment properties.
14:58
So working with Nathan and a really good broker, we can restructure the portfolio and
15:03
and every portfolio is different, Nathan, obviously, I'm on the phone to you with me all the time.
15:08
Where can we maximise what we've got in terms of gearing up on the properties that we had post-budget to be able to make sure that we maximise the negative gearing on them and then looking to deploy that capital in a lower LVR environment on the new purchases that will likely be neutrally geared if I'm buying them at 60 or 70%.
15:29
So it's just playing with the chips that we've got currently in our portfolio and saying, okay, what can we refinance to increase the debt levels on those that already have negative gear exposure pre-budget and use those funds to potentially
15:44
reduce the gearing on the next purchases.
15:47
And there's different forms of that.
15:49
One that I'm seeing at the moment, your primary place of residence, speaking with clients now, is okay, well that was pre-budget.
15:54
So that could make for a very effective investment property through negative gearing and or capital gains.
16:02
So if you're looking to upgrade,
16:04
It could be a fantastic dime where you can upgrade, create that as your investment property, still get the pre-budget benefits, and then go into a tax-free environment with your private place of residence.
16:12
So it's just looking at the portfolio.
16:15
And like I said at the start, we should be trying to save tax.
16:20
Excuse my French, but this government.
16:22
Can you bleep that out?
16:24
Seriously, we should be banding together to explore how we can reduce tax, and that's your job, Nathan.
16:30
That's why I'm on the phone to you every day trying to spitball different strategies, and there's a few simmer in the background, which I hope – I don't want to talk about it too much on the podcast because you don't know who's listening.
16:40
And we'll find – the devil will be in the detail, and you talk to me all the time.
16:44
Everything I send to you, you're like, yes, that would work in theory based on the information we have today, but if they do –
16:50
It depends how it's written when it comes out as to- And how long has that taken?
16:54
I know I get so frustrated.
16:56
I know you do.
16:59
These will start to come out and there's the governing bodies of the accounting profession.
17:03
They're trying to get in there and make sure that there is-
17:07
clean as possible so we can decipher them and they're not too vague.
17:12
But to your point before, I think you're exactly right.
17:14
So we've gone through a window of time where the debt strategy was about rinsing through your non-deductible debt and converting it to deductible debt.
17:25
So pretty vanilla, not a lot to it.
17:28
There was some really easy strategies that you could...
17:32
implement, but once you didn't have any non-deductible debt, you were in the clear.
17:37
It didn't matter where you borrowed money from to do your next investment.
17:40
It all kind of washed out.
17:41
So a good example of that, just so the listeners are going, what's deductible, what's not?
17:45
Typically, what we'd want to see is your prime place of residence, you don't get any deductible debt because it's your home.
17:52
So we would like to see history, say there's low debt on that.
17:55
And if I had an investment property, we'd probably want to see high gearing because we could activate the negative gearing.
18:00
So that was a simple strategy.
18:01
Yeah.
18:02
How wrong people got that, I'd often do a portfolio review and they'd add a heap of debt on their home and they'd almost paid off their prime place of residence, didn't make a lot of sense.
18:09
And I still see that at one the other day and I'm like, you've got a great opportunity, why don't we gear up your investment property because it was pre-budget and you're gonna get the gearing benefit.
18:17
And you're like, oh, didn't think of that.
18:18
And we still see that as well.
18:20
Unfortunately, it's not a topic at school that we get taught, which again, these are things that we're going to have to start playing around more with.
18:27
And now we're going to have a more complex environment where there's going to be different buckets of deductible debt and more long-term strategy planning, which might be, okay, well, we are buying the million-dollar investment property, but if we had a million dollars worth of debt,
18:43
it's not going to be positively geared and we're going to waste all that negative gearing, but we might still borrow a million dollars and then offset a portion of it because we've managed to get other debt in some business refinances or off a share portfolio that we can move around and trigger some gains or some losses and reset the cost base.
19:04
And then over time, if we crystallise that original million dollars on the investment property, over the next 10 years, the rent yield may come up to make that a million dollars
19:13
still positively geared or neutral, and we've got that full debt level there to make the next properties viable, we can start tapping into that debt.
19:21
So now it's not just a today debt strategy, it's, well, what are we doing over the next 10, 15 years?
19:26
What does the debt need to look like day one?
19:29
And how can we preserve that debt for as long as possible while getting all of the benefits along the way on the different investment classes we're in?
19:37
So it's a much more complex long-term solution because you can't just refinance something
19:42
and create new debt for an old asset, you need to create that debt from day one.
19:47
So a lot of strategic planning, right?
19:48
So the days are going to just go in on a Saturday and buy something at the whim and trying to sort it out later.
19:53
It's preparation in the structure you're going to purchase, preparation in the debt strategy.
19:58
The debt strategy is a whole new piece that we've never had to deal with before because the original one was quite vanilla and you could fix it retrospectively or over time, whereas this one, you've kind of got once off.
20:08
Yeah.
20:08
Let's talk about company structures.
20:10
That's probably one of the big things to come out of the budget with, especially around the trust lending as well and the restrictions that were applied.
20:18
What are you seeing post-budget with your clients that are looking to get into company structures?
20:23
And the other question, I guess, to that is, is that the best advice for everyone?
20:26
Are you seeing people coming to you, hearing the budget, saying, I want to change the structure, but they're actually not in the right position to be doing something like that?
20:33
It's still not clear what suits who.
20:36
The benefit of time that we had before was that there was a set of rules that were in place for a long period so we could see what worked, what didn't work with real life examples and seeing them play out.
20:48
Right now, we're dealing with hypotheticals, if you like.
20:51
So a business owner that can stream profits into a holding company is definitely going to be better off buying an asset in the company using that portfolio.
21:01
reduce tax on initial capital because if they're paying 25 cents or 30 cents from their current profits instead of 46 and a half, they're already 15 to 20% in front.
21:13
Whereas if you don't have the opportunity to put money into a company, then you're only dealing with future gains.
21:20
So you
21:24
that same person couldn't buy an asset in a trust because they wouldn't get the negative gearing.
21:29
So now it may just be better that they hold it in a trust, whereas they couldn't before.
21:33
So depending on the person, they might have lifted to a different level, but it's not the same level that someone else might be using because their personal circumstances are far different.
21:42
So now it is a much more complex if this than that.
21:46
Yeah.
21:47
It sounds like, from what you've said there, you need, like, people...
21:51
It's way more complex now.
21:52
So it is having a team around you to have that conversation.
21:54
I think the challenge you're seeing, and I don't know if there's... We looked at the data from the ABS recently where it showed all the new companies that had started.
22:04
I think that's where Albo was coming out and saying, you know, there's been a rise in new businesses.
22:08
But when we looked at the data, it was just a significant rise with those with zero employees.
22:13
So looking, you know, from a...
22:15
Out of the lens, it's looking like people are setting up company structures potentially from an investment standpoint.
22:22
There would be, so even from our client base, there's going to be a big push of company setups for multiple reasons.
22:29
One, people will start investing in companies.
22:32
A negative outcome of all of this is obviously they put the capital gains changes in, but there's a lot of investments that don't have much of a cost base.
22:40
So the spec share market, there might be a 5 cent company or a 10 cent company.
22:45
and you're hoping that it hits gold or it hits iron ore and it goes to $1 or goes to $2, indexation is never going to give you any benefit.
22:53
$0.05 is going to be indexed to maybe $0.06 over a period of time.
22:57
$0.06 isn't a cost base against a couple of bucks.
23:00
So you're just going to buy those in companies.
23:04
People that play around with the speculative share market, they are probably setting up companies already to do that.
23:11
And then you've got businesses that operate out of trusts.
23:15
They would be going through a process to roll their existing business into a company.
23:19
And then you've got good profitable businesses that have streamed or plan on streaming profits into a holding company.
23:26
All of that's going to change under the current proposal, so they might be doing that in advance.
23:30
to load up a bucket or a holding company with all of their retained profits so that that's crystallised and done and it's out of the risk of the company environment.
23:39
So there's lots of reasons why, but they're all company related because if you're setting up a business now, no one would be setting it up in a trust because we know that there's negatives in the trust world.
23:52
One thing you spoke about there is indexation, and this is gonna play a huge part, and it's gonna affect the holding periods of how long you wanna hold on a property, right?
24:00
Like the golden day is, you buy a property for a million bucks, hold it for 12 months, you're gonna get 50% capital gains discount off that straight away.
24:07
So if I buy a property for a million bucks, sell it a year later for 1.2,
24:12
$100,000 of that gain is in my pocket tax-free.
24:15
That was the old rules.
24:16
Problem with that now with indexation, talk about that exact same scenario and how it's not going to make sense to flip properties and probably an intended consequence of the government to stop people going and buying and selling is around this indexation introduction.
24:30
Yeah, correct.
24:31
So the original modelling that the Labor government actually brought out showed that over the 10-year horizon, indexation and the 50% discount washed out to be almost a negligible difference.
24:45
So I think over the long-term horizon, holding property, both models kind of deliver similar results.
24:52
But over 12 months, they're miles apart.
24:54
If you get a really good uplift in gains- Yeah, let's use that example now.
24:57
So that $200,000 gain of which you're going to get $100,000 tax-free, the other $100,000 is going to go into your taxable income.
25:04
Call that-
25:05
35%, you're going to get taxed on that.
25:08
So you're going to get 75 of the $200,000 game, you're going to receive $175,000 of that income and you're going to give 35K of that to the government.
25:16
What would it look like now in indexation?
25:18
So with indexation, they'll publish the indexed rate per year based on inflationary numbers and et cetera.
25:24
So let's call that in a strong environment, that's going to be at most maybe 5%.
25:30
So in that same year, your cost base will go up by 5%.
25:33
But realistically, the RBA are trying to get it in a target range of 2% to 3%.
25:36
So let's call it 4%.
25:38
Yep.
25:40
So then your cost base is going to go from $1 million to $1,040,000, and then the balance, that $160,000, you're going to get taxed on that.
25:48
At that 35%.
25:48
So we're talking, what's 35% on $140,000?
25:50
Well, you're basically paying another $23,000 on top of the 35% that you were paid.
26:01
So you're almost paying, losing double, almost double to the tax man in that scenario there.
26:07
While we're on that topic, the big one that I'm seeing a lot of articles about recently, and I saw one today, I think it was like two and a half million properties or something out there where people are going to need to be getting valuations done on these properties before-
26:20
they start looking into the new rules.
26:22
If you've had advice or what sort of feedback have you had from the government around when that needs to get done?
26:26
Because there's a lot of valuations that are going to need to get done in a very short space of time.
26:32
Yeah, so historically there's been no feedback on what the rules are going to be for this round.
26:36
But historically you just need evaluation done as at that moment in time.
26:42
So whether it's done on the date or whether it's done retrospectively five years from now, that's always been acceptable.
26:49
You can't do anything prior, obviously, because you're not going to be able to give forward predictions on house prices.
26:53
Correct.
26:53
So you're stuck on either of those.
26:55
So that's always been the case because, you know, in a main residence journey, you might have the house as your main residence.
27:01
You might then rent it out.
27:02
You might have intended to move back into it, but you never did.
27:05
You ended up selling it as an investment.
27:06
You have to get a retrospective valuation at that date.
27:10
So I would assume those rules will be exactly the same.
27:19
You know, if the advice coming from the accountant, which wouldn't be unlikely, is to get two or three valuations because you really want that number as high as possible.
27:26
It's important, right?
27:27
You want that number to be as high as possible.
27:29
And I think that's where people just think, you know, probably misunderstand why.
27:34
You want to explain as to why?
27:35
And that's what's going to pay to have...
27:37
two or three opinions and even it costs you a little bit more, it might cost you an extra three, four, five hundred bucks to get multiple, it's going to value off very handsomely in the thousands and potentially tens if not hundreds of thousands depending on that valuation figure.
27:50
Yeah, spot on.
27:50
So if you bought a property for a million bucks and you get a few valuations and one's at 1.5 and the other is at 1.3 or 1.4, the important bit is that the 1.5 not only locks in your 50% discount gain, but,
28:06
but it also starts your indexation number.
28:09
So now you've got a higher cost base that then gets indexed, and the amount that gets indexed is tax-free too.
28:16
So you've locked in your 250K, 50% of the gain saving, and then all the indexing that comes from the 1.5 onwards is also a tax saving.
28:26
So it is really critical that you get that number as high as possible
28:30
It'll be in the tens of thousands, and in some examples, hundreds of thousands of dollars difference based on that valuation.
28:35
So the desktop VAL world won't apply to this, and I think it's going to put a lot of values under a lot of pressure.
28:43
It will.
28:43
If you've done a lot of work to your house, the desktop's not going to see any of that.
28:46
So you're going to want to make sure that you get the right valuer in to value what it looks like and what it actually is.
28:51
Well, you know, you're a qualified valuer.
28:53
It was a previous life for you as well.
28:56
How hard is it going to be for these valuers?
28:58
You mentioned there, Nathan, that, you know, looking at the current model, they could potentially go back five years to do a valuation.
29:05
How realistic is that getting an accurate valuation six, 12 months down the track from the cutoff time?
29:11
Retrospective valuations are difficult, particularly if you're looking to get a higher valuation because what you can't take into consideration is the volatility in the market.
29:21
And in the time, if a valuation is done and you are pushing for a higher figure, you can justify that in the comments that there's been some big transactions, feedback from the agents.
29:30
You can't do that in retrospect because you can't call back an agent in that moment of time to justify in your comments as to why it's higher.
29:38
doing in my personal portfolio to try to get a valuation at or very shortly after that period if I'm pushing for a higher value because I can use sentiment at that time to justify a potential higher figure.
29:51
Whereas you're looking back in three years, me trying to tell you what the market was doing in February 2023, very hard if that's called upon from the ATO to justify how you could argue that sentiment was high when it was three years old.
30:05
So, yeah.
30:07
It's going to be another unintended expense or intended expense from the government, again, that goes to the consumer.
30:14
Look at the fees now.
30:16
You've got investors that now have to pay for more for accounting advice.
30:19
Nate's happy to be about that.
30:21
Probably going to need financial planning advice now.
30:23
The broker's going to get a workout.
30:25
We know brokers are pushing for fee for service.
30:27
They've got to go see a property professional without a doubt to help manage their portfolio.
30:31
And now they've got to get a value on board.
30:32
It's just like at a time when people are trying to save money, the government's making spend more.
30:37
I'll stop ragging on this government, but it's ridiculous.
30:40
There's a lot more going on, and probably to your point, there's the valuations and the sentiment at the time.
30:47
The only time I see that having any kind of positive value
30:50
By doing a future valuation where you're looking back is if something was to occur and the Labor got knocked out in the next election and all of this got reversed, and then when you do the valuation, there's a window where there wasn't a lot of transactions and you've got transactions before the date, transactions after the date, or supporting a higher figure.
31:11
Those retrospective ones could forget the sentiment of the time if it was negative.
31:17
and have it more as a flat line.
31:18
But again, you won't know any of these until too late.
31:21
So to summarise that, if it's a rising market condition, retrospective might work better.
31:25
If it's falling, get it on the day because something's going to get worse.
31:28
Yeah, that makes sense.
31:30
SMSFs was another big one, probably post the initial budget, but definitely throwing that curveball probably four weeks ago, five weeks ago now.
31:40
What have you seen within your business from SMSFs?
31:43
Were you...
31:44
inundated with these in the lead up or it was probably too late for a lot of those clients that were reaching out.
31:49
And do you see this?
31:51
This is the one, I was actually having a chat with an economist, pretty senior economist in the industry.
31:55
And this one was, he was pretty bullish on wouldn't, they'd reverse this decision within the next 12 months out of all the changes that had been there.
32:03
What's your opinion on that market as well?
32:05
And have you seen anything change amongst your business?
32:07
Yeah.
32:07
So the self-managed market has historically not been a resi-orientated market.
32:14
Leverage has always happened for commercial.
32:15
The rule of thumb was superannuation should be high-yielding assets.
32:20
And so you would stick with your good blue chip shares.
32:22
You would stick with commercial property because it gets a better yield.
32:25
And when the budget came out, there was an instant shift.
32:28
So we're losing capital gains.
32:30
All of the other environments are rubbish outside.
32:32
We're just going to use super for everything that's capital gains.
32:37
accretive.
32:38
Because it's a great tax environment.
32:40
Overnight, there was a complete shift.
32:42
We should be buying these in super, even spec shares.
32:46
While we buy these in our own name now, we're not going to get any capital gains benefits.
32:49
We'll start punting.
32:51
In our self-managed super fund.
32:52
Our retirement funds.
32:53
Because it gets the capital gains benefits.
32:55
I'll do all the income-yielding, boring stuff in a holding company because it pays a reasonable tax rate in a holding company, whereas your super fund still gets an effective capital gains rate of 10% or tax-free in retirement.
33:11
So the unintended consequence of the budget was that it shifted an entirely different demographic.
33:15
Yeah.
33:16
into the self-managed market, which would have taken money from industry funds, which I don't think is something that the Labor government would want to see happen.
33:26
So it wasn't really changed.
33:28
Before we let you go, so you actually came on this podcast 12 months ago and told us your strategy, and I hadn't really heard that as a property strategy.
33:36
For those...
33:37
that didn't listen to the earlier episode, I'm sure there's a lot, because we've had a lot of subscribers since your last class came on, but your strategy for investing was actually buying your principal place in where you wanted to live, and eventually doing it as a rental, eventually then to move into that house, knowing that was gonna be a principal place in the future.
33:56
Is that strategy still viable for you in this current market?
33:59
That strategy's long gone.
34:02
And so I think the new one would be, so obviously the old one leveraged the negative gearing.
34:06
It meant you could afford something that you couldn't yet afford.
34:09
You got the privilege of two properties in the market.
34:12
You let inflation kind of help you pay off the debt, so to speak.
34:16
And then when your number hit the right level, you sell your main residence.
34:20
You move to the new property.
34:22
You use the funds for that to pay down that debt, and then you reload at the next property using those funds, but you have a low level of non-deductible.
34:31
That was the fundamentals of the strategy.
34:34
Now, without the negative gearing, your leverage will be less.
34:37
You won't get any of the debt perks.
34:39
Therefore, that kind of strategy is disappearing.
34:42
Whereas now, I think there'll be a shift on the back of the rezoning changes, the R20 changes.
34:48
If that all goes through, I think there'll be a big shift to buy your first house in a subdividable R20 block.
34:56
So for those listening, that's a Western Australian code.
34:59
But nationally, this applies because we know the density across Australia, medium density in particular, is getting pushed from all state governments.
35:06
That a strategy of buying an old house in a desirable location, knocking it down, building one, prime place of residence, potentially building on the other, prime place of residence, we're now in a tax-free environment.
35:19
It's just going to be the lending makes it difficult for probably mum and dad investors.
35:23
Yeah, correct.
35:24
And that's where I think the slight difference to that would be a bias towards retain and subdivide.
35:30
because your first-time punters couldn't do a full duplex two new builds.
35:36
So you'd be buying the front site, you'd be renovating that, then you'd chop the back block off and you'd sell the front one to inject a bunch of capital and you'd use that capital to build at the back.
35:47
You'd get main residence on both.
35:50
And that would be the new version of the old strategy.
35:54
And then you either live in the back one and you have a brand new property on a smaller block, or you use the funds from both of them to reload again into the next.
36:03
It's a great strategy because you are artificially creating...
36:06
wealth and equity by developing and you're still getting an income which will support your debt position because you're buying an established house.
36:15
One thing you know banks don't particularly like when you just buy land and there's no income, they sort of penalise you heavily for that.
36:20
So I think buying that established house that is subdivised ticks that box.
36:26
A really good strategy moving forward and for those that are trying, if you can time the markets, where that one probably works against you if you're buying in a market that could potentially be trending backwards, no matter how good you are as an investor, if you hit the wrong market at the wrong time, you can be the best developer in the world and you lose money.
36:44
So it's trying to get the fundamentals of that strategy to work in a rising market, that's when you get your four, five, six X returns.
36:51
Yeah, correct.
36:51
And I think to go back to what we talked about earlier, a lot of the legislation is pushing investors to the wrong areas, so your house and land packages or your apartments, whereas using this strategy in a few different combinations could be –
37:09
buy, move into the front, renovate, and then build the investment property on the back under the new legislation, which will give you the negative gearing and the capital gains discount, but you're doing so in a blue chip suburb that's less prone to big fluctuations in a downturn, will get the better yields from an income perspective because I believe there'll be less good quality blue chip stock available for rent.
37:31
because your average mum and dad won't be able to buy a site in Duncrague or an old house in your leaderfuls to rent out because they won't get any negative gearing.
37:40
So they just won't do them.
37:42
Yeah, I agree.
37:42
I've seen it on the ground.
37:43
The data is showing that we're seeing a disproportionate increasing rents in more expensive blue chip own occupier areas because the investors are out of those markets.
37:52
So you're right.
37:53
It's sort of the benefit of reducing tax and increasing yield.
37:57
It's a really good strategy.
37:58
Yeah.
37:59
Nathan Hood, thanks for coming in again, mate.
38:01
That was a really good breakdown.
38:02
We'll have to get you again in a couple of months when I'm sure there's probably more changes that are going to come off the back of the budget.
38:08
But thanks for coming in.
38:10
You've been listening to Folio Property Podcast.