Special: From 11% to 8.4% - What the 2026 Budget does to property investment returns

Added: 2026-05-15

[00:00:00]Hi, my name is Stuart Williams and welcome to the Investop podcast. Our goal is to share easy to understand evidence-based holistic insights to help you master the game of building wealth.

[00:00:10]Yesterday, my colleague Mina Abraham and I, Mina looks after our tax and business advisory part of Pro Solution. We recorded a presentation on YouTube and I thought I would share it here. So, without further ado, let's get into it.

[00:00:28]Okay, welcome. Uh, my name is Stuart Williams and joining me is my co-host from the Holistic Accountant podcast, Mina. Welcome.

[00:00:36]>> Thank you, Stuart.

[00:00:37]>> It's been a pretty busy 40 hours since the budget landed, as you can imagine.

[00:00:42]Mina's been very very excited. He gets he gets over excited any about anything about tax. So, uh, it's great to have him here today and it's great to have you here today as well, uh, listening.

[00:00:54]And of course it is only has only been uh 40 hours. So there's a lot of water to go under the bridge before we as investors make decisions in terms of the advice we give our clients and I guess the decisions you make as investors. So we got to keep that in in mind. Um uh during today's session we've got a lot to get through as you can imagine. Uh and but we would love to receive your questions. So uh if you have any questions, we'll try and get to them throughout the presentation, but please do uh do ask your questions. It'll shape even further or future uh presentations.

[00:01:28]So let's start off by I guess talking about the budget very generally and I I always want to be apolitical. So it's this is not going to be a political statement. I'll leave that commentary certainly to other people. But the rhetoric around the budget was really about creating intergenerational fairness and h helping housing affordability. And according to KPMG's numbers, uh, additional tax revenue receipts are predicted to projected to increase by $126 billion over the next four years, but spending is projected to increase by $129 billion and debt to increase, net debt to increase by about $220 billion. So this budget isn't about intergenerational fairness as we'll talk about today because we don't expect it's really going to change the landscape and it's certainly not about housing affordability. It's about raising tax revenue which shouldn't be a surprise to anyone. Uh I mean that's what governments do. Both sides of governments uh will raise tax revenue at the same time. But it's good to sort of cut through this because we don't want to distract the debate away from, you know, what they think or what they're selling to us. Uh the benefits are uh also, you know, the thing we got to think about carefully is flat tax rates.

[00:02:50]That's why we've got a marginal income tax rate uh system because it it does create unfairness. So, you know, anyone with significant wealth in a family trust or significant wealth generally uh is probably going to pay an average tax rate of greater than 30%. It's not a big deal for them. But think about a mom and dad self-employed person uh running a a small business trying to make ends meet.

[00:03:16]They earn $200,000 a year. Moving forward, if these proposals go through, they'll pay $60,000 of tax. uh previously they would have only paid $45,000 of tax. You know, that's a one-third increase in the amount of tax payable to people arguably uh would you would argue is is Labour's sort of core cohort if you like. So, you know, there there are going to be some problems with what has been proposed, some substantial problems, and that's why I think we as investors don't need to sort of overthink it at this stage. I think there's as I said a lot of debate to occur and so forth. Uh the the final thing I I will say before we get into today's content is that New Zealand banned uh interest deductibility for investment properties in 2021 and they reinstated it phased it back in uh beginning 24 through to 25. Now, it's really difficult to pull apart and work out what happened in New Zealand to try and draw a conclusion what might happen over the next few years because of course as you know hopefully probably remember you had co uh during that period. That period began with very low almost zero interest rates and ended with very high interest rates um as well as immigration work from home all the co impacts. So impossible to pull apart, you know, what happened there. But the government decided that it really didn't help housing affordability. It didn't help renters and that's why they reinstated the national party reinstated interest deductibility which Mina I think is a great segue to get into.

[00:04:52]Let's talk about and that's what we're going to do today is we're going to talk about um negative gearing first. Mina, let's start there. Yeah. Perfect. So, a lot to unpack there. And before we I I want to start um I just want to say that this these are all just announcements.

[00:05:06]Nothing's law yet. So, there's no need to jump ship or sort of uh you know uh you know make any sort of transactions that are unwarranted just in the hope that these sort of uh laws will pass.

[00:05:18]>> Y >> so really the the first the first change is around existing property. So with existing property, you're if you got an existing investment property, you're lucky the rules are grandfathered. You can continue claiming the negative gearing. Nothing changes from that front. Um that also applies to your owner occupy home. So say hypothetically you've got a home at the moment um that you're looking to potentially upgrade in sort of 5 10 years or whenever it is.

[00:05:44]now because it's been that home was purchased before budget night. The way that the sort of the proposal works at this point in time is that that that that home is still you can still negatively gear. So we're advising our clients at the moment to just put those put any excess funds in an offset account rather than any redraw paid down the loan just to preserve any interest deductibility you've got on that on that property, excuse me. Um going forward.

[00:06:12]Um now there is a transitionary period around uh till 1 July 2027. So if you've purchased a property between budget night being 13th of May to 1 July 2027, you can actually still claim the negative gearing up to 1 July 2027.

[00:06:28]However, those properties post 1 July 2027 assuming it's established home that is can no longer be uh negatively geared. Now there is a a couple of carveouts for negative gearing. The first is around new homes. So with new homes, your um if you've purchased a new home, so a home that's been uh so think of like new town houses or apartments where there's been more volume added to the existing uh land, then those properties can still uh benefit from the negative gearing. Um similarly with commercial property, any commercial property acquisition, uh you can still claim any any um negative gearing associated with that. Now finally there's also around shares. So with with shares um any sort of margin lending or anything like that you can still claim deductions to invest in the share share portfolio. So th those are really the the the carveouts for for negative gearing. So sure I think you've done some modeling as to what this looks like from a percentage uh perspective around negative gearing. Yeah, I mean I guess that's the first thing people are going to be thinking about is you know what impact does it impact me as a as an existing investor or a prospective investor. You know if I'm thinking about buying another investment property um and you know your point is is very important in terms of we can't overreact on these things. You know it could change. So I don't think we need to make any decisions today but the the reality is that it will move the dial. Certainly the negative gearing situation and benefit dramatically changes uh the the efficiency of investing in property and it makes sense right because we tend to go and borrow the full cost when we buy a property. So our contribution is the negative cash flow.

[00:08:19]Um we get a at the moment we get a tax deduction for that contribution. So, it dramatically reduces, particularly if you're on on the highest marginal tax rate, dramatically reduces the amount of uh negative cash flow that you've got to stump into. But if we don't get it, all of a sudden, we've got to put in twice as much cash into the property. Uh but we're not necessarily going to get twice as much as capital gains, of course, particularly if you're in Melbourne. Uh so, you know, it does certainly move the dial. So, let's just talk about uh a scenario where we've got 6 12% growth.

[00:08:53]We've got sort of 3% yield, which I think would be I mean, every property is going to be different, but I think that's going to be reasonable assumptions. Well, uh we can if we have that situation, we've got a a after tax internal rate of return of 11%. So, after all taxes, you're making 11% on your money. That's a pretty good return, right? You're going to you'll be happy with that.

[00:09:16]>> Definitely. uh if we factor in the higher CGT uh that return drops by around 7% to 10.2%.

[00:09:24]It's not ideal. No one wants to donate any extra money to the ATO but except you me uh but uh you know 7% isn't really going to you know move the dial too much.

[00:09:37]Borrowing to invest in property is still going to be attractive. But here's the kicker. If you then overlay no negative gearing on top of that it drops to 8.4%.

[00:09:46]4%. So that's a 24% total decline in total return. So I think as property investors we need to sit back and think is 8.4% enough compensation for the risk. So you know what are the risks? Of course we've got um higher tenants or more tenency rules which give rise to less control, higher costs. We've got the the risk associated with borrowing, you know, which obviously we put ourselves into a long-term commitment.

[00:10:16]We've got interest rate sensitivity. Um, we think about cash flow cost associated with the property maintenance. You can't predict those things. I mean, you can make allowances, but sometimes you can have, you know, you got to replace air conditioner that you only just put in 3 years ago. Sorry, I'm just venting here.

[00:10:34]Uh, and these things, you know, so that's not necessarily uh predictable.

[00:10:38]Um and then the time the time and energy that goes into managing property. So the question I put to listeners then is 8.4% after tax going to compensate you for that? because you could put that money into super uh and you can do that very tax effectively and if you have a look at most you know most of the good industry funds over the last 10 20 30 40 years they've delivered you know 80ish% 9% some of 10% you know and that's an after tax basis uh and that's no investment risk you know you've got no control over the asset like you do with property but um and you know it just I don't No, I really think it actually moves the dial on investing in property and um and and doesn't necessarily make it worthwhile.

[00:11:29]Now, of course, a lot of people going to be thinking, what about, you know, new new build property? You know, should should I uh invest in that? Well, um it's kind of interesting. I guess firstly, we shouldn't let uh taxation measures influence investment decisions.

[00:11:46]>> Agreed. uh you know the first thing I would I would the first observation is these things can change like they might change as proposed uh and then you know elbow might lose uh the the government in two years time and they might get changed back all of a sudden you've made what is a 20 30 year investment decision off the back of you know a moving target tax is always going to change rules are always going to change so we shouldn't we've got to resist the temptation to make uh decisions purely on that look I did the numbers numbers. If I assume and I looked at some example properties for this, if I did the numbers and assumed a 3.7% gross yield and let's go 4.5% growth, I think that's pretty aggressive because what we're doing is we're buying a house and land package really on the outskirts of a capital city. Um and the livability of those properties is only going to be only going to reduce because in Australia we cannot build infrastructure cost effectively and fast enough uh for that livability not to reduce anyway I get about an internal rate of return of 11%. Which is the same as what property is investment grade property is today. So on on the face of it, you would go, okay, it's a good it's a good proposition, Mina. But I think that there's going to be some really significant downsides to doing this.

[00:13:08]Firstly, and and absolutely as as anyone that listens to the podcast will know, we're all into evidence-based investing and fundamentals, and those properties are located in an area where the fundamentals don't stack up. I'm buying an asset where there's an abundant supply of of vacant land. That's not ideal. Uh and that's not necessarily going to be ideal for for capital growth as well. The other problem is going to be is that me as the first owner of that property has some unique tax benefits that are unique to me. They won't those tax benefits won't pass on to the potential um purchaser down the track if I go and sell that property. They're not going to get the negative gearing.

[00:13:49]They're going to pay the higher uh capital gains tax. So to what extent will prices reflect those unique tax benefits? I don't want me as an investor, I don't want to pay prepaid for them. And then if you have a look at what's happened over the last 20 years in Brisbane and Melbourne in particular, there's been a lot of high-rise development, you know, 15 years ago that was sold off the plan. Um, Victorians were buying apartments in Brisbane for $300 or $400,000 15 years ago off the plan. sight unseen. You know, if you speak to locals in Brisbane at the time, they were laughing their heads off thinking these idiots are paying 3 to400,000 for something that's not worth that amount. And similarly in Melbourne happened, a lot of Chinese buyers bought off the plan. 80% of the building would be owned offshore.

[00:14:36]>> Now, that doesn't happen anymore. But the thing is that developers and the the the people that promoted the those sales, which would have earned commissions of 10, 20, $30,000 to sell these properties to their clients, um you know, they designed the product for that exact purpose. It's not a product built to create long-term value. It's a product to create profit.

[00:15:02]>> That's right. And uh and so I think I think uh you know we can do the numbers and we can look at these things but we've got to factor those risks into it as well. So um we can talk about you know other other opportunities in the in the property market as well because I think you know the question Mina will be then well what do you guys think about investing in direct property if these changes come through or you could go to commercial property um and go and buy a you know commercial property you know in the in a small town or something like that. I see a lot of that on social media. Um I I'm going to do a podcast on that probably next month, but I think the yields the cap rates that they're selling for are too thin. I don't think there's going to be any future returns.

[00:15:45]So in summary, if these if these uh changes get enacted as proposed, uh I think there's more attractive opportunities uh from uh for for investors. But I mean what what about existing investors? What do you think they should do? Look, I think as an existing investor, if you've got a if you're got a property that you're already negative gear in, there's nothing nothing's changed from that perspective. Our clients would already have investment grade property. Um, we don't think any sort of investment grade property will be affected by the negative gearing changes or the CGT changes. Typically, we tend to invest or have our clients invest in sort of areas that are highly owner occupied. So in those areas there that you know there's a big demand for those that kind of property and you know if you think about the likes of the inner circle of let's use Melbourne as an example the inner circle of Melbourne you draw a 7 km radius around Melbourne there's very limited supply um you know you look at especially areas in in the eastern corridors where um there's not much apartment supply more houses and end of the day there's a a lot of owner occupiers they're not selling for negative gearing They're not selling for CGT changes. They're just basically selling for the benefits of, you know, upgrading the home or accessing equity or just downsizing. There's still going to be a large cohort of people that want to get into those areas. They're not really targeting the people that really need that negative gearing to to invest in those areas from from my perspective.

[00:17:17]So, in short, if you're an existing investor, I would say just sit tight, don't do anything. Um, again, these changes or these proposals aren't law yet. A lot can change between now and when it goes to Senate. So, um, if you're an existing investor, you're probably one of the lucky ones to just still have a property that you're either negatively gearing or a property that you can potentially negatively gear in the future.

[00:17:41]>> Yeah. Um, I would just say we understand that you're not able to pose questions, which is not ideal, but uh, we're just trying to work through to to change that. So, apologies, but we did receive a whole bunch of questions. So, I I feel like we can certainly talk to them. I mean, a lot of people will be thinking, what is that going to do to property, property prices, rental yields, these sorts of things? And look, there's going to be a lot of self-interested comment commentary around this. I think I've already sort of seen a little bit of it, so it's good to get into the facts. Um if you if you look at inner city locations in capital cities around Australia, um it's kind of surprising that you see about 50 to 60% of property is is rented. So it's owned by a landlord. Um uh we only have to look to pre 85 CGT assets. You know, if we come across, we have some clients every now and have precg assets. No one is selling them, right? They're unique. And the same with property that's going to have negative gearing, investors won't sell.

[00:18:43]I mean, some investors will just because it's circumstantial, but if left to, you know, if it's their decision, they're going to hang on to it. So, I expect that the the volume of vendors will reduce. I mean, particularly if you look to Melbourne, there's been a lot of investors selling um over the last few years for reasons that we've previously talk about talked about in the podcast.

[00:19:04]I think that'll stop. Um but also I think buyer demand obviously from investors which tend to represent about 30% of the market. At the moment they're representing about 40% of borrowing capacity just probably because of the other states are doing so well in terms of capital growth. So I think that'll disappear as well. So I think we'll see fewer vendors and fewer buyers which will probably underpin prices. Um there's a lot of commentary around oh it's going to um skyrocket rents. The ar the counterargument to that mer is that if I own a property as an investor and I go and sell that property and an investor uh can't buy it um then an owner occupy is going to buy it. So in that situation we've got one less renter in Australia and one new owner occupied it doesn't really move the market. Now that's true at an aggregate level but of course it's going to be different in geographical locations. So I think we'll see some increases in rental income, some changes to property prices, but I think they they'll be patchy. I think at an aggregate level and certainly if you look at the Treasury modeling on this, Graten Institute, you know, a few other independent areas, they sort of say it moves at the margin, but it doesn't really change very much, which as I talked about at the beginning of today, that's the whole point, right? they they sold it to us is to try and help young people uh with housing affordability, but all the um all the modeling says that it's not going to do that. So, uh I don't think it's really going to change very much. As I said, there will be patches, but I don't think it's really going to change very much.

[00:20:37]>> Um except borrowing capacity, Mina, that's going to have an impact, isn't it?

[00:20:40]>> Yeah, massively. And we talk about the young people having uh or or trying to get access to property. And yet, you know, the borrowing capacity, we're talking about increased rate rises. um the fact that you can't negatively gear anymore. So the negative gearing component alone, we've modeled it out that affects borrowing capacities by what was it 15 to 20% I think it was.

[00:20:59]>> Um so that's a huge huge amount that you can't borrow. So on a million dollar loan that's $1500 to $200,000 already wiped off your budget and as we know in most states that's that's a you know a million dollars doesn't really get you a lot in terms of an investment grade property.

[00:21:15]>> Yeah. So, I'm not sure this budget or these measures will actually help um sort of first-time home buyers get into the market. Um especially with the current rate rises and the inflation and you know government spending and unemploy uh the employment figures the way they are. So, I'm not sure it's really going to get to where they really want to with or in targeting the you know first home buyers or getting people into the property market.

[00:21:38]>> And what about uh you know what would you advise clients if they're looking for a property at the moment, an investment property that is? Yeah, first is sit tight. I wouldn't be doing anything. Secondly, I'll be I'll be telling them just be cautious. There's going to be a lot of noise out there around developers and new stock. Um, we've we talk about a lot in our in our podcasts, our blogs here about what an investment grade property is. These new builds, like you mentioned before, typically don't meet that criteria.

[00:22:04]They've got very minimal sort of land sort of uh value to it. Developers obviously focus on volume, so they want to get as much onto a block as possible.

[00:22:13]Um, so they're not really great and they're out in the outer suburbs. So stay away from all stay away from those types of products. Stay away from that kind of noise. They're going to sell you sell you the dream in terms of the negative gearing, the CGT discounts and so forth. Um, but from my perspective, I would just be telling people sit tight.

[00:22:31]If you had a pre-approval in place, um, and you wanted to invest or something like that, just wait. Wait it out. Let's see where this goes. I think a lot will come into into fruition or light in the next few months anyway. Um there's been a lot of rhetoric in the in the news. Um a lot of push back. So it'll be interesting to see what the government sort of backtrack on as we've seen with for example the div 296 with super.

[00:22:56]>> Yeah. They've got history here.

[00:22:57]>> That's right. So they backtracked on that. Um so I wouldn't be surprised if there's some measures in this budget that they they sort of redact.

[00:23:04]>> Yes. Yeah. And I think um I think that's good advice, Benner, because you know what's I guess we always think about opportunity cost in terms of delay and you know we don't want clients to procrastinate. That's uh that delay is too long. But I I think if we put our plans on ice, if we're going to make some substantial plans about investing in property, which are, you know, it's their it's an expensive and um big commitment. Uh I think to park them for for 3 to 6 months or even a year uh is not that big a deal rather than rush into something. um make a decision based on you know what we know today and then you know in well you got to ask yourself in 20 years time will you look back in and reflect on 2026 and go I shouldn't have overreacted I shouldn't have done something like that so I think we to keep it in context I was talk about making long-term decisions playing the long game and I think in the face of significant uncertainty uncertainty in respect to what the rules are and also uncertainty of whether if those rules are in place for the foreseeable future, you know, whether it moves the dial in terms of um uh whether it's going to be attractive to invest in property.

[00:24:15]>> What do you think from an owner occupy perspective? I sure would you know if we focused on investors, what would donor occupiers in the current market want to do?

[00:24:24]>> Yeah, I mean it's it's really interesting. I guess it depends on what happens to to property prices and your view to that and I think it depends on where you're buying and what type of asset you're buying as well and to what extent will that be affected by investor demand. But maybe that's a good segue into the CGT changes. Mina let's uh because we we'll come back to that.

[00:24:45]Let's let's talk about those CGT changes. They're pretty significant.

[00:24:48]>> They are significant. So there's again a lot a lot to unpack here. We've got um the precg assets which I'll start with.

[00:24:56]Um I know not a lot of people have these and if you've had them you're quite lucky to to have them. Um so basically you still get the CGT exemption up until 1 July 2027. So what that means is you can still sell that property um or that investment whatever you had before u uh 1985 up until 1 July 2027 completely taxfree. Now um anything above uh anything acred in terms of uh value from 1 July 2027 onwards it will then attract the CG attract CGT. So we're encouraging clients um to basically get valuations if it's a property or similar as or or even a business um as at 1 July 2027 just to get that cost base reset and get confirmation around what that cost base looks like. Um, this doesn't mean we necessarily recommending to clients to sell assets as a result because like I said, you still get the the gain, the uplift from 1985 up until 2027 completely taxfree. So, it's, you know, no worse off. You're getting a complete market reset at 1 July 2027. Um, similarly that obviously the CGT rates are reducing from 1 July 2027 across all asset classes. So that's property um shares >> increasing >> uh sorry increasing >> increasing I wish decreasing that would have been nice um uh increasing uh from 1 July 2027 so we're seeing that um that a minimum CGT tax rate of 30% will apply um and that that will be indexed from also you got the either a minimum of 30% from 1 July 27 2027 sorry or it'll be uh you can use the indexation method from there on as Well, >> yep. So, it's 30% of that indexation method. So, correct. I maybe explain if I've got a if I've got a property asset, for example, that I bought 10 years ago and I sell it in 10 years time. Um, maybe explain how that's going to work with the new >> Yeah. So, basically, you'll get still get the 50% CGT discount up until 1 July 2027. Um, and then from 1 July 2027 onwards, you would basically get um assuming that's the end of your 10-year period. um the for the preceding 10 years you'll then apply the new CGT laws. So that's basically either applying the indexation method or the 30% whichever.

[00:27:15]>> Yeah. Yeah. Yeah. Yeah. It's index I mean it's 30 the indexation method works by indexing the the cost base. So they'll index the cost base. The cost base will become you know the the market value at uh July 27. So they will need some pretty attractive high valuations if you like. uh and then they will index that of course to CPI versus what you end up selling the asset for uh will be your gross capital gain and it's 30% minimum 30% of that gross capital gain.

[00:27:48]So that's how it's going to work. Um there's some again there is some misinformation out there in terms of I mean Treasury has done some modeling on CPI versus 50% discount. they made some comments to say that they concluded that uh CPI is equivalent to a 60% discount and that is true if the asset doesn't return very much.

[00:28:11]>> So it really whether you'll be worse off or better off really depends on what is the capital growth of the asset because it's really the difference between CPI which I think longer term we can think maybe it's 3% versus what the capital growth is post 2027. So if you only get 5% or 4% capital growth actually the CPI methodology will be you'll be better off.

[00:28:35]>> Yeah.

[00:28:36]>> But if you you know if you're lucky enough to get 10%. Uh you know that that's obviously you're going to end up paying more capital gains tax. We've modeled it uh just looking at a sort of 7% capital growth rate and sort of the effective rate is somewhere between 30 and 35%.

[00:28:53]Whereas today mean people pay around 20 to 22% depending on their circumstances but you can sort of draw a circle around that. So >> it's 50% increase.

[00:29:03]>> It's only a 50% increase. Yeah. It's not too bad.

[00:29:06]>> It's not a tax grab, right?

[00:29:08]>> The good thing is it's not going to skew capital allocation, you know, because it it applies across the board. And if that's a good thing, I mean, it's a good thing in of itself, but the fact that it applies to all assets isn't a good thing. Um and certainly that applies to business I don't think is a is a great idea. It doesn't really encourage you know people to start a small business although there are some small business concessions that still are around.

[00:29:32]>> Yeah. They're bringing through the uh the loss carryback provisions that they introduced in co uh which I think is good where you basically can use losses that you accured uh from uh early years or profits that you accured from early years to offset those um losses that you have. um subject to your franking account balance of course. Um and also the small business CGT concessions are still around. So they haven't changed those which is great. Love to see them index those J. They have an index rule a number.

[00:29:59]>> No, they're pretty generous. I'm surprised they haven't haven't cut them out as well to to be honest. Um so what do we do about uh CGT the higher CGT?

[00:30:10]Well, as I said at the beginning of today, the internal rate of return for property drops from 11 down to 10.2%. So about a 7% reduction. Like I said, I don't think it's going to change the strategy. I don't think it's going to change the advice or approach. I haven't done the same numbers for shares. You know, one of the advantages of course investing in the share market, Mina, is I can sell incrementally and from our perspective that's been an advantage. If we enter into retirement and we need some money, we need another $50,000 a year where we can sell $50,000 of an asset. Unlike property where you can sell the whole thing and hopefully then keep our our tax rate pretty low and not pay too much CGT. Well, unfortunately that opportunity is has gone which kind of puts pushes property and shares sort of closer together except for the negative gearing of course but you know if they can see the negative gearing. Um so what what are what are some reactions I guess that uh existing investors should should uh consider as a result of these changes?

[00:31:13]>> Look I think it's just made two things more clearer for us. I think it's it's shown that the two biggest asset classes or two biggest biggest sort of tax havens that we have is basically your family home and super. So from my perspective, I think those are the biggest things you got to really execute well on. Ensure that your family home's a really good quality asset as well as focusing on super, getting funds in there and and and making sure you're investing in super regularly.

[00:31:39]>> Yeah. Yeah. And I've written a couple of blogs about uh that I coined live investing, a little bit of a tilt on rent vesting uh which is you know the sort of strategy to put all not all your wealth but you know a lot of your resources into upgrading the family home. Um and potentially making friends with downgrading that family home in the future. Uh and certainly the family home has kind of been a bit of a free kick uh from a taxation perspective. So, you know, I think that I think that strategy was good before the CGT changes, but not it's even better post. Um, and we've done a few podcasts recently, uh, particularly talking about property investors, you know, trying to move more of their wealth in into super as they approach retirement or maybe the first 10 years after retirement. Again, I think it it uh highlights that. But for prospective investors, you know, people are going to be thinking, I got a question on YouTube last night, I think it was about, well, should we now invest for income? Should we chase frank dividends? Um, I don't think so is the answer. I think the answer still lies in compounding capital growth. The benefit of compounding capital growth is that I don't pay tax every year. I get the return. I get to reinvest that return.

[00:32:52]Now, sure, I'm going to pay 7% more in the back end. hope you know in 10 20 30 whatever years it is that's not ideal but it still makes compounding capital growth attractive so I don't think it changes our approach to investing in property or shares the property of course you know negative gearing is the big the big one but if we're just isolating the impact of uh capital gains tax um I don't think it it changes that >> y >> okay let's talk about uh family trust which was the third really big change uh in uh in the budget. Uh maybe you can take us through that. That's a pretty significant one.

[00:33:31]>> Yeah, I'll probably say it's probably the biggest one out of the three. I know a lot of investors are focused on negative gearing and and uh the CJT changes, but the trust one is probably the most convoluted and will probably have the biggest sort of tax effect for a lot of people, especially if you consider how many people are self-employed in Australia and how many small businesses make up our economy. A lot of them will have trust structures in place. So from from a family trust perspective, what they're essentially trying to do is basically do a minimum tax rate of 30% across the board. So basically, if we use the example that Stuart mentioned earlier, around the $200,000 of income in a family trust from a business business entity, typically we will distribute $100,000 to one partner and $100,000 to another partner would yield about an average about $45,000 in tax as a result.

[00:34:20]because of these new laws, it's going to be a flat rate of 60 60,000 and you don't get a you don't get a tax credit for that additional 15% you've paid otherwise. So, you're a lot worse off.

[00:34:31]Um, and what they're also trying to do is um reduce the ability for you to for you to use a corporate beneficiary. So, typically what we used to have is say a business in a trading trust um uh and have a corporate beneficiary. So that we used to be able to distribute to say mom and dad or or partners or whatever it is um up to say $190 $200,000 each and the balance will go to a corporate beneficiary who usually can cap the tax rate at 25 or 30% depending on what type of entity you are. And what that's done is now that every uh that that sorry those taxes are now at a flat 30% but the company doesn't receive a credit for that 30%. So there's no franking credit there. So the company pays an additional 30% on that that income. So you can essentially end up with 60% in in of tax payable on those business earnings which is quite significant. Um sorry go ahead.

[00:35:26]>> No no I was I was just going to say like uh you know it seems like they want to make everyone pay at least 30% but in this situation they're saying well as the penalty is 60%. So it's almost like the policy is we don't want people to invest.

[00:35:41]>> That's right. you know, if you're actually putting the money into the corporate beneficiary, capital is flowing into share markets, capital is flowing into equity markets. That is good >> for a country.

[00:35:52]>> Um uh but you know, you would you would want uh to you the idea is build the tax base, you know, grow the economy which builds the tax base, then you don't need to increase taxes as a percentage. Um this this seems nonsensical.

[00:36:08]>> Yeah. And to be honest, out of all the measures that have been announced, Stu, my gut, again, don't take this with a grain of salt, but my gut tells me this is the measure that will be most likely round back. And the reason is that trust laws actually embedded in common law.

[00:36:21]So, it's not about just changing tax law, it's about changing common law, too. Um, and from my perspective, it just there's a lot to unwind here to get this through. Um, and like we've sort of mentioned to clients previously, do nothing for now. you don't need to restructure your affairs. These changes won't come into place until 2028. Um, and you've still got they're still giving us the three-year grace period.

[00:36:45]So, even if they do come into effect, apparently there's going to be some CGT provisions that will allow us to restructure um your your affairs so that you're out of this sort of trust structure.

[00:36:56]>> Yeah, that's right. And you know, the common law principle around trusts is they look through entities. you know they don't a trust is just an agreement to hold assets on behalf of beneficiaries. It's not a legal entity in of itself. That's why it needs a trustee. It needs a uh some legal person to hold those assets uh on trust and they've always been taxed that way as look through entities. You know whatever passes through a trust the tax nature is retained. So it is a massive departure um from that approach. Um let's talk about sort of two cohorts. mean I know it's far too early to um uh react to these changes and we do have uh you know plenty of time if they do become law plenty of time to react but I guess let's talk through some of our thinking and I think there's sort of two cohorts here there's going to be self-employed people with trust structures um that have you know taxable income profits from their business to distribute uh and then there's going to the other cohort is really um investors you know people that have a passive investment vehicle be it a trust with a corporate beneficiary or whatever it might be. So let's talk about those two. Uh I mean let's start with business owners first.

[00:38:05]What are we thinking in terms of navigating these changes?

[00:38:08]>> Yeah. So typically for business entities or uh people that are in active active businesses um we would have most likely have them in some sort of corporate structure. So a company and that company's shares will typically be held by a family trust. Now to prevent the frank dividend coming from the company into the trust and into the beneficiary from being double taxed what we could do is then interpose an entity uh before the family trust. So the shareholdings of the trading company uh then take uh taken place by the corporate beneficiary which would have otherwise sat further down the line.

[00:38:42]>> So what that does allows you to basically still get money out of the out of your company uh pay dividends into it. So from an asset protection you're reducing your retained earnings. there's no concerns from there. You can invest those funds and still in a in a tax effective environment >> and then stream dividends out as and when you need it for personal living expenses.

[00:39:01]>> Yep. And we we of course haven't seen the the legislation or the detail, but they do talk about CGT rollovers a as a result of restructuring. So, um we would expect that we'll be able to transfer rejig things without really upsetting anything. And the only change mina then is sometimes we would we wouldn't distribute um that much money to or the maximum amount to individuals. We might only distribute 135,000 or something if we wanted to really optimize tax. But now if we're going to distribute to individuals we want them to at least have a 30% average tax rate. So that's sort of 190 200,000 to so that's really the only change. It's It's not ideal, but I don't for self-employed people, most self-employed people, I don't think it's going to change too much. Oh, of course, actually, before we get to that, I should say that um we've fixed the comments. So, uh if you do have any questions, please post them in. We're getting towards the end of today's session, which is perfect timing to answer your questions. So, if you do have questions and we haven't covered them, please um put them in now. Um I guess ma the only proviso here is that you know for self-employed people that distributed outside the family group or the wider family group that's probably not uh achievable anymore.

[00:40:20]>> Yeah. Because typically if you you sort of uh distributed to people outside the the family group you they would have typically been below that 190,000 mark.

[00:40:29]So again you're you're really sort of paying 30% tax on someone that would have otherwise been paying a lower marginal tax rate. So it's definitely not recommended.

[00:40:38]>> Yep. Yep. The second cohort may are passive investment entities. Uh so this is a situation where we're using a trust to invest in the share market whatever sort of assets. What what do we think uh with respect to that?

[00:40:52]>> So you you're probably in that sort of uh if you recall I mentioned that you can still use gearing for share trading.

[00:40:59]Um, so you know, think of the likes of margin lending, but we typically like clients to use sort of equity against the home for more favorable rates and so forth. So you can introduce gearing into that entity. So you can start investing and get get some tax deductions. Um, also through um just consider moving investments into a company structure. So capping the tax rate if you guys are if you're at the highest marginal tax rate and also consider super you know getting more money into super start investing more into super as well. Um you get the tax deduction personally it's still in your tax haven we'd like to think it won't get touched again for a little while. So >> yeah I I think the other thing u people can do is think about investment management as well like what do they invest in? If I look at our portfolios over the last three or four years, they've generated about 1.5% in to in total return in income and capital gains. Uh and about sort of 13% total return over that period. And I'm just going from memory, by the way. But so we're we're investing in a way that's generating not a lot of income or capital on purpose. you know, ultimately we're focused on total overall return, but to reduce the taxation drag, we want less income and capital gains. So, um, that's another way to sort of navigate it as well. And, uh, you know, moving money into super is something we always think about, particularly if we've got a client and we want to have the flexibility have assets outside of super, particularly if we want to have the flexibility to, you know, stage or early retirement. But as we get closer to 60 and being able to access super, that's when we potentially move money out of family trust um subject to capital gains tax of course into if if it's uh if you're able to do that into uh superanuation. So I think there's going to be some changes here like you do Mina, I think there's at least going to be a small business income carve out.

[00:42:59]So that is that you know people that are running a small business that aren't millionaires you know that aren't then going to be in that that example that you gave where the tax bill increases from 45 to uh to 60,000. But actually I wouldn't be surprised if this one got totally knocked on the head.

[00:43:17]>> Yeah. because it does really change how trusts are being used and corporate beneficiaries. And the ATO was previously in terms of its compliance operations really focused about people misusing trusts. So distributing distributing money but not actually distributing the cash, saving the tax, going out and buying a yacht or a new home, doing these sorts of things. So, I mean, they're clearly, you know, playing the tax system to their advantage, and that's what they were really after. Uh, I think this has too many negative unintended consequences. Yeah, definitely.

[00:43:54]>> There's a question there, Mina. Gearing into shares, is that still attractive?

[00:43:58]You know, negatively gearing into shares. If we can't do it with property, what about the share market? Definitely as long as uh you sort of got a a right investment philosophy, you know, following ev evidence-based sort of investing as we sort of bang on about day in day out. Um sort of gearing to invest into shares is definitely a good idea. Would an overgeear though obviously we all know that the share market is a lot more volatile than than say brick and mortar is. So it's you know having a a good sort of buff margin as we call it is still definitely uh recommended. Yeah, I've recorded two podcasts over the last uh let's say couple of months and I can't remember the episode numbers off by heart of course, but one was around constructing an ETF portfolio. Another one was about lump sum share investing. So, uh if you're thinking about um using negative gearing in the share market, those two podcasts will certainly help. And it really comes volatility is an issue, but it really comes down to what you're investing in, not necessarily just how you're investing. So if I'm investing in a sector of the market that's very attractively priced, probably doesn't matter that I'm going to put a lump sum in that market. But if I'm investing in a market where it looks overcooked or stretched on a valuation perspective, you know, that's not ideal. I mean, we got a question about valuations. Of course, if we're going to get assets revalued on as at July 27, you know, how's that going to work? Everyone's going to be looking for a valuation. And do you need a sworn valuation? Can you, you know, just ask a real estate agent what what does the ATO typically look at there?

[00:45:33]>> Yeah. So, typically we used to be able to get away with a agent valuation, quoting a range, quoting some sort of comparable sales around that sort of point in time. Um, now I've recently had a review for one of my clients who disposed of a property who where the ATO actually where we had an agent valuation, but the ATO actually asked for a sworn valuation. Now, luckily in that instance, the sworn valuation came in higher than the agent evaluation. So, it worked in our favor. So, I would generally recommend getting maybe obtaining a sworn valuation of some sort. Or sometimes even if you look, you're refinancing and you've got a bank valuation, you can get a copy of that bank valuation and it's a favorable valuation and not might not be a bad idea to use either.

[00:46:17]>> Yep.

[00:46:17]>> Cool.

[00:46:18]>> Um, there's another question about internally geared ETFs. I actually just finished writing an episode about uh investing super in internally geared ETFs which is which was off the back of a question I got on uh YouTube. So um everyone that posts those questions they do take a lot of time to answer but they do give me ideas. Uh so I think that one's coming next month but it's kind of interesting. Usually internally geared ETFs will actually reduce the income profile of the ETF give you some leveraged exposure. So that's not so bad particularly if it's in a family trust because as I talked about portfolio construction trying to reduce the amount of income that comes off a a portfolio.

[00:47:01]We also had a question Mina about you know is using a family trust to invest in the share market still a good idea?

[00:47:09]You know this is one of these this is one of these challenging questions isn't it? I mean, do you make a a what is a long-term decision of something that you know, a rule that may or may not go through uh and may or may not be around for, you know, the next 10 or 20 years?

[00:47:26]What what's your view?

[00:47:28]>> Look, my view is that there's another election coming what is in two years time?

[00:47:31]>> Two years. Yeah.

[00:47:32]>> So, a lot of this could get scrapped and I wouldn't be surprised if it does go through it and getting scrapped in a few years time. So, >> you know, we we invest for the long term, right? So, we don't buy a property today to sell tomorrow. We don't buy a share today to sell tomorrow either.

[00:47:47]We're we're here for the, you know, the ups and the downs. Um, I from my per personal perspective, I'd like to hear what you think, sure. But I I'll sit tight. I'll still continue what I'm doing. I'll still be investing um in shares. That is I'll sit tight on the property front.

[00:48:03]>> Yeah.

[00:48:04]>> Um and and see how things go. Um you could always do things like we said in terms of introducing gearing down the track. there's going to be around the things around the restructuring provisions down the track as well. So I wouldn't I wouldn't think that there's too much to do now or shouldn't be changing your investment appetite other than property that is for the time being.

[00:48:25]>> Yeah. I mean you got the minimum uh you know if we just assume everything goes through as it is you're going to have to pay 30% on the CGT anyway. So whether you had that in or outside of a a family trust, your only uh upside is that those rules are changed in the future. So therefore, the only downside to still using a trust is will you pay higher tax between now and when you want to sell those investments. Um and that you know that that depends on the the value of the investments in the trust and the nature of those investments in the trust. But if we can manipulate them to produce less income, then arguably I've got some optionality there. I'm in a in a tax environment that's not really going to punish me too much. And then I potentially got the long-term flexibility if and when the rules change. And if there's a change in government, I would say that there's a very high probability of the rules changing. And I would say there's less than a 50% probability of these rules as proposed as they apply to family trusts of being legislated. I think less substantially less than 50%. So let's not get too excited about it. There's a good question here Stuart. I didn't think about credit policies with banks and around borrowing capacity. Obviously you've seen the bank share prices get smashed. I haven't checked today actually but yesterday the banks obviously all took a hurting on their share price. Do you think their policies will change when now when it comes to borrowing capacity and their appetite to borrow or lend funds to investors?

[00:49:55]>> So, I mean, it's only been uh 40 hours since the budget. Uh so, it's a bit unfair, but we've we've had crickets from the banks. The banks haven't haven't communicated uh about this in respect to credit policy, you know, to mortgage brokers and their impact. I think they're probably still getting their head around it. I think it's really challenging for them. They've always included negative gearing in serviceability calculations.

[00:50:20]Um, and now it's going to be a real challenge for them because they're writing a 30-year mortgage. Do you write that 30-year mortgage based on what you know today from a taxation legislation or what you think's going to happen in the future? You know, what you're trying to do is assess a borrower's capacity to be able to service and repay that loan over over a three decade period, not over the next, you know, 12 to 24 months. Um so I think it's a really difficult situation for them now much like investors trying to make decisions today. Um I think they will probably be conservative and um take negative gearing out of the calculation for now.

[00:50:56]Um but that's okay because I think the best thing for investors to do is do nothing.

[00:51:01]>> Yeah. Right now.

[00:51:03]>> Perfect. Yeah.

[00:51:05]>> Um we've got a new another question here. How does the new CGT proposal work for a precg asset? So a pre1985 asset.

[00:51:13]So if you're one of the lucky ones that still have that kind of asset, you still get the tax saving up until 1 July 2027.

[00:51:20]So if you dispose between now and 1 July 2027, you're completely taxfree still.

[00:51:26]Um post 1 July 2027, you'll need to only pay capital gains tax on the portion of the market value increase between 1 July 2027 and when you actually dispose the asset. So you'll get a valuation of whatever you're selling at that point in time.

[00:51:43]Okay. Uh look, just conscious of of time. Uh like to thank everyone for tuning in. Just a couple of apologies.

[00:51:51]Um you know, the the comments uh didn't really work that well. So apologies for that. We'll fix that. And as I understand it, um YouTube serves some ads as well, which isn't ideal. Uh you know, we're certainly not making money off this. So uh that's an ideal. will know that for for next time. Um I guess the the thing we'll leave you with is don't do anything is probably the answer. Don't make any decisions. Don't make any changes. Let's just watch the debate. Um we'll drag Mina back for another presentation, you know, once we know what things are going to look like and we'll help uh you know, our listeners, you know, make make important decisions and the decisions they need to make at the right time. But uh I'm sure there'll be plenty of commentary. Um, there'll be plenty of self-interested commentary as well. So, look, just be careful. Um, I mean, it's good to to listen to different views. I'm certainly not saying that, but um, don't necessarily react off the back of one person's commentary. I think we want to see a a consensus here. So, uh, we might leave it there. Thank you, Mina. Thanks for joining. You did show how excited you were about taxation, which is uh really worrying. But anyway, uh, thank you. And before you go, if you enjoyed this episode, please share it with someone that you think will get value from it. And if you have a moment, leave a rating or review on Apple Podcasts or Spotify, as it really helps more people find the show. If you have a question you'd like me to answer in the next Q&A episode, email it to questionsinvestopolley.com.au.

[00:53:24]And if you'd like to learn about my new book, Wealth by Design, which is out in a few months time, head over to investop.com.au/ /book. The link is also in the show notes. And you can also register for the pre-order offer, which is an AI tool that you can use to get more personalized value out of this podcast.

[00:53:43]Thanks for listening.