This transcript was generated automatically and may contain small errors.
Markets that I'd struggled to get in, I got in. Markets that were just like, you know, agents back and forth on stuff, we adjusted pricing on our comparable analysis reports and were able to nail it. And so the main thing here is that there's a buying opportunity, a sensible one, combined with a lending urgency. Advantage, yeah. Advantage, yeah.
NERD ALERT! Property nerds. The home for data-driven property investors. Where we uncover Australia's hot and cold markets, latest headlines and trends. Welcome to another episode of the Property Nerds podcast.
And this one is an important one. Like, they all are, but this one's a very, very important one because today it's the post-budget deep dive on the Property Nerds podcast. And today's one isn't just a post-budget deep dive. It's a post-budget lending deep dive because that is the game of property. Property is a game of finance.
And who better to have in the studio than Jack Fareka, Fareka Financial. Jack, co-host of the Property Nerds podcast. He's here. Let's get into it. Good to be back, mate.
Let's do it. Let's do it. So firstly, this is a lending-focused one because I feel like everyone is talking budget. Everyone's talking negative gearing. And we'll talk to it.
But look, take a step back. There's 40 years of property data through wars, policies, migration shifts, supply shifts, and there is a lot more expensive properties today than there were 40 years ago and than there were in between. So we know what long-term property can do. So for those who are tuning into this episode, you're tuning in because you're wondering, how do I get my hands on more money? How do I get my hands on money?
And how will this impact me on getting my hands on money? Because the getting the hands on the money is the difference between scaling and the difference between getting to your goals faster because we know what property is going to do long-term. So let's do a quick rapid budget breakdown. But the rapid budget breakdown, I'll jump into it and I'll come straight to you for finance. So first part is CGT.
CGT basically saying from the date of budget up until 2027, people who have owned properties before that date of budget, those properties by 2027, July, can be revalued. And when they're revalued, that gain from the purchase price at the purchase date all the way through to that revaluation event by July 2027 will be at the current method of calculating CGT. But if that property goes and is held beyond that date, it's still going to get CGT discounts, but it's just going to be calculated differently. It's going to be calculated for the portion of gains after July 2027. And so hypothetically speaking, if you have a 500K property and it grows up to a million dollars, that 500K to a million dollars from purchase to July 2027 valuation, taxed at the current model.
Half it, 50% CGT discount if it's personally owned or trust owned. And then after that, you have your individual tax rates or where you distributed the tax rates. Then if that million dollar property, you didn't sell it, but you just kept having the gains go further to 1. 5, depending on what inflation is and depending on how long you held it for is the tax rate on that property. And that's where it just is slightly different.
Now, in some cases, it can actually work out to be a little bit better with the indexation, but let's just assume in most cases, it's a little bit worse. But that little bit worse is just a bit more tax over many, many, many, many periods of holding and still a strong period of gain. So that's CGT. Any properties purchased after, they just have the normal, the new indexation rate that will kick in after July 2027. Now we move over to negative gearing.
Negative gearing is the next change. Negative gearing was previously claimable on all personal purchases where the property is negatively geared. And for someone who's new to negatively geared properties, all it is is an outcome, not a strategy. So an outcome being that the fact that the rent is not able to cover deductible expenses, deductible expenses being council rates, water, insurance, some maintenance, not all, depreciation, and then also interest on the loan. These are some, there might be a few others, property management fees and things as an example.
Then from there, that gearing has a deduction. Hypothetically, if you have a 100K income at the moment and you have a 10K negatively geared property, so those deductible expenses are 10K more than the rent you receive, then your taxable rate is going to be based on 90K, but through the year you'd pay tax on 100K. The gap between what tax you should have paid and what you did pay is what you then have a tax return event and that tax return comes back into your pocket. So what's going to shift now is this. Anyone who owned a property, an owned property is defined as a contract date from what we know in the past, that took place pre 7.
30pm the 12th of May 2026, Sydney time, New South Wales time, no changes for you. Any properties you had then negatively geared, business as usual. But anyone who purchased properties or purchases properties after that, you do not lose negative gearing, you still get it, but in two different components. The first component is that you get it as usual up until July of 2027, no changes. But after 2027, any negative gearing taking place comes to you as a deferred tax benefit, which simply means this.
That example I gave prior with a $10,000 negative geared amount, year two, if you have another $8,000 negative geared amount, it is now a total of $18,000. It's building up, still claimable. Year three, if it's $6,000, it's a total across three years of $24,000. This keeps building up. One day, let's just say it reaches $50,000 over five, six, seven years.
Rent's been going up, so the deduction amount is getting lower and lower from being negative. Now let's just say in year eight, it's positive. Year nine, it's in positive. And that positive number happens because rents have gone up, offset balances have gone up, interest rates have come down, or more reasons. Loan's going down, whichever.
Now that deduction is turning into a positive, and the property is $2,000 positive cash flow per annum. Instead of you paying tax on that $2,000 property per annum, you have your negative gearing deduction that you racked up to $50,000 over nine years go down to $48,000. The year after, it's $4,000 positive per annum. It goes no tax payable. It just goes down to $44,000.
So if it has $10,000 the 11th or 12th year after, and it's positive cash flow $10,000 to $11,000, it doesn't matter. It'll not be taxed. It'll come down to $34,000. If any accountants are in the room, we're not one of those, but I spend all day with them. If I've made any mistakes, do just send me an email.
Correct me, arjun. investikit. com. au, but that's our interpretation, and we'll continue to be updating any guidance if I've made errors or mistakes, and it's not financial advice. I'm just doing my interpretation of what I've seen and what I'm reading and what Jack and I are constantly doing to stay informed and keep you all informed.
So that is the what it means, and I'm up to one to two last parts now of the budget. It's jam-packed. I'm trying to do my best future treasurer approach here. The next one is trusts, and so in trusts, what's happening is that the changes where you previously can income split quite generously. So for example, if you had 100K positive cash flow or gain post-tax in the trust ready to distribute, and you had a child, a partner, and some parents on no income, retired, and you're the sole income, or stay at home, and child of working age, post-18 as an example, you could distribute that 100K across all four of them and get basically close to tax-free because of their no tax thresholds up to just over 18K, saving you circa $40,000 to $47,000 thereabouts as an estimate on tax.
What they're trying to do is two things. Number one, they're basically saying you can't have a rate lower than 30%. So immediately your savings of $40,000 to $47,000 come down to about $17,000. Secondly, is that you also can't park it in a company to save tax that would have been at 25% to 30%, which is 25% to 30,000 if you didn't have those distributions occur the way I had before, because if you do that, we'll tax you not once at the $30,000 level of 30%, but we'll also tax you again by moving into that company and that company's tax rate being at near 60%. So from that perspective, that's leaving people taxed at a minimum number of 30, but can go up depending on who you distribute to from 30 through to 47, or if it's in a company, 30 through to 60 plus.
That is basically trying to say that family trusts from a tax strategy is just going to be taxed more, but still can have some rooms for savings because of distributing control, but not the maximum savings that you once could have. Now we go to the final budget update, new build property, and there's many other things, but we have a So, wait to see, but I think it's important for investors to know that the buying opportunities that are going to be available as a result of this can't be ignored, right? And the uninformed investors are going to flock to off-the-plan house and land packages and things like that, and we'll do a deep dive on that eventually. But realistically, the people listening to this podcast, they're informed investors, right? They're not the ones that are going to follow the masses and go out and think that brand new properties are going to be the way to go.
So, yeah. It's a big one. Don't sit on your hands. Because, yeah, if you can take advantage of your current lending capacity personally before all the calculators go crazy and change, before all the lenders need to find ways to claw back, which is lost time too, because they'll be fine again, you're sitting on a buying opportunity and a buying environment now of low sentiment. And every time we've seen this, we've been in this, like I've been doing this for like almost eight years now.
I go back, COVID, 2020. Interest rates rising, 2022. Interest rates rising again, late 25, early 26, third one. Also, 2018 and 2019, fixed rate cliff, mortgage interest only cliff, and first talks of Bill Shorten with negative gearing. Every single time one of these events took place, it was a great time to buy.
Like it was markets that I'd struggled to get in, I got in. Markets that were just like, you know, agents back and forth on stuff, we adjusted pricing on our comparable analysis reports and were able to nail it. And so the main thing here is that there's a buying opportunity, a sensible one, combined with a lending urgency. Advantage, yeah. Advantage here.
And so two final points to talk about on that before we go to trust loans is that I thought pre-budget, not from the budget aspect, but just imagine it never happened, the forecasts were pointing towards the affordable ends of the markets wrapping up and money starting to transfer towards mid to higher priced markets because of the interest rate cycle eventually reaching its end. And you come out the other side and then that 800K to 1. 4 million Maitland, Melbourne, Geelong, Newcastle, Central Coast, premium parts of Hobart, inner parts of Perth, inner parts to middle parts of Adelaide, that was going to be the swings. I felt that the swings were going to start to happen. And they're still good markets.
But that swing is going to be slightly delayed now. We're going to see the 600 to 900 pump for that little bit longer. We're also going to see this house market all over country where there are owner-occupier markets too. You're going to see investors who are in the million-dollar budgets push towards there. You're going to see not just from borrowing capacity.
Let's say no servicing calcs change. Perceived cash flow risk. Oh, I'm getting 15 grand back per annum only for the next year, but then after that I won't. Because remember, not everyone's investing in trust and companies. This is the personal investors that have been doing it for a while.
So that 15 grand per annum I won't. Of course, rents will eventually catch up. But that is on the mind of an investor. So you've got two things to do. Three things potentially.
The uninformed one will go to a new build property, and we'll cover that in a big deep dive on the next episode. But the informed one will either go, I just won't do anything, or I'll do something but cheaper. Because if I can bring my 15 down to 10, or 15 benefit, I might not get anything. So my 25 negative, can I bring it down to 20? These types of things will come into play.
So that's the first thing to see off the back of these changes. But the second thing on the whole personal lending as well is that when it comes to rents, if the rental yield and rent equation starts shifting too, eventually borrowing capacity, another thing that you could talk about too, is like rents will start picking up and yields will start being better. We're so used to putting three and fours and early fours on yield calcs. Fours and fives might start showing up in yield calcs too. And interest rates coming back down eventually, buying windows with a bit of uncertainty, this is those times again to get into a market before rents start rising, rates start coming down, and remember the only difference between budget unclarity and budget clarity is legislation.
So as soon as investors have clarity, they start acting again. Remember, investors didn't stop acting in COVID because the economy shifted immediately. No. The economy shifted after multiple periods of lockdown combined with unemployment increasing, job redundancies, business closures. That's when the people shut stuff down and actual functional and physical things stopped and they actually impacted lives.
But when COVID got announced, the stopping of the buying happened because people weren't sure what was going to happen. Clarity was missing. So if you combine clarity, rental increases, cheaper money, and money that's now starting to flow more again in the future, you're going to see another run. And it's about being on which side. Are you going to be on this side from low sentiment, people unsure, uninformed investors looking at other asset classes or types of subassets, and you're going to get an opportunity to buy in this window, or are you going to look at this side?
And the biggest mistake there is people waiting for that side and it's deja vu happening again. So that's the individual personal name world. Jack, let's talk about this trust and company part because I wouldn't call it a mistake, but I would say I'm in early stages of interpretation. And my interpretation is left, right, center because everything's changing rapidly. And you're the finance expert here.
You see calculators. You see stuff all the time. You know how lenders exclude lending, lenders include lending. And right now, everyone from a taxation view is talking company to replace the trust method of investing. But we had a really good sit down on this today and we're talking about it and we're just like, hold on a minute.
We're just getting into everyone's same viewpoints. Let's not be the sheep here. Let's take a step back and go, do people buy property with taxes as a core outcome decision or do people buy property with lending as a core outcome decision? And lending is what scales portfolios and it's the same reason why we don't buy new build properties because we don't buy them for taxes. We don't want to do that.
We buy properties where lending is better, scale is better, structure, performance, outcomes. So let's talk lending entities. Again, it's not advice. This is lending interpretation. So let's go companies because of this new change and then versus trust.
A lot of people are saying trusts are dead. Taxation, lending, two different games. How do trusts, even with these changes, still help with lending? And more so, how do they help more so in comparison to companies? Yeah, so since all the changes in trust lending late last year, early this year, I feel like the dust has settled a bit and we kind of know where we see it.
Trusts and companies seem to be a non-major bank, third-tier lender space. And from a lending perspective, I don't see anything has changed as a result of the budget. From a lending perspective or a lending strategy perspective. Taxation strategies and all that, sure, that's a different topic. But from a lending perspective, I really don't think strategies change in order to, if you want to be an aggressive scaling investor, the trust route still has more options for you to be able to exclude debts in trusts when purchasing in other entities or in personal name.
There's only a couple options for you to buy in a separate entity or in your personal name and exclude a company-owned debt, right? Unless you're self-employed. So it seems the way that it's shifting because the trusts don't have those same tax advantages, you'll see a lot more business owners go towards the company route because they still have the flexibility to make a company that owns a property more self-sufficient with profits from their trading entity. But PAYG clients, people that kind of need that flexibility, not about a solid tax outcome, although they're still going to be some better tax outcomes. Yeah, you still have indexation.
You still have personal distribution. And that's the same you would have had personally owning property long-term, which, by the way, if you're so upset on negative gearing for future purchases, from a CG perspective, you're always on those negative geared at 47% anyway. Yeah, that's right. So some people won't even... It's not even difference in tax.
Some people weren't even purchasing in trust or company for the tax outcome. They were always doing it for lending flexibility. For the lending flexibility. And I can tell you right now, none of that's changed. And when it does, we'll play with it.
And that's the thing. You're always meant to adapt to the times. And it hasn't changed. That's a very, very sage advice there. It's very, very sage insights there.
Yeah, yeah. Well, the thing is as well, what gets me is that the supposed people they were trying to help with this seems to be the biggest victims of it all, right? Because the top end of town, the business owners, the high-income earners, a lot of them were already buying in trusts and companies. So their outcomes... Three quarters of my own last portfolio is a family trust.
Their outcomes on these changes, they're just going to get taxed more. It doesn't stop their ability to buy. For the average person, hardworking family that are trying to build wealth and get ahead, buy one or two properties in their personal name, you know... That's much harder.
