#492 Capital gains discount changes

A lot of people started January saying this was the year that they were going to finally get their money sorted. They were planning to save more, invest properly, stop that bit of leakage, and get themselves organized. But we're now almost a quarter of the way through the year. And life's happened, work's been busy, the inbox has taken over, and money planning is still just sitting there in a too hard basket. Now the truth here is that doing nothing is still a decision. And for most people, it's a decision that gets expensive quietly in the background. So, this is my bit of a public service announcement for you to let this be your line in the sand. Now, at pivot, helping people with this stuff is our bread and butter. And so, if you're earning good money and you know that you should be further ahead, you can book a quick chat with our team and will help you work out what's possible for you, where some of the things might be slowing you down or holding you back and what your smartest next move looks like. If we think we can help, we can talk about how if not, we'll point you in the right direction and either way, you walk away with clarity. So you can access our calendar and book a quick chat over at bit.ly/podcastmo money, which is bit.ly/podcast mo money to book your chat with us. All right, let's get into today's episode. In this episode of the Mo Money Podcast, we're chatting about the potential changes to the capital gains tax discount on property in Australia. This has been getting a lot of attention. And as more time goes on, it seems more and more likely that it may be included in the budget. So we wanted to unpack what's being spoken about, who would actually impact what impact it might have on the market, and what it means for the viability of property investing and buying property as a strategy moving forward. And so I think anyone should be aware of property and have it built into this strategy. So this episode is perfect for anyone that doesn't want to be caught on a wears by these changes. Welcome to low money, where we bring you practical tips, hacks, strategies, and the knowledge to level up your money game and replace your salary by investing. Hey guys, welcome back to the Mo Money Podcast. And today we're talking about the capital gains tax changes that are being proposed, fucking terrible. This has got people fired up. The inquiry, our web inquiries that we get, there's a lot of angry people on there about these looking for answers. Yeah, I've seen some people say this is up there with franking credits. Things that people don't really understand, but get very angry about and generally inform policy. Well, look, it's, you know, the government often float these little ideas, these things that you hear about. And I was really hopeful when this first started getting spoken about that it was just exactly that. That it's just a thing that would turn into nothing. But as more time goes on, it seems more and more likely that this is coming. I actually just saw a post just yesterday from the city morning, Harold and they said that they through their research, they think it's likely that this is going to be the centerpiece of Jim Charmer's budget in May. No. Yeah. When would it get passed? I'm getting to the punch line here. Well, in the past, when they've made changes, they tend to basically just implement them immediately. Although there is some talk and we'll get into it in a bit more detail, some talk of it potentially being phased in over a period of time. But they have in the past, when they made changes to the super contribution limits and the super strategies, it was literally an overnight thing that as soon as the budget went through, those changes were essentially live. So look at some, yeah, we're going to unpack it anyway and talk about what's actually going on, who's impacted, what the potential impact actually is. And whether people should be as angry as they are on our text line. So what do we get to see in flurry of people trying to offload large amounts of capital growth? Yeah, look, this is the interesting thing that what they're talking about is essentially, I suppose to just to get into it, they're talking about reducing the capital gains tax discount from 50% to 25%. So essentially at the moment, when you have any investment, if you hold that investment for longer than 12 months, you once and you make a gain that you only pay tax on half of the gain. So for example, just say you buy a property, you sell it more than what you paid for, just to make my math easy, that's a $200,000 capital gain. But with the 50% CGT discount, which you get so long, she've held the investment for 12 months or more, that you get a 50% off that $200,000. So the accessible capital gain reduces down to $100,000 and then that $100,000 that gets added to your taxable income and then taxed at your marginal tax rate. And so what they're talking about now is that you will pay tax on 75% of the gain rather than 50% of the gain. And so going back to that example, that you're going to pay tax on $150,000 rather than just the 100 gram. And so given that, particularly when it comes to property that most of the time, the capital gains are large right there, they're in the six figure type territory. What it normally means is that a capital gain is going to push you into the top marginal tax rate, meaning that whatever your accessible gain is, that the majority of that gain is taxed at the top marginal tax rate of 47%. And so the effective impact there, and I 200 gram is a relatively low sort of gain on a property, particularly if it's something that you're holding for long term. For the impact there is you've got $50,000 more accessible income. That income is going to be taxed at probably 47%. So you're going to pay an extra $25,000 in tax. Does make a pretty significant difference to how much money you get left with as a result of selling a property and actually making that gain. You did make a gain. So I suppose that's, you know, you're still ahead. It's not like you're you're worse off for making a gain or anything like that, but it's just definitely not as good as what it's been in the past. Wow, this is going to impact a lot of people. Well, you know, Australians love property. We all love property investing people of our own property in any kind of entity that they can to be honest. So there's that impact. And I did the other thing that I got thinking about was people who own like large portions of like employer shares, if they are experiencing or if, you know, especially businesses that are gearing up to IPO. Absolutely. Holding on to a lot of employer share options and then they're going to get converted into shares that you can liquidate at your own discretion. Yes. And look, this we should obviously qualify that this is all essentially speculation at this point because it hasn't been passed and it hasn't been said that it's going to be put in place by the government. And so obviously the details are all just stuff that sort of leaked out through the media. But essentially what they're what they're actually talking about is that this change will be limited to property sales because essentially the justification for this apart from the gaping hole in the budget that the government's trying to feel is the fact that they're saying that they want to make property more affordable property affordability has been high on the government's agenda for particularly in their most recent term. Obviously they've already launched that brilliant idea of allowing people to buy properties with only a five percent deposit with no income caps, which clearly that's going to be magic for helping people get into the market. Slash just driving up property prices even further to actually make it harder. So clearly their policies are there's an argument that those policies are misguided. Maybe not to be a little bit political on this, but that's essentially what they're talking about property. They are talking about grandfathering the arrangements for existing property. So if you already own a property that you will be subject to the historical laws and this is like when capital gains tax was first introduced, they grandfathered any previous assets or any assets that were owned before the introduction of capital gains tax. If they're sold even today 40 years later, you don't pay any capital gains on those assets, but then any new assets that are purchased after the rules changed, they're subject to the new rules essentially. And then they're talking about potentially phasing this in over a period of time rather than being immediately, or at least this has come from the Grapman Institute. And so who knows, I suppose, that the government use the Grapman Institute for advice on and modeling around the potentially impact of policy decisions. So they've got a pretty good line in, but they're not the ones that are making the policy. And so I suppose we don't really know. But what we do know for sure is that like the there is a big cost that comes with this policy being in its current form. The estimate is for just for the FY 2026, so the 2025 2026 financial year that the capital gains tax discount cost the budget around $21 billion, which is a pretty significant amount. And so we've got 2.2 million Australians that own at least one investment property and 830,000 people used their CDT discount in 2022-23. That's like the last round of data, which obviously is a little bit a little bit stale, but lots of people taking advantage, big impact on the budget. So we can talk about the impact for the property market, but if this change does happen, then clearly it's a significant windfall for the budget. And is the goal here to deter people from purchasing investment because it isn't as lucrative. I think so. I think the argument is that investors are driving up property prices. And so that makes it harder for people to get into the property market. And therefore, by making it slightly less attractive for investors to be investing into property, then there'll be less pressure in the property market. And therefore, people will be able to buy properties more cheaply. Whether that's correct or not, I suppose time will tell. The data that I saw from this Sydney Morning Herald post that I was looking at, it suggests that over the long term that it potentially has a 1% impact on the growth rate of properties. Because the reality is that something like this, it only punishes people when they're selling properties. And so it just makes it more attractive to keep the property that you've got. And like, you know, borrow against the equity in that property and just build quality property portfolios. That ties in, you know, with the strategy that a lot of our clients follow where it's like buy, blue ship properties that you can hold for the next 10, 20, 30 years, like decades and decades into the future. Then you'll avoid all of the selling costs and selling and rebuying. You got a good leverage to asset. You're getting the tax benefits. And yeah, you're avoiding the tax on exit each time because so many people talk about like buy property, flip it. And then go and do it again. But it's like stamp duties 4%, the sale costs are 2%, then you pay the tax on top. But the amount that you're actually left with is pretty low. And then you just go and reload and buy a very similar property. Like it doesn't make a ton of sense. So maybe this is going to push people to the more to the, you know, area of sensibility where they're following a strategy that they can follow over the long term. And maybe it does stop people speculating in regional property markets because we have seen big growth in those areas. And particularly driven by people, sort of either chasing hotspots or working with, you know, property professionals that are, you know, looking at all of the growth that's mainly driven by their other clients and people in the same boat and talking about, you know, how they do that. But often in those sort of situations that people are looking for a quicker exit. It's just by a property, wait, wait to make your, you know, you quit cash. Quite a million. And then, and then just move on. Yeah, there's been a lot of that in the last few years. I'm interested to see how that plays out. But anyway, I don't know. We cannot be another one. That could potentially be one of the one of the only positive things to actually come out of something like this. And I know that in those more regional areas than then that is where it can be quite difficult for people to get into the market. And then not on the sort of incomes that allow them to actually just buckle down and crack on like you can in the, in the major cities. So there's potentially something there. But look, I think it's worth talking about the maths around this. And, and what the, what the actual impact of this could be because one of the things, and I don't know, like obviously the government, I don't know if you'd say that they're smart or that they at least have consultants that are really smart. So you think that they'd be looking at this stuff quite closely. But one of the things that immediately sort of came to me in looking at this is that if you look at a 75%, only capital gains tax discount, meaning that 75% of a capital gain on a property is accessible. If that's taxable at the top marginal tax rate of 47%, what that means is that effectively the, the tax that you pay, the tax rate that you pay on a gain is about 35%, just over 35%. Right. That's 75% times, which is the amount that you pay the tax on times the 47% the top marginal tax rate, 35%. But anybody can purchase property under like a company structure and a company only has a tax rate of 30%. And so there's a difference there. Obviously in the tax rate, and it's sort of potentially going to push more people to invest more through structures than what they otherwise would have. Because literally any single person or property buyer can just go and start a company for it's like 500 bucks to register it with ASIC. And then all of a sudden you've got a vehicle that's got a lower effective tax rate than what you would have personally. And you know, if you're talking about a million dollar capital gain, then that's a $50,000 tax saving. And so probably covers the cost of setting up the company and you know, doing your tax return, actually, it should be pretty simple on a company that just owns a property. So I think that maybe this is an unintended consequence. But I think we'll see a bit more of that. Sorry to interrupt today's episode, but this is just a quick reminder that even though we're a quarter of the way into the year, it's not time to write it off yet. Now you don't need another fresh start. You just need to start properly because plenty of people came into 2026 with big plans for their money, then got distracted by life, work, kids, interest rates, and a whole bunch of stuff, the usual chaos. That doesn't mean that all is lost. It just means that now is the time that you want to really stop drifting. So if you've been thinking that you need to get your financial stuff sorted, you can book a quick chat with our team. It's a simple first step to help you get clarity on what to do next where you might be leaving money on the table and how to actually build your momentum from here. So you can book your call directly in our calendar at bit.ly/podcastmo money. That's bit.ly/podcast mo money. And you can grab whatever time suits you now back to the episode. My question around that though is aren't lenders cracking down on that kind of lending? Well, there what what some lenders have been limiting is around people that are buying multiple properties and recycling their borrowing capacity. So some of them have moved away from that and there was talked about more around trusts and trust borrowing because that tends to be a little bit more popular. But a trust would be the same because any trust can distribute gains to a company and then the company tax rate is 30%. So whether you buy any in a trust or you buy any company, you're you're able to effectively get your tax rate to a maximum rate of 30% on capital gains or on income as well. And so we we have seen Corey was most notably came out and said that they're just stopping all trust lending Commonwealth Bank have said that you need to be like an existing customer. You can't just like open an account one day and then go borrow a million dollars and buy a property in a trust the next day, but you can still do it. And there are a lot of other lenders out there that allow for lending in those structures as well. And you know, apart from the potential tax benefits should this tax come in. There are some pretty significant other benefits of purchasing properties through structures. One of which being you get asset protection because the assets are sort of removed from your name and allows you to do a state planning more effectively. And so if you're passing passing on you know an interest in a company say to future generations, then it doesn't always have the same tax treatment than it does if you just inheriting a property where you inherit the cost base, you know, and then also people inheriting money and then having relationship breakdowns like you you pass on assets to your kids. They have a relationship breakdown with their partner, you see half of your assets leaving in a property settlement. So there are quite a few benefits and that's on top of the fact that you can be a bit more strategic with your borrowing capacity and how you structure it to potentially borrow more money than what you could if you were just borrowing all the money in your own name because in your own name you don't think of one sort of level of service ability and once you reach that limit. Then you're essentially capped out but there are still a lot of lenders where you can borrow money. You're still on the loan that you borrow it through a structure and then so long as you can build up some assets in that structure so that it doesn't require you to tip in money every every month or every week or whatever to make it break even you can then go and borrow the same money again. So you can kind of do the same approach that you would do to a trust as you would accompany as far as you know say with the trust structure. One thing that we speak about is opening up an investment portfolio inside the inside the trust structure. You would get to a certain level like it would need to be considerable at three four or five hundred maybe a million dollars worth of investments and they're spinning off dividends and then you buy an investment property within the trust structure with external cash and then it services with the dividend service. Yeah. So you can do the same thing with the company exactly the same. Right. It's just a slightly different rules around companies and trust and like the key rule the trust is that you need to distribute the money that comes out of that trust each year or the net income that's generated by that trust to another taxpayer. Can be a company and that's how with a trust you can cap your tax at a maximum rate of 30% or it can be individuals as well and so historically and also to actually today but like a trust gives you more flexibility because you can choose to distribute to the company if that's going to be the most beneficial but you can also choose to distribute to other people individuals. A company doesn't get the 50% capital gains tax discount or the current capital gains tax discounter so it doesn't get the current 50% if this change comes through it won't get the 25% discount and so historically that's been a bit of a barrier for people in in purchasing assets in a company because you are essentially worse off because as it stands now with the 50% CDT discount. If you're getting a 50% discount and then you're paying tax at the top rate of 47%. your effective tax rate is 23 and a half percent. So 47% times half, but under a company, the company tax rate is 30%, which is 6 and a half percent higher than what it would be in your personal name. And to say that a different way, if you own a property in your personal name and you sell it and you make a $1 million taxable accessible gain versus the same gain in a company, then you are going to pay 30,000 tax in the 300,000 tax in the company compared to only $235,000 tax in your personal name. And so that's why a lot of people don't use companies or what they do use trust to buy a property because when you get a big gain, you can distribute to yourself, your partner, and even if your income is already half a million bucks a year, you still get the 50% discount and you still only pay an effective tax rate of 23 and a half percent. Right, got you. Yeah. And so that's why in its current state, companies aren't as favourable to invest into, but they could be with the 25%. Exactly, they would be more. Yeah, we would switch to go the other way, essentially. And look, obviously it depends on your situation and none of this is clearly financial advice, but with the company, particularly for business owners, if you've got your company owned through a trust structure, you can stream business profits to a company and pay no more than 30% tax. And so like I brought a property recently, I did it inside a company structure because otherwise I'd have to pay the deposit out of my company as a dividend, pay tax on that income at 47% and then use that to put it into a trust if I wanted to buy through a trust or to buy my personal name, whereas in a company, it's only 30%, you only pay tax on the profits at 30%, 30%, which makes a really big difference. If you're talking about it, say even the $200,000 deposit on a property, the difference there is like 17%, and so you talk about $34,000 extra that you have to, if you want to buy in your personal name, we'll take it out and then put the money into a trust. You need to pay an extra 34 grand in tax to get that money in there, which doesn't make a ton of sense. Except for the fact that you pay 6.5% extra tax on the exit, but for me, I'm buying property that I want to hold for 20 to 30 years. So even if that does happen, maybe I never sell the property, but even if I do, it's going to be years and years in the future. And so I've saved, not paying the $34,000 tax now. Maybe I pay 6.5% more tax in the future, but I think on balance, for me, that seems better. But obviously, you get your advice and run your numbers yourself. But yeah, I do. I don't know if they've thought about this, but it does seem like a bit of a loophole that one reduces the income that's payable to the government, and two means that we're probably going to see more and more of these structure type investments. Especially if the prominence of bias agents, there's a lot of borderline celebrity bias agents out there. They're quick with this information and sharing it, and then helping people quickly implement this stuff. I think historically, it probably seemed a little bit difficult. You probably needed a bit of a sophisticated accountant. Yeah, you were trying to wrangle it. Whereas I think now there's a lot of people, and there'll be more people, if anything, based off of this, I can see obviously a big fact, business opportunity for a lot of people who are already playing in the space. Absolutely. Yeah. And so I sort of touched on it at the start, but what the experts are saying about the potential for its impact on house prices here is not really dramatic. The Centre for Independent Studies, they've said that they expected to move prices by around 1%, which isn't really a material change to the growth rate moving forward. The Gratton's Institute has said that they think that the effect will be quite small because the concession is small relative to the size of the 11 trillion dollar housing market in Australia. So like, I don't know, is it just a tax grab that's wound up as as policy that's supposed to be helping people or whatever, but it only impacts when you sell. And so I think we'll just see people holding properties for longer, using their equity more, being a little bit hopefully more strategic on the properties that they are purchasing, and probably no real material impact on the suitability of buying property as a strategy. And I should just say for anyone listening, like this change or the potential change that we're talking about here, this is not going to make the difference between investing, buying an investment property, being a good strategy and not being a good strategy. It's still going to be a good strategy. You're still using the bank's money to buy a nice asset. So long as you choose a good one, obviously, you've got tax deductions that still come on top of that. And so they're not at least now talking about any changes on that front. But even if the tax benefits weren't involved with negative gearing, it would still be a compelling strategy from a numbers perspective because of the fact that you're using a small amount of money, i.e. a deposit or no money, i.e. your property equity, to purchase a good quality asset, which is going to grow for you into the user head. So I don't know. I don't know what they're thinking. Shippon, what are they thinking? Can we send them an email or something? Where to from here? What do you just put your hand up to just get on some advisory government advisory board? Oh, that sounds like a dream. Yes, sign me up. Imagine the policy. Just send them an email instead. But look, I think that there's obviously a lot of beat up in the media and people talking about that this is about landlords versus renters or the evil landlords that they got it too good or something. It's not going to change it that much for them. It's not going to change the property market that much. We might see people holding properties for longer, which I think that's actually worse for people trying to potentially get into the market if part of the market is sort of dark and not getting traded. And look, if you're one of the tin hat-wearing people and you know who you are that's expecting this to crash property prices and thinking that you're swooping and pick up a bargain. Let me tell you, you are 100% wrong. You heard it here first. Let's lock this in. Do you want to bet on it or anything, Shivon? No, not the house prices are going backwards. It's not going to change. It may potentially slow it a tiny bit, but there's not going to be, there's not even going to be a blip. I don't think when this comes through quality assets will still be in high demand. We've got a serious supply problem in this country. And so the assets will continue to grow. Yeah, maybe rocking him or something. What are those? What are those places? The shithole peninsula. Yeah, exactly. A la Jack Henderson. Shout out Jack. But yeah, it's it like I said, potentially it's just a tax grab wrapped up as a policy here who knows what happens behind closed doors, but the impact seems like it's going to be some more still a good strategy. Make sure though that if you know for anyone that's thinking about buying a property, you know, one of the sensible things to look at now is if you're in a position to do it now, you know what the rules are now. It's likely if any changes are made that they're going to be grandfathered. So long as your plans rock solid, that your risk management is tight, then pull the trigger on it before all this stuff happens. And then you avoid some of the noise. And you don't have to stress as much. But for everyone else, it's likely that you want to be more strategic when you do buy and make sure that you've got the right plan, the right structuring to use assets depending on how these rules potentially fall once once once the policy is released if it is. And make sure you go your strategy right and you you're still benefit from the right strategy. 100%. Definitely having go going back having a plan knowing your numbers, no time frame. And I and I really took from that the key takeaway as far as taking action. You wait for this, you start to get impacted by this in the longer term. So if it upsets you and you've been sitting and you've been thinking about it for one, two years, you know who you are. Take off the tinfoil hat and just take action. I thought you were going to say that your top takeaway was my great explanation of trusts and some of the intricacies of our trust versus companies should want to come on. My personal great takeaway was the company being, I don't know about that. You were totally about that. What am I paying you for? Guys on that note, we'll leave it there for today and we'll go to you next time. Cheers guys. Bye for now. Thanks for listening to Moe Money and we hope you picked up some knowledge to help make your money easier. This podcast was recorded on the land of the Gadigal people of the Eora Nation and we celebrate and pay our respects to elders past, present and future. Now don't forget to subscribe to the podcast to get future episodes delivered to you directly and if you're ready to save more, invest smart and maximize your money, head over to www.pivotwealth.com.au where you can level up your money knowledge and get clear on your next steps. Helping people with this sort of stuff is our jam so if you get stuck we'll need a hand to move forward, you know where we live and we'll be back here with another episode really soon.