Episode 116 | Property & Taxes 101 | Alison Lacey, Ecovis Clark Jacobs

Our first tax orientated episode delves into how you could be the envy of your friends knowing the ins and out of the system.
In this episode we talk tax, tax, tax with Alison Lacey and you are going to love it. Alison is the Director of Ecovis Clark Jacobs a recognised accounting firm in Sydney, but is also an investor and married to a builder giving her a multidimensional insight into property and tax. Today she gives the scoop on recent changes to the CGT exemptions for expats, showcases the nitty grittiness of the ATO and describes the most common tax mistakes the average property purchaser makes. 

Here’s what we covered:

• How does tax work with an owner builder?

• What is the definition of a non-resident?

• Why changes to the CGT rule might backfire for the government?

• Knowing your numbers and your opportunity cost.

• What is the biggest tax benefit from owning an investment property

• How does depreciation affect your capital gains?

• How to offset capital losses against future capital gains

• What can you do about land tax?

• What is the 6 year rule and how does it work?

• How much does the ATO know?

• The problems of owning your property outright.

• What is repairs and what is maintenance?

• How to structure your loan? 

MENTIONED EPISODES:
Episode 60 | Mike Mortlock
Episode 15 | Taryn Brown

GUEST LINKS:
www.clarkjacobs.com.au/

HOST LINKS:
Looking for a Sydney Buyers Agent? www.gooddeeds.com.au
Work with Veronica: info@gooddeeds.com.au 

Looking for a Mortgage Broker? www.wealthful.com.au
Work with Chris: hello@wealthful.com.au

Buy the book - AUCTION READY How to buy property at auction even though you’re scared s#!tless:
www.getauctionready.com.au
Use the coupon ELEPHANT for your 30% listener discount.

EPISODE TRANSCRIPT: 
Please note that this has been transcribed by half-human-half-robot, so brace yourself for typos and the odd bit of weirdness…
This episode was recorded on 20 February, 2020.

Veronica Morgan: You're listening to the elephant in the room property podcast where the big things that never get talked about actually get talked about. I'm Veronica Morgan, real estate agent buyer's agent, cohost of Foxtel's location, location, location Australia and author of a new book called auction ready, how to buy property at auction. Even though you're scared shitless.

Chris Bates: And I'm Chris Bates, financial planner, mortgage broker, and together we're going to uncover who's really making the decisions when you buy a property.

Veronica Morgan: Don't forget that you can access the transcript for this episode on the website as well as download our free Fool or forecaster report. Which experts can you trust to get it right, the elephant in the room.com. Dot. AAU.

Chris Bates: Please stick around for this week's elephant rider boot camp and we have a cracking Dumbo, the weight coming up

Chris Bates: Before we get started, everything we talk about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyers agent. They will tailor and document their advice to your personal circumstances. Now let's get cracking.

Veronica Morgan: We've probably discussed tax in one form or another in nearly every episode on this podcast and if you think it's a boring topic, you've obviously never heard Chris or me ranting about negative gearing, the capital gains tax concession land tax or why the desire to minimize your tax bill is a terrible reason for buying an investment property. That said property investing and tax are topics that go hand in hand. Knowing how to best structure investments can have a significant impact on the amount of tax you pay, which then affects your cashflow and ultimately your ability to reinvest.

Veronica Morgan: In this episode we pick the brains of an expert in this field. Alison Lacey, who is an accountant and director of the firm, it Covas Clark Jacobs. Allison's interest in tax as it relates to property is more than purely professional. She describes herself as having a real love for property for investment and wealth building. Over the years, she's bought and sold property, renovated, done a knockdown, rebuild and own several rental properties. So being an accountant has certainly been helpful. We're making decisions about property, but on the flip side, the practical experience of doing it has made her a much better accountant and empathic with clients. So we're looking forward to hearing about how we might be able to save tax both now and in the future. Thank you so much for joining us, Alison.

Alison Lacey: Thanks. Happy to be here.

Chris Bates: Thank you Alison. This is definitely a long overdue episode. We've been wanting to do an episode on tax since the start really, but we just haven't really found someone that we really connect with. So very happy that you're here. Your love for property. What came first, your profession or kind of property?

Alison Lacey: Well, probably property in a way. I'm the daughter of a builder and now the wife of a builder. So there's always been property and discussion about things. My parents had some rental properties. So it's always been discussed at home. And then when we I met my now husband, we bought a house and we intended to renovate and flip it. We stayed there for about 15 years before we then built out, bought our next one and did the knockdown rebuild. So along the way, obviously being an accountant, there's been lots of pluses in knowledge and you know, things put in there. We've bought some rental properties. So yeah, so it's been very good.

Chris Bates: So you said you didn't knock down rebuild and your partner is, I built up, he built it, he built it, added the owner builder sort of experience go because they do say that it's not as easy to pull off because you've got the habit of potentially either capitalizing or changing everything on productivity of the other business. There's other consequences over how did that experience all go.

Alison Lacey: So we made a decision with our place that he would have 12 months off effectively from work. And that was the job. The agreement was that the job was to be completely finished and it was, so we were fully landscaped and finished when we moved in, which was great, partly because we had renovated our first house that took us about six years. So the first year we did the kitchens in the bathrooms, the next year we did the internal bedrooms and then we moved through it all.

Alison Lacey: We built the backyard and the deck and the next year we built the garage and then the front yard and the driveway. So so having done that, we didn't want to go through that again and he didn't want that burden. So own a building was interesting. Our biggest issue was a homeowner's warranty and issues around that was that around the time when that getting it because he was building his own home. So he was both the builder and the client and also the bank because again, we you know, we sold our previous home and we had plenty of equity and capital, but they couldn't quite get their head around the fact that there was no contract and will, and if we had a contract, it was a contract between grant the builder and Alison and grant the owner. So actually finance and that's something that, you know, probably we'll talk about. But finance is actually the biggest issue for a lot of people nowadays.

Chris Bates: Yeah. I mean, that's right. With home builders owner builder, you know, however you want to say it. Yep. Exactly. Not many banks want to go near it just because they it's a more risk. There's no sir, you know your personal affairs. It's too interconnected and you know, you've gotta be licensed and you know, there's just so many risks to it for the bank. They much prefer to outsource that.

Veronica Morgan: And everyone thinks, Oh, it's, Oh, it's a great marriage to a builder. That'd be great. There's actually creates problems.

Alison Lacey: There was plenty of interesting discussions about room sizes and changing windows and yeah.

Chris Bates: So on a tax side, let's talk this through because let's say that you cause there's pros to this strategy on a tech side, right? So let's just not your pitch situation, but let's say someone does buy a block of land and then they do do a build. Yes. And then they decided to sell that and it's their principal place of residence and they say make $1 million. Do you pay tax on that or how does it, how does a tech work on owner builders?

Alison Lacey: So if it's their principal place of residence then there would be no tax on that property. So obviously you've got all your cost base issues and yet, you know, purchase of land put, do the building. But if they have had no other principal place of residence since they bought that block of land, then that would be tax free.

Veronica Morgan: So if they had another principal place of residence, which is what we did.

Alison Lacey: Yeah. So we had a house we bought a block of land, well we actually bought a house and land and we rented that for two years and then we knocked that down and then we built the house. Okay. So I am keeping our first house as our principal place of residence til I sold it, which means that that first two years really of this house is subject to capital gains tax.

Veronica Morgan: Right. And then how, there's a couple of different ways that you can sort of calculate what that is, isn't it? So that was an important point because people get very, you know, Oh yeah, we'll just keep that as an investment or do this or do that. And I'm always going to feel, go and get some advice from a camp area is the timing of what she'd get. Where you do, where you get valuations or appraisals and all that sort of stuff is really important. So what's that process that you would go through in terms of working out how to calculate the capital gain in that period?

Alison Lacey: So the tax office would really look at it that it's a time based thing and then your portion, the gain over the number of years that you've owned that property. My example, for instance, if I, we've now owned that property, the new one for say six years. We rented it for two years and then we sold our other place and then we had our new house for four years. So a third of that gain that we make on the new one would be subject to capital,

Veronica Morgan: Which is interesting because then what about cost base because you build a new house.

Alison Lacey: So, so, so you keep all your cost based records because I know what I paid for the land. Yeah. I know what my holding costs were while I was building that house in terms of land cause we had land tax and you know, rates and things while we wasn't built yet, but we're still paying for all this. All or part of your cost base. Um so that you need to document that. And that's actually one of the big issues we get with clients when, you know, they sell a property they have own for 10 or 20 years and they don't have all those original records.

Veronica Morgan: Yeah. That's just very timely for me personally. So, you know,

Chris Bates: Veronica sees this as an opportunity to get some free tax advice.

Veronica Morgan: I want to get a bit of free tax wise. So I mean I have been collecting all of my bills and all of my invoices and all the rest of it. But like literally two days ago, moved into my house. Finally we'll be talking about this on the podcast and I know I had it rented out originally and then I spent some money actually upgrading it in that time because even the, even the students were complaining about the condition of it from period of time. And then I basically gutted it and rebuilt it. Um and, and yeah, I would hate to think that for the first five years, it just be amortized in with the, you know, the greater game, which is after post renovation. So that's how you do that. So you've got to, so then the other one is capital and.

Alison Lacey: The other way people often look at capital gains. Two is a valuation points. So I bought it for this price. I rented it for five years for instance. And it was valued at, at the end of that five year period, you get a valuation so that growth period is subject to capital gains. Then you move into it and it's a print out of the way to calculate it. But the tax office is not so keen on that.

Veronica Morgan: All right. And that's actually what I did do, but I got an agent to appraise it. Is that, does that count?

Alison Lacey: You really do need a written valuation. I think you've got it because you've got to be able to show them and demonstrate what it isn't. It can't be just anecdotal or you know, it needs to be by someone that knows what they're talking about. And in writing ideally, and you know, email could be fine, but you've got to have some documents. If someone wants to look at that in the future evidence.

Chris Bates: And I mean that's a really good point. So evidence keeping and keeping records is, you know, fundamentals one Oh one, but most people are pretty poor at keeping records and, but you are investing in property especially around capital gains tax and all your rental receipts. You've got to Cate days because you know, chances are you might get audited and if you do then you're in a bit of trouble. Especially when you're investing in property. In terms of this, these parents will place a resident exemption. I think there's a big part of the property market, right? So when someone is upgrading their how long can they keep, let's say they buying another house and they've already got a house but they decided to move into the new house and then keep their other house growing tax free cause they going to sell it. How long could you potentially keep your existing house growing tax free

Veronica Morgan: If you're not living in it if you're not tricky?

Alison Lacey: Yeah, depends. We would probably look at which house rather than the first house. Which one has the most capital gain on it during a period? So I would get valuations at the time you moved. So you had them up your sleeve or later? Indefinitely really. I guess you could have that first house as your principal place of residence, but if you rent it now you can't because if you rent it out then it's a rental property subject to CGT. So yeah. So you would move your second property would then become, because if that's where you're physically living, that's your principle place of residence.

Chris Bates: Yeah. So the only way to potentially keep that is to potentially not rent it. Would you say like let's say something,

Veronica Morgan: Hang on a minute, but like say you rented out for six months, a year, a really small amount of time and then you sold it your own and it was principal place of residence right up to that point. It's just have a really small proportion of the whole value. Right? You have to pay it on the hot water. No,

Chris Bates: But you, I mean you only pay it on that last year, but you know, sometimes people are leaving Sydney for example and you know, get isn't there we go, well I've got a really good house in Sydney. I want to keep that growing tax free and I'm going to move to South coast or something like that. Right. And that's not as good a property to grow or we're going to move to an apartment and I can afford to keep my house. Sometimes from a strategy point of view, it's good to keep it growing tax free for a period. I was just wondering if there's any kind of ways.

Alison Lacey: Very few people would be able to afford to do that without having a tenant in there helping to pay potentially the mortgage. Yeah. And once you put a tenant in, as soon as you put attain, so if it was sitting there tax free, if it was sitting there empty I think you would have no tax consequences. You could just leave it there indefinitely and deem that to be your principal place of residence. And then obviously the other ones subject to capital gains tax. Okay, cool. What if you wait Airbnb very effectively, that's renting that property as if you're deriving an income. If you rent it for one weekend a year, no problem kind of thing. But if you rent it permanently or every the tax office or with Airbnb, there's lots of stuff around that now.

Alison Lacey: But effectively if you're renting it for all the big holidays, Christmas, Easter school holidays, all that sort of stuff, and it's empty for the boring rest of the year kind of thing. Or you rent it for, you know, a biggest chunk of the year, then it's the same as a rental property. Income is X is included as taxable income and the expenses of the property are deductible to the extent it's rented.

Veronica Morgan: Yeah. Right. Yeah. And once again, record keeping. Right. But further to that point, there's been recent changes with experts, right? Yup. So can you fill us in on that? Well, it's, the legislation's only come in fairly recently. Because of the change of government. It all got put on hold, but it has all been approved now. So for properties that I'm pretty sure you owned after 2017. Yes. There's all the dates involved in everything.

Alison Lacey: If you sell your property after the 30th of June, 2020 and you're a non-resident, you don't get any capital gains tax concessions anymore.

Veronica Morgan: And what's the definition of a nonresident?

Alison Lacey: That's a bit of a contentious one. Again, again, you probably should get some good advice around that. Typically though if you go for more than say two years or you an intentions, it'd be gone if you have no intention of coming back or you intend to be a resident overseas for a long period of time. It, they also look at what's really happening with your family. Like if your whole family goes right then you know, if you've got no connection back here with Australia, then you'd likely to be a nonresident. But it really depends on personal circumstances. So you really need to look at that.

Veronica Morgan: It's interesting because a lot of people, you know offered great opportunities to go and work in Singapore or Hong Kong or London or somewhere like that. And so then they're going to have to factor that into their package. Very much so. Loss of tax benefit.

Alison Lacey: So if you, if you know that you're going to go for a certain number of years, for instance, you know, you might, you know, a lot of people go overseas with their kids and then come back for latest schooling or you know, things like that. If you know you're coming back, maybe not such a problem. But if you think that you might sell your house while you're away, yup, definitely need to factor the cashflow of that in. If you think you're coming back and you're going to rent it and hold it until you come back, you need to actually establish, establish yourself as a resident before you sell it. So you can't, you can't just come back a week decide I don't want to live here anymore. Stick it on the market next month and go, you really need to come back and be a tax resident. And when the Tech's office looks at who is a tax resident often they might look at, well, where was your recency on your last tax return? So it's, it's certainly months and years rather than weeks kind of thing. So, and this is,

Chris Bates: I think this is a stupid tax policy and a lot of tax policies quite frustrating cause I think that they're sometimes flawed and they could be, they can get taken advantage of or they're going to drive behavior isn't it? And that's exactly right. So see behavior, this will drive is kinda, it's shooting themselves in the foot. So they're trying to encourage people overseas to sell their property. Because that'll create more stock on the Australian market for other Australians who are living here who need property.

Chris Bates: The problem is after June 30, most people are a bit busy. So they will think I'm going to sell it. And then all of a sudden it comes to April and they can't sell it. Because if you've got to do a campaign and it goes over June 30 and it's contract date, so yeah, Oh, there you go. So it's not even set. Also it's contracts exchange, exchanging contracts, not settlement. Well that's better extra six weeks, six weeks, but it's not six years. So I think the reality is on July one if you're living in London and you say how to house in Melbourne or Sydney and you took a job over there and you said you're going for two years, but ended up being there for 20 years and that house has got, you know, hundreds of thousands of capital gains tax, you will do everything you can not to sell that property. And the behavioral drive is actually less owning stock on the market because people overseas will say, no way, I'm giving 200 grand to the government. And so I thought, I think he's actually driving the wrong behavior. Do you, would you agree with that?

Alison Lacey: So I think people really should treat it as an investment decision separate to a tax decision. But I agree the tax is a big driver and yes, I think they will hold onto it. They are getting you on the flip side of that though. So if you have vacant property now in lots of States is a surcharge on that. Yeah. So you should rent it. And then also there's like a land tax surcharge for non-residents now as well. So you're paying more land tax. So actually look at that and then it really still consider, well it's costing me more to hold it too as well. Yes, I'm going to pay that capital gains tax, but it's costing you more to hold it now than it was before. 10.

Veronica Morgan: More stamps if they're going to buy, I mean this is people already own. Stamp duty, which is sort of interesting as a whole.

Alison Lacey: Non-Resident question is a big, you know, big issue for buying but also holding properties nowadays.

Chris Bates: Yeah. And I think that's the thing, isn't it? It's like the whole but people just try to avoid capital gains tax. Like, I mean I've got a client at the moment who you know, they've got an apartment, they inherited the apartment, which we probably don't need to go into all the how inheritance tax works in terms of when you get assets. But they got a reasonable size land, a capital gain that I have to pay. And the reality is I want to hold onto this apartment cause I don't want to pay the capital gains tax, but that by not selling it they're stopping future opportunities.

Alison Lacey: And we see that all the time. Actually. that's one of the reasons, and it's happened in my family too. You know, people have held onto property for a long time and had no capital growth effectively or very little capital growth cause they don't want to where the capital gains tax bill or in fact probably would have been better to have sold that property, pay the tax and use the capital. If there haven't been cancer growth, they wouldn't have to pay any. Well they might've at some point like think about mining, you know, like, or L suburbs. Earth has had some big growth areas. They've got a capital gain, even if it's not huge. But then for the last 10 years there might've been no capital brace or going opportunity, so they could have invested that money in something that would have had a better return. Um but because of the don't want to pay the tax, we're not going to like,

Chris Bates: It wouldn't be in this situation, there might be such a small capital gains tax, but just the times that even know what it is.

Alison Lacey: And that's about knowing your numbers, you know, if you know what that capital gain is. So maybe talk to your accountant, find out what the gain is and then verse that compared to the rate of return you're getting from your rental yield and what you could get somewhere else.

Chris Bates: And it's an opportunity cost. Exactly. So if you end maybe about capital gains taxes, you only have to pay it once, right? Like you, you pay it, it's over.

Alison Lacey: And usually you're paying it when you've got the cash to pay it because you've sold the property. So, assuming you've got equity in the property, you've got the cash to pay it.

Veronica Morgan: And also the thing is that yeah, you've been acquiring this sort of growth over a period of time and not paying tax as you were acquiring it. And so therefore it's a bit more of a bit of pool to take to to take at the end of it all. But I'm interested in you know, how you sort of, people will come across you come across because of course a lot of accountants and I've heard this time and time again, they recommend to their client, look, you know, you want to minimize your tax then go and buy a negative gearing pro property and negative gear. And the best way to get maximum negative gearing is to go buy brand new. And the accountant will say that because of the numbers. Right. The reality is, as you've alluded to not all property goes up as we've talked about many, many times and, and not all properties equal. What's the expectation that you find a lot of your clients would have prior to you educating them? Clearly? what is the expectation that a whole lot of people have in terms of property and tax minimization.

Alison Lacey: So most people would probably buy a rental property to minimize their tax is the, is the first one or because they've maybe had a bit education and they are looking at that longterm capital growth, you know. So now there's been a bit of a shift I suppose in terms of, and there's lots of, you know, more education and discussion around buying a property to get that growth. And you might actually buy a rental property first instead of your own home because you can buy a property somewhere for good capital growth and you get the tax benefits to help you afford to pay for it and rent somewhere you to leave for instance, downside isn't there.

Alison Lacey: Yes. Because it's costing you to hold that property. And equity would be in that. Yes. So I did completely depends on purpose, personal circumstances. Most of my clients would probably have a property first and they are usually using that equity in that property to then go and buy another rental property. They obviously a lot of people like the new aspect as you said, because there's big depreciation and capital allowances, which is non-cash tax deductions, which means they save more tax and not costing them as much. Yeah. I guess we've seen in the last two or three years, several years with so many new units and things on the market, they've bought properties and either lost value if they're bought off the plan or they've bought properties and the values just been the same for years. Often the rental expectations, they've been told don't eventuate because there's been so many properties come on the market. Um so it's really important that you kind of do your numbers and certainly in terms of valuations and borrowing build, if it's off the plan, building a good buffer for valuations.

Chris Bates: Really good advice. I really like that. You know, the rental was, your expected was just basically a lie and when you do finally get that property, you're not the only one trying to rent it because everyone's settling on the same day, you know, 600 apartments or a hundred apartments. And to be honest, if they're building one building, you look around, there's probably another 10 cranes to, there's 10 more buildings coming. So it gets pretty dire. And it actually, and the problem is in the building, someone just starts renting, you know, the best apartment rents for $300 cheaper. Then the whole partner, my building gets revalued from a rental price cause everyone says, well that one rented for 700.

Chris Bates: So I think it's a really good point in terms of depreciation. We've had depreciation people on the podcast and you know, they're a little bit conflicted in terms of depreciation because that's what they do is provide depreciation reports. Can you please explain how it actually works? Not only on the, cause, I know there's a lot of changes, the rules, but also when you sell the property, how does it affect your cost base and how does it affect your capital gain? Because I don't think many people understand that. They just understand that you get a tax benefit on your income. You're holding the property, but they don't understand the impact when you have to sell it.

Alison Lacey: So do the depreciation reports or quantity surveyors reports have really two elements in them. There's, there's, if you picture it the capital cost of the building itself. So, you know, if it's a house, it's the bricks and mortar and roof and lands, external landscaping and you know, that sort of thing. There's stuff that you cannot take away. And then there's depreciable items within the house that or apartment that you can remove. So your ovens and your curtains and your carpet and your like feedings and things like that. So a depreciation report or quantifies report will cover both of those things. The depreciation items, you get a tax deduction for them. As you hold that property, and I obviously, because they will expire over their lifetime, you'll replace the carpet and the curtains and the throw out the dishwasher and put a new one in.

Veronica Morgan: And you can only do that on new properties, correct?.

Alison Lacey: Depreciation, depreciation, you get the, yeah, exactly. We get the deduction, no further issue. That's just each year and it will run out over the lifetime of those assets. Yeah, the quantity of 40 years now. No, that like curtains and carpets and things and escalations will have a life, sorry. Sorry. The other part is capital allowance items, which is the bricks and mortar stuff. So capital allowances is 40 years, two and a half percent a year, but obviously two and a half percent on the cost of building a house can be thousands of dollars. It might be, you know, yeah, exactly. $1,000 a year. So you get a tax deduction in each year while you are in that property. But at the end when you sell that property, that capital allowance portion is clawed back as part of the capital gains tax calculation. So effectively it reduces the cost base of that property because you've had a tax deduction for it along the way. No, that's right.

Chris Bates: Yeah. So I mean, let's just get some of those notes. Some numbers. Let's say that a pop partner would say $1 million. You know, really the problem with these new apartments, and this is not the whole purpose of this podcast, but in reality is your depreciation is a good example. The land component might only be say 200,000. That's probably being generous and the building's worth 800 and then all of that 800, maybe 100,000 was fittings. So that's the, you know, the oven and the lights, switches and all that sort of jazz. Which is only a small element. And then most of the money though at say 700,000 is the building is it costs $100 million to build that building, right? So that a hundred, that's 700,000 is depreciating every year, two and a half percent, which is quite a lot of money. That's 20 grand a year. And so what ends up happening is someone even say had

Alison Lacey: Big tax deductions all the way through, and you've saved lots of tax that everyone thinks the cashflow out of this rental property is not too bad. But when you come to sell it and if you've held at $20,000 a year and you've held it for 10 years, that said $200,000 adjustment, your cost-based reducing your cost base. Which means the capital gain is that much more when you come to sell it.

Chris Bates: Exactly. So let's say that's a brilliant, so they bought it for a million, they lost now any worth 800 from a tax point of view because it was 200,000 and then they sell it for a million cause it didn't go up. Yup. Now they would think that there's no capital gains. I paid it.

Alison Lacey: Yeah, you've held it for 10 years, you've got to take 200 off. So now you got going 250 pay back. The government for the tax

Chris Bates: Probably got 50 grand. Do you know he's probably cause it's hard and then it's hard to gain cause it top tax rate. So that's grand attacks

Alison Lacey: That they didn't end and if there was no real growth in terms of you know, the value, then they might not have the cash to pay that then yeah.

Veronica Morgan: How often do you come across something like that?

Alison Lacey: In the past, not a lot, but in re in now, yes, we are seeing that more particularly with apartments. Yes, because there's not lots of growth and people do tend to hold them when there's maybe not a lot of growth. They getting their tax deductions and it does come back to bite in the end. Oh wow.

Veronica Morgan: This is actually really interesting because we've talked about so many reasons what I bought in the, you know the risks around buying brand new and off the plan, and this is one we haven't touched on before. This is a massive elephant.

Alison Lacey: It's really, I think it really hurts people too that might sell it within like a 10 year timeframe because if you buy, you know with property cycles, if you buy it and it doesn't have that growth aspect to it, but you are claiming your capital allowances each year in your tax return actually costing you. But if you sell it before you've had that growth uplift or maybe the cycle property cycle hasn't moved and you for whatever reason have to sell it. So I really talked to clients, you know, if you can't afford to hold a property for at least 10 years, then you shouldn't buy the property.

Chris Bates: So yeah, I mean I started climbing in a Melbourne apartment, one better Porter for 402,006 a sold for three 60 some horrible, I've seen a lot of stuff in the city was selling. Everything's just kind of sideways for a long, long time. Every decade at 400 thousands. The kind of the nothing goes more. And the older ones, cause there's new ones at 400. Why would you pay 400 so I can get you know, and they pay paid. They sold it for three 60 12 years later. And I had a and I lost 40 grand, but they still had to pay capital gains.

Veronica Morgan: Oh, that's just so, so they've lost 40 grand plus the stamp duty plus selling costs, plus a capital gains tax band. People think they can't go wrong. I know. It's heartbreaking. It really is. It's, it's Oh. Anyway, so you're seeing more of that. And he's that because people have bought these and then they can't really comfortably afford to keep it or because they're really realizing they're sitting on a bad asset.

Alison Lacey: I think they make a decision that's quite emotional and they go, well, it hasn't made me any money. Like it hasn't grown in value for several years, so I'll get rid of it now. So they should have made that decision, made it not bought yet, not bought or even better yet. Can you see that? Yeah. Or get rid of it earlier than that day.

Chris Bates: It's a hard thing to do though because no one wants to admit they were property. There's been a regret. Painful. So yes, I get lots of clients you know, sometimes through these podcasts on from, for LinkedIn or wherever it might be. And they'll come in and say, can you please check me through our home properties? And even last week how do you, let's say you bought a property and you know, it's not a great property, which I'm sure a lot of people in this part, listen, today's got that. And it's lost money.

Veronica Morgan: Oh, sorry. I shouldn't laugh. I get a lot of people come to me and they say, Oh, I've been listening to the podcast. I have to confess, I've got a couple that are really bad. You know, this is quite sweet actually. And I'm good. At least you won't get any more. They're really bad.

Veronica Morgan: Yeah, that's exactly right. And so this is not a judging thing at all.

Chris Bates: It's all about looking back on decisions. I've made mistakes. Exactly. Yeah. It's like today's today, right? So we need to, what can we do for the future? And that's the reality. So, and a lot of the, it's really hard cause I mean even one last week who you know, went to a financial advisor, very frustrating. Then that financial advisor sent them to a spruiker and that's Bruker sold young girl doing really well for herself, working really hard, couldn't afford to buy in Sydney or the family telling her to buy, had all this pressure. Parents said, just get an investment property when 25 supervisor and then all of a sudden she bought two places in Southeast Queensland. One, a townhouse and one a house and land package. My package is gone sideways, which most house and land packages do. Yup. The townhouse though because of new supplies fallen about 40, 50 grand the house on my packages, she probably could walk away with the money back nightmare isn't it?

Alison Lacey: Yeah, it is honest. I think she should almost bite the bullet. It depends how, like does she have the resources to pay out the loss?

Chris Bates: Yes. So she's cause she's doing quite well for herself financially and she's working hard and saving hard. She could afford to cover it and, and this is what we'll probably do, but in terms of actually that loss, that tax loss she kind of blatant that. I get your advice and I believe it, but in terms of the, she, she has a four $50,000 tax loss on that property and it'll be how does it, how does that actually work? When did she actually get the benefit of that loss on that investment property?

Alison Lacey: So because it's a capital asset, it's going to be a capital loss. The same as it would have been a capital gain. If there was a profit, you can only offset capital losses against future capital gains. So unfortunately for her, it's not going to offset her taxable income in the year that she sells it. She will have to carry that capital gain forward indefinitely and you can, it'll go for indefinitely in your tax return until you make a future capital gain to say that. So if she buys another property in the future and does make a gain or other investment assets, then she can use it against that.

Veronica Morgan: That's like in the bank for her future it is. Does it go up? Doesn't help her now? No. And also if say you got a $40,000 loss in 10 years time, it's still $40,000 or is it index? Nope. Diminishes in value.

Chris Bates: Do like to be hypocrites. So if you make a gain, you claim it on your tax return that year, but you make a loss. Nope, can't use that. Got a white female another game. So they like to play both sides of the coin, but you're right. So like, you know, her belief was, and a lot of people's belief was that she could claim that off her tax return and you know, and the reality is she's got to lose that money today and she's got to wait till she makes investment gain.

Veronica Morgan: Yeah. She has to actually sell something. So you know, it's right. You hope she'd do it in shares or something. So not property that.

Chris Bates: It's hard to, you know, 40,000 gain. You might have been invest say 40, 50 grand, but the costs true.

Veronica Morgan: But the cost of getting in and out of buying shares, if you can do it that way. And I'm not, I'm not an expert in this by any chair. I'm not by any stretch, but, but it's, you know, it's much easier to get an as much more liquid. The property, I mean, that's one of the benefits he shares over property.

Alison Lacey: But then with property, you're much more leveraged than you are. Might make the game. I get faster property. If it's a good property, she lose it. And she might not sell it for the next 10, 20 years. So,

Chris Bates: So our LA Verona Coronado is actually presenting at a conference event last year. And you know, we get the questions off up and champion the front road going to piped up and said, why in tax? What can you do about land tax? I hate paying land tax. I've got a massive land tax problem. And Veronica and I had our answers towards that. Cause I think it's a good problem to have.

Veronica Morgan: It's a horrible, but it is a horrible bill to take. Gusty honestly, I hate the way it's

Chris Bates: Trying it. It's, I've worn it, he's very passionate about this, but it's gonna be otherwise, but the reality is land tax is something that's very misunderstood. Yep. Can you could explain how it works for property investors and ways to, I guess, minimize or reduced land tax.

Alison Lacey: So land tax is based on whatever the value of the land is and usually you can work that out from your counsel rights. Notice the first notice of the year gives you what your land value is. In new South Wales, it's 700. You guys probably know exactly what it is. Seven 15, the threshold, the threshold. Yeah. So it's based on the value of your land over that threshold. And then the land component, that's the thing. The land is not the value of the property. Correct. So if you've got a house potentially wallet, yeah, there'll be a lot more land value in a house than there will be in a unit because you know, there's lots of units on one block of land. So and again, it depends who owns the property. If you own it as an individual or in joint names, then you get one threshold.

Alison Lacey: If you own it as a trust you don't get a threshold unless you're a fixed trust in new South Wales. So we have some clients that hold property in trusts, but then they pay land tax from Donald one. So that can affect it as well.

Veronica Morgan: Another good reason to get some accounting advice before you sign a contract. Right.

Chris Bates: We're going to go there, come back to them.

Alison Lacey: The other thing is each state has their own land tax threshold. So you know, if you own property in, if you own five properties in new South Wales, you're going to probably pay land tax at quite a decent rate. Whereas if you owned a property in each state of new of Australia, you may not pay any land.

Veronica Morgan: And that's one of the reasons I see. I think it's very unfair tax too, because he can work around it like that. Yeah.

Chris Bates: Yeah. That falls with them. So you're right though, so let's say you're a couple, you get a couple of, you get first. If you own it jointly or any sign you get one threshold. So the only way to get avoid that is to split it. So you have it over across two properties. Yep. Yep. And if, but what, say someone buys it all in one name and they think they're going to avoid land tax, you know, and they've already had other properties, right? Cause they go, well I'll get you know, I get a lot of clients who say for example, they want to get negative gearing and so they'll put it in the high income tax earner, but then they don't realize that then you're gonna end up paying land tax, the land tax issue

Alison Lacey: Because he'll end up owning several properties, pushing him over the threshold and then you're into that internet scenario.

Chris Bates: So the elephant in the room is 100% for you.

Veronica Morgan: The reason that Chris and I do this podcast is because we passionately believe that property buyers can do it better. We really want to help all of you understand all the risks, but also the ways in which you can avoid your elephant making the decisions.

Chris Bates: Love for you to do is just to share this episode and share other episodes with people around you that are going through the property process.

Veronica Morgan: Give us a review on iTunes. Five-Star please will be very appreciated because this is about making sure that we all benefit from the wonderful information that our guests have been sharing with us.

Veronica Morgan: I discovered land tax pro and I got a bill, so I got rid of that accountant who I was using before then. So I had my principal place of residence, I had another investment property. I bought a house because land the values and that land, you know, and Oh, that's what you have to do. And then I moved in with my partner at the time into, not like, I didn't buy another property straight away. And so I had my six years and then I sold it, but in the, and then that sort of triggered something and all of a sudden I got a land tax bill float for four years or something. Anyway, it was a whole six years and it was like, Oh, it was incense. Oh, it's a principle place of residence. I even rang them. I had to go with them and there were not, if you're renting it, Oh no, no, no.

Veronica Morgan: It's like, sorry, where the state government, that's the federal government as in, you know, principal plays a residence and your tax in that regard. Yeah, that's the ATO was this one state and I was like, Oh, and Ray, my accountant, why didn't you want me about this? Oh dude. Really? Really? Yeah, he did. Yeah. Which is why I just got the bill. Look,

Alison Lacey: I've been caught out with that one too. In the past. A lot of solicitors that we deal with will register you for land tax when you buy that property, even if it's your principle place of residence. Oh wow. Your situation may change in the future. You know, like if they say to you, will you stay in this property forever? You may. Most people can't say yes to that question of forever home for me. Hashtag forever home. Yup.

Alison Lacey: Yeah. So, but once you register, if it's your principal place of residence, you never get the bill. But if it changes and you do rent it out and they do compare tax records, that's how they would have found. You know, they found that you were renting that property in a rental income and your tax return. So now your grandmother will catch you do it. And they actually often catch most people when they sell properties cause they check what's going on with that property as well.

Chris Bates: It is tax deductible, isn't it? Yes. Yep. Yeah. Ridiculous is that, you know, that's the thing, like if you are you know, yet it's so expensive and then you get 40, 50% of that back, you know, and it's not the same as not paying it. Yeah. But I mean it's, it's something that, you know, I think if a lot of people think, Oh, it's another number to factor into your cashflow.

Veronica Morgan: Yeah, yeah, yeah. Well, and you know, when the market was rising, and so I've, I've actually sold a couple of houses, so my Bill's not so great any longer. Thank God. But when the market was rising every year, I get that bill and I'd choke on it cause it just, honestly, it was like terrible. And, but I'd sit down at a workout, my, my capital gain over the previous year and I'm like, yeah, okay, fine. It's well under. I'm okay. But then the market started falling. You don't have such a lovely warm, fuzzy feeling when you start considering you've made losses potentially over the previous year. And you know, you'd never make the loss until you actually realize it of course. But still I'm monitoring the values of the properties and you're still paying the bill. It doesn't change. In fact, in two of them it went up.

Alison Lacey: The market was actually falling on my, I really defies logic how you can have it going up, you can question your land tax valuation. I did that exercise with our previous home. Does it work? Do it. Yes. Because we had a big easement across the back of our property that we couldn't use. So for the exercise, you know, cause I'm going to counselor and all that, I should have. Yeah, yeah. So I did it and we did get a valuation reduction because they do tend to look at, you know, your average property, not across the whole suburb but in streets and areas and things like that. But that was something that was old on owls compared to, you know, lots of normal blocks and it's not an easy process is it actually took a long time. Yeah. Cause I did consider it a couple times.

Veronica Morgan: But yeah, and I went, Oh my God, I know I long application you've got to document things and then it's a lot. It was a long process and I think you need to low quite a lot about property values to be able to do it. Yup.

Chris Bates: Yeah. I mean the other reason is the counselors generally are conservative because if they were, you know, a bit over the top, then you'd have a complete nightmare if with headache or paperwork because everybody would be, it's what your council rates are based on that. So yeah, they can't just suddenly hockey runs counselor. Right. So people scream about that too. Yeah. So I guess let's take a shift into a different direction when I can mention it just there. She said, Oh I did the six year old, etc. Can you please explain, like is, you know, it is a great strategy for, you know, a lot of people who potentially want to buy haven't got a, and want to buy their future home but don't want to live in it today.

Chris Bates: And one strategy that, you know, sometimes I talk to clients about is you know, you buy the house that you might live in in five, 10 years with a family. Yup. But because it's in an area or it's too big for what you need today is you move into it make it your principle place of residence because you haven't gotten the other property correct. And you live in it for a period and then you move out and you rent something else and have it growing tax free. Can you please explain how that strategy really works and where can it go wrong? In terms of shooting yourself in the foot, where can it grow?

Alison Lacey: Um so first of all, you actually have to move into it. So you can't just buy a property, deem it to be a principal place of residence. And they, you know, be there for a week, no bit like that. Non-Resident we spoke about earlier. You have to actually establish it as your principal place of residence. So you need to live there. You can't not live there. You need to get things like your mail sent there, your, your electoral roll address. You might have equal license, you know, all of those things have to demonstrate that you're, that you're there electricity and gas bills. Yes. Yet you actually had to pay expenses for the property. You can't, you can't just still live at home with mom and dad and leave it sit there empty. So yeah, so you gotta be there you you can and there's no set period for what that is. Again, it's intent to a certain extent, but I would heavily suggest it needs to be at least six months to a year kind of thing.

Alison Lacey: At least a year. I would suggest, you know, it's, it's gotta be your intention for it to be your home. Yeah. Cause a lot of principal place of residence if it's not your home and need to live.

Veronica Morgan: This, is there a reason, a lot of that sort of rent vesting mentality, you know, I'm just gonna live in it for six months. Let me back to my parents. So that, that does the intent doesn't sound like so.

Alison Lacey: And where does it, where does it come on stuck? I've had a couple of people who have bought properties and rented it, you know, for cash to their friend for that first 12 months. But they didn't do all this stuff. So there was electricity being paid on that property and things like that. Electricity bill, no. Will the, they put the electricity bill in their house in their name, but they left all their car license, you know, their license address and their electoral roll and dress and everything was elsewhere. So so the year they got it knocked back, that was, yeah.

Chris Bates: You know, I've got clients and you know, I was recommending they go down this strategy. Yes. Because of the potential of a future good quality asset and Sydney growing tax free for them. So the pain of leaving a rental property that they love breaking a lease, going off the bond register actually to the property moving in drama it 12 months moving out again. Yeah. But how long can it grow? Tax free. Obviously we've said the rule six years.

Alison Lacey: It's six years and it can, you can come and go in that six year and restart the period again too. Okay. So you've got to move back in before that six year period. If you don't move in, you can potentially have that period as tax free but the clock but not if you have another principal place of residence, you've got to make sure you didn't buy something else and deem that to be principal place of residence.

Veronica Morgan: And there's a couple of, so could you, you know one person or in that property and the other person by the next one? Yeah. Network. Cause that's like a couple of years and then you can only have one principal place of residence really size doesn't it suck? Well I mean the reality is the biggest tax write off in Australia.

Chris Bates: The government doesn't want to find lots of ways to the biggest tax.

Alison Lacey: And yes we get asked that question a lot too. You know, with people that have, you know, as people are older, you know they both do have a property then they get together, you know, so are we going to live in your Xero? We're going to live in mine. But the minute you rent one of them out, that's a problem. Obviously can have some tax applications to the loveness so you really need to think about that one. Again, that comes down to documentation because we've had a client go, well we both have our own property and neither of them are being rented. I live in mine, she lives in hers and then we go. But you're putting her address on your tax return. That doesn't really wash in terms of, yeah.

Chris Bates: And so the big brother ITI, how big brother is it becoming huge because they know everything and so they can find out everything. What are some of the new data feeds that they're using that they weren't using? Say when you started your career?

Alison Lacey: A lot of paper back then, but now everything's electronic. So all government agencies share information. So anything that's related to Centerlink in terms of income is certainly shared. The registrations of cars and vehicles nowadays is shared with the tax office and that's catching lots of people out. You know, you've got someone with a luxury vehicle or the boat down in the Marina and they're saying they earn 10 or $20,000 a year kind of thing. How do you afford that asset? So they do, they track with Oz track, they track cash transactions over $10,000. They check property title records and changes.

Alison Lacey: So any time you buy or sell a property anytime you buy or sell shares are the interests that you earn on your bank account. All of that is fed to the ATO. Now is there a partnership with Airbnb? Ah, yes. Yeah. A lot of businesses are now sending their data to the ATO and that's when the ATO came out a few months ago and said that that's going to happen this year. So Airbnb will be in the same way that your employer tells the ATA what your salaries and wages is. Air B and B will be telling them what your rental income was.

Chris Bates: So some people don't love it as much as me, but I think it's great.

Veronica Morgan: This podcast is not being sponsored by being in there.

Chris Bates: We don't take any sponsors. We've had a few requests recently we've had to decline. But the Airbnb in terms of renting your home out like renting a room out, can you explain the big consequence that this has? 

Alison Lacey: Not for not getting on with your neighbors? Yeah, that's true. Yeah. No, got a story there. But anyway, big consequence could be that it's going to taint your capital gains tax free status of your principal place of residence numbers or, yeah, because you know, if you Airbnb your spare room or you go overseas and then you BNB house out. Yep. So it's a little bit, I can't give you a definite black and white answer. It really depends on what are you renting and how much and for how long and proportionately of what, you know, how long have you owned the property. So for instance, I've got a client who's owned a property for probably 10 odd years. He is looking at renting his property out for three months a year while he goes overseas on holidays. And I've kind of said to him, so that's quite a decent chunk of time.

Alison Lacey: I think for a quarter of every year your property is going to be subject to capital gains tax now because we're not going to get a valuation every three months. You know, we will probably track it based on his time that he rents it out. So every year we'll be including that income in his tax return. Obviously, while the, for that three months he can claim his cancer rates and running costs and all that sort of thing. Yep. So taxable income and texts will expenses, but we will document the number of days every year that it's rented. And when we do the capital gains tax calc at the end of the period, that period will be subject to CGT. And obviously he's a County bill is going to be hard. Yes. Yep. Yeah. But it's records too because if he hell's that, holds that property for the next 10 years and he only does this two or three times in 10 years time he'll probably forget to tell his accountant that it happened. In fact, most people don't tell their accountant that they been being anyways. So yeah, that's right. But in 10 years time he probably won't remember that. He, you know, when like I'll be saying, well, when did you rent it out and I'll be denied. And you don't actually have to keep tax records for longer than five years. Necessarily have the records either.

Chris Bates: It's interesting cause I think a lot of people think, ah, you know, I've got a spare room or you know, I can help me with the rent and buying an investment property. I'm going to live in it. And then eBay made a second room is, it's definitely a.

Alison Lacey: I think it depends. If you did it for one weekend a year or something, that's you know, not worried about that. But if you rent that second room for six months of the year or for the whole year, then yeah, definitely half potentially half your property is subject to CGT cause it might be one bedroom. But if it's Shay, the kitchen share the bathroom share the lounge room. Yay.

Chris Bates: Exactly right. So you kind of go, well you know I'm getting 150 a night on Airbnb. Then you take off air BNB fee, you take off all your running costs and you end up and your tax on any game on a rental sort of gain.

Veronica Morgan: And say for argument's, it went up a hundred grand in a year and you rented it out for a quarter of the time. So I 25 grand and gains pay half of that in tax. If you go in the top bracket, so you lose about 12 grand, I going to get 12 grand. Exactly. Is it worth it? And then you get to have someone in your house. Yeah.

Chris Bates: Yeah. And that's the thing, is it actually worth it sometimes cause people don't factor in the potential cost of capital gains tax and home offices are exactly the same thing I believe. Correct.

Alison Lacey: Yeah. So yes he claim it. Yeah. So if you, if you're claiming a business is running from your home, then yeah, it can. It'll again taint that capital gains.

Veronica Morgan: So the best way to do it is to rent. So if you want to do that, go and rent somewhere. Yup. And did go to go to town. Well yeah, because part of your rent is potentially subject to deduction, but yes. But there's no capital gains towards the income that's not actually effecting any, any capital gains. So basically the moral of this story is only rent your room. I only have a business at home if you read. Yeah. Yeah. I mean fundamentally it is it, you know, cause you think our owners, I'm gonna put my office in there and claim more expensive. It does help you pay the mortgage, but down the track there'll be a bill when you sell it.

Alison Lacey: Eh, I love this stuff for something that might let them get into like, yes, there'll be a bill, but it's not all negative. Like if that lets them get into that property, you know, or you know, let's them get the other 75% of capital growth under their belt. Yes, I'm going to pay some CGT. But maybe that's the cost of me getting the rest of the growth and the cashflow is, and the same with business scenarios. Like sometimes people cannot afford to go and rent somewhere to run their business out of, but they can't out of their homes. So, and, and if you know, you're going to, so in terms of business scenarios, if you know you're going to eat, yes, I'm going to pay CGT but, but I can then claim, you know, maybe whatever percentage of the interest on the bill and that sort of thing. So it helps with your holding and running costs while, yeah. You know, getting established if you need it.

Chris Bates: Common tax mistakes that you see people either not claiming or overclaiming or let's maybe not more towards personal tax, more like around property. What some of the mistakes you think where I've just reviewed your poverty tax and you've been over claiming this or under claiming this the last 10 years, we need to adjust 10 tax returns sort of thing. Are we

Veronica Morgan: Jumping ahead to the Dumbo? He or the one Oh one for the Dumbo got one. Go on stash way keep going.

Alison Lacey: But there's lots, when I spoke to some of the guys in our office, you know, where everyone came up with lots of stories. So lack of records is the big one. You know, like especially when you're selling properties, people can't come up with records or were they homes, you know, everyone's claiming their holiday homes. That's another thing. The ATO can now track to where as when you say they can track it, what do you mean? They can track it? They will. If you you know, if you say, I've got a holiday house and it's available for rent for the whole year they, you know, if really want to, they'll go, well, show me how it was publicly available for range. And you go, Oh, Oh, well I had an agent, someone rang me. Yeah, rent it. Gotta have it listed with an agent too though. And you can put it on Airbnb and stays and things like that, but then block out all the Christmas holiday school holidays, they stay, you know, that sort of thing.

Chris Bates: Apartment block, when I started, my first job was in Canton and I it was kind of common knowledge at that point. The accountants were the biggest users of holiday homes because the reality was at that point, like the accountants would say that it's available for rent, but it's $1,000 a night. Yes.

Alison Lacey: And no one's going to buy that. So, yep. Holiday homes with people claiming, and we've had several clients have come to me over the years with their, you know, holiday home, they've claimed and you know, it's been a $20,000 deduction in their tax returns and things. And I gave, I'm sorry, can I have it this year? You know, hang on, we'll go back to our old account. And then it was like, you know yeah, so holiday homes lack of depreciation reports interest and claiming interest on properties. So, and that's a big one actually. And again, it's record. So they're not doing it or will they do it? Well, they don't understand what they're doing. So obviously if you borrow money to buy the property, you can claim the interest, but a lot of people have then maybe paid back a chunk of that line and then they redraw money to use for the car or you know, something like that as opposed to having an offset. Say I hate redraw accounts. I love officer. Yes. Yeah, that's a whole topic on its own.

Chris Bates: Let's go there cause I think it's a very important one because I think just the chili last week I had a couple of email communications with a client and a couple of phone calls discussing this topic and you know, I'm a tax financial advisors or can talk about these things. The, you know, say let's talk about her situation cause I think it is easy to explain. She bought an apartment in the East, it's doubled, bought really well. Older apartment, you know, Eastern suburbs moved overseas and she's paid it off is, you know, she had had a 20% deposit. So there was 600 she paid and Natalie, now that property is debt-free. Cause she had cash when she was away looking at CS. She thought she was doing the right thing, which you know, fair enough. And she bought really well.

Chris Bates: So she did two things. You built a lot of equity for selfies. You pay the mortgage off but basically bought really well so it doubled. So whether it's capital gains tax or something, we'll talk about that as a side issue. But she's come back and we, cause she knows it's a great property cause it's doubled and a mother's got a few properties and Dublin in halo. I just want to know, ah, like things you bought in 2011 or something. She bought really well. It was like a really nice part of it. Yeah. It's like a really nice older block, North facing balcony. So and, and so and is actually a partment

Chris Bates: Looks a quite a nice building and things like that as well. So we don't really want to sell it. Nope. Cause if you do, I've got a few clients, it might be that one up. There would be something you'd buy and that's the thing. And so it's really hard for her to get ahead around selling it and a mother's saying don't sell it, but she's trapped all the equity in it. Yeah. So she's paid her loan off now and that's the problem because once you've paid that loan off, that property has no loan on it anymore. So she uses the equity in that property to go and buy another property.

Alison Lacey: That's okay because if she, well if it's another rental property, yeah. But if she uses the equity in that property to buy her principal place of residence, the tax office looks at what is the purpose of the borrowing and if the purpose of the borrowing is to buy a principal place of residence, it's not tax deductible.

Chris Bates: Exactly right. Answer. Even though the loan is not secured by design, is secured by an investment property, it's what doesn't matter the borrowing.

Alison Lacey: So back to my little example before where you know you've paid down a chunk of the loan with and then you know, such a balance is down and then you go, Oh, I'd really like to buy a new car. So you redraw the $50,000 and buy the new car. That $50,000 is not tax deductible anymore. But that's a really messy calculation. Now to then work out this bit's deductible, this bit's not. And for every principal payment you make in future, you've got to split it between the tax deductible loan and the nondeductible loan. So keep it all separate. Yes. So we really like offset accounts for that cause if you have an offset account and the loan statement itself will always say the same figure.

Alison Lacey: So you know, you've got a loan balance. It always says 500,000, for instance. Any extra cash you've got, you put into your offset account, which is a separate savings account. The interest purposes, the two balances net off. And you pay interest on the lower amount. Yeah. But in 10 years time you might have 200 saved in that offset account. The loan still says 500 you can take your 200 out of the offset account and buy your next property, but your loan is still 500 the full amount of your was 300 now cause you've paid it down.

Veronica Morgan: And when will the tax office decide that that's no longer going to be available to everyone because it's such a look, this is a lovely, she's a things around years ago, split lines and all sorts of things.

Alison Lacey: But I think, you know, at this stage that's still quite reasonable. Certainly there's been nothing I've read about it that they're saying that's not okay. Really. So yeah, structuring advice. Yeah, it really does. Ken, you've got to follow things. Do it properly, you know? Yeah.

Chris Bates: So sometimes clients will get me frustrated cause we will count with a loan strategy. You know me and Ben actually does it, to be honest. It's the Royal way. He, he basically says like, you know, set one, we refinance, we release equity and we do this loan split and it's come times clients get very confused cause there's like six loan splits yep. And weed on securing properties and where, and you know, for them it's very complicated. They go can't, we just don't have any one split and things like that. You've gotta be you can join splits together in the future if you keep evidence. And access all comes back to what was the purpose of lions.

Alison Lacey: So if the purpose of a new loan is to pay out a previous tax deductible loan, that's okay. It still maintains that text about deductability. But you've got to be very careful. And we've had people burned like that in the past where, you know, they've blended things. We've been able to go, well it's a 60, 40 split, but then in the years to come, they've sold something else and paid down more equity and then it's, you know, diluted things again and it gets quite messy.

Veronica Morgan: What if it gets better to have separate would save them an account. And bill too. So what if you buy properly? Like I have, I bought my house, which is now my house and I'm living in and everybody excited a lot. But this is what I live for, you know, but so I bought it and it was rented out. The purpose of that loan really was to ultimately renovate and become my home. What am, I shouldn't say this on here, I'm shutting up now. The ATO might listen to this, but no, but I, but I was able to claim the deductions on that interest for the period of time it was rented out.

Alison Lacey: Yup. Which is what I did with mine. Did the knockdown rebuild. So, but so this CJ T there now, but yeah, so you can but when you move into it, now it's your principal place. Residents can't claim the interest.

Chris Bates: It's interesting. Now you make a point. So let's say you bought an investment property and you knew you're going to live in it in the future. There's a big discussion around rent maintenance. Yes. Versus repairs. Yup. And what is repairs and what is maintenance. Right. So if for example, you knew you were going to live in it in the future, the reality is you'd want to kind of renovate it while it's an investment property and sometimes people can get in sell and problem here is cause they start doing things that are really repairs and improvements. Improvements is the issue. Yep. So can you please explain what, how does the HOD look at it? Because you know, the easy question is you break a window and you replace it with a nicer window, but it's not that simple is it?

Alison Lacey: It'd be very careful where there's these repairs and you know, things that you have to do to maintain the property at the state it's in and these improvements. So when you buy a property if you bake improvements to that property in the first initial period after you bought it, the tax offices, they are capital amounts that you have to treat as part of your cost base of the property. So you can claim deductions for them. They may be able to be part of that capital allowances thing. If they're structural. And you know, two and a half percent and that sort of thing in the future, but their capital, you can't just claim tax deductions for them. Mommy used to offset the capital gains tax at the end when you sell us. Right? Yeah. Part of that cost base of the property. So again, it's,

Alison Lacey: There's no set timeframe, but I would say at least six to 12 months would be my recommended period, minimum 12 months kind of thing. So, so if you buy the property thinking in a couple of years, I'll move in and then you replace the kitchen and you upgrade all the windows and you build a deck out the back and, and you do it in the first 12 months, I would say. Well, none of that is tax deductible. If you have though a tenant in there and the shower head falls off the wall obviously that's replacement. If the window pane broken, you needed it replaced then or the window itself broke and you put another wooden window back in, you know, that might be replacement type costs as opposed to improvements. The big example always kicks around is fences. You know, like if you've got the half falling down paling fence and you suddenly decide you're gonna replace all the fences on the block kind of thing with new Colorbond it's a different improved fence. Um so it's not just fixing and patching what was there kind of thing. So yeah, that's something to kind of look at before you spend the money.

Chris Bates: Could you say though that the improvements are needed to justify a better tenant, but it's still an initial improvement? Yeah. Let's say for two or three years down the track. That's different. Yeah. If you've got a revenue stream and you need to, you know, replace the carpets cause they're moldy and disgusting and then you'll get a better rate of return. Yeah, definitely. Then it becomes a depreciable item. The same with a new kitchen or you know, that sort of thing at that stage. So, yeah. And so that's kind of the strategy there. So let's say you have a, you buy are more of a rundown older house or just an established property. Try not to do too many renovations or makers yet.

Chris Bates: Initially the first 12 months oriented to students and get a revenue stream, there's texture to it. It's not a new property anymore. Yep. And then look at what do you need to do in terms of improvements and there'll be deductible or depreciable depression you're doing that. You're thinking you get Olivia at some point or does it matter?

Alison Lacey: No, it doesn't matter. It doesn't matter. It's any property. So any initial repairs, not deductible. Capital costs anything down the track then yes, you can look at it. Yeah.

Chris Bates: So what was there on the other ones around the borrowing costs? Yeah, that's a common mistake that our, you know, a lot of people don't realize. So when they originally buy the property, there's certain expenses on an investment property that you can claim over a certain number a year at a time. How does that really work? Like things like lenders, mortgage insurance, which sometimes people don't know is tax deductible.

Alison Lacey: Yup. So all your initial purchase costs are the properties. Obviously your property costs you legal fees, your stamp duty or capital items can't claim for loss of buyer's agent. Yes. Buyer's agents fees. Yep. Capital nineteens deductions, all part of your cost base. But the borrowing costs are, you might be paying lenders, mortgage insurance, borrowing cost, your bank fee their deductible over five years so you can apportion them and then climb them over the timeframe.

Chris Bates: Yeah. So a lot of people don't realize that, that, you know, for a home, if you buy a paying lender's mortgage insurance, it's not tax deductible. But if you're paying lender's mortgage insurance to buy a pure investment property, you know, that is deductible over five years. So you know, you don't want to pay too much. And then there's mortgage insurance, so you could probably pay about 88% loan, but it's not the end of the world to pay that a little bit to get in the door to get in the door. But also then it's tax deductible so your real cost isn't actually that much. And then you keep a lot more as a buffer. So it's a strategy that they will die because they don't know as deductible.

Veronica Morgan: It's really interesting one actually, because a lot of people, I just had an email from someone during the weekend. I'm a first home buyer, can you help me? I want to borrow, I want to spend under 650 cause I want to get all these government incentives and I don't want to pay lenders, mortgage insurance, blah, blah, blah, blah. And I'm like, I'll go back and say, well here's a bunch of resources cause actually if that's what you want to do, no, I can't help you. But you know, is that the only reason that you're keeping your threshold at 650,000 because really, what are you, what are you, what are your objectives here? And what can you borrow? What can you afford? What, what do you really want? How long you live in it, et cetera, et cetera, et cetera. Let's ask some other questions. And you know, it hasn't gone back, but you know what I'm saying?

Veronica Morgan: Came back and said, Oh, I could borrow 2 million, but I didn't want to do this and blah, blah. And you and Andy sort of then have the conversation, well, you can get a better asset and you might stay in it longer or might go up more, or all those sorts of farms. Right. You know, that was false economy of trying to get, it's all that, know your numbers and know what your options are. So exactly know, like, yes, I could borrow this much. Yes, it's going to cost me a bit more the factor that entails, you know, against the rental income, I'm going to get on a better property versus a horse. And that's, yeah.

Chris Bates: Every week we hear incredible stories of the dumb things, property buyers do, dumb things that end up costing a whole lot of money and a whole lot of stress mistakes that can be avoided. Please, Alison, can you give us an example of a property Dumbo? We can all learn what not to do from these stories.

Alison Lacey: So yes, we had a client years ago come to us and they'd owned a property for years. And they'd never got that quantity surveyors report in the first place. Never had a depreciation report and it was quite a valuable property. There was quite a lot of deductions that they had. But because with the tax office you can only go back two years in a main tax returns. They had lost about 10 years with the depreciation deductions. So yeah, it was quite painful when we sat down and told them initially we got them excited and went, we need a quantity surveyors report.

Alison Lacey: We went, you can claim this, this and this. And then we went, ah, but you only get this last two years and Mindanao. So yes. So it was a little bit bittersweet. That one. Yeah. There's lots of stories. There's just, the other thing is get your name right. We hadn't talked about structures but yeah. Yay. Get the name on the contract. Right. Cause we've had clients buy a property in the wrong name because they didn't know how to work with borrowing though. So they sent in the wrong name. They put in their name instead of a trust or they've put it in a company name instead of a trust name or the, you know, these sort of things. Always go back to my clients say double check with you. You have an accountant and all lawyer the names. Correct.

Chris Bates: It's really an off. I do explain to clients when they are buying investment properties, just make sure you get a depreciation and go, it's all old. It doesn't need one. I'm like basically,

Alison Lacey: Yeah, my sister has depreciation items in there. Even if they don't have others. Washington Brown not expensive to get there as well. I think I've always had more depreciation value in tax saving in the cost of the report. Yeah. I feel that I'll actually say like if we don't save you watch, we're going to charge you. We will do it. We will give it back for free.

Veronica Morgan: We have interviewed two quantities devices, Mike Mortlock and also Taryn Brown and you know, go back to those episodes. Look about guys because you learn all about this stuff and here they are. They're not that expensive and you usually get more back than the cost. It's not something I recommend all about Vista clients get them. Definitely. Yeah.

Chris Bates: The good thing is you just tell your tenant that someone's going to come around the house for an hour and it's done right actually. And the real estate agent will, Oh yeah. And so I think that's a huge one that, and it does save you a lot of money. It's a lot of extra tax deduction. You get if you miss it, you can't get back two years. Two years is not long. Cause like when you forget to claim the child care costs SendLink same deal.

Veronica Morgan: Lost thousands of dollars cause I can't be bothered. Oh you go in there as daunting. I don't know how that's the idea, isn't it awful? He, I mean I'm fortunate that I got ah, what smart home with no. Whereas people who need, sorry. I mean as an accountant I do forms all the time and yeah, that's one of the hardest processes I've had to do. The childcare falls when I had kids. The only one. Right.

Chris Bates: Sorry. I want to have to pay that. But the one final question, cause you right, we didn't talk about structuring and I think, you know, our listeners would be kind of saying no one talks about trusts and we don't know we're going to get back next. So sounds like you were talking about, you know, everyone knows like, you know, buying single name, joint tenants, tenants in common. You know, if you buy a property you could have it in one night, but the loan could mean two names, which sometimes people don't realize. But in terms of like property trusts, you know, there's a lot of books out there and a lot of people out there telling people that you want to become a property investor, you must have a property trust. What's your views on all that and how does it actually benefit someone and win? And most of the time does it not or does it? So

Alison Lacey: I would say probably 90% of my clients own property in their own names. Some of my bigger pro clients, they do own property in trusts, trusts a year for me in my base trusts are usually use for asset protection. So that's really the bottom line of why someone would use a structure other than the individual names. Just going back to joint names. So if I've got, you know, somebody that's in a risky profession, for instance, we might buy the asset in the wife's name if that's from an asset protection scenario. So again, it's still an individual name. You get all the, you know, individual concessions and capital gains tax and things like that. However, you know, if that's not an option, both working, you know, both in professions and things like that, you might use a trust. The downside of using trusts though is that you've got harder to get the borrowing and you know, it's more messy and things like that. Especially nowadays land tax concessions, you know, you don't get individual thresholds with trusts unless you have a fixed trust.

Alison Lacey: You, you know, there's more cost involved with it in terms of running accounts and tax returns and all that sort of thing. Yeah, so it's a yes. Yeah. You don't always get the same CGT concessions if you use a company, very little personal CGT concessions, but you pay less company tax than you normally do an individual tax, right? Yeah. But when you flow the cash out, the cash is still coming out. It's going to end up in someone's marginal Tech's name, someone's name at their marginal tax rate. And so there's no CGT concessions trusts. You do get that flow through of income down to an individual. But unless the trust, so if the trust has the borrowing and the trust makes a loss because, you know, if we're negative gearing a property and it's, you know, the costs are more than the rent, that loss is stuck in the trust.

Alison Lacey: You don't get the benefit at an individual names. So, so as you know, years go by and it might become cashflow positive, you'll start to use up those losses then. But otherwise, you know, you've got a big asset sitting there costing you, you know, dollars to hold it that way.

Veronica Morgan: Yeah, that's interesting. And you said around 90% of your clients actually own in their own names. Is that because of your advice then?

Alison Lacey: Yeah, look, it depends on circumstances. A lot of people have a property, you know, couple of properties. There is no point going and analyst, you know, income less. Asset protection is a huge issue. And to be honest it's not for a lot of people. Then I wouldn't at all consider structures for property. It's interesting cause that's probably an education thing too. You know, people don't understand structures and things like that. It's more expensive, you know, they don't always understand property. I would suggest you do the first one in your own name, get your head around it, knowing what's involved, you know, and if you've got a growing portfolio, then maybe you're looking more at asset protection. But if you bought your first property and the bank owns 80% of it or 90% of it, there's not a lot of asset that's there. So yeah.

Chris Bates: Yeah, I think that's a thing. No, it's not a shot. And accountants, cause I was having shots of financial vases before and brokers and buyers agents, everyone there are, you know, unfortunately, you know, certain professionals that would encourage people to take set up trusts because it's more, I could stop any super funds, my income if I told every client to have a company, a trust in a self medicine. But it is not appropriate for most people.

Veronica Morgan: That's the note to end this on that. That is so good. And I'm, look, thank you so much for joining us today. It's been lovely. It has, you know, can you believe he has such a spirited conversation all about tax. Yep. And we've, we're not too dry and boring and we've run way over time and just being so good. Thank you. Thanks.

Chris Bates: We want to make you a better elephant rider. And this week's elephant rider training is,

Veronica Morgan: Well, I loved this conversation with Alison and he's quite funny that we did take a long time to talk about tax and we could have talked for longer.

Veronica Morgan: There's, there was more to cover. I think what I want to talk about in this bootcamp is the importance of having a team to support you when you are buying a property. We've talked about so many traps and pitfalls in this conversation just around the tax side of things, the structuring, et cetera, et cetera. Now you know, likewise, if you don't engage a good mortgage broker, you can have the same problems on the mortgage side of things. If you don't get a good lawyer, exactly the same issues there. You definitely need to talk to somebody who's an expert in insurance as well and obviously I'd advocate that you talk to a buyer's agent who's an expert in the area in which you're looking at buying. So all of these advisors can pull together so that you don't go down a path that is really ultimately going to be the wrong path for you and ultimately costs you more money because you haven't actually understood what the traps and pitfalls were in advance.

Veronica Morgan: So I just want to encourage you all, build a good team around you of experts in the relevant areas, and be very careful as somebody who doesn't ask enough questions about what you want for your future, but also who actually oversteps the Mark and gives you advice scenarios that they shouldn't be giving you advice in as bit of a problem with property because of course properties unregulated. So therefore, be very careful of those that do give you advice outside their area of expertise. Really look for those that really like to working in conjunction with other experts as well. And then you will ultimately make so much better decisions.