Ep 75. | Why This Budget Punishes Aspiration Not Wealth

Treasurer Jim Chalmers handed down the federal budget and the proposed changes to capital gains tax, negative gearing and family trust distributions could significantly affect how Australians build wealth. In this special episode, Capital Partners founder David Andrew and wealth advisor Aden Wilkins speak with Nick Menegola to break down what has actually been proposed, who it impacts, and why you should not be making any rash decisions just yet.

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Chapters:
(0:00) Welcome and Wins of the Week
(3:55) What This Budget Is Really About
(6:15) Who Does This Budget Actually Hit
(11:45) Capital Gains Tax Changes Explained
(17:00) The 30% Minimum Rate and Pre-1985 Assets
(20:00) Negative Gearing: What Changes and What Does Not
(23:15) Beware the House and Land Package Spruikers
(27:30) Family Trust Flat Tax
(31:15) Real Example: What It Means for a Small Business Family
(37:25) Why Super Becomes Even More Attractive
(40:00) The Trillion Dollar Debt in Perspective
(43:40) Who Needs to Be Paying Attention Right Now

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Recorded and produced by Podwave Studios https://podwavestudios.au/

The Purposeful Investor Podcast is a public service provided for Australian investors wanting to make smart decisions with their money, avoid costly mistakes, look after the people they care about, and, have a great life!

We draw on over 30 years of experience from David Andrew and the Capital Partners team.

For more information on Capital Partners' award winning team, visit capital-partners.com.au.

Have a question? Email us ask@capital-partners.com.au.

This episode provides general advice only. We do not consider your personal circumstances when we share this information. Always refer to your financial adviser for advice about your personal circumstances. 

Capital Partners Consulting Pty Ltd AFSL 227148 trading as Capital Partners Private Wealth Advisers ABN 27 086 670 788.

Transcript

Welcome And What’s At Stake

SPEAKER_02 0:00

Tony Burke, the Minister for Home Affairs, uh in the Register of Interest, has six properties. Now I have absolutely no doubt that at least if not now, at some point in time, he has negatively geared those properties against his parliamentary income because of course he's never had any other job.

SPEAKER_00 0:16

There's going to be a wave of people spruking the new house and land package.

SPEAKER_02 0:20

Oh, that's going to be the next scam.

SPEAKER_00 0:22

Asset protection is going to be much harder going forward, and there's going to be a tax cost to have asset protection.

SPEAKER_02 0:28

And then the next group I would say are the affluent. They're the people who have got between three and ten million dollars of investments, and things have got to go pretty bad to knock those people. We all expect good roads, we all expect good hospitals, we all expect good services. Any money that's taken out of the system in tax that's excess to requirement is a massive, massive drag on our wealth as a collective commonwealth.

SPEAKER_00 0:55

You need to be very careful about making your decision based on the negative gearing because it's still about what is a good asset.

Aden 1:01

Who are the people that really need to pay attention? So anyone who is Welcome to another episode of the Purposeful Investor Podcast. We're a podcast for successful families who want to make smart decisions with their money and avoid costly mistakes. We're here so that you and the people you care about are going to be okay no matter what. And we're also here to set you up to live a great life. Welcome back to another episode of the Purposeful Investor Podcast. We have a very special episode in line today. Treasurer Jim Chalmers dropped the federal budget just under a week ago. And we thought we'd better get in the studio, record a podcast, and go through some of the proposed changes and what it means to people in Australia and our listeners. Joining me today is Capital Partners Founder, David Andrew. Good to be here. And in the other chair in the studio is our resident guru on all things investment strategy structuring, Nick Menangola. Nick, welcome to the studio.

SPEAKER_00 1:58

Thanks for having me.

Aden 2:00

So we've got quite a bit to digest today. There's going to be a few talking points, and it's been you pretty much couldn't have turned on a TV or the radio without hearing something about the federal budget in the last week. But before we get into the content and the talking points of the podcast, as always, we start with our little win of the week. So that's something personal, professional that you can reflect back on that was a little win. So, David, why don't you start with your little win of the week?

SPEAKER_02 2:23

I feel as though I might be stealing your thunder. Robin and I have just returned from a couple of weeks in Vietnam, which was great, great fun, very relaxing. There's always that little bit of, you know, third world Asian country. It's uh the overwhelming sense is coming back to Australia, just how lucky we are. You know, the cleanliness, the, you know, the the it's just a more organized way of living. Um and we're not subsisting. So yeah, pretty cool. But it was an uh it was great. It was unfinished business for us getting to Vietnam. Um, so we enjoyed it.

Aden 2:56

Love it. What about you, Nick? What was your little win?

SPEAKER_00 2:58

Uh not as exciting as Vietnam, but uh Georgia and I on Sunday um went for a picnic in the park. Um, no phones, just sat there and read for a little while, and it was um it was just a good good way to switch off on a Sunday afternoon.

SPEAKER_02 3:10

Taking your partner to a picnic in a park, was she was she gonna be? Oh no, no. There's no expectations for the biggest.

SPEAKER_00 3:19

No, I'm wearing a knee race.

Aden 3:23

Yeah, Dave, as you alluded to, we've got pretty similar wins. So by chance, I was also in Vietnam um for the last week in a little bit. Uh went with a group of mates, um, one of the one of the guys is turning 30, so it was sort of a good excuse to go on a trip. Um, good weather, good food, played a bit of golf, um, and just nice little circuit breaker to get away from work, take some time to relax, um, and then come back refreshed, full of energy. And like you said, you're always grateful for living in Australia, in particular Perth after those trips as well.

SPEAKER_02 3:52

Yep, for sure.

Aden 3:53

So it's been a big week. There's been lots of news that's come out of the federal budget, um, and there's been lots of talking points, people wondering how does this impact me? What does this mean? Should I be doing anything differently? Because they were quite substantial proposed changes that came through. So today we want to cover off on what are the big changes that we think will impact our listeners, our clients, um, but also just reassuring everyone to say at the moment they're proposed changes, so we don't want to people making rash decisions, but it's really just about understanding what's been proposed and what some of the implications might be. But to start off with, I think it's probably, Dave, I might get you to talk to this in terms of why this budget, I guess, has been brought about by the government of why they've proposed it's come in and what it what it really means for broader society.

Why The Budget Lands Hard

SPEAKER_02 4:43

Yeah, okay, that's a really big, big, big, big question. Um and I'll do my best, Aidan. Um, this government has been talking a lot about solving the intergenerational equity around, particularly around housing. And um at the end of the day, you cannot do that through adjusting the tax system. Any any impact of that will be marginal. So this is a very political budget. Let's not be let's not be hoodwinked about that. This is all about political values and the way the Labour Party currently, the the those in power, see the Australia that they envision. It's interesting. I actually listened to the budget speech from from Vietnam, which is a bit nerdy. Um and I got off the the budget speech night and said to Robin, you know what, I don't think it's going to be that bad. And with each day that's passed, and the deeper I've gone into it, and and you read the analysis of you know tax partners at law firms and so forth, frankly, I've become more and more pissed off because this will do nothing to solve intergenerational equity. And I think we're seeing that from the response of your generation. I think you're just as pissed off as everyone else is, right? Yeah. I do have a little a little um uh context piece that I think it'd be useful to start off with um in terms of who this um budget actually impacts. Because there's and we'll talk about the changes specifically, but if you think about the Australian population in context, we've got about 82% of the population, 82% of households you would consider in the mass affluent. You know, they are aspiring to build wealth. You know, they're they're not rich yet, but they're aspiring to build wealth. Then you've got your next level, which will which I call the emerging affluent. They're they're people who have um between a million and three million dollars of investments. And that can be equity in their home and so forth. And that's about another 11% of the population. So we're at the moment, we're talking most of the population. And then the next group I would say are the affluent, you know, the truly affluent. They're the people who have got between three and ten million dollars of investments. And you know, things have got to go pretty bad to knock those people off their perch, right? Um, that's another 5% of the population. So we're now at 82, 11, so 93, um, and another five. We're at 98% of the population with those first three groups that I've talked about. And then I'm gonna quickly go through you've got the superaffluent, which is people who have got more than 10, between 10 and 30 million. You've got the ultra-affluent, between 30 and 50 million, and you've got the sentiaffluent who are the people who have got more than 100 million. That's less than 2% of the population. So there are very few households by number that have that sort of money. But here's the thing: this is where the um the this budget really attacks uh aspiration is for the mass affluent, which includes your generation, the emerging affluent and the and the affluent, I guess, you know, that no one's gonna cry me a river for the affluent, okay, because they've already done okay. So fair enough, I get that. But geez, the emerging affluent and the mass affluent, who are all, you know, the guy that mows your lawns, that that's taken the risk to start his own business, the the guy that's cleaning your gutters, the guy that's come to build your house, they are the people who we really want to incentivize to create wealth. And it seems to me that what this government is proposing is to take away the strategies that have enabled the previous generation to actually achieve some level of financial independence. So there's my starting rant.

Aden 9:03

I think that's a good point. I guess, like you said, Nick and I are probably good people to talk to this in some extent because we're from that next generation that are aspiring. And it almost feels like with the budget coming out, you want to like deentivise people to be aspirational and create wealth. And I think create's the right word because sometimes people think, oh, they've stolen wealth, or it's taken to get to this point. But it's people creating wealth through enterprise, through taking risks, through business, through employing others that creates a lot of this wealth, and it feels like a lot of the measures in this budget are just cutting a lot of that down, which previous generations have benefited from. I don't know.

SPEAKER_02 9:39

You know, I I'm 60, so I have a perspective on the world that's different to yours. Um, but I've got a lot of friends who've made money, and there are a few that have been lucky, right? But the vast majority have worked so hard to get where they've got, and they've actually been in the early stage of their lives pretty frugal because they've had to be, because they've rolled the dice. When you think about tax, tax is a n we need you know as a civilised society, we need to pay taxes. I think the whole narrative in the US where we shouldn't pay any taxes is nuts. Okay, we all expect good roads, we all expect good hospitals, we all expect good services, but there is a point at which any money that's taken out of the system in tax that's excess to requirement is is a massive, massive drag on our our wealth as a collective commonwealth.

Aden 10:43

Or how many countries have taxed their way into prosperity. You can't. Yeah. Yeah.

SPEAKER_00 10:47

And I saw a stat um recently, I think um we are the most um so if if if we were using the tax better and investing it and really reallocating it into like growing the pie, then that's a slightly different story, which I don't think we've necessarily seen with this budget. But you look at Australia and um um 25%, which is a staggering number, of our workforce is working for the government.

SPEAKER_02 11:13

And what's more, the increase in the federal public service since COVID has been 26%. Yeah. You know, it's just astonishing level of growth. And there's just no accountability around how that money is being spent and how those jobs are being allocated. So it's I think w if there's one thing our listeners should cotton onto here is just there is very little accountability coming out of Canberra in terms of how our tax dollars are being spent.

Aden 11:48

Yeah.

Capital Gains Tax Rulebook Shift

Aden 11:49

So into some of the actual changes. So there's there's lots of things that came out of the budget, but we probably want to distill it into sort of the the three or four areas we think will impact most of our listeners or potentially impact most of our listeners and clients. And so they're going to be there's changes to the capital gains tax discount. There were some announcements around negative gearing and when that can and can't be used. And also one of the bigger ones was the flat tax rate on family trust distributions, which was probably the one. There was a few whispers that it was coming out late, but that's probably the one that caught a lot of people off guard in the budget. So why don't why don't we start, um, Nick, by talking about the capital gains tax discount and what what's being proposed there? Yeah. So just before I jump to you, I will cave it by saying all of this is just information and general advice. Obviously, anyone acting on it, please speak with your professionals, your accountants, your financial advisors before making any rash decisions.

SPEAKER_00 12:44

So the the change, and everyone would have um, I'm sure heard this by now, but we previously obviously had the 50% capital gains discount system. So you make a gain after 12 months, you can say half of that gain is wiped, and I'll get taxed at my marginal tax rate on those gains. Uh, what they're proposing now is that any gains from 1 July 2027 onwards, it's going to be tax based on real gains. So each year, um, if you bought an investment for $100 and inflation is 2.5%, the cost base of that asset grows by inflation. And so it's a still a version of the CGT discount. It's just a different version. It's most pronounced for really fast growing assets. For assets that are growing at rates similar or slightly above inflation, the change isn't so dramatic. Um, so for example, if your portfolio is growing by um, let's call it 4% growth, um, not 4% total return because income is carved out, but 4% growth and inflation is 2.5%, it's a 5 to 10% tax increase. So it's but on those um really big growing assets, so small businesses, for example, growing at you know 15 to 20% a year, that's really where it's quite it's felt quite um pronounced. And um, for those kind of assets, um, in a worst case scenario, you um the tax would double because you just don't get the CGT discount, and then it's taxed at your marginal tax rate. Um, and the the effect of the inflation is just eroded away by the size of the gains. Um there's a minimum tax.

SPEAKER_02 14:24

I think I think though, I think though, if the government had called it there and just said that's that's the way it's gonna be, then we probably could have lived with that. You know, that's what I grew up with for many, many years, up until I think it was about 2005, 2006.

SPEAKER_00 14:41

1999, I think, wasn't it?

SPEAKER_02 14:43

That um uh it was the Howard government that changed that brought in the 50% discount. Uh I don't know exactly when it was, but but um that was a major simplification, and that was that was the reason they bought that in. Um I think if they just said, yep, we're gonna index real gains, it's very hard for people to argue against that. But it is, as you said, Aiden, the minimum capital gain. 30%. Yeah, 30%.

Aden 15:08

Yeah. Which I think, and like you talked about with business owners, it that feels very, very substantial for people who've grown a business, worked in it the blood, sweat, and tears for all their lifetime to pay that tax on the sale. And when when people are selling substantial enterprises, they are paying a lot of tax. I've had four or five or five clients that come to mind who've sold a business, the dollar value that they're contributing for that is pretty substantial that's going into it. So I think, and a lot of the noise that's come out has been how does this incentivize people to go out and take risks and create value?

SPEAKER_02 15:41

But also, uh you know, yes, we have a passion for supporting business owners because we fundamentally believe that business in the right hands is a is a force for good on the planet, right? Yeah, it creates it's an amazing value creator, it's an amazing um employer of people. But also spare a thought for the the teachers and the you know the painting contractor or the you know the the carpenter who spent all their life you know paying off their mortgage, paying off a rented, negatively geared property and putting money into super. And they have always planned to sell that uh property once they've got into retirement. And because their marginal tax rate is lower, because they're retired, their tax burden is much lower. So I think that 30% flaw on capital gains tax is a pretty gratuitous slap on the very people that you would think the Labor Party is trying to look after. I I I have got a sneaking suspicion they've been, you know, told by Treasury this is what you should do. I I don't well it in fact it's been evidenced by some of the interviews that have happened with um you know Minister O'Neill and others, and the Prime Minister, frankly, since the that they really haven't understood what they were doing in its full in its full form.

Aden 17:17

I think also important to distinguish, Nick, the the treatment of gains before this comes in and after. So do you want to talk to that a little bit?

SPEAKER_00 17:23

Yeah, so before um so 1 July 2027 is when this one takes effect, and treatment of gains before that uh unchanged. So if you um sell an asset before that. Additionally, if you sell an asset after 1 July 2027, the expectation is that the um or the treatment of gains pre-1 July 2027 isn't changing. It's only gains after 1 July 2027 that are impacted by the new regime. But how they apply that is still not clear. So we don't have the detail on um assets that are uh owned across both regimes, how exactly they're gonna do that calculation.

SPEAKER_02 18:01

And so that's um but it but it would seem, Nick, the practical response to that would be that you probably should go and get, for example, your properties appraised. Yeah. The shares are easy because there's a a daily known market value. But properties you probably we're probably gonna need to get people to appraise those.

SPEAKER_00 18:22

Especially pre-85 assets. So pre-85 assets are the ones that um Well, they've always been exempt, right? They've been exempt forever. Um and they're the ones we probably didn't see coming as well. So they're going to be included in this new CGT regime from 1 July 2027. Yep.

SPEAKER_02 18:37

So they're still exempt up to 1 July 2027. Correct. And then from 1 July 2027, they attract. Yeah. That's got huge implications for family farms and big bits of land as well. Yeah, definitely.

SPEAKER_00 18:49

And so those ones especially, um, so the pre-85 assets 100% need a valuation at 1 July. The um other assets, highly likely you need a valuation at 1 July. Um and if it's in a self-managed super fund, you're gonna need it anyway for other reasons. Um and so yeah, getting a starting to your plan for a 1 July 2027 valuation is is not a bad way to go.

Aden 19:14

And I think also with the capital gains changes or proposed changes, sorry, what was what all the whispers coming out of Canberra before the budget that was, yep, we want to we want to tackle this intergenerational property problem. How do we get more young people into the property market? So they'd already pretty much come out and said for residential property, we're going to change how the capital gains tax works. But the the spreading out across all asset classes again is probably another thing where people didn't necessarily see that coming. And there was, as you alluded to before, Dave, the interview with the Prime Minister where he gets asked the direct question, well, how does taxing all um investment assets at the same rate with capital gains? How does that decentivise property investing? And the answer I think was pretty self-evident that the it wasn't quite clear. But I think that's the other thing that has been quite unusual out of this budget or quite interesting, that it's being applied to all asset classes. Yeah.

Negative Gearing And Property Distortions

Aden 20:09

So negative gearing, so what's so it's a it's a term that's thrown around a lot. Firstly, it's probably worth it explaining up what it actually is, I think, just to all of our listeners, and then what the proposed changes are.

SPEAKER_02 20:18

Yeah, I think most people are across this, but but negative gearing basically means that if you you buy a an asset, let's just say a house, because most people understand negative gearing of a property. You buy a house for a million dollars, let's say you've got a a 5% interest cost. Um so that means you've got a $50,000 cost, then some rates and taxes and so forth. Let's say all your costs are sixty thousand, then you rent it out of thirty, that means that you've got a net loss of twenty thousand dollars. So sixty thousand dollars in total costs, interests, rates, land tax, et cetera, less the income that you receive, you've got a twenty thousand dollar loss. But the way the system currently works is that you're able to take that loss and offset it against your personal income, your your your your um accessible income. So if you earn $120,000 by by taking that loss off, all of a sudden you're taxed on $100,000. Now, this has been the strategy that so many people of my generation have used to quietly, very, very quietly, uh just buy a property, have it sitting in the background, essentially using a bank's capital to leverage the increase in the property market and tax effectively use that to to create wealth. Um now Tony Burke, the Minister for Home Affairs, uh, in the register. Of interest has six properties. Now, I have absolutely no doubt that at least, if not now, at some point in time, he has negatively geared those properties against his parliamentary income. Because of course he's never had any other job. Yeah, so so th that's how it works. Um, but it's it's um it's it's been a very, very effective way uh for people to own more than their primary residence.

SPEAKER_00 22:30

And I think a lot of people of our generation looked at their parents doing that or people around them doing that, and it did look like an attractive strategy. And obviously that is um no longer available in the current format.

SPEAKER_02 22:43

Only for existing commodities, yeah.

SPEAKER_00 22:46

And you need to be careful because I think there's gonna be a wave of um of people sprooking the new house and land package.

SPEAKER_02 22:53

Um, that's gonna be the next that's gonna be the next scam.

SPEAKER_00 22:56

Yeah.

SPEAKER_02 22:57

That's gonna be you know, you look at it's already happened in Queensland. People selling apartments off the plan in the Gold Coast and so forth. That is the next that happened in South Bank in Melbourne. Um, big developers come in, they build multi-story dwellings and people buy them off the plan. It'll it'll be the next ASIC inquiry.

SPEAKER_00 23:22

Yeah. You need to be very careful about making your decision based on the negative gearing. Um, because um it's it's still about you know what is a good asset. Um and so buying a um typically where that land is available, is that the right place that you want to be investing, noting that when you go to sell it, the eventual buyer probably needs to be for a um owner-occupier, because when you sell it to another investor, they're not going to get that negative gain, um negative gearing benefit. So you just got to be careful there about um not making a decision purely based on negative gearing benefits that you can get from a um uh building your own. And so it's just uh be caught a be careful there.

SPEAKER_02 24:04

Yeah, it's another really good example of government intervention. So where where governments leave things alone, typically markets work them out. Now that's not to say we should we don't need some regulation, of course we do. But if you think of the current housing stock in Australia versus what's built each year, I don't know what the numbers are, it will be interesting to find out. But I'm gonna say it's probably 98% existing housing stock and two percent new dwellings. So anyone who wants the negative gear has to compete against everybody else who wants the negative gear to buy probably less than two percent of the total housing stock. What do you think that's going to do to prices of properties that can be negatively geared? It's a distortion created by government policy.

SPEAKER_00 25:03

And the new lands, uh new builds also have the CGT discount, they get to choose the old method. So they get to choose between the new method or the old method. The one that annoyed me about that is that it's grandfathered indefinitely. Um so they had to introduce some level of grandfathering, but leaving it indefinitely felt like a long time. Um like if you if you are focused on um the next generation, you've left all the benefit for the ones who've already had the benefit forever. And so that's the that's the one that um made me frustrated in that one is just that um make it a even if it's a 15-year grandfathering window.

SPEAKER_02 25:39

It's so arbitrary, isn't it? Yeah, it's so arbitrary. I'm telling Aidan we were joking, one of our sons uh has a property that's negatively geared, and he said, Well, when do you reckon I would sell that dad? Never. Yeah. You just hang on to it forever because that's the only way you're ever going to be able to use the government's the the the tax deduction to use the bank's the bank's capital to purchase that asset.

Aden 26:03

So I think it's worth delving into as well because the negative gearings, it's slightly nuanced compared to the capital gains changes in terms of what asset classes that's gonna apply to the changes.

SPEAKER_00 26:12

So negative the negative gearing change only applies to uh existing residential properties. Every other asset class is um is pretty much um unaffected by the changes. So borrowing to invest in commercial property is still um an option, like we've talked about new builds, or borrowing to invest in equities is still an option. So the thing that will change here is uh borrowing capacity will be impacted because um then negative gearing into a say residential property, because you can use that income and the bank is comfortable to loan against that property. You can borrow quite a lot. So the capacity, but borrowing to invest in, say, a shares portfolio is still a really attractive option. Um and um yeah, this has is probably gonna push some people that way.

Aden 26:58

And speaking to a couple of mortgage brokers in the last week, they've said like some of the banks have already passed on these rules as if they've come in.

SPEAKER_02 27:05

Macquarie Bank has in there. Macquarie Bank has, yeah, Commonwealth Bank, I think, has. So yeah. Yeah.

Aden 27:11

So it's having an immediate impact on that.

SPEAKER_02 27:12

But I think the devil's gonna be in the detail of this as always. Because what if you set up a company that is in the business of buying and renovating existing housing stock and then selling it? The ability to use to deduct interest against uh an income-producing asset is section 511 of the Income Tax Assessment Act 1936. It is such a fundamental pillar of our tax system. So can a can you set can a business I you won't know the answer to this because this is the devil's in the detail, but can a business set up as a company buy and renovate existing housing stock and claim their holding costs as a deduction? Now, they ought to be under section 511 of the Income Tax Assessment Act. So it's just gonna be fascinating to see how this unfolds. I think they've bitten off way more than they can chew here.

Aden 28:18

It talks to that point as well around there was all this pre-budget talk around simplifying things. Oh, yeah. But that's the last thing it's done. It's not made anything more simple at all. And it's just created more complexity for people to navigate.

SPEAKER_02 28:29

You bet.

Aden 28:30

So the the

Trust Distributions And Bucket Companies

Aden 28:31

third one, probably the one I I think that probably impacts most of our clients the most, or potentially does, is the changes to the family trust um flat tax rate on distribution. So what's what's that all about, Nick?

SPEAKER_00 28:43

Yeah, so this one is the um this one in particular, we need detail before we can really make any good decisions on. Um, and it is complex, so I apologize in advance. But essentially they're applying a minimum 30% tax to any discretionary trust. So family trusts are typically discretionary trusts. So they're applying a minimum 30% tax to that. It gets taxed in the name of the trust, and then you distribute a non-refundable tax offset to wherever the eventual beneficiary is. So, for example, trust has $100 of income, it's going to pay 30 cents of tax. If we then pay that out to someone who's on a 30% or 37% um marginal tax rate, they'll pay that, um, they'll pay 37 cents in their name, get a 30% refund on the um 30%. And so they'll essentially pay a 7% top up. So for people above a 30% marginal tax rate, it doesn't make such a big difference. But for people below the 30% tax rate, they're the ones that are um they're going to pay additional tax that they otherwise wouldn't have. There's also complexity in the way that franken credits work, which uh we'll pause and come back to, I think, because it's complex. And also distributions from trust to company, that's the major change. Um, that's going to have the biggest planning implications in terms of how people set up structures. Because if you distribute that, if trust earns the income, pays that $30 of tax, and then you distribute that income to a company, you're going to pay that tax, you pay tax again. And that $30 of tax paid in the trust isn't recognized when you distribute it to the company. And so it's it works out to be 55 to 60% of tax on that initial $100 earned. And so that strategy, as it's if it goes through as um proposed, is um almost dead. You would you wouldn't do it anymore. There's there'll still be places for trusts and companies. It's just going to be how you flow it through your entity structure needs to change. Um, but that one isn't set to change until 1 July 2028. And I would flag that we have an election in May 2028 with um Taylor. Angus Taylor's already come out and said that he'd unwind all of it if elected. And so um it's a big change.

SPEAKER_02 31:06

Yeah, I think the head wins, I think the head wins for the Liberal Party are so significant that you might fight the good fight, but I don't think they can win. Yeah, they can't they probably can't win the next election after that with the numbers they have in the House. But we'll see. I wouldn't mind just giving an example of how this in real life impacts a small family business. So let's say you have a a small family business, um, it might be a window cleaning company or whatever, um, and you have a business that's owned by a family trust. It's a very common structure. In let's say in the early years of the business, um, the family is set up in such a way that mum, dad, um, and two kids are working in the business. So you've got mum, dad, um, K1, K2. And let's say in the first year of business, the business makes $100,000 profit. Now, if the way it that would currently work is that you couldn't if if if all these people are legitimately working in the business, they've all said, yep, we're in this together, mum and dad, they stream through the trust $25,000 of that profit to each of those individuals, then they would effectively pay no tax or a tiny, tiny, tiny bit of tax. Now, if they had that job anywhere else and they were earned twenty earning $25,000 a year, that is a that would be perfectly legitimate under the marginal tax rate system. Under this proposed rule, if you tried to have your family business owned by a trust so that you could distribute the profits to the people who are working in that business under these new rules, instead of paying no and let's face it, $25,000 each, working your backside off to try and establish a little family business is not a lot of reward for a lot of effort. Under the new rules, that family will pay 30% of that hundred thousand dollar profit away in tax before it even gets to them. Like it's going to be taxed at the trust level. So using a family trust to set up your business appears to be pretty well dead.

SPEAKER_00 33:24

There might be some benefit at the really high net wealth level for asset protection reasons. So um where the 30% flaw isn't going to impact you, there still might be.

SPEAKER_02 33:38

Oh, because if you're already paying a relatively high level of tax.

SPEAKER_00 33:41

If you're already at a relatively high, the benefits of asset protection might mean that um it doesn't is not so consequential.

SPEAKER_02 33:48

But as we talked about earlier, Nick, we're talking about less than 10% of Australian households in that position. This this is this is hugely impactful on the people who we want to get out there and be productive and make a go of it. Yeah. Have a crack.

SPEAKER_00 34:06

Yeah. And so in that example, they'll now have to set up wages to avoid the minimum floor. And that means setting up a payroll system, and it's it's it's not simplification. Um and so um there'll be a lot of work in the next three years about how do we structure businesses um going forward. And um starting one right now would be really hard because there is so much complexity in this asset structuring. Um people are just trying to make sense of it all. Um but yeah, it's um it's definitely not simple.

Aden 34:43

I think that sort of comes back to how we started the conversation, which is a bit of the frustration that I'm sensing from large parts of society in terms of the people who've already made it. Like it doesn't actually impact them as much as people are trying to make it and get out there and go in terms of set themselves up, structure themselves right, and make use of these opportunities to be aspirational and make something of themselves. And I think that's where there's a lot of frustration for people saying, well, hang on, well, why are we getting impacted by this as well? So I think it will be interesting the sentiment that continues to come out over the next few weeks and whether that impacts um any tapering back or what actually comes in place.

SPEAKER_02 35:23

I think that's gonna be fascinating, Aidan. I think it's a really good point because if you look at the section 296 changes where they originally said we're gonna tax uh account balances in superannuation funds over three million dollars based on a you know um mark-to-market basis, you know, that we're gonna we're gonna tax unrealised capital gains. They eventually unwound that. Now, I I think um if if Mr. Albanese gets to the point where he says, hang on a minute, we're spending way more we're spending way more political capital than I ever thought we were going to. You've hoodwinked me. I wouldn't be at all surprised if he if he dials back some of the more egregious um changes that have been proposed.

Aden 36:09

There's been a little bit of talk initially about um potentially with startup businesses as well. Like, is there going to be a few more concessions with those? They haven't announced anything yet, but there has been some whispers about that they're gonna be.

SPEAKER_02 36:20

Claire O'Neill was on TV last night and she could not answer the question. How is how is a start-up business, how is a tech business different to any other business? Like just because they're tech bros wanting to make a say a quick buck and they shouldn't be penalized on capital gain states. How how different is that to the mum and dad who say, I'm sick and tired of working for the man? I'm gonna set up my own business and I'm gonna do what it takes. Like seriously, how is that any different? If in fact, if I was in politics and I was in power, I'd be wanting to reward the value creators who are there for the long term. Who are there for the long term? Absolutely. Who are the people who are fundamentally altering the nature of this country by becoming business owners, creating wealth, employing people? That's where the real that's that's really what we want to incentivize as a nation.

Aden 37:16

And I

Super, Debt, And Calm Next Steps

Aden 37:17

think on that topic as well, so we'll talk a little bit um in a little bit of detail now around who who needs to be thinking about things differently, not acting yet, but who needs to be paying attention to these changes. But I think one of the the byproducts of some of these proposed changes, again, is that superannuation becomes even more attractive, which again is a vehicle that's accessible for people closer to the end of their careers.

SPEAKER_02 37:39

Well, there's a huge paradox in this, Aidan, because the the superannuation system is so generous and so skewed in favour of the boomer generation that it almost makes some of the changes that have been made or been proposed an absolute joke. Um I've said this many, many times before and several times on this podcast. Before the changes were made in 2006, when pensions, superannuation pensions were made tax-free, most of our clients paid between 10 and 15 percent tax on their superannuation pensions. And basically what that was was the difference between the amount of when they put their money in, they paid 15% tax. And the government essentially said, if you want to take the money out of the pension, you've got to pay the top up up to 30%. There was no one complaining about that. Everyone thought it was everyone still thought it was the best deal in town because they paid no more than 30 cents in the dollar on their pension. Now we have just trillions and trillions of dollars in a system where people pay no tax. And I know some of our listeners, certainly some of our clients, would say, hang on a minute, David, you're my advisor and you're advocating that I should be paying more tax. What I'm really shining a light on is that the this is very much a political budget, not a not a truly transformational budget to change the tax system. If we were going to change the tax system for keeps, for really, we would fundamentally alter the level of income tax people have to pay, and we would include we would increase the GST. You know, if if if you said to people, look, if you save all your money and you don't spend a lot, you're not gonna pay a lot of GST. If you spend all your money, you're gonna pay a lot of GST. So that incentivizes saving and and really incentivizes people to work hard and save. So that that's what real reform would look like, and it would appear none of our um political um representatives are willing to go there.

Aden 39:52

Yeah. So just before we jump into the people who need to be paying attention, Dave, you had a really good analogy that you used when we were driving here in the car today around government spending and what how big the actual figures are.

SPEAKER_02 40:04

Yeah, look, I was thinking about this. You know, how do we how do we have a conversation with our listeners to give them some context about how big a trillion dollar debt burden is? So remember, we did not have a debt burden in 2006 because the Howard Costello government paid off all the debt, right? And so in a very short space of time, we're knocking on having a trillion dollar debt. Milton Friedman is one of the most famous um uh economists of all time. And he used to say the the real tax that a populace play pays is equal to the amount of money the government spends. Because you you generally cannot rely on the government to spend it wisely. And um because so much of it's unproductive. Like if it's if the government's spending money on bridges and dams and hydro schemes maybe um but you know productive infrastructure that's gonna help us grow the economy, then that's really useful spending. But if it's being spent on welfare and and it's uncontrolled welfare, then that's not gonna be productive. No one's arguing that there shouldn't be some sort of welfare. But here we are getting to everyone gets what a million dollars is. Everyone gets what two million dollars is. For most Australians, a million, two million dollar mortgage takes 30 years to repay, 20 to 30 years to repay, right? So here we are. I just wanted to give this analogy. A million seconds is 11.5 days, right? So I'm just gonna use the time analogy because I just think everyone understands time. So a million seconds is 11.5 days. How many, how many how long do you reckon a billion seconds is?

SPEAKER_00 42:05

Two months. A year, wouldn't it?

SPEAKER_02 42:07

A billion seconds is thirty-one point seven five uh years. So a trillion seconds is thirty-one point so thirty-one thousand seven hundred years. That's pretty powerful when you can see. So let's just say that again. A million seconds is eleven and a half days, a billion seconds is thirty-one point seven years, and a trillion seconds is thirty-one thousand seven hundred years. That's a long, long time. So you think about how big a trillion dollar government debt is, that's a big, big number. And and sadly, what this budget does not do is make any serious attempt to bring the budget back into surplus. Because you two both know, and all of our listeners know what happens to households who are profligate with money. And eventually you have to pay the piper. Eventually you have to know, oh, right, life's gonna be tough for a while because we need to get our spending under control. We see it occasionally with clients where we just say, well, really sorry, but you can't make progress because you're spending too much money. You either need to go and get a different job that's gonna pay you a lot more, or you're gonna get your spending under control, or you're gonna have to trade off these goals, right? Because you can't have it all at once. And I think that's the biggest fear I have is just the size of this of this spending problem.

unknown 43:36

Yeah.

Aden 43:37

So, Nick, just coming back to that point of so who needs to be paying attention to some of these changes? What are the types of people? What are the people with certain assets? And like we said, not acting yet, not being rash, but starting to think through, speak with their professional advisors, who are the people that really need to pay attention?

SPEAKER_00 43:54

Yeah. So anyone who is uh streaming income from From a trading company through a trust and using a corporate beneficiary to so most business owners owners owners super common structure. They need to think about what their plan is after 2028 when that those rules change. And some of the things that you might think about is is there a window in the next few years where I can push a little bit harder on my distributions out of my company and get it into that corporate beneficiary before the changes come in?

SPEAKER_02 44:31

So that's and that's because when that happens, the franking credits that are there when they distribute back to the trust will be So the there will also need to be so yeah, so um getting it in from trust to company.

SPEAKER_00 44:51

Um so the at the moment it's a um effective strategy because it saves about, you know, if you're on the top marginal tax rate, it saves 17 cents on the dollar um as opposed to paying it out versus paying it into a company. In the future, when you then take those funds out of a company through a trust, you'll need to you need to model that as well because um there is um one of the other things that we touched on but didn't really go through is that the franking credits apply against that 30% minimum in the trust. And so there's gonna be some there's gonna be some people who have franking credits um which would previously create a refund in their personal name that they no longer get.

Aden 45:32

Yep.

SPEAKER_00 45:33

Um and so there's there's planning there as well. If your corporate beneficiary is owned by a trust, how does that look going forward? And there is proposed roll-over relief. So there's a three-year window from 1 July 2027 to 1 July 2030 to adjust your structure. So people who own the shares of their corporate beneficiary or trading company in a trust should start thinking about that. And one of the strategies might be that trading company is owned by corporate beneficiary or holding company, and then the trust is cut out. But the downside of that is that those assets, so that holding company, so let's say the holding company owns your shares in your productive business, that's an asset in your name if you're distributing that directly to you. So there's asset protection implications of that. So I think asset protection is going to be much harder going forward, and there's going to be a tax cost to have asset protection. Yeah.

SPEAKER_02 46:31

Because very few people we work with use trusts purely for tax planning. Yeah. Most of it's for asset protection and long-term structuring. Yeah. And I think it's important for those listeners who don't have these things called bucket companies, is that people who use bucket companies aren't avoiding tax. Um they're essentially parking the money in the company. They can't really get any benefit of it. They can't use it other than to invest. Um as soon as they take the money out of the company, they're going to pay tax, top-up tax from the 30% up to the probably their highest marginal tax rate. So it's been a very effective way of quarantining money, particularly for people who own businesses, because you don't know when in the future you're going to need to deploy that capital back in your business. So you may well defer the tax um with a view to using that capital to grow your business in the future.

SPEAKER_00 47:28

And where you can still stream income through a company from a business, there's still benefit in it. But there's also some talk about because the CGT discount, um, I don't think there's much benefit for people to bring forward sales that they weren't otherwise going to do because of the changes apply or the current regime applies to 1 July 2027. And then it's only gains after that that are under the new regime. And so it's not like there's this big opportunity to sell before 1 July 2027. So the big question is if I have cash or assets, where do I invest now? So if I had say $2 million in cash because I've just sold a business, it's after tax, where do I invest it? That's the hard question for the next little while. While we still don't have full clarity, we don't know exactly what the final um shape of this looks like. But a lot of people will talk about loaning that into a company to cap the tax at 30%. And that is an interesting idea, but I'd be careful on that because then when you take it back out, you're gonna pay top-up tax. So you might save a little bit up front, but cost yourself long term. And so it's just a there's gonna be that is gonna be talked about a lot, and there'll be accountants talking about that. And I'd just I'd want to see modelled numbers before I actually went ahead and started making that decision, especially in the next few years where there is um scope for things to go through differently to how um they look today.

SPEAKER_02 48:57

And so you, Aiden, I think make a very wise point about don't be jumping to conclusions because um I think the government this morning made it very clear that their legislative priorities are the capital gains tax and the negative gearing with the trust stuff to come later. Yeah. Maybe maybe that's the first um sign of some low-level capitulation from Mr. Albanese. I don't know. Yeah. But I think that that plays into your counsel for our listeners is don't be don't be jumping into this.

Aden 49:35

Exactly. And I obviously we've we've had clients reach out and say, Hey, what does this mean? And what is this? And when I've looked into each people's each of their individual circumstances, the implications are potentially different for everyone. So I think it just really highlights you'll see lots of information, lots of news, lots of people spruking strategies. Don't jump into anything because your unique circumstances are unique to you. So you really actually need to have the conversation with your trusted professionals and just be open about it and say, well, what are the things we need to be thinking about and make sure you make a really considered decision, which is which is all part of our role here as advisors.

SPEAKER_00 50:13

100% agree.

Aden 50:14

So we've covered a lot of ground today. There's lots of proposed changes that are coming in. I'm I no doubt, I have no doubt that we'll probably talk about this in further detail when we know a little bit more about it. But as we alluded to, just make sure if you've got any questions or considerations, reach out. We're always happy to field questions here on the podcasts. Send them through to myself, David, or the podcast email, which is ask at capitalhyphenpartners.com.au. And also make sure you subscribe to the podcast so you never miss an episode. We love it when you share with family members, friends, people in your network so that we can help more Australians. David and Nick, thanks for joining me. Been a pleasure. Thanks for having me. Thank you for listening to another episode of the Purposeful Investor Podcast. Make sure that you share it with a friend, someone in your network who you think would benefit from having a listen. Both David Andrew and myself, Aidan Wilkins, are authorised representatives of Capital Partners Consulting Proprietary Limited, and we operate under the Australian Financial Services Licence 227148.