Ep. 70 | Why Smart Investors Are Rethinking Their Tax Structure

Is the government about to change capital gains tax, superannuation rules, and how trusts are taxed? In this episode of The Purposeful Investor, Capital Partners founder David Andrew and co-host Aden Wilkins unpack everything you need to know about Australia's proposed tax reforms and what they could mean for your wealth. Whether you invest in property, hold assets in a trust, or have money in super, understanding how the four main investment structures in Australia are taxed is one of the most important decisions you can make. As David explains, getting it wrong could cost you thousands of dollars over your lifetime.

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Chapters:
(0:00) Introduction & Episode Preview
(1:00) Welcome to The Purposeful Investor
(2:00) Win of the Week
(4:00) Tax Reform: The Big Picture & Henry Tax Review
(7:30) Capital Gains Tax Discount Explained
(8:30) History of CGT Before the 2006 Howard-Costello Reforms
(11:00) Government Spending, Demographics & the Tax Challenge
(16:00) The 4 Investment Structures in Australia
(19:30) Superannuation Deep Dive: Accumulation, Retirement & Division 296
(22:00) Trusts Explained: Asset Protection & Tax Planning
(26:00) Companies as Long-Term Wealth Structures
(30:30) What Tax Changes Are Coming? GST, Bracket Creep & Trusts

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Recorded and produced by

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

A Super Sceptic’s Wake-Up Call

SPEAKER_01 0:00

I hate superanimation. I hate superannuation. I'm not doing superannuation. You know, they'll take my money away from me. And the difference was exactly what you said. It was a million dollars.

Aden 0:08

Just the tax difference. There's been headlines, and sort of they're saying, does a 50% discount get reduced to 30 or 25 for residential property?

SPEAKER_01 0:16

I would be surprised if that did not attract scrutiny during this term of government.

Aden 0:23

There's been a bit of noise about it, and like we sort of touched on, do they bring in a flat tax rate?

Welcome And Why Tax Headlines Matter

SPEAKER_01 0:28

The truth of the matter is that our tax system is a bit of a mess. If you can invest in Singapore at a company tax rate of 15%, why would you invest in Australia at a tax rate of 30%?

Wins Of The Week

Aden 0:41

Welcome to the Purposeful Investor Podcast. We're a podcast for successful families who want to make smart decisions about their money and their future and also avoid costly mistakes. We're here to make sure that you and the people you care about are okay no matter what, and also to set you up to live a great life. Thank you for joining us on another episode of the Purposeful Investor Podcast. Today we are going to talk about a few topical issues that all our clients, I'm sure, would have seen across the financial press in the newspapers. We're going to be talking about changes to, or proposed changes, sorry, to the capital gains tax, any tweaks that they're looking at making with different tax structures around Australia and what it means for you and your situation. And joining me in this studio, I've got Capital Partners founder, David Andrew. David, thanks for joining me. Thanks, Aiden. Always good to be with you. Before we dive into the content, as our listeners know, we like to start with our little win of the week. So that can be something personal, professional, anything you can look back on. That was a little win. So what was your win, Dave?

SPEAKER_01 1:40

Well, this was a week or so ago, and um it was quite an unusual situation where we we've been given the opportunity to um submit a proposal to help a family with their wealth management affairs, and it's very complex from a technical and from a um emotional point of view. And um the the the size of the opportunity, okay, so that might be exciting. But what was really cool from my point of view was the teamwork. So it was you, me, and Nick all working together in a really pretty short time frame frame, turnaround, what I think turned out to be a pretty amazing proposal, and I just loved that teamwork because we all got to do the bit that we're good at.

Aden 2:27

Yeah, it was really good function. Yeah, that when you can get all the people in the same room working together, bouncing off ideas. It was good funning.

SPEAKER_01 2:36

And after 30 years, I'm still able to get excited about the idea of helping a family. Yeah. And it dawned on me that that is actually still that's pretty cool. I don't get as excited about getting into the trenches and doing the technical work anymore, but actually the helping the family, that's still super motivating.

Aden 2:54

Love it. Um, so mine, I'm gonna go with a per personal win. So I've been playing, I've been getting back into my golf a little bit recently. I've actually been playing or hitting the ball reasonably well. So um anyone that knows um golf when you play stableford, um, essentially if you have 36 points, you play to you play to your handicap, and normally you're pretty chuffed if you do that. So I had two rounds in a row where I've done that, um, and it's just been good fun getting back into the swing of things and getting the golf bug again. So that's been good.

SPEAKER_01 3:21

I'm I'm pleased that you've um you're finding time to in a very busy professional life. You're also finding time to have a bit of fun, which is cool.

Aden 3:30

Yeah, Saturday mornings for golf.

SPEAKER_01 3:32

Good on you.

Aden 3:33

So into the content at hand, we are going to be putting to some extent the technicians' hat on today and going into a little bit of the conversation or the dialogue that's been going around around what the current government's thinking around tweaking with how the tax system works, um, but also understanding why that's come about as a bit of a frame up and then giving our listeners a bit of context around what does that actually mean for you? What are the things that we're thinking about as your advisors as it relates to the topic? So sort of give a bit of a frame up, Dave. What's what's currently in the headlines and why has it come about?

SPEAKER_01 4:05

Well, tax reform. Tax reform has been in and out of the headline since the Henry tax review, which is quite a few years ago. Um in fact it was in the the Rudd Gillard years. And subsequent governments have found it very hard to find any consensus at all around what tax reform should look like. And I think the truth of the matter is that our tax system is a bit of a mess. And so for me, a root and branch, you know, review of the tax system and a reframing of the tax system would be fantastic. And this government has the numbers and I think probably does have the mandate to do this work with the support of the Greens in the Senate. You know, there will be business owner types like us who are not going to like some of their priorities. But generally, if we could simplify the system, that would be great. The current headline, I think, is a little bit of a distraction because they're talking about removing the 50% capital Keynes tax discount on residential property, investment property, essentially, and that that is somehow going to miraculously um solve the housing crisis. Well, the housing crisis is being caused by a supply issue. We're not able to build enough houses. There are many, many thousands of people coming to live in Australia. And why wouldn't they? You know, if you were going to choose a place to come and if you were wanting to leave where you'd grown up and where your life currently is and move to a new country and start a new life, frankly, Australia is going to be a pretty attractive place to do that. So we're not able to build enough houses and the capital gains tax discount removal on um residential property investment is not going to solve the problem. But be that as it may, I think it's useful for us to unpack the way we're thinking about tax reform. And it might be controversial. So our clients might want to, our listeners might want to send us an email and tell us that they either agree with us or they disagree with us.

Aden 6:26

Tax being controversial.

Capital Gains Discount Explained

SPEAKER_01 6:27

I've never well that's the that's the issue, of course. In a in a civilized country like Australia, everyone wants the benefits, but no one wants to pay the price or or feel as though they're paying more a disproportionate share of the price. Well, wealthier people are always going to pay more than others because they've got more. That's just the way the system works. But I do have this little anecdote for you and our listeners, Aidan, and that is um Charlie Munger in his um Poor Charlie's almanac um uh was quoted as saying, you know, people don't get socialism forced upon them. They vote for it because they love the handouts, and it's only when they work out the ultimate price of all of those handouts that they decide that it's not such a good idea. And so a lot of the reason I raise that anecdote is is we have a huge spending problem in this country. You know, that's that's the issue.

Aden 7:25

Yeah. I think just to give a little bit of context to our listeners who maybe might not be so familiar, so as it stands currently, the capital gains cap tax discount works like this. So for example, say if I bought an investment property, um, say this year, bought it for 500,000. If I hold that property for more than 12 months, so next year, and then after that period, I wanted to sell it and I'd made$100,000 as a gain, half of that, so$50,000, would be discounted under the current system. So where you hold an asset or a property for over 12 months, you get that 50% reduction in the capital gains tax.

SPEAKER_01 8:03

And likewise, if you if you sold that property after 364 days, the full$100,000 would be taxed at your marginal tax rate.

Aden 8:12

Yeah.

SPEAKER_01 8:12

Um so wealthier investors with higher tax rates are still paying much more capital gains tax than those on lower tax rates. Um, but the 50% discount is a very generous discount. Yeah. It might be useful to talk about the history of how that came about.

Aden 8:29

Yeah, because it didn't always used to be there, right? So what was it, 2000?

How CGT Used To Work

SPEAKER_01 8:33

2006, yeah, there was a major. 2006 really was the last major tax reform by the Howard Costello um government just before they were voted out. And um prior to that change, and and this was done in the name of simplicity, simplifying the system. And there's virtue in simplicity. I think, with the benefit of hindsight, much of the change that they did to capital gains tax and to particularly to superannuation was probably a little too generous. And we're we're now starting to pay the price of that. But prior to 2006, what happened is that if you bought a property in 1990 and you sold it in 2025, there would be a relatively simple calculation to work out what the inflation rate had been between those two dates. So, you know, let's say 1st of January 1990 to the end of February 2025, month by month, you would know exactly what the official inflation has been. So you would work that out. You would take off the growth or the gain that had been given to you by virtue of inflation, because that wouldn't be fair, having to pay tax on just inflation, the just the general increase in in asset prices. And you would you would pay tax then at your marginal tax rate on the gain. Yeah. And that's so that's how it works. So it was a little more, a little more convoluted. You had to know how to calculate it, but it was not a terrible, a terrible system. That's yeah.

Aden 10:15

Yeah. And so we don't know what's coming about yet, but it's been pretty widely spread that the May budget that's gonna come out, there's gonna be some changes. And what there's been whispers, there's been headlines, and sort of they're saying, do, does the 50% discount get reduced to 30 or 25 for residential property, or do they move back to a similar system like they had before, Dave? And so we don't know where it's gonna land. But I think on top of all this, it'll be useful for us to go through what are some of the other areas that the government might be thinking of tinkering with, because like you said, there's a spending problem and they've got to they've got to raise tax revenue in some way or another. So I think we'll explore that.

Spending Pressures And Demographic Strain

SPEAKER_01 10:51

Well, it would be wonderful if they could actually acknowledge that there's a spending problem because you know, really, spending got out of control kind of understandably during the COVID pandemic under the Morrison government, but it has spending uh increases have uh just uh continued unabated since then. So putting the COVID pandemic aside, this is the biggest uh spending government in history as a percentage of GDP. But the other the other issue that we've got is uh structural and demographic in that the tax system is very dependent on uh income taxes uh to fund the budget. And uh, you know, there are fewer and fewer people in Australia each year who are actually working. So the baby boomers were the biggest cohort, uh biggest uh birth group in history, in Australian population history, and they're all by and large retiring. So they're moving out of the workforce. Not all are not working and and many have assets and still pay tax, but the vast majority of um baby boomers will either go on to the pension, so they become a cost to the system, or they will be self-funded, which is awesome. That's a that's a goal of many, many, many of our clients. Um, but the superannuation tax regime is so uh um generous that very few people, if they've planned well, will pay much tax at all in retirement. So that leaves you, Aidan, and your cohort and younger people. And you know, the the working the population as a percentage of the overall population is getting smaller and smaller. And there is only so much tax that you are capable of paying before it really starts to bite deeply into your capacity to do anything. Now, cost of living these days, I know this cost of living crisis gets is is sort of almost a beat up these days, but but if you're earning two hundred thousand dollars a year, as many young professionals might be, they're losing half of it, or close to half of it in tax, you know, with with the cost of housing and the cost of educating children and the like, you know, that's whilst two hundred thousand dollars might sound like a very big number, there's not a lot left after the income taxes. And so that's a massive challenge that this government needs to address.

Other Levers Government Might Pull

Aden 13:38

Yeah. And like you touched on and what sort of triggered is the whole housing issue, because it's something like not exactly, but nine times um after taxpayers what's what's going towards property or servicing debt. Yeah, and so that's what's really times. Yeah, so that's what's really making people feel the pinch. And so we were chatting um off air day before around so what are what are some of the different levers that the government can book out?

SPEAKER_01 14:01

Well, I'm fascinated that I I don't know how courageous this government's going to be because you know they've got a huge majority in the House of Representatives, and with the Greens, they've got the capacity to pass just about anything. And so, you know, the last election that was fought on tax was with Bill Shorten as leader of the opposition, and he lost, and that was around franking credits, um, the reversal of franking credits, or the franking credit rebate, not franking credits per se, but the franking credit rebate. Um, and and many, many people would say, yeah, that makes perfect sense. Others, of course, are dead against it. Then there was the um the superannuation changes, the recent superannuation changes, and they got wound back to a pretty sensible place.

Aden 14:53

Yeah, we'll unpack that a little bit later.

SPEAKER_01 14:55

Okay, good. And then there's tax on trusts. You know, I I think the Greens would say that trusts are structures that are only used by rich people, um, which which is a ridiculous uh characterization because trusts trusts are used by most business owners. And a lot of it is uh tax planning. I think that's fair, but a lot of it also is asset protection. How do I how do I own assets in a way that if my business you know you as a business owner you face different risks to an individual who is employed? You just do. And and you don't hide behind a tax uh structure like a trust to try and avoid your responsibilities, but you do use things like trusts to ensure that uh you give yourselves yourself all the protection you can. So I think taxation on trusts is an area that that that they really could look at because because as I say, the green that's for the greens, that's a a real politic, that's political red meat. I don't think they're gonna do anything more with the super system. Yeah. So that's a good start.

The Four Main Investment Structures

Aden 16:10

Yeah. So I think maybe just to recap, we'll go through like how each of these different tax structures, what's currently set up. And I think when we when we do put the technician hat on as advisors, this is one of the biggest, chunkiest projects that we first look at with people. Because I think if you get it wrong, like the difference in outcomes over 30 years is literally millions of dollars. Yeah. If you're not setting yourself up right, if you if you're making decisions before considering that. Yeah. And the amount of times you would have seen it, I've seen it where someone comes in and we just really high level look at this and we go, we can make this so much better.

SPEAKER_01 16:44

Yeah. So I've got a funny story about that that confirms your point. And and I hope she, I'm sure she wouldn't mind actually. Um, but this was a very, very long-term friend of mine who has always said, Oh, I hate superannuation, I hate superannuation, I'm not doing superannuation, you know, they'll take my money away from me, blah, blah, blah, blah, blah. And I'd I'd always thought that she would never be a client of ours. Anyway, I got a phone call. She said, Ah, I think we need some help. We really need to talk to someone. So I introduced them to David Rossbach, who's done a brilliant job for them. And um, and it was, well, what do I do, Dave? Because um, you know, she's just not going to accept a superannuation recommendation as part of this advice. Like she's so anti-superannuation. I said, just do the modelling and compare the compare the pair, and just say, this is the outcome you'll get not using superannuation, and we respect your right to do that. Yeah. This is the outcome you'll get if you do use superannuation, and that would be our recommendation. And the difference was exactly what you said. It was a million dollars over their lifetime. The difference, just the tax difference between the smart use of structured superannuation versus paying essentially marginal tax rate all the way through.

Aden 18:03

Yeah.

SPEAKER_01 18:04

Crazy. Yeah. So so paying attention to this stuff really matters.

Aden 18:07

That's a it's a good point in terms of it's it's hard to expect people who don't wake up and do this every day to know the different tax structures, but we are paid to know this as legislation changes. We've got to be thinking about how does this change for our clients. So for us.

SPEAKER_01 18:21

Your job is to help your clients make smart decisions with their money. So if you're not starting, well, so so two things. If you make, if you screw it up, either tax or investments, you're never getting that money back. No. The ATO is not a charity. The money's gone there. It's not a boomerang. It's not coming back. Yeah. So so it pays to pay attention to your taxes.

Superannuation Phases And New Rules

Aden 18:47

Yeah. So let's just, yeah, let's get into the technical for a little bit. So broadly speaking, within Australia, there's there's four different tax structures, if you will, that you can invest in. So you can invest in your personal name. So that's, for example, at the moment, if I wanted to go and buy a property or shares or a portfolio of shares, I could do that in my personal name. Any income or growth on that asset, I would just pay tax at my marginal tax rate. So really simple way to do things, no real structuring, no asset protection. No asset protection, but also surprisingly more common than you would think for people on significant incomes to do that. Um, and it can be a very big tax hindrance. Yeah. So that's just buying in your personal names. You can also do it in joint names. So if you're a couple, own the assets jointly. Yep. Another another structure is superannuation. So we've talked about that really high level. So there's two distinct phases in superannuation. You've got your accumulation phase, which is when you're working and you're earning. So within that, um, within that phase, you typically pay tax at between 10 to 15%. So 15% on your earnings, and then 10% on any capital gains where you've held the asset for more than 12 months. So you don't get the full 50% discount in superannuation, you get a third discount. So it rounds out to be a 10% tax rate. So really attractive. But then the kicker is once you get to retirement, you can have so at the moment, up to 2 million each, so 4 million as a couple if you do your planning right, completely tax free. So no tax on withdrawals, no tax on income, no tax on um capital gains.

SPEAKER_01 20:22

That sounds to me that it's almost too generous, but I don't think there's any political will to change that.

Aden 20:30

Yeah. Um, and just yes, sort of going into so a lot of our listeners, well, you can't not have heard of it, it was all over the news. The Division 296 tax.

SPEAKER_01 20:37

Oh, that was the tax where they were for anyone with more than three million dollars they they were gonna pay but on on unrealised capital gains.

Aden 20:47

Yeah, unrealised gains and no indexation. And that's been wheeled back and it still hasn't come in. But what they're thinking broadly now is that there'll still be an additional tax on over three million, so it's just gonna be an extra 15%, but they've got rid of the unrealised gains, which I think everyone rightfully thinks that that was probably a smart decision. Yeah. And at the moment they're also proposing that balances over 10 million, there's an extra 10%, so 25% all up.

SPEAKER_01 21:12

I don't I don't think many there will be people who will rail against that. Yeah, there will of course there will be people who rail against it. But as a principle, if someone's got$10 million in a very, very tax-advantaged environment. I don't think there are too many rational thinkers that would say that's unfair.

How Trusts Work In Practice

Aden 21:32

No. And you're still getting some great concessions on the first two, four, ten until we get there. So it hasn't come in yet, but that's how they're thinking. Well, hasn't started yet. Yeah, yeah, yeah. Yeah. So that's within the superannuation system at a really high level. So you can see by paying attention and making sure you're you're structuring things right, there's already a massive advantage you can have by, like you said, paying attention to those things. The next one is trust, like we've talked about. So there's a Of there's a lot of people that uh there's some misconceptions around a trust. So a trust itself doesn't actually pay tax. So the trust, I like to think of it as a big box, a box that holds assets. And the two primary reasons that you mentioned, Dave, is one for asset protection. So they're assets that are out of the individual's name, but there's also some tax benefits or for tax planning considerations as part of it. So within the trust, the two main roles are the appointor and the trustee. The appointor, ultimate power, they can hire and fire the trustee. And the trustee manages the assets on behalf of the beneficiaries, which are typically, so if it's a family trust, it would be parents, um, siblings, and other members of the family. Yep.

SPEAKER_01 22:43

And this this is a weird concept for people to get their head around who aren't when they're not familiar with trusts, in that in that the tr the role of the trustee is to hold the assets of the trust on trust for the benefit of the beneficiaries. Yeah. So the family members. Now, the weird thing about this is that when you put assets into a trust, they're not your assets anymore. They are the assets of the trust and they are there for the beneficiaries' benefit. Even though you may control the trust, it's not your money anymore. Now, that's at a legal level. People will say, of course it's my money. I control it, it's my money. But but at law, it's not. And as a trustee, you have obligations to steward those investments in a way that is beneficial for the trustees. Some countries take that really seriously. Like in New Zealand, if you're a trustee of a trust, you have to demonstrate that you are managing those trust assets in a fiduciary way. It's a bit looser in Australia.

Aden 23:50

Yeah. And I think um yeah, I think the important part about like that quite often there's a misconception that, oh, there's these trust funds and it's a magic fund that's been set up. But quite often, like you said, trusts are set up a lot of the time for business owners are people that need to protect the assets. And it's it's not just some it sometimes it is, but and it's not just this tax structure that's been passed down from generation to generation to generation.

SPEAKER_01 24:13

Well, they only last under in Australia. Historically they did. Um and so so where trusts came from, I I find this endlessly fascinating. So when when trusts were first established was in um England, when landed gentry would go off and fight in wars. So if you were if you were a a lord or a knight, you were a you were landed gentry, you you'd been given a grant of land by the king, you couldn't really entrust that land to anyone else while you were away fighting the war. So you would place your assets into a trust and you would appoint a trustee to look after them on your behalf for the benefit of the beneficiaries while you're away fighting the war. That's where it came from.

Aden 25:00

There you go.

SPEAKER_01 25:00

And it's essentially the same principle still applies today.

unknown 25:04

Yeah.

Aden 25:04

And so from a tax perspective, so once, so if there's assets within a trust that generate income or gains, the trustee then determines where they get distributed to amongst the beneficiaries. And so where that comes in from a tax planning perspective is some of it might go to the member of a couple who's um on a lower tax rate. Yeah. Or if you're helping your adult children into the property market or with university costs, they might get distributed some income from the trust. Yeah. And it probably links to the third structure.

SPEAKER_01 25:33

So the only exception to that, of course, is minor children. Miners, yeah. So miners, miners can really not earn less than a thousand dollars a year out of a trust before they're taxed at the full marginal tax rate of 45%.

Companies And The Bucket Company Trap

Aden 25:44

Yeah. And then there's also the option, so you can distribute to beneficiaries, you can have a company as a beneficiary. And so that's that's sort of what links to normally where you see this, the fourth tax structure used, which is a company. And so that's where if a trust distributed income to a company which has a flat tax rate of 30%. And so typically that's done where, say, everyone else is normally on the top tax bracket, there's money that you might not need, but you're setting it aside for the long term, you distribute it to that company to cap the tax at 30%, and that's a long-term investment pick.

SPEAKER_01 26:17

And here's a spoiler alert for our clients the ownership of that company is absolutely critical. The number of times I have seen companies set up to own a business, for example, and the ownership of the company is husband and wife. And so when you come to try and get the money out of that company in the form of dividends, the only place that those dividends can be paid to is mum and dad. And they are going to pay a lot more tax than is necessary, had their planning advice been well structured.

Aden 26:58

And so typically a lot of the times we see that it's called a corporate beneficiary, a bucket company strategy, is with business owners, and it's it can be quite a good, disciplined way of extracting money from the business as you're still working in it and having it as an off-farm asset. Um, but like you said, there's so many considerations, and that's where thoughtful planning, working with your tax accountant in the room to get it right from the get-go is so important.

SPEAKER_01 27:22

Yeah. And this is a real caution for our business owner listeners. It's very tempting when you're running a business just to dive in and do things. Oh, I want to buy a property. Yeah, okay, let's make an offer on the property. It is so important just to pause, pick up the phone, and say, how should we own this asset?

Aden 27:41

Yeah.

SPEAKER_01 27:41

It is one of the greatest bugbears of the accountants we work with is that they find out that their client has done something after the fact. And once you've signed up an offer of land or a purchase contract on a property, it's impossible to change it without paying double stamp duty. And so it's very, very important that you you get this tax structuring right in advance.

Aden 28:07

And there because there's nuances, other nuances to each structure. So for a company, for example, that you don't get the capital gains tax discount, it's a flat 30% regardless.

SPEAKER_01 28:16

So Which is still pretty damn good. Because you get within a company, you do get a lot of asset protection benefits and you know, deferral of tax for a long period of time. So of course, you'd rather pay, you know, if you can, yeah, 50% of 45 cents in the dollar, but 30%'s pretty good.

Aden 28:37

Yeah. Well, and I think it it also talks to like when you're building up the plan, knowing what your strategy is in the different structures. So, for example, in a company, if you had a bit of play money that you traded a lot and you didn't hold the assets for more than 12 months, that probably isn't the best structure to use that for. It might be trust or super. Whereas, like you said, for long-term wealth accumulation where you're not triggering gains, so you're getting that compounded growth on unrealized gains, that's where the company is really beneficial.

SPEAKER_01 29:05

And I think that is really and companies. So, so I I didn't tell the rest of that story. When I was telling about the nights, um, how where trusts came from, those trusts were perpetual. They theoretically could last forever.

Aden 29:20

Yeah.

SPEAKER_01 29:20

In Australia, certainly in Western Australia, we have the law against perpetuities. So a trust can only last for 80 years. 80 years and one day, everything in the trust is subject to a capital gains tax event. Yeah. Companies don't have that. So for multi, multi, multi-generational wealth, really significant wealth, owning it in a company that is owned by a trust. So the shares in the company are owned by the trust, can be a super, super way to structure long-term wealth.

unknown 29:55

Definitely.

Aden 29:55

And I will just cave it. We probably should have said this before. This is all general advice. And obviously, obviously speak to your personal advisor before going down. But I think it's really important.

SPEAKER_01 30:05

Aidan's happy to talk to you.

Aden 30:06

It is really important that we go through this because, like we said at the start, there's the headline that comes in getting rid of the capital gains tax discount. And it's floated out there. But like you said, there's actually a lot more detail and thinking that needs to go behind it.

GST Reform And Bracket Creep

SPEAKER_01 30:18

And what are they going to tinker with and what aren't they going to tinker with? I guess that's really the question, having given client our listeners that that background, um, what are they likely to tinker with and what aren't they? Well, they've made it very clear they're going to do something about um capital gains tax on residential property investment. Frankly, I think that's virtue signalling. I think that's, oh, yeah, we're being tough on property investors. We're going to make this problem, it's not going to matter, it's not going to make a difference to house prices. Yeah. It might, it might deter a few people from buying investment property. If they were really courageous, and I doubt they are, but if they were really courageous, I think the GST is the place to look. A report that was done by the OECD suggested that if they increased the GST rate from 10% to 15%, that would raise about$24 billion in the first year. If they then said, okay, we're going to remove some of the exemptions. So at the moment, there's an exempt exemption on fresh food, on education, and on healthcare. If you remove those exemptions, the revised GST at 15% would raise$30 billion in its first year. Now the GST is a much, much fairer tax than income tax because everybody pays it. So everybody that consumes anything. You buy a beer at the pub. Anyone who consumes anything in Australia pays the GST. So it's a much, much broader base, a much, much fairer tax. So people who are in retirement and who are on zero tax pensions pay the GST. So you increase tax on everyone when you do that. But you can also be very targeted in the compensation that's provided for low-income earners. Now how they divvy it up and share it with the states, that's another thing entirely. I don't want to get into that argument. But but but the OECD said if they do this, if they actually go down this path, review the GST up from 10 to 15%, remove those concessions, raise$30 billion a year, compensate those people who really need it. They can then reinvest that rather than just spending it, all of it, they can then reinvest that in lower marginal income tax rates for working families. They could index the thresholds for the marginal tax rate, because that's one of the big problems with bracket creep. Yeah, break, bracket creep. Bracket creep is over a 10-year period, you know, you are paying the tax brackets don't keep up with your wage increases. And so as a proportion of your take-home pay, you're just paying more and more and more every single year, right? But this OECD report suggested if they did those things, the the grow the GDP growth in Australia would increase by 1.6% per annum over the next 10 years. Now that's a lot. And that's the problem with people having to pay more and more and more all the time in their in their income tax rates. Because they're raising families and doing all of the things, um, is it's a real disincentive to go and earn more money. Yeah. And we're actually what we want is to cr provide people with the incentive and the so that they can be aspirational. Exactly. So that they can say, okay, damn it, I am gonna get retrained and I am going to I am going to do an extra university course and extend my capability and my acumen. But if there's no benefit to doing that, why would you?

unknown 34:22

Yeah.

Aden 34:23

And it also links probably to like company tax rates within Australia are relatively high compared to other nations. So between 25 to 30%, depending on a few things. But where you can reinvest and have that lower, it encourages entrepreneurship and things like that where people go out willing to take on, but also for other countries to want to invest, people to invest in Australia.

SPEAKER_01 34:44

That's exactly right. So if you can if you can invest in Singapore um at a company tax rate of 15%, why would you invest in Australia at a tax rate of 30%? You've really got to want to be here. Yeah. And it's quite a small population. So being as internationally competitive as we can on company tax rates makes perfect sense. Yeah.

Trust Tax Scrutiny And What’s Next

Aden 35:06

So I think, yeah, the the reason we wanted to go through this today is we know it's a it's a hot topic because whenever something gets blasted, particularly on things like the Australian Financial Review, the local press, it's a topic that comes up in conversations. So we wanted to get into a little bit more of the granular detail and go through that. But also give our listeners the context to know that as these things come up, we love it when you ask us questions and say how should we think about doing this or this or this? And it's um it's part of the technical work that we all really enjoy doing. Yeah, exactly.

SPEAKER_01 35:36

I think um before you close out, Aiden, it's probably really useful to have a chat about what might happen with trusts. Yeah. You know, if they're ambitious, um, so at the moment you can you can receive income in a trust and distribute it to different beneficiaries on different trades so long as they're adults. They're their personal circumstances, there so for example, you've got um uh let's say there's a daughter-in-law who is taking time out of the workforce because she's raising young family, her income right now might be zero because she's not working. And therefore, you could stream income to her and take advantage of it's approximately the first$20,000 is tax-free. Yeah, the first margin marginal tax um range is 15% in the dollar.

Aden 36:27

To$45,000.

SPEAKER_01 36:28

Yeah, to$45,000. So you can actually stream quite a lot of money to a low-income person and pay very, very little tax. Now, I would be surprised if that did not attract scrutiny during this term of government.

unknown 36:45

Yeah.

Aden 36:46

There's been a bit of noise about it. And like we sort of touched on, do they bring in a flat tax rate for trusts instead of saying there's it depends on the individual circumstances? It says no, is it a flat 30% or 25% on any income generated?

SPEAKER_01 36:59

And and look, Aiden, I I reckon our listeners, there would be people, there will certainly be people out in the community who would be mightily pissed off if they introduced a flat tax on a trust. Yeah. But I'm a pragmatist. The way I look at that is I'm much better off paying 30% and holding assets in a trust or a company than I am paying 47%, 47%, you know, 45% plus Medicare. Yeah. So it's all about real relativity. Yeah. And that's what planning is. It's all about working out where the relativities are and where the arbitrage is, where the advantage is. 100%.

Aden 37:32

And there's so much to that. And I will just I will put the caveat because we always get it. And I know, Dave, we touched on it at the start. With regards to superannuation, there's always got to be some incentive for people to save up for the long term in their retirement. So I know there's always going to be tinkering around the edges, and it's the question we get all the time of they're going to change the tax rates for super. There's got to be some incentive for people to be self-funded retirees so that everyone's not dependent on the age of pension.

SPEAKER_01 37:57

Yeah. And my personal view is that the superannuation system is too generous.

unknown 38:02

Yeah.

SPEAKER_01 38:03

Uh, relative, again, it's all about relativity, so don't be angry with me. But most of the people that I know that are my age or older who are taking advantage of the very, very attractive superannuation system have children and grandchildren who are marginal tax rate payers. And so it's all about working out what works for the entire system and what works for our aspirational young people because they are the future and we need them. We need you and your generation and other generations of young people in this country to aspire to do well, um, create wealth and live great lives. Because without that aspiration, it it's pretty dire.

Listener Questions And Closing Requests

Aden 38:58

Yeah, yeah, exactly. So, yeah, so today we wanted to put the technicians hat on, go into a bit of detail, but I think also just give a bit of perspective to all our listener community. So, as always, we love it when you send through questions, topics, or anything that you would like us to explore in a little bit more detail. So send that to myself or David or the podcast email, which is ask at capitalhyphenpartners.com.au. Please send this to anyone in your network, a friend, a colleague, someone who you think would benefit. Um, um, because we love it when the message keeps spreading and make sure that you subscribe and leave a review so you never miss an episode.

SPEAKER_01 39:32

Love it. Thanks, Aidan.

Aden 39:33

Thanks, David. Thanks for joining us on another episode of the Purposeful Investor Podcast. Be sure to subscribe so that you never miss an episode. We also love it when you send through any feedback, comments, or questions through to the podcast, and be sure to share it with friends, family members, or colleagues who you think would benefit from a listen. Both Aidan Wilkins and David Andrews are authorised representatives of Capital Partners Consulting Proprietary Limited. We operate it under the Australian Financial Services Licence of 227 148.