Accountant EXPLAINS: How to Reduce Capital Gains Tax (Legally)

Summary

In this enlightening session, accountant Davie Mach gives us a deep dive into the world of Capital Gains Tax (CGT) and how to manage it effectively. Covering various ownership structures such as buying property in your own name, under a company, a trust, or a Self Managed Super Fund (SMSF), Davie explains the nuances and the practical tax implications of each. He also sheds light on timing your property sales to minimize taxes and the significance of understanding your borrowing capacity. He further discusses the impacts of state taxes like land tax and stamp duty, how to leverage CGT exemptions effectively, and the benefits of utilizing a company structure for investments. Learn all about maximizing your tax benefits while staying within legal bounds.

Highlights

• Davie Mach breaks down complex tax strategies with ease and expertise. 🤓📊
• Discover how different property ownership structures impact your tax situation. 💼📉
• Learn why timing is crucial when selling properties to minimize your Capital Gains Tax. ⏳🏘️
• Understand the pros and cons of utilizing a trust in property investments. 🤔📜
• Davie stresses the importance of borrowing capacity in maximizing investment potential. 🏦🔍
• How state-specific taxes, like land tax in NSW, can catch property investors by surprise. 😮🏡
• Leverage your business income smartly in property investments without paying excessive personal taxes. 💵📈
• Maximize deductions and cost base to offset capital gains legally. 📑💪
• Using a company structure may offer you a lower flat tax rate ideal for long-term investments. 📉🏢
• Emphasize on professional advice from accountants to tailor tax-saving strategies specific to your situation. 👨‍💼💬

Key Takeaways

• Choosing the right ownership structure can save you loads of taxes on property sales! 🏠✨
• The timing of your property sale matters enormously for tax savings. Tick-tock! ⏰💰
• Trusts might be tax-free initially but watch out for those sneaky state taxes! 🚨⚖️
• Smart borrowing can enhance your capacity to invest, even when personal borrowing power is tapped out! 💪🏦
• Don't break the bank on taxes by not planning your property purchase thoroughly. Preparation is key! 🗝️📋
• Utilizing a company for investment might just be your golden ticket to saving on the tax front. 🎫💼
• Davie's ultimate tip: Avoid the common trap of ignoring long-term investment goals and tax implications. Knowledge is power! 📚💡

Overview

In a world where taxes can seem overwhelming and complicated, Davie Mach simplifies and demystifies the intricacies of managing Capital Gains Tax effectively. By breaking down the importance of selecting the correct ownership structure for your property—from personal ownership to SMSFs—Davie makes tax planning sound less daunting and more strategic.

Davie’s insightful talk guides you through timing your property sales wisely to take full advantage of tax breaks. His tips on understanding borrowing power and how it interacts with your investment strategies are golden nuggets for property investors looking to get the most out of their real estate endeavors.

What truly stands out in Davie's approach is his emphasis on the strategic use of businesses and trusts in property investments. Highlighting potential pitfalls like the dreaded land tax and illustrating how a franking credit system can be beneficial, he proves that with a bit of knowledge and planning, you can dance around the taxman legally and fairly.

Chapters

• 00:00 - 00:30: Introduction to Capital Gains Tax (CGT) Introduction to Capital Gains Tax (CGT): The chapter focuses on understanding Capital Gains Tax for property owners. It explores the challenges of managing CGT effectively, emphasizing the importance of selling property at the right time, choosing the correct ownership structure, and understanding tax exemptions. The narrative is provided by a chartered accountant who aims to guide property owners in planning better for minimizing CGT liabilities.
• 00:30 - 01:00: Client Coaching Session Overview In the 'Client Coaching Session Overview' chapter, the discussion focuses on providing guidance for investors regarding Capital Gains Tax (CGT) exemptions, ownership structures, sales timing, and strategic planning for better investment outcomes. The chapter highlights the importance of selecting the appropriate entity for holding investment properties to optimize CGT outcomes.
• 01:00 - 05:30: Ownership Structures and Tax Implications This chapter discusses different ownership structures for buying properties, including buying in a personal name, under a company, under a trust, and under an SMSF (Self-Managed Super Fund). It examines various factors that influence the choice of ownership structure, such as tax implications, simplicity, cost, and borrowing power. The chapter notes that some people choose certain structures for tax benefits or because of the borrowing constraints they may face under their personal names. The focus is on selecting the most suitable ownership structure based on individual circumstances and financial goals.
• 05:30 - 10:00: Tax Rates and Hidden Taxes The chapter 'Tax Rates and Hidden Taxes' explores the considerations individuals must make when purchasing property, particularly in relation to tax structures. It highlights the challenges faced when one's personal borrowing capacity is maxed out due to possessing multiple properties or partnerships. In such situations, people may need to utilize trusts or establish a Self-Managed Super Fund (SMSF) to enhance their borrowing potential. The chapter underlines three critical considerations when selecting the appropriate financial structure for property acquisition, starting with securing a deposit.
• 10:00 - 15:00: Land Tax and Trusts This chapter discusses the intricacies of land tax and trusts. It touches on financial concepts such as equity, deposit, serviceability, and credit rating, which are critical aspects of purchasing properties. The chapter emphasizes the importance of these elements in the context of buying property under an individual name and suggests that there might be scenarios where individuals could potentially proceed with minimal initial deposit, though specific details are not extensively covered.
• 15:00 - 20:00: Capital Gains and Selling Property This chapter discusses the financial strategies and government concessions available for selling property and managing capital gains. It emphasizes the importance of having equity in your home for purchasing or securing loans, and describes how government guarantees can help reduce the required deposit percentage to 5%, allowing you to borrow up to 95% of the property's value. Additionally, it highlights the significance of serviceability, which refers to the total income from all sources, including personal and business earnings, in determining one's capacity to pay.
• 20:00 - 30:00: Company vs Trust for Property Investment In this chapter titled 'Company vs Trust for Property Investment', the discussion revolves around common misconceptions about borrowing money using company structures. There's a prevalent myth that one needs to pay themselves wages to borrow money. However, it's explained that business income can also be factored in, negating the necessity of paying oneself a large wage. The recommendation is to pay a modest salary, for instance, $100,000, and recognize the company's profit as part of the income.
• 30:00 - 40:00: Retirement Planning with Property Investments This chapter discusses the considerations of using property investments as part of retirement planning. It highlights the importance of maintaining a good credit rating as it affects the ability to borrow and invest in property. Issues such as previous debt defaults could hinder property purchase capabilities. The chapter also touches on the strategic use of companies or trusts for purchasing properties to potentially mitigate these issues. Additionally, it mentions the role of being a business owner and how it affects income and serviceability calculations when involved in property investments.
• 40:00 - 50:00: Main Residence Exemption and Six-Year Rule The chapter discusses scenarios where a property might be owned by one partner due to the other's poor credit rating or serviceability issues. This is relevant in situations where borrowing power is essential to support a loan, although it might not directly impact taxes. The focus is on understanding the dynamics of property ownership and borrowing power, which, while not affecting taxation directly, is crucial in enabling the purchase of property. The underlying message is the strategic structuring of ownership to facilitate better financial planning and asset acquisition.
• 50:00 - 60:00: Real-Life Examples and Client Calculations The chapter discusses tax considerations, simplicity, and costs related to property ownership and investment, focusing on succession planning and future income projections. It suggests that individuals with low current income but expected high future income might benefit from holding property in a super fund, trust, or company to avoid personal tax implications. The chapter also touches on the various tax rates applicable to individuals.
• 60:00 - 70:00: Rental Income and Property Expenses This chapter explains the distribution of profits in a trust setting where the trust itself doesn't pay taxes. Instead, profits are passed to individuals or beneficiaries, including companies, which can receive profits at different tax rates (0%, 30%, or 47%) depending on their income. The chapter touches on how trusts are particularly useful in managing these distributions.
• 70:00 - 80:00: Conclusion and Advice for Property Investors This chapter discusses the tax implications for property investors, particularly focusing on income tax rates in Australia. It explains how the tax rates can differ for individuals depending on their age, specifically highlighting that the tax can decrease to 0% for members over 60 who are looking to retire. Additionally, the chapter touches upon the often overlooked hidden taxes and clarifies the distinction between federal income taxes and state taxes in Australia.

Accountant EXPLAINS: How to Reduce Capital Gains Tax (Legally) Transcription

• 00:00 - 00:30 If you own a property and plan to sell it at some point, you probably already know what CT is. But the real question is, are you managing it in the most tax effective way? Because owning property isn't what creates a problem. It's selling at the wrong time, holding it under the wrong structure, assuming exemptions apply when they don't, or worse, not realizing they could have applied if you plan better. As a chartered accountant with my own accounting firm, I see this all the time. So, I'm sharing this recording of
• 00:30 - 01:00 a client coaching session I had where I cover what CGT exemptions are available, how different ownership structures affect your CGT outcome, what to consider when timing a sale to minimize tax, and strategies to help you on your investment journey. Let's dive right in. I usually like to start off the uh deep dive about investing and what type of group structure that we should look at. So choosing the right entity to hold your investment property for the best capital gains tax uh outcome. So
• 01:00 - 01:30 obviously you can buy in your personal name, you can buy under a company, you can buy under a trust which is a lot of people doing these days and you can buy under SMSF. There are many reasons why you would consider each structure. U the most uh important ones that you would consider is usually the taxes uh the the cost. So, simplicity and cost, the borrowing power. So, sometimes people can't borrow um under their
• 01:30 - 02:00 personal name anymore because they've got too many um you know properties in their name or with um different partners. So, there as a result they may need to get a trust involved or set up a SMSF to increase their borrowing capacity. But the main ones that they usually look at are these three uh considerations when you're looking at the different structures. The main thing that when you do buy property the the three there are three um things you need to get and that is obviously a deposit
• 02:00 - 02:30 uh which is they call it equity as well and I don't want to go into too much specifics of this because I'm not a mortgage broker uh but yeah deposit uh serviceability um and um your credit rating all right they the three main things that obviously there's a lot more, but these are the main ones that you need to know. And um buying in an individual individual name, you could possibly get away with putting no
• 02:30 - 03:00 deposit in as long as you have equity in your home to be able to purchase or you can, you know, get someone to personal guarantee the equity. Could be the government that, you know, the government now has these concessions where they can personal guarantee part of your um your deposit and so you can borrow like 95% rather than and then put down deposit 5%. Then there's serviceability which is your income. So total income that you make, the business makes u your partner makes as well. So a lot of people think oh I have to pay
• 03:00 - 03:30 myself wages so therefore I can borrow money. That's actually a myth. You can actually add in your business income as well. So you don't need to technically pay yourself a wage. I do always recommend to clients to pay some sort of wage to themselves. Um, but you don't need to pay yourself like you know 300k and pay super taxes and then insuranceances for that. You can pay yourself like you know a modest salary of like say $100,000 and your company's profit would also be added into the
• 03:30 - 04:00 serviceability calculator because you own 100% of that business as well. So you don't actually need to pay yourself a high amount of wage as a business owner. and credit rating. Not going to go into specifics, but like you know, if you got a good reputation with the banks and you know, you're bu paying your bills, then it should be good. If you've defaulted and had some issues with your debt before, that could cause issues for you when you're borrowing and buying property. So that's why um people do sometimes purchase under the company or a trust uh you know with uh the company
• 04:00 - 04:30 being run by the partner instead or is owned by the partner because maybe their credit rating is bad or maybe their serviceability is not good and so you have to use other income to be able to support the loan. So that's why borrowing power is even though it doesn't really matter for taxes and accountant, it's something that actually is considered even though uh because it would allow you to actually purchase the uh the um property rather than like
• 04:30 - 05:00 looking at the taxes and simplicity and cost. Obviously there's other things as well. It's secession planning. Say that you know that your income right now is low but in 5 years time, 10 years time, you know it's going to be high. then you might rather have the property in a super fund or a trust or a company because then it doesn't have to be incorporated in your personal taxes. Yeah. So just to explain real quickly the tax rates. So the tax rates for individual is 0 to 40 uh 47%. And 25% oh
• 05:00 - 05:30 sorry 30% most of the time for a company. And the trust doesn't pay any taxes. Yep. And what I mean by that is it's NA because it passes the profits to the individuals or the beneficiaries. It could be a company. So you could have a bucket company on the side where all the profits go to and it goes here. So therefore it be 30% or it can go to the individuals. It could be 47% or 0% depending on what their income is. So that's how useful a trust is. An SMSF is
• 05:30 - 06:00 taxed at normally 15% but when the members are over 60 looking at retiring it can go down to 0%. Okay. So those rates I gave you just then is the income tax rates but there's also some hidden tax that a lot of people don't know. So first things first income tax is the federal taxes taxes of the whole Australia right? But there's also state
• 06:00 - 06:30 taxes. There's also local council. So state local are also uh governments that will tax you as well. The state government will tax you. And that thing is called land tax. And the local government also tax you tax you which you've seen. It's it's usually council rates. And um so stamp duty is estate tax too. Sorry. So you would have heard stamp duty before. And so these are the taxes you also need to consider especially this one here. these two. So,
• 06:30 - 07:00 land tax is stamp duty you can't avoid, but land tax you Oh, no, sorry. Stamp duty you can avoid depending on where you're transferring it through. I am not an expert with stamp duty. Uh, usually tax lawyers are. So, I can't really give you too much advice about stamp duty. Uh, but there are some sort of concessions when you're like moving assets um uh to like family members due to a divorce um and other matters where you can actually exempt the stamp duty. But land tax is something that gets is quite a big deal because in New South
• 07:00 - 07:30 Wales if you buy under a family trust the there is no land tax-free threshold and that's very scary actually. Um in different states what that means is basically land tax gets taxed at a very high rate. So, the usual formula for land tax is it's um in in New South Wales at least, if you got a $1 million piece of uh land that and the value of the land is 1 mil, the
• 07:30 - 08:00 threshold basically is usually, let me just quickly find that out. Actually, I'm not 100% sure what the threshold is because it changes every year. New South Wales land tax. So the land tax free threshold is 1 uh 075. Yeah. So that means that basically if the land value is 1 mil, you don't pay any uh tax on land tax because it's under the
• 08:00 - 08:30 threshold. But and and that's that that's for individuals and for companies. But if you bought in a trust, there's no threshold there. So basically you'll be paying basically 0.16% so zero um uh 1.6% of the land value. So every year you'll have to pay land tax of 16 grand. So, I always get scared when a client comes over and they buy they've purchased their first investment
• 08:30 - 09:00 property under a family trust uh and they live in New South Wales and the properties in New South Wales because that there means that the threshold they haven't utilized their threshold um because they purchased it in a family trust and for some weird reason New South Wales they just basically say that if you buy in a trust um family trust uh land tax threshold in New South Wales, it gets removed. You don't get uh you don't
• 09:00 - 09:30 get the land tax free threshold. So say they call it special trust. So uh special trust or well some types of trust which is a special trust are not eligible to receive land taxree threshold which basically means that you get taxed at 1.6% flat tax rate every single year. um and that means that you're paying 16 grand a year every single year and that would eat up all your net profits. So that's why um it's very dangerous um to
• 09:30 - 10:00 buy using a family trust and it's always better to uh seek professional advice. I get scared when um you know clients go and get advice from brokers. Not saying all brokers are like this, but sometimes some brokers aren't too careful and they'll give you advice on buying a family trust because it helps increase your borrowing capacity and helps you with secession planning and distributing your profits for tax income tax purposes but it doesn't help for land tax purposes. So very important to always
• 10:00 - 10:30 consider question regarding to the you know the family trust right is that the benefit is when you selling the property because there are no tax for capital gain. Yes. So um very good point um is you know how I mentioned that there's no taxes here uh for a trust income tax purposes because the distribution of the profits gets given to the individual um or to a company. So it really depends on how you distribute the profits every single year. So when you sell the property for
• 10:30 - 11:00 example, if you distribute the profits to an individual, it's taken as if the individual sold the property. So therefore um individuals get what you call a 50% discount if they held the property for more than 12 months. And that's based on the income tax. So they call it capital gains uh 50% discount for 12 months if you held it for more than 12 months. So yes the answer is if you purchase in the trust it's great. Another question what happen if in the option one right so instead of
• 11:00 - 11:30 intervenor so if you buy the join like you know you and your partner buy the property under join name join name. Yeah. So when you sell that after 12 month is that you got exactly the same benefit with the family trust. Yes. The only difference is that the family trust can distribute the profits every single year to um you know different people and and maybe possibly a company. The profits being the rental income because there's not there's two
• 11:30 - 12:00 types of income that you can make in investment property. Rental profit on annual basis and the sale of the um property for capital gains purposes. Yeah. So the benefit of having a trust is being able to distribute that profit if it's positively geared to the individuals um or to other individuals or give it 100% to the partner because the partner is a low income earner. Um the if you own it 50/50 with the individual uh with two individuals, you
• 12:00 - 12:30 have to split 50/50 every single year. And that may be a painful exercise every single year if one partner is high income and the other partner is low income. Because yeah, you're paying taxes on the positive gear property. Okay, that's different. You know, you can ratio between different, you know, the the employee, sorry, the person behind the family shares. Yes. Yeah. You can you can decide something like that. But in the join name, so you have only 50/50. Yes. Um but I actually think um
• 12:30 - 13:00 the land tax problem is massive if you buy in a family. Yeah. because 16 grand a single year could eat up all your profits every single year. And then when you times it by like say you hold it for five years times 16k um that's $80,000 that could be like your capital gains um because obviously you have to pay stamp duty and all that stuff as well to that would eat up your cost. So um to answer your question it
• 13:00 - 13:30 it's really hard to say what's beneficial for you. It's based on your intention of the property. Is your property going to be like a investment property where you're focused on rental profits or is it focused on um equity growth or are you even selling? Are you planning to sell selling the property? If you're not planning to sell the property and you're planning to keep it longterm, say you want to keep the property for the next 15 years, maybe even 20, 30 years, and you're not planning to sell it, then why not even consider a super fund? Because a super
• 13:30 - 14:00 fund has a lower tax rate and uh if you do sell it, you also get the 50% discount. Uh sorry, you get the discount, but it's only 10%. You get you pay tax on 10%. If you sell it, if if you held it for more than 12 months, which is beneficial compared to this because 50% of 47% still is like, you know, close to um it's 23% roughly, right? Rather than um you know, 10% in your super fund. However, the interest rate in the super fund is probably
• 14:00 - 14:30 higher and it's a bit harder to get the loans in SMSF. Takes a bit longer to be able to do it. That's that's the downside of that. So, you have to be, you know, certified, you know, super as well like you know in Yeah. You have to have enough cash in the SMSF which is a pain in the butt as well. Yeah. So, um so that's basically the different structures. Obviously, there's land tax that you need to consider. There's 50% discount. My argument a lot with the 50% discount and I don't gen like if you were to choose ask me what I would like to invest in I always choose a company
• 14:30 - 15:00 and the reason why I choose the company is because I love the 30% flat tax rate. I think 30% flat tax rate and I run a business as well. That means that when I were to like, you know, invest 300k to pay for a deposit on a house, say I buy a million dollar property, um, I can buy in my personal name, but that for that 300k that I earned to put down for a deposit, I need to have paid taxes on
• 15:00 - 15:30 that 300k. And usually, if my tax rate is on the highest tax bracket, it would have cost me basically um nearly 50% to be able to pay for that. So, I would have had to earn another 300K to be able to get that deposit of 300K to buy a property. Whereas, if I earned all the money in my um company, my Box Advisory Services, I could just lend from Box Advisory Services to this company, and my Box would have paid 25% taxes for it.
• 15:30 - 16:00 Um, so I don't need to pay 47 a top up tax to take that money out. So, I could just lend from Box to this company, make sure Box pays the taxes of 25%. And there's no division 7A issues if you're running a business, and then you can just like invest using that. So, instead of me having 300K, I most likely will have like if it's like say say it's a 600k profit, um I would most likely pay 25% tax on it. So, I'll pay 150 and I
• 16:00 - 16:30 would still I will have 450 to play with rather than 300k basically. In order for me to take this money out of my business, I need to pay a top up tax or a tax in my personal name. And generally, if I'm already paying myself a wage, which I am, and I'm at the highest tax bracket, I would need to pay 47% to take that money out, that 600K. And when I take that 600K out, I would have paid um $300,000, close to 300K in
• 16:30 - 17:00 taxes. So that means that the leftover deposit I have is only 300k because 50% of it went to the government. Whereas if I took it out of box and moved it into a holding company or bucket company, I would pay 30% tax. 25 or 30%. Let's just say 30. I would lose 180 and I would still have another $120,000 extra to play with when it comes to investing. And I prefer this over this. Yes, I do lose the 50% discount because companies don't get it. But if I don't plan to sell, then I
• 17:00 - 17:30 don't really care too much about the discount, do am I? And the goal is you don't need to sell. Like what um people always do is they leverage. They use um finance to refinance the money out. So that means that you're taking technically tax-free money because money from the banks is a loan that you have to pay back. So, I just won't pay um any taxes on the the money that I get because I'm not selling it. Uh there's
• 17:30 - 18:00 no stamp duty. There's no uh sale of bit uh property, so there's no capital gains tax. And I take that money back out and then I'll reinvest it into another property and I buy a few more in the company. Once I've done that and I have enough properties in my company and I have, let's just say five properties, then I'll sell. All right? I'll sell because they've gone up in value. I'll probably sell one or two, pay off all the taxes, pay off as much as I can for the loans. It's positively geared. Um, and then my four five properties reduce to to say three
• 18:00 - 18:30 properties. But the difference is and I might I might sell four of them and then buy like another two that commercial properties with a higher rental yield. But the reason why I would do that then is that I'll have a higher rental yield now. Um, and it's in positive. So I get uh annual profits every single year and I pay 30% tax every single year and I just keep holding all those profits in this company and then once I decide that I want to retire or stop
• 18:30 - 19:00 working as hard. I will stop making money from Box. I'll sell Box maybe. Don't worry guys, I'm not selling Box. But yeah, if I do ever sell, I would just start collecting dividends from this company now. But the great thing is the tax has already been paid. There's 30% tax being paid already. So, I can just take 100K um and I shouldn't pay any top up tax if I don't receive any more income because the tax is already being paid by the company and because there's a franking credit of 30%. So, and that's my way of retiring.
• 19:00 - 19:30 I I just take money from this company uh and I call it a bucket company now. And I have a super fund that also um I once I've turned 60 put it into pension mode and I can just withdraw some cash from the super fund. So I've get money from my company and the super fund and that's how I retire. These days um the super fund won't be enough I think over time because uh the government keeps changing the rules and eventually the taxes in the super fund is not going to be beneficial to keep like all your cash in
• 19:30 - 20:00 those super funds. Um that you know it's like 30% tax over 3 mil in a super fund and there's tax on unrealized gains um from the labor government. So it's just going to be a lot more harder. So therefore, you need something else to supplement your income and cost of living when you start looking at um reducing down your workload and income and having a a um bucket company that's positively geared that's paid 30% tax which you have franking credits that you can take out. Perfect perfect opportunity for you. That's why I prefer
• 20:00 - 20:30 a company, but a trust still works. All right. Some people would still use the company uh trust as long as they can uh escape the land tax threshold. People sorry escape the extra land taxes they have to pay. And the way they do that is you know not buying New South Wales. So if you've got um some investments in different states they don't have that threshold issue with land tax. Yeah. Any questions so far? Yeah. Quick quick
• 20:30 - 21:00 question. Um you mentioned about the companies. 30% franking credit, right? So when you take that money out to your personal because you know that's a company, right? Let's say you sell a company, you take that money out, so you need to still buy 15%, right? Because the the company already pay 30%. You take that money out your personal because the personal is 47%. So you need to pay another 12%. It it depends on what your income's like, right? Say you're already earning
• 21:00 - 21:30 $190,000 or 90,000 in your personal name. Yeah. You you got a salary and um you're making this much money net um after tax. Why would you take more money out? Why would you need to? But you mentioned because when you retire. Yes. You take the money out. Let's say you retire, you have none, no money in y in the personal, right? So you take that like for example, if you take Yes. So if you retire, what happens to your income? It goes to zero, right? Yeah. But you still
• 21:30 - 22:00 pay like let's say you got a one meal, right? You need to pay at least 12% of one meal. Is that correct? Because you need to Why would you take one meal out? You would take like say 100 uh say $80,000 out, right? Because that's your that's how much you will need to spend. Am I right to say that you'll probably take a dividend of 80,000 rather than 1 million? Oh, okay. Yeah. So you take it like a quarter like a bit off every single year when you Yeah. for your spending. And then I said if you need more money, you take it out of your
• 22:00 - 22:30 pension, but or your super fund if if you're over 60, but say uh you're not over 60, you take $80,000 out. You take 80 from you and you take 80 for your wife or your partner. That's 160K net. All right. And then what would be the tax on $80,000? Uh you'll get a gross up of dividend. So, say it's 80 and the franking credit on $80,000. Let me just quickly do that calculation. People are going to get confused, but because that $80,000 that you took out, there's tax
• 22:30 - 23:00 that's already been paid on it. So, it's 80,000 divided by uh 75 times by 25 to work out what the tax is. The franking credit is 26. So, that 80,000 ends up being uh 80 plus plus 80,000. Sorry, my math does not work matching. So, it's 106. See? So your total income is now 106 grand uh including the franking credit and then the net like the wages that you've um the dividend that you
• 23:00 - 23:30 took is 80 grand. So therefore your total tax um that you had to pay is 25 grand. But remember how I I worked out what the franking credit was? It was 26k. So because you already paid 20 you've got a franking credit of 26k you don't actually need to pay a topup tax. you actually get a small refund of 26,000 minus 24K. Does that make sense? Yep. So, that means that's what I love more, right? I think if you're um worried about that
• 23:30 - 24:00 last sale, capital gains tax, 50% discount, which is what all accountants care about, which I get very frustrated on. It's not just about that. It's about the 10 years of positively geared property income that you're earning. You want to like pay as little tax for the next 10 years, not just based on that last sale because that last sale might not never happen during your lifetime. You'll probably be dead and and honestly the property will be
• 24:00 - 24:30 passed over to your kids. So, I don't really care about that. I want to get that money out and and use it. Um, so that's why I think having a company is better. Yeah. For investment purposes. But that's just my point of view. It's because I'm looking at properties for rental uh positively geared um properties. But what people could do is buy in the trust um as long as not land the land tax is not an issue and then make a capital growth and then sell the property get the 50% discount then buy
• 24:30 - 25:00 in the company after because they trying to look for positively geared properties after that. That's Can I ask a question, David? Yeah. Yep. Sure. Let's just say you've got the trustee company and trust set up already. Um, can you then start by if you have to buy something else, can you use a trustee company to buy property in directly or does that always have to belong to the trust and it can't make investments directly? Yeah. So, this is like actually a very common question that gets asked. So I I the
• 25:00 - 25:30 atto hates it using trustee company uh for income or profits attoto there's there's actually a rule about it the ATO is actually very against it and they basically say a trustes goal job should be to manage the trust assets not to receive income for tax purposes to minimize tax. So they're very against that if if that's one thing. Second thing is that um if you're
• 25:30 - 26:00 trying to limit the the powers of the trustee and this is like a legal question. So like you know just take this this is not legal advice um but you're trying to limit the the use of the trustee. So if the trustee actually does more things on top of um managing the trust assets which is one of them distributing profits to the trustee and then paying franking dividends it starts diluting like the use of the trustee and um then it actually means that if
• 26:00 - 26:30 there's a beneficiary of the the the company like the shareholder shareholder can sue the the trustee and say well you're not acting on my best interest anymore and then they can basically like you know go after the trust assets. Okay, very worst case scenario barely ever happens. But I've seen a case where for example um I haven't seen it. A lawyer told me about this is that they used the trustee as a bucket company but they also used the trustee as a trustee for SMSF and something bad happened with
• 26:30 - 27:00 an investment and they went after the trustee company. Then they found out the trustee is actually owns all these assets and has a money in the bank account. They thought the trustes um assets was their assets but it actually was the super funds assets. So they took based basically um take make a claim against those the super fund assets and you had to prove otherwise that the assets owned by the trustee is not um you know it's uh the bucket company's assets. It's actually the super funds
• 27:00 - 27:30 and it starts getting very messy. So that's why if you're just paying extra thousand, you might as well pay the extra thousand just to set up a separate trustee and have a separate bucket company. Yeah. Does that help answer your question, Lee? Yeah. Yeah. It just gets too messy. Don't do it. It gets very messy. Yeah. And I I rather just pay an extra $1,000 and it's just once off and you don't have to think ever think about it again. Well, actually, it's not once off. You have to pay asset fees as well, but you know what I mean. Cool. Sounds good. Anyone have any other questions? happy to answer more because
• 27:30 - 28:00 the whole point of this is deep dive so we can go into questions but if we don't the next thing I'll talk about is maximizing deductions and cost base. I'm going to quickly smash through this because you can easily figure that out by just like you know doing some research online. Okay, so I found this um capital gains um calculation that I I did for a client of mine. obviously tried to remove all their details. Um but basically uh this person sold their property for $2 million, owned a 50/50 between um two partners and um what
• 28:00 - 28:30 happened is the purchase price of the property was 1.9 mil. So that's the there's like five elements of being able to capital uh calculate the the cost that you can claim against that 2 mil. So the whole point is trying to calculate the profit the capital gains. So um you can add all the sale uh and selling fees which is marketing agency cost and all that but you can also add the the purchase cost as well purchase legal fees and then you also have what
• 28:30 - 29:00 the purchase price was initially you know back in the day like 2 years ago say. So in total when you add all these costs up it worked out to be um 66k plus the 1.9 mil and then it worked out to be 1.966 and as a result because they sold it for $2 million the capital gain is $48,000. Okay. So there is um you know renovations that you can also add in if you you know spent money to improve the
• 29:00 - 29:30 value of the um property you can also add that in. So that's where you can actually minimize the cost. So for example, if you spent like you know 150k in renovations which is legitimate you that could mean that you actually made a loss in the um the the um sale of the property if you sold it for 2 mil. So that's how to calculate the capital gains. If it's a loss what happens is that loss then gets carried forward over to the next few years. If you buy another investment property or you sell shares, you can offset that 100k uh loss
• 29:30 - 30:00 against um you know the future profits that you make in capital gains. Okay, so that's how that works. Does anyone have any questions about the uh calculation of capital gains? What happened to stamp duty? Stamp duty. Oh yes, stamp duty is also added in this case here. I think it was combined in um this calculation here. But yes, stamp duty is also added in there. So sorry about that. I I think when I did this calculation I added the stamp duty in here in the purchase price
• 30:00 - 30:30 but yes stamp duty is also added. Can you add any capitalized interest if it was untenanted and you couldn't claim it or any anything any reason for adding interest to this? Yes. So there's there's something called cost of owning the um CGT asset. So that's holding cost. So there there is been a case like this. I actually had a client last week um two weeks ago actually where he bought a property with his mom and he um never lived in it and actually that home was uh you couldn't live in it. It was inhabitable um uh basically meaning that
• 30:30 - 31:00 like it was I think there was mold or like there was a hole in the wall where basically you couldn't live in it and so they had to do all these like intensive renovations. CO happened um and they went also through a the actual um client went through a divorce as well and it just got really too hard. So he just rented some other place to live while that was happening. And as a result his mom even couldn't live there and she rented. So they held onto this property,
• 31:00 - 31:30 paid interest for two years and what would happen is it was like 12 24 months um times say 0.5% in interest and the the amount borrowed for them was like say 500k. They paid like basically um sorry not 24 years say two years or 5% interest for a loan of 500k and he had we we got to add the $50,000 interest as holding cost as
• 31:30 - 32:00 well that help reduce the cost base. However, if you're renting the property out and you're earning income, then you can't claim this holding cost because you're already claiming that interest against your rental income per year. So you won't be able to do that again. So you can't double dip. Yeah, cool. Does anyone have any other questions? Just a simple one. Um, in regards to renovations, how uh how far back can you actually claim um from the time of purchase um
• 32:00 - 32:30 from the time that you're selling the property? Like how long does it have to be to be able to still be able to claim those um renovations and what sort of like what would they ask for in terms of sort of receipts and you know sort of data that you have to hold to be able to make that claim? Yeah. So you technically supposed to have the receipts if you're planning to make that claim. So try to get the receipts as much as you can. They do sometimes look at the development application if you're doing like a DA or CDC with the government council. So they can look at that as well. You could get a property
• 32:30 - 33:00 surveyor um those depreciation uh tax experts guys. They can go in and like you know do an estimate of what the cost is. Sometimes you can rely on them as well. So, you can get one of those that cost like 600 bucks cuz like when you move into a property or you buy a new property, you might not have the receipts because the previous um tenant, sorry, not the previous tenants, the previous owners um were the ones that paid for it. So, yeah, you could possibly get a depreciation tax expert
• 33:00 - 33:30 to get that schedule for you. Um so, yeah, the answer is yeah, you don't need the receipts, but you can get a um expert to go and get you a estimate. Um, but you got to be careful as well if you lived in the property at that time and it was your main residence because that's normally what happens. You hold the property for like say 15 years and you know first 5 years you lived in it and then you decide to upgrade and you moved out. the first five years you can't really claim the um the cost of it because the interest and the holding
• 33:30 - 34:00 costs and and the renos because the renos oh no renos you can but like some of the other costs you can't claim because it was actually a personal use um house. However, when you move out, you usually take the market value as the um cost price and you get to uplift the cost price. So, even though you bought it for 1.9 mil, but the time you moved out was $2 million, then you take the $2 million as your cost price. Yeah. Sorry, I answered like a few questions thinking that that could apply to you. Yeah.
• 34:00 - 34:30 Cool. Baby, what sort of evidence do you need um if you're going to move out and change it to that that new value? Real estate agents, is it valuers? Is that the way you do it or is it a simple you sell it in 10 years for 2 and a half investment for one year um the rest so you just do a proportional calculation based on actual sales. So the the proportion is actually um depending on how when you move in move out. So say that it was your home from
• 34:30 - 35:00 the very start and you never uh rented it out and then after moving out you rented it out um that you take the market value. That's what you're supposed to do. But it if you moved into sorry if it was an investment property first and then you moved in. It's actually a proportion method. It just depends on your scenario. So just so you know like don't always use the market value. Speak to your accountant which is me and I will tell you which um method you're supposed to take just so you know. But you have to get a market value
• 35:00 - 35:30 valuation. So you have to pay like stupid amount of like 1 grand or two grand to get a market valuation. that's the best bet because if you were to get audited, that would happen. Um, however, the good thing is you actually can go backwards. You can get a market value done like 5 years ago. So, someone and it's actually easier to do that because then people um the valuers, they can just look around the area and see what was sold at what price and they can get that market value for
• 35:30 - 36:00 you. Yeah. Um, I've seen auditors uh I I I used like a like for like uh sale price once for audit and the the ATO order wasn't happy with it. They they forced us to get a market valuation. Just so you know. Yeah. But I don't Yeah, it's up to you if you want to get one um when you move out cuz it's kind of like a waste of money. You only really need it when you when you um get audited technically.
• 36:00 - 36:30 Yeah. So, why kind of waste your time paying for like a two grand fee when the for the chances of you not being ordered? Yeah. So, you might just get it when you get ordered instead and just use a estimate that you have. All right. So, we we're pretty much um leaning towards that anyway. So, I might talk a bit about it. Um, so obviously when you purchase a property and you uh if you've actually lived in it, you can just
• 36:30 - 37:00 ignore everything. So say if you bought a a property for um you know $2 million or 1.8 mil and there's something called a main residence exemption. So if you ever lived in property as your principal place of residence, PPR, you may be able to claim the main residence exemption, which means that the capital gains tax that you have um uh or that you were supposed to pay even though you made a million dollars on the uh on the sale of the property, as long as you can consider your home and the
• 37:00 - 37:30 land is two hectares or less and you haven't used it to produce any income. And at some points you can but um in this case you haven't. The whole thing is exempt which is amazing like your whole property can be exempt. There is this myth where people say oh I will just move into the property for 6 months then move back out then it's completely exempt with capital gains tax. I don't know why people think that that's true. That's not true at all. That's where the proportionate um value will come in. So what would happen is say you owned the
• 37:30 - 38:00 property for 2 years and um you moved in to it for the last 6 months and but that the first year and a half it was rented out that means 75% of it will be taxable 25% of that property would not be taxable because of the fact that you only moved in for 25% of the life time. So so technically uh the exemption won't apply. There's a six-year rule that people use. So, a six-year uh main residence exemption. So, the six-year
• 38:00 - 38:30 main residence exemption is treating a former home as main residence. So, you can't treat like a new home and that you like you've purchased and then say it's like 6 years um from you know back then or from like future. You have to move into it first. That's one full rule of thumb that you have to do. So, if you actually had the property as your uh investment property at the start, then technically for the the starting period of it being an investment property, it cannot be you can't use the 60 rule on
• 38:30 - 39:00 it, just so you guys know. And another rule of thumb is that you can only elect one property to be your main residence at one point of time. There are some exceptions if you're moving between two places, but most of the cases if you're um if you've got one property and you got another one, you can only choose one at a one time. So, you can't like have you can't have your uh two properties that you live in and say both of them are your main residence. There are some exceptions where like you're you're traveling a lot or you travel for work
• 39:00 - 39:30 and you have to live in two places at um per week, you know, three days in in like, you know, say Sydney and then another three days in Gold Coast for example, then you there might be a chance of being able to claim that, but it's very hard to prove. Um so yeah, you technically have it has to be your main residence. And once you stop living in it, as long as you don't have a main residence at that point of time, say you move back home with mom and dad because you know you want your mom and dad to help um look after your kid or you move
• 39:30 - 40:00 to another country because you've got a job offer overseas and you just want to leave then you can actually claim that that property for 6 years straight um to be your main residence. But the point is you can't have a second main residence somewhere else. Yeah. That you own. Okay. So the last thing that people always get confused in is you technically can move back in within the 6 years, live there for you know x amount of months then move back out and then it resets the six months at six
• 40:00 - 40:30 years again. However, there is a like a lot of people think get confused about this like how long they can actually move in. There is no set rule on how long you need to stay there for. You know you can stay there for a month, you can stay there for two months, three months. You just need to prove it. And the way to prove it is looking at water rates, um, uh, internet bills and your address changes from your license and, um, you know, voting, uh, details. If you change those, especially water and internet bill, electricity, that proves
• 40:30 - 41:00 that you actually lived in it. It that also proves that you registered your details. It's your personal details and your address is the right address. It also the the AT is a bit smarter. They will actually check if there was usage. So, internet, water rates, and electricity are the main ones they'll be looking for. Cool. Any questions on that? Nope. That is good. So, um, some people then like, yeah, use the 50% discount to be able to claim and on top
• 41:00 - 41:30 of that use the 60 rule. So sometimes when you buy a property you can actually and you live into it live in it for a few years you can use the exemption for a portion of the property increase the market value then also use the 50% discount after that so you can use different concessions to reduce your taxes. Don't just think that whatever you bought it for minus whatever you sold it for is the tax and then 47%. It's not like that. Sometimes the tax
• 41:30 - 42:00 rate that you calculate or the calculation you calculate is bump up the value of the cost base from 1 mil to 2 mil because that's the market value. Then treat it as if you live there for like 3 4 years because of the uh six year rule that you could say. Then you bought another house and you live in there. So you can't use it for the full um 6 years but you can say 3 four years. Then you can also add renovations. So there's throughout your life you in living in that property you would do like so a lot of things in your
• 42:00 - 42:30 situation that would change the cost price and those are the things renovations moving in moving out um claiming a six year rule and also possibly even like holding costs like that might be a point where like it's just sitting there and it's not rented out at all and also maybe even like the sale um cost as well. You can add all those up and you can reduce the the profit on it. Um, so that's one thing. The last thing that you could also do is also looking at your personal income. So
• 42:30 - 43:00 yes, you would pay 47% if you're on the highest tax bracket, but for the year that you're planning to sell the property, maybe it might be a good idea not to earn any income during that period. So as a business owner, you can make that happen. You could stop paying yourself a wage. You can stop paying yourself a dividend. Or you can redistribute the income into, you know, your partner's name rather than in your personal name if you own that property yourself. There are things to really consider. The best thing you could do is not sell. So, as I pointed out in the
• 43:00 - 43:30 start of the conversation is that uh when you access your property's equity without triggering a CGT event, that could be the best scenario for you. And that's the scenario that most property experts and um investors do. They uh they remember that CGT is only triggered when you dispose of an asset. So if you don't dispose of an asset, you don't transfer your asset away, then technically you don't need to pay any taxes. But the problem is they need the
• 43:30 - 44:00 money to be able to reinvest it or they need to take profits out um to be able to to spend for their personal spending. So, what you could do if the bank or the lender can provide that to you is reassess, look at your income that you've made and see if you can uh refinance that money out. And when you refinance that money out, technically you haven't sold the property, so therefore you don't have to pay tax on it. So, that's an option for yourself as well that you could do where you could just refinance rather than selling the
• 44:00 - 44:30 property. Um but you got to understand that refinancing rather than selling can result to you um increasing your uh loans which means that you have to pay your like repayments higher which means that you have to pay interest. So you got to take that in consideration before you do that. Um I see a lot of um retirees what they've done is they a lot of them are widows because um their partner passed away and they don't work as much anymore as a result. Um and they also look after the kids and the
• 44:30 - 45:00 grandkids and all that stuff. So they stop working. So what they do is um before they stop working they refinance that money out and they use that let it sit in the offset account use that for spending and because the time that they purchased the property which could have been 10 15 years ago uh they might have bought it for 500k but now it's worth $2 million. So, they refinance, you know, $500,000 out, let it sit in the offset account, and then as a result, they um use that money to to live and and spend
• 45:00 - 45:30 on the property or whatever it is. And so, um they don't need to ever really earn as much income anymore. Uh, and also, um, once they need to pay for that $1 million loan because, um, they need to still pay that $1 million loan eventually, they might just sell the property and downsize after, you know, another five more years or 10 years when they decide that they don't want to live in that big property anymore. Yeah. So, that's like an option for them that they can do. Yeah. Uh, let me just see was if
• 45:30 - 46:00 there's anything else. Does anyone have any other questions? Nope. Okay, great. All right, so let me just quickly show you one last thing uh for you guys uh which is the rental um what you can actually claim. So there's one thing that I always forget is the um to explain to clients is the what you can actually claim um for tax deductions. So remember like I said in property there is the capital gains tax that you had to
• 46:00 - 46:30 pay but there's a second transaction that people forget about which is rental. Well, no one forgets about it, but they don't talk about it that much, which is your rental income minus your expenses, which you get to put into your tax return and claim um a loss if it's negatively gained against your income or pay taxes on it based on if you made profit. So, I've got this client here. Um this is back in they've purchased a property back in 2016, purchased it for 980K, and um they rented it out. So,
• 46:30 - 47:00 they rented it out for $27,000 a year. um they had like you know outgoing income that they uh sorry uh they also recovered outgoings to from the tenant and they had a whole bunch of expenses as well. So these are a list of expenses that you can claim advertising bank charges uh you know body corporate or strata. The biggest ones that you would always see is commission uh for the agency like if you have a property manager that you're paying uh
• 47:00 - 47:30 depreciation counter rates is usually quite high. There is always electricity and gas sometimes but you can sometimes pass that to the tenant. Um repairs and maintenance and they them and then interest as well. So they the main ones that you would always see and they are the ones that the highest. The rest of them are quite small, but you would also have like postage and you know legal expenses and leases. But the main ones that you should not ever forget about are the E1C, which is commission uh for
• 47:30 - 48:00 the agent, counter rates, depreciation, interest on the banks, repairs and maintenance. Um yeah, they or B corporate if you're you own a unit. Wait, let me just check the chat if there was anything else. So first question is how about if you use a buyers agent? Say you pay a buyer agent to buy the property. You can't claim the buyers agent cost against your rental income and expenses. This is the downfall of it. But you get to claim it on the um the uh second element or which is looking for that
• 48:00 - 48:30 acquiring that property. So you can add the buyers agent cost here. But the problem is if you never sell then you technically can't claim the buyers agent because you don't sell it. But yes, you technically claim it but only against the uh capital gains tax. Um, yes. What happens if you finance the cost of the buyers agents? Same thing. Yeah, it's still considered as if Oh, what? Oh, you can claim the interest. Yeah, you can claim the interest because it just boostes up your um your uh your loan and
• 48:30 - 49:00 then the interest that you claim against your rental income. Um but then who does that? They finance the the cost as well. Well, I've seen scenarios where you if you've got the right security, you uh you can finance 100% of the cost of the purchase plus the cost. Yeah, I've never seen it happen before, but yes, depending on the state, that's maybe 107 108% depending on if you use a buyers agent or not. So, that's all then tax deductible. Well, the question is, is all that tax deductible? Yeah,
• 49:00 - 49:30 technically is, but just so interest, but interest is a small amount. And the last thing is like I meant who does that as in which buyers agent would wait that long. That's what I mean. Yeah. Because they're not going to get paid all the way until the like very end they find a uh the property. So some most of them will want to get paid earlier. Um look I think we got to go but there's one last question which is is there any exception to using the method you just explained using a bucket company? My case is it I don't know if PSI Yes. So I think you're
• 49:30 - 50:00 referring to um when I was talking about um there's different structures and using a company rather opposed to like you know a trust or individual. Yes. The answer is there's heaps of exceptions like you you have to first earn the income in a company. Like if you had the money in your personal name and you're just releasing equity it might not be better to um like I I like this method because I have my profits in the company and so I don't want to pay the topup tax. So, I want to set up a company to
• 50:00 - 50:30 house my bucket uh my profits and use as a bucket company and then invest. But there are cases where you've made the profits in your personal name already paid the taxes of 47% because it's your wages. Then you know you could use a trust or buy in your personal name um or use a super fund even for fact you can contribute the money into super fun. So, there are a lot of cases where you would not use option two, but I'm just saying my method that I like because I'm a business owner and I can pass the
• 50:30 - 51:00 profits out as well as I'm a high income earner as in my wages are quite high and I also have other income and I already have investments in my personal name. I prefer investing using a company. That's just my preference. Cool. All right. But when you do decide, speak to your accountant. There is no no one way to do it. I I can't stand it when clients just say, "Can you just give me one structure and set it up now and that's that's it. That's what I'm going to continue to do forever." I always say to them, it
• 51:00 - 51:30 really depends on your property. It depends on the intentions. It depends on where you're buying. It depends on how much you're buying, how much you're borrowing. Are you buying to develop? Are you knocking down, rebuilding? Are you more focused on rental yield, or are you focused on just keeping the property as long as you can? Are you planning to pass it down to your kids? There's so many questions that you should be asking and it's always dependent on the particular property that you're buying. So don't ever have one way of doing things when it comes to
• 51:30 - 52:00 structuring and for your investment properties. Always consider asking your accountant every time you buy to to give you advice. Don't be cheap on it. Cool. All right. Thank you guys. Have a lovely weekend and hope to see you guys in two weeks. [Music]