Contributing to Your Life

Breaking Down the 2026-27 Australian Federal Budget | Ep. #02

• KHI Partners • Season 1 • Episode 2

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In our second episode, we're joined again by Munzurul Khan, Chairman and Founding Partner at KHI Partners. With decades of experience in accounting and business advisory, Munzurul breaks down the major changes announced in the 2026 - 2027 Federal Budget last week, and what they mean for Australian business owners and investors.

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DISCLAIMER:

The discussions in this podcast are for informational purposes only, and should not be considered financial or legal advice. It does not take into consideration your personal circumstances. Consult a qualified professional first before making any investment decisions.

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SPEAKER_01

In the OSCD countries, Australia is one of the highest taxpaying nations. Right? There is different statistics now coming in saying that with those new taxes, we will become the highest taxpaying nation, not one of the highest tax-paying nations. So tax will definitely increase. So you look into the news, which comes in quite a bit saying, oh, negative gearing is being abolished, it's been taken away. It hasn't been taken away. It has been modified in terms of how do we claim the negative gearing.

SPEAKER_05

Today we've got Manzur Khan, the chair of KHI Partners. He's got decades of experience in strain property and tax and is someone who's watched the government try this before. He's going to cut through the headlines and tell you exactly what changed, what didn't, and what the smart money is doing right now.

SPEAKER_01

So where it has become, in my opinion, a little bit unfair is that if there is not enough taxes being paid, the commissioner is adjusting it. But if there is more than enough taxes being paid, we're not getting refund to it.

SPEAKER_04

We're covering negative gearing, capital gains tax, indexation, trust structures, self-managed super funds, and what this means for everyone.

SPEAKER_01

So that means under the family trust, we could have distributed the profit in a very flexible manner. Very, very flexible manner.

SPEAKER_04

From first home buyers to advance investors.

SPEAKER_01

But I suppose the question is, what does it mean for a longer period of time with the residential property? And I would strongly argue the answer would be no impact. If anything, the people who go through the journey, they are the ones who would be winning.

SPEAKER_05

Stay with us. This one's worth your full attention.

SPEAKER_00

Before we get into the episode, please be aware that the discussions in this podcast are for informational purposes only and should not be considered financial or legal advice. It does not take into consideration your personal circumstances. Consult a qualified professional first before making any investment decisions.

SPEAKER_05

Well, Aaron, huge amount of discussion following the federal budget announcement last week. A lot of conversations around negative gearing, CGT changes, trust structures, SMSF, and the broader investment reforms and tax reforms. Australians are really struggling to understand what it actually means for them, right?

SPEAKER_04

Totally, totally. And you know, even I've noticed with the budget, people that never watch the budget have come out of the woodwork and watch the budget of my own mum, who doesn't really even, you know, understand the property market and said, Oh, son, I've seen there's something going on with the budget, which means and shows the importance of what's actually happened with this budget. And as we know, there's a lot of headlines, opinions, emotion in the media right now. And I guess what we're here today is to separate and digest what has been announced, uh, what is still uncertain and what still needs legislation and detail. And so I guess our goal today, Frank, is to get a real practical understanding of the budget. What do these changes actually mean? Maybe we should be looking a little bit longer term in terms of strategic thinking. A lot of panic in the market, a lot of fear-mongering happening with the media, and kind to, I guess, digest that in really practical steps for our listeners today.

SPEAKER_05

That's right. And look, these could be some of the biggest changes we've seen in decades, right? So we really want to start to understand uh what this means for different groups, such as you know, first-time buyers, residential investors, commercial investors, business owners, self-managed super funds, and so on. Right. So I think it was very important for us to bring in somebody today that has been um around for quite a while in all things investing and um and probably seen quite a number of different cycles, changes in policy, uh, and so on. So we've brought Munza Rul Khan, the chair of KHI, in to have a chat with us. Thank you. Well, Munz, thanks for being here.

SPEAKER_04

Like Frank said, you've uh been around. Or lack a better word. Uh been around. You've seen multiple cycles, you've seen policy changes. I guess we really wanted to bring you here to cut through the noise, essentially. Yeah. And so a lot of discussions going on, changes. We want to first go through, I guess, from a high level, what are the changes so people can understand exactly what to expect potentially. This uh budget does get legislated. And so we hope that you can uh digest that in simple terms for us.

SPEAKER_01

No, thank you. Thank you. Thank you very much, Aaron and uh Frank. Thank you very much. Uh you're right. I mean, uh this budget that there was uh quite a bit of an anticipation with the budget, right? And prior to the budget, you had all those sort of different layer of sort of news that started to come in is that, oh, good lord, is the Labour government is going to try to tackle that whole negative gearing and CJT and all the rest of it, right? So there was two sides of the view. One side of the view is that they would not dare. We'd done this back in 85, we'd done this back in 87, surely we would have learned our lesson, surely we'd have said that there is a reason why we haven't changed it from 85 all the way now, which is 2026, 40 years. There is a reason, right? Uh on the other side of the spectrum is that we go back and we sort of say that good Lord is the error that we make and whether we make it over and over. So, yes, it has gone through many, many changes. And I can relate to your mum's sort of being interested in the budget. It is fundamentally once in a generational changes of the budget. Yeah. This much changes after 1985-87 is that it hasn't happened in the last 40 years. There were so many changes which came in on the budget. So many changes, right? So if we go through and try to sort of go through with some of the fundamental changes, yeah. Uh negative gearing, as an example, is uh negative gearing is being modified. So the first comment which I want to say is that it is modified, it's not being abolished. So you look into the news, which comes in quite a bit saying, oh, negative gearing is being abolished, it's being taken away. It hasn't been taken away, it has been modified in terms of how do we claim the negative gearing. So you've got the brand new properties and you've got the existing properties. Yeah. So what the uh the budget says, and mind you, when we say budget, now none of these things being passed into the Senate and being legislated as yet. The standard process is that it goes through the budget, goes through the Senate, goes through the debate, goes through the past, and it becomes law. Sort of expect nine out of ten, nine and a half times out of ten, it becomes the law, but very often there is slight changes. So we assume that all of this, unfortunately, fortunately, will be law. Yeah. So negative gearing is that you've got the brand new properties and you've got the existing properties. So the brand new properties, nothing changes. The negative gearing sort of continues, your deduction, you can claim it. Yeah. Existing properties, what they have done is that they have grandfathered the existing properties. And grandfather saying that the budget is on uh May, 12th of May uh 2026. So anyone who signed a contract as of 12th of May 2026 or prior to it or owning those properties is that the negative gearing will continue. Anyone who signed the contract subsequent to that budget night is that negative gearing will stop. Yeah? So while that negative gearing stop, i.e. being modified, it means is that from 1st of July 2027. Uh so you've still got a bit of a transition period between now till then, right? From 1st of July 2027 is the losses from your existing residential property you can only offset against the rental income of the existing residential properties. Yeah. Now, if the losses are higher, then uh, i.e., your expenses are higher and you create a loss, you do not lose any of those losses, the losses get carried forward. And while the losses get carried forward, you utilize the loss for the future rental income andor any other CGT. So you sold the property, you made a profit, you can utilize those losses. Your rental property has become now positive cash flow, you can utilize it and you can do it. So this is where the comment comes in that it has been modified in terms of how we claim it, as opposed to it's being completely being abolished. Yeah.

SPEAKER_05

So it's more of a timing.

SPEAKER_01

It's a timing difference, Frank, exactly. So it's more of a timing. And Frank, if I look through, right, that if I look through in terms of the some of the structure side of it, if one were to own the property on a trust, if one were to own the property on a corporate entity, that's the rule. That was always the rule, right? Your rental income is about 20 grand, your expenses is about 25 in a corporate entity, you've got a $5,000 as negative, you can't distribute that $5,000 to an individual. You would carry forward that loss into the corporate entity in future when we have more revenue, is that you can opposite. So all they've done is that they brought forward uh within that sort of the similar rule. But nonetheless, there is an impact. Yeah, and we don't hide away with the fact that there is an impact. And the impact is that many sort of mom and dad investors is that whether there was a sense of reliance on some of those tax benefits or their cash flow point of view. While there is a timing, means that it will all get rectified and balanced out at the end, but in the shorter period of time, you're still not getting the benefit. So my that's one fundamental change. Yeah.

SPEAKER_04

So can we go through that? You highlighted the negative gearing now or capital gains. Yeah, that's something that's a big change at the moment as well. Can you talk about that?

SPEAKER_01

And yeah, yeah. So capital gain, the CGT has impacted quite a bit as well. Yeah. So at the moment, is that if an asset is being owned, whether it's property, whether it's shares, whether it's sort of any other venture or as such, is that if you own that asset for 12 months or longer, generally speaking, as an individual, you get a 50% CGT discount. In a trust, if the beneficiaries are individual, still there is a 50% discount. Yeah. Corporate entity, there was no discount. And the self-managed super fund, there was a one-third discount. So those were sort of the rules what they have. Now, what the budget sort of now says, they say that, well, we want to modify these in terms of this CGT side of it as well. And how the budget is sort of modifying is the budget is saying is that from 1st of July 2027 is that we're going to bring in the indexation method. Now, indexation method is something which we had in the past, yeah? All that indexation method effectively says in sort of simple terms is that the real gains from an asset would be taxed at the marginal rate. That is what the indexation means. Yeah? And the real gains means that I bought a particular property for, say, 700,000 a number of years ago, and then what we do is that we increase the cost base with the inflation. And say by increasing that cost base of the inflation, now it becomes about 900. I'm selling it for 1.1, so 200,000 is subject to tax. Yeah? So it's different than previously. Previously it was 700,000, you made a $1.1 million profit, uh, you made a $400,000 as $1.1 is the sale price, $400 is the profit, you get a 50% discount, and the rest of it becomes subject to tax.

SPEAKER_04

So do you mind drawing that on that whiteboard just so people can clearly identify? Because I think we get a lot of questions from clients, how does it work? Yeah. And so you just break it down there.

SPEAKER_01

So say that as an example that he bought this particular property for $700,000, right, at a particular point of time. Let's say you bought it about four years sort of earlier, uh, that you bought at uh $700,000. Time goes on, is that you're selling it for $1.1 million. Yeah. So on this example, under the existing rule, is that you made a $400,000 profit. Yeah. That $400,000 profit that you made on this example is you get a 50% CGT discount, uh, assuming that it is an individual and/or is it trust, and then you have $200,000 as the net uh discount. This through $200,000, which becomes your taxable income, you pay tax at your marginal rate. Now, that is sort of the rule as we uh had as at now. Now, under the new legislation, what they say is that they say is that change away this rule, and rather than having your uh $700,000 to go into $1.1, they say start with $700,000, and then yes, you are selling it at $1.1 mil. So those two remain the constant yeah. However, that $700,000, which was your cost base as such, this is the cost base which gets increased uh through the indexation. And indexation effectively means your inflation, right? At the moment we sort of have high inflation 4.6, there was a point of time it would be 2.5, there was a point of time it could be lower than two, higher than three. Yeah? So you do the indexation over a number of years. So we spoke that it was being bought in four years earlier, so you do the indexation over four years, and whatever the value comes in within that period of time, if we assume the value comes in to about 900, probably wouldn't be, but let's say value is 900 through the indexation, means that on this example, you also made a profit of 200,000 and you pay tax on that 200. So it's a two-mechanism. Uh, in this mechanism through an indexation, and in this mechanism through a discount. Now, in our example, we sort of came in saying that it's the similar number, but it would not be the similar number, right? It would not be the similar number on the basis of your return as you do. So if I do the maths, is that if a property increases, let's say 7% on average over a period of time, if you get a 50% uh discount under this method on the left, is that 50% discount means that 3.5% is you pay tax. And if I look through in here, I sort of say the indexation method over a period of time would not be three and a half because our inflation is between two to three percent. So that means this side of the equation is that your cost base would be much lower. Cost base could be for argument's sake about 800 grand. And if the cost base is 800 grand, is that rather than having 200,000 in here, now we have 300,000 as sort of our taxable profit. So we just pay tax a little bit higher rate. But where I suppose the some of the tricks comes in behind it is is one is to know that all the existing properties, they haven't been grandfathered, but it's sort of a bit of a uh mix and match process. That's right, that's right, Frank. So it's a bit of a mix and match process, right? And mix and match process, as you said, that it's sort of multiple sort of process, means that let's say I own a property for many years as such, yeah. So my 50% CGT discount, which I have, that will apply all the way up until June 2027. And then in June 2027, what I need to do is that I need to do a valuation of that property. I need to do a market value of that property right at that stage, yeah? And then the indexation method, which is the new method, came in, is that it will only apply from 1st of July 2027 on the basis of the market value, which has now become my cost base. So when I sell it over a period of time, is that I would be getting discount from the day I bought up until 30th of June 2027 with a 50% discount. But from 1st of July 2027 onward, it would be utilized as an indexation method. These are the properties that sort of someone owns at the moment. Yeah? Any new properties that people are buying it, everything goes through on the indexation method. So it is a bit of a change. Does that mean that we will pay a little bit more tax? You know what, Aaron? Unfortunately, we probably will. And uh how is the government sort of justifying? The government sort of says is that, well, Aaron, you're paying tax on the uh real profit because the indexation is the one that we take away the uh inflation as such. So the real economic growth is the one that you are paying tax, which is the argument, but nonetheless taxable increase.

SPEAKER_05

I guess moving on from there, um, another change that was announced was around trust distributions, right? Yeah. Yeah. So yeah, would unpack that for us.

SPEAKER_01

Yeah, trust distribution again, there's there's just many merits to it, yeah. So when we speak about trust, there are fundamentally two trusts. So you've got your discretionary trust and you've got your fixed trust. Yeah. So all the changes that came in is is effectively on your discretionary trust. Now we use different terms. We set up, say, family trust, we set up say non-fixed trust, we set up, say, property trust, many different terms that we use. But effectively it's a discretionary trust. And discretionary trust, Frank, effectively means is that you uh when you have profit on the trust, you can distribute that profit at the discretion of the trustee, who's the manager of the trust. Yeah? So what the rule previously was is that in a family trust, you could distribute your profit to whoever the beneficiaries are. And generally, the beneficiaries they define on the trustee, they go very deep. You have a primary beneficiary, which is the husband and wife in most cases, and then you have secondary beneficiary. And the secondary beneficiary, we used to have uh kids and grandkids, and parents and grandparents, brother, sister, nephew, niece, uncle, aunt, any other entities that you have got ownership or control. So that means under the family trust is that we could have distributed the profit in a very flexible manner. Very, very flexible manner. Of course, there are some rules around it, like you've got to have a family trust election, you've got to have a trust distribution minutes, the profit needs to go out. So there's a whole bunch of rules. But within those rules is that you could distribute it on your discretion as such. And then the individual beneficiaries they used to receive on their own hand, they would pay the tax. That was the rule. So the commissioner's view at that stage was that it's fair because ultimately the consumer who is receiving on their hand is the consumer paying tax at the consumer's rate. To me, that makes sense. Yeah? What the rule now has changed is to say that, well, rather than having the uh consumer paying the tax, is that the discretionary trust by itself will pay 30% tax. You pay flat rate, 30% tax. You made a $100,000 profit, don't worry about the distribution, however you wish to, you can do that, but you would pay a 30% tax. So 30% is the minimum tax. Where the devil and the details are is that what happens to that 30% tax credit? Now, if it goes to an individual as an example, let's say that it goes to an individual, let's say you've got a trust, you distribute to your mom, let's assume that your mom is sort of on retirement and your mom's taxable income is lower under the trust regulation that you can distribute. Yeah, her tax rate is lower, she's sitting about 16%. Yeah. So the new rule now says is that while the taxpayer 30% tax, when it goes to your mom who is sitting at 16% tax, the balance of that 14%, she cannot get that as a credit. So trust is still paying a 30% when you're distributing to your mom when your mom was sitting at 16% marginal rate. So you sort of don't have that credit, that's sort of uh 14%. So that's a bit of bugger, yeah? If your mom were sitting at a higher tax rate, for argument's sake, let's say if your mom was sitting at 37% tax rate, when that distribution would be made to your mom, she has got 30% coming in from the trust, she'd be paying the balancing 7%. So where it has become, in my opinion, a little bit unfair is that if there is not enough taxes being paid, the commissioner is adjusting it. But if there is more than enough taxes being paid, we're not getting refund to it. Another way of saying it, the commissioner is sort of saying it, the budget is sort of saying it, Albanese is sort of saying it is that, well, the tax rate is 30%, that's the minimum tax you've got to pay. Another devil on the detail, Frank, is is that bucket company. Bucket company is one of those buggers, yeah. So it was very common for many accountants. What they used to do is to say that, well, you've got all of those trust profit, and if I distribute it to individual, they could be sitting at the highest marginal rate. Effectively, they pay 47% Medicare levy. Yeah, that's what they pay. But if you transfer all of this profit into a profit holding company, which we call a bucket company, the bucket company very often has a 30% marginal rate. So with that 30% marginal rate, you can capture at a lower level of the rate. Again, there are rules such as the cash needs to go. You gotta be careful of the division 7a. But nonetheless, you could distribute that profit into a bucket company and the tax would be quarantined at 30%. The new rule says is that if you distributed on the bucket company, that 30% tax that the trust has paid, the company doesn't get a credit. So you made a $100,000 profit in the trust, you pay $30,000 tax, you're transferring that $70,000 back into the bucket company, and the bucket company needs to pay another 30% tax on that $70,000. So that means another $21,000 tax. I add away the number, remembering, so $100,000 is the overall profit. The trust is paying 30% tax, so you've got $70,000 being left. That $70,000 is being distributed back to the bucket company. Bucket company now gets that $70,000, bucket company pays a 30% tax on that $70,000 again. So bucket company pays a $21,000 tax. Yeah? So then what do you say is that you say, hang on. So initially there was a 30% tax was being paid by the trust. And now you've got another, say, $21,000 tax being paid by the bucket company. That means effectively the tax paid was $51,000 on $100,000. Your effective tax rate has now become 51%. 51% is the tax rate. But that's what the rule is.

SPEAKER_05

Yeah, that seems uh like a bit of an overreach, I think.

SPEAKER_04

I hear also part of the ruling, Manzuru, is that they potentially, if this gets legislated, they're allowing people to potentially change structures and things like that during that time. Is that something that you've heard as well?

SPEAKER_01

That's right. A very good question, mate. Many of the details are still getting being formulated and finalized as such. But what they're sort of saying is that they're saying is that we will probably give them a two year transition because this whole trust distribution and the bucket company comes in on July 2028. So we got extra one year, and they're saying is that. Within that extra one year, we may provide some rollover relief, so to speak, is that if you want to transfer this, change it and so forth. My challenge is that it's about the confidence on the system. Yeah? So the Liberal government has come in and made all of those different adjustments and so forth. We as an accountant, we diligently start to go ahead and start making all of those changes. How do we know that the liberal is going to come in and not going to repel all of those and reinstate all of those back? So, what happens if I get all of my clients to restructure everything, do all this work, change all the structures, something which we've been doing it for 40 years. And then we go back and change all of those, and the liberal government comes in and changes the rule, then do we change it again?

SPEAKER_05

Totally, totally. Yeah. Yeah. So with um just a question um out of curiosity on that. So if they're um allowing a bit of a grace period for people to restructure, is that going to bring in things like CGT exemptions? Because I imagine some of these restructures would be CGT events.

SPEAKER_01

Yeah, so they're saying that rollover relief, right? Rollover relief means is that uh CGT gets sort of carried forward, i.e., when we're saying exemption, there is no CGT event. So it gets rolled over in terms of the transfer as such. So that's what they're saying, but we're still waiting on the details in terms of what is the mechanism behind it.

SPEAKER_04

Okay. SMSF, Manzuru, self-super funds. There's been not much about it, but I know there is potentially some impacts. Can you talk about that?

SPEAKER_01

Yeah, look, I mean, uh uh surprisingly, list amount being changed on the superanation fund field. So your 15% tax rate is still remains the same, yeah? And and your losses, you can still sort of claim it as you sort of do. So some of those things haven't changed it. Your superanation contribution, the uh the concessional contribution gone up a little bit from 30,000 to 32 and a half. So some of those minor things got changed. I think there are some of the details that we are still waiting to be confirmed is that when we speak about trust distribution, what happens if there is a listed trust, a managed trust as an example, uh, and a unit trust that listed, and and you've got a profit distribution from those managed trusts and coming into the self-managed superanation fund, what would be the tax ramification behind it? So some of those details are yet to be confirmed, uh, but more or less superanation hasn't changed a lot.

SPEAKER_04

Commercial properties.

SPEAKER_01

Similar. Yeah, yeah, similar hasn't changed quite a bit a lot. Yeah, commercial properties in negative gearing, you can utilize the depreciation, you can utilize it. So all those old rules in the commercial properties sort of remains the similar.

SPEAKER_05

All right, so we've we've spoken a little bit about the the what, what are the changes? Yeah, but I think what we want to really dive a bit deeper into is what does this actually mean for the various different groups. Yes. Um, so if you know, what does this mean for residential investment properties and people looking to invest in properties? What effect do you think this is going to actually have?

SPEAKER_01

I was reading this news uh this morning, and this is middle of uh May, so we're sort of second week after the end of the budget, and and the auction clearance rate dropped over the weekend. Yeah, some of that. And auction clearing had absolutely dropped over the weekend, which is not surprising, right? Uh so what is the impact with some of the uh I suppose the residential property side of it is that one would strongly suggest that there would be quite a bit of a fear and tear. And uh your sort of the fear and tear and sort of the uh I suppose the uh the warning of that fear and tear would be is that there would be many of the investors they would sort of say that, well, now is not the time to buy. Many of the investors they would sort of say, well, do I sell it before June 2027? Uh, within that sort of a transition period. So your negative gearing, as an example, well, we sort of say it applies from 12th of May 2026, is that the actual implementation date is 1st of July 2027, right? So you've still got a little bit of time in between so that they get the system right. And that means within that period of time is that you've got the transition period. So uh there is there would be a quite a bit of a, I suppose, fear that many people will sort of jump in into the market and they will try to sell some of those properties. So unfortunately, I've got no doubt that in the short period of time there would be much of an impact on the residential property. But I suppose the question is, what does it mean for a longer period of time with the residential property? And I would strongly argue the answer would be no impact. If anything, the people who go through the journey, they are the ones who would be winning. And let's develop that a bit more throughout the uh podcast.

SPEAKER_05

No worries. And um, you mentioned that commercial property is not really impacted by these changes. Would that be about right?

SPEAKER_01

Yeah, so uh one one may say that commercial property, whether it gets the uh benefactor, so to speak, in terms of being the winner and and sort of ungiven the winner with this whole budget, right? Because you can claim the negative gearing, you can claim all those different deductions as such. I think that commercial property just becomes a touch bit more sort of uh, I suppose, attractive. Whether the rental returns and the rental returns is a bit challenged at the moment, but the commercial property will definitely become more attractive.

SPEAKER_05

Sure. And do you think people are gonna rotate into alternative um investment asset classes?

SPEAKER_01

Good question. Very good question. Um, I think there would be a natural uh inclination for people to try to rotate and people try to sort of say, you know, the property market is gone, it's dead, it's not gonna happen. I've heard that in the past, I've seen that in the past, right? It's not gonna happen, the it's gone. All the benefits are gone, prices dropped, so now is the time to go back into some of the sort of the alternate sort of the investments, whether it is different layer of shares and managed funds and so forth. My personal view, Frank, is that uh we as a group, we've always taken the view that it's not a particular asset class that we set up, say diversification has got a merit to it. It has got merit, but there is a fear factor that there may be a lot more unwanted interest on some of the other investments just purely because of some of the tax fee that we have at the moment.

SPEAKER_04

And the whole budget, we heard you know, Jim Chalmers talk about the first home buyers. First home buyers, we're doing these for the first home buyers, you know. But from my opinion, what we can see hasn't really changed is supply. So, what impact do you think this is gonna have on the first home buyers? Is it gonna help them? Is it not gonna help them? What's your personal opinion?

SPEAKER_01

I'm really glad that you spoke about this whole supply. What we haven't spoken throughout this whole budget is that this is all about the demand side of it that we try to sort of work through, right? And the whole equation has got the supply side of it as well. You've got the demand, you've got the supply. You've got both, yeah? And sometimes we sort of say, can we look through in terms of demand? Sometimes we say we look through in terms of supply. The challenge with the Australian property market for years and years and years and years and years, I'm generalizing, but years and years is that it's the demand, is the demand that we always sort of work through. We never worked on the supply, which you're right. And what is the definition of the supply side? It means that give us more land. And Australia is a big country, right? There is only a handful portion of the land which is being which is being zoned in terms of the investment in residential and commercial property. The rest of it is not zoned. Bring in more land, and once you bring in that more land, your demand will naturally become balanced out. That's the impact of the supply side. But this whole budget is on the demand side of it, right? So what the government is sort of saying it is that government giving a whole lot of statistics saying that, well, you know, people will sell, residential property will drop a bit. We have created some incentive in terms of first-term buyers with their saving through the superfund, as an example, different ways that we created some incentive. With all of this incentive that we've sort of naturally created, means that it would just become a little bit easier for the first-term buyer. What my fee factor is, is that it may arguably change for a very short period of time. But in a very medium to longer period of time, what you would see is that a lot of things start to balance out and there would be a natural cycle where the rent sort of increases and the investor sort of comes in over a period of time and the price gets adjusted. And the fear factor is that in the longer period of time, that these first-home buyers will still pay the same amount, if not much higher, simply because that whole base of the cost would be increased quite a bit in the medium to longer period of time. There could be an anomaly for a very short period of time. The question is, is it going to be really short-lived?

SPEAKER_04

Totally. And that's what we saw with the 5% deposit scheme. You know, the first home buyers, the you know, they cut the income caps. And what happened to property markets is that 800,000 then become 850,000, 900,000. So it's actually pushing the price up. First home buyers, then we've got your beginning investors. So maybe someone that's looking to, you know, buy their first investment property. How is this? You know, I've had a lot of clients now say, I don't want to buy property, you know, I'm unsure about what's happening in the budget. How's that going to affect our investor market? Because really that's what the budget is targeting, is trying to decentrifise the investors from buying and allowing the first home buyers to get in. So, how do you think investors are going to be affected by this?

SPEAKER_01

You know, I mean, one of the messages which I try to pass and for years and years and years and years and years, is to say you never ever invest uh simply because of the tax benefit as such. You know, that years and years that many of the seminars that we used to see is that uh buy the brand new property because you get that full depreciation, you can claim them as part of your PYG withholding variation. You get all of those tax reductions as such. Look at this, how beautiful it is. The property sort of cost you about 15 grand to hold it, but it doesn't because you get a tax benefit behind it, and you get about 7.5,000 tax benefits, so it's only cost you seven and a half, and seven and a half is pretty good, right? From a tax benefit for years and years and years that I've sort of said that you do not invest because of the tax benefit. You always take the tax benefit as a bonus. So that is the message that I want to pass it to the first-time investors, right? And and the first time that sort of the early investors is is that I think there would still be a fear factor in the shorter period of time because one sort of assumed that, well, these are the beginning investors, means that the experience are still building. It's very difficult to cut through the noise and to really sort of see that longer period of time. So I don't think the first the initial investors by themselves has been jeopardized, so to speak. But I think that there is just so much more noise that one has to cut through.

SPEAKER_04

Yeah, especially with new builds off the plan.

SPEAKER_01

Yeah.

SPEAKER_04

You know, and that's what they're encouraging in, you know, with the negative gearing. I've had clients call and say, look, now I want to buy, you know, off the plan.

SPEAKER_01

Yeah.

SPEAKER_04

But the issue with this is, as we've seen with many off the plans, is you know, two years it takes to build, we do evaluation and the property values drop because there's too much demand in the area. And you know, I think what people fundamentally need to understand is that you shouldn't be worried about the capital gains tax if you have no capital gain on that actual property. And so I think what's your opinion out of that? Because they're clearly pushing for someone to, especially in the first home buyer space, to buy off the plan or buy a new build because they get this negative gearing benefit. Is that the right message that we should be pushing to?

SPEAKER_01

No, I'm not so much against a brand new property. Yeah, I'm indifferent whether you buy it to a brand new or not. But what I do do is that I break it down and I say that brand new property has different elements of, when we say risk factor, you've got to just take away some of the additional due diligence. Yeah, and some of the things which are beyond your control. Exactly as he said. You signed away today with a contract with a piece of documentation saying that this is what the architectural design is. You don't know exactly whether it's going to end up being exactly this. Because of circumstances, it could be slightly different. I've seen that many, many times, right? In the initial design, it was this, it had to be changed, and it was not because it was being planned, it was beyond everyone's uh control. And it was the circumstances that it had to change. That's point number one. Point number two, as he said, is that what happens in two years' time in terms of the market price? He's buying it today at the right market price. Let's assume in two years' time, if the value drops, then from a bank's perspective, you've got an issue, right? Because the bank will give you the lending on the basis of the valuation at that point of time, not so much as the valuation when he bought it. So there are elements of the risk with the brand new properties as such. Yeah. So that's where it is, I strongly come back and set up say that you do not buy those brand new properties purely because that you are getting some tax benefits. We gotta get our objective being very clear. What is our objective? If an investor is investing, an investor is investing from an investment point of view, from a wealth creation. So is this particular property going to provide me a lot more wealth in the longer period of time? Then that is the right property. Let it be brand new, let it be an existing property. That's the first question. Then if I find a property which has got all the growth potential, also gives me tax benefit. Well, I'll take that tax benefit as a bonus, not the other way around.

SPEAKER_05

Totally. Right, and how do you think this affects the more advanced um investors? Good question.

SPEAKER_01

Love this question. Uh, thank you, Frank. Love this question. Why do I love this question, Mike? Because you know what? The really advanced investors actually seeing this as a moment of incredible opportunity. I actually went home and I said to my wife that this is once-in-a-lifetime opportunity from our point of view. This is coming in from someone who always says that once-in-a-lifetime opportunity in property market comes in every other week. And I sort of say, no, no, no, now it's not every other week. Now I've got a really once-in-a-lifetime opportunity. Why? Because as a very long-term investor, I've been investing since 1999. I have seen things gone up, since gone down. I've seen government tried many different things, many different things in many different ways. Some work, some absolutely ridiculously dropped, right? And some we learned quite a bit. But one thing which I've learned over that journey from 1999 up until now, 27 years of physical investment every year, that what I've learned by looking through is that the investment is always in the longer period of time. That whole concept of the Smurf's law of average means that everything balances out. That whole economic concept of the invisible hand means that the economy balances out in the longer period of time. As soon as there is an anomaly, economy somehow balances out. So what the advanced investor will think is that they will sort of say that between now and June 2027, maybe another year or two years, is an absolute opportunity to buy. Why? Because the auction is dropping. People are fleeing away. People are not buying. Banks are changing their role. So if you look through some of the bank side of it, even I we spoke yesterday, Aaron, that some of the larger banks have started to take that sort of not having negative gearing as part of their serviceability math, right? So it just becomes that much harder for some of the people to even qualify from banks, by the way. Means that it would be harder from that perspective. There would be more people on the market, the prices will drop. I think this is an enormous opportunity for the substituted investors because the substigated investors will be doing the maths carefully. They will set up, say, okay, we understand that the interest rate is high, we understand inflation is sitting as 4.6, interest rate 4.35, and the interest rate may go up a little bit more because the inflation probably will go up a little bit more. I, as a substigated investor, I will do the math for the interest rate to increase. They will do that cash flow carefully, and then they will come back and say, this is the storm where we really need to dabble in and acquire a bit more.

SPEAKER_05

Now, if we look at the new rules in play, it seems that there are investors out there that, you know, property trading was their strategy. Um, obviously, with these new rules, it would seem like they would be a lot more expensive to be doing that. Do you think that there would be uh a growing uh cohort of those type of clients moving to do that in super instead where the tax environment is a little bit more friendly?

SPEAKER_01

Such a contiguous question. I'm not gonna answer that question. I will answer that question.

SPEAKER_05

I will answer that question. Asking for a friend.

SPEAKER_01

I was never a big fan of property to be trading. Sure. Property is not a trading instrument. Property has been for years and years and years and generation and generation. We say it's a liquid asset. It's a liquid asset means that it's a long-term investment. So, yes, there are some bias agencies that we've seen in terms of the properties that they sort of say that look, we we see that as a trading, we buy it, we sell it in the right time. If you can get everything right, let's just make a list of how many things that you need to get it right. You've got to find the right area to buy the property, you've got to find that at the right price, you're gonna be set, you're gonna know where the market is, you're gonna be knowing all the changes that the economy is going to go through. You sort of need to know what the inflation is, you sort of need to know what the interest rate is going to come in through, you've got to know what the supply and the demand of those areas, you've got to know what are the infrastructure that they're going to build it into those areas, you got to know what the council are going to build into those areas, you've got to know what the population are going to be increasing or decreasing on those areas by knowing all of the above, I've just counted 10 of them, by knowing all of the above, you will make a decision that when am I going to sell it, where the price is absolutely at the right price, so I can sell it and I can get myself out of it. Yeah? If you can get all of those things right, then yes, you will get it right. But the challenge is that what is the risk of getting one or two of those things wrong? And if you get one or two or three or four or all ten of them being wrong, then it becomes a disaster. So I don't know whether I'm a big fan of property being trading, but yes, to answer your question, it's just going to become so much harder.

SPEAKER_05

And I guess another group that's going to be quite impacted by uh these changes are business owners.

SPEAKER_03

Yeah.

SPEAKER_05

Right now, um, I did see a very uh interesting headline. Um it was a young business owner, um, and the caption was introducing my new co-founder, the Australian government. So, you know, and and where that I guess that's coming from is, you know, a lot of business ownership.

SPEAKER_01

Yeah, correct.

SPEAKER_05

Correct. And you know, and where that is coming from as a business owner, you go through all the stresses, the pressure, the sacrifices uh to build your business, and then on exit you're handing over 47% to the government. What are your thoughts on that? Like, is that exactly how that's going to work?

SPEAKER_01

Okay, it has, I suppose, impacted in two ways. Uh we say the soft impact, and we say the hard impact, yeah? So you've got your hard currency, so to speak, and you've got your soft currency, so to speak, yeah. So your hard currency is to say that there is no doubt tax has increased in many different ways. Yeah, all taxes increased. I've just given that example that a family trust distribution to a bucket company effectively pay 51% tax. Yeah? In the OSCD countries, if you look through Australia, it's one of the highest taxpaying nations, right? There is different statistics now coming in saying that with those new taxes, we will become the highest taxpaying nation, not one of the highest tax-paying nations, right? So tax will definitely increase. So, yes, to answer your question is that, Frankie, if I look through some of the statistics, as at now, May 2026, what are the statistics, yeah? So you've got our unemployment rate, which is 4.3%, our interest rate sitting about 4.35%, our inflation is sitting about 4.6% right now at the moment. Yeah? Our average property price is over a million, depending on which estates you're looking into, it can be all the way to 1.6, 1.7, over a million. Our debts, our household debts are sitting at 177% of our household income at the moment, right? So in many, many, many different ways. The lucky country that we say is that yes, we are the lucky country, but we are in a state of bother at the moment. And while we are at the state of quite a bit of a bother at the moment, is that if we go around hard to the individuals and the small businesses and say, I want to take away more tax, I want to take away more tax, you're just making it that much harder. So definitely.

SPEAKER_04

Because the sole goal they're they're talking about is productivity. Yes. Right? And so can you talk a little bit about that productivity? How is this going to help productivity, especially exactly what Frank just said there, when the government is, you know, potentially going to take 47% on someone's exit.

SPEAKER_01

So, see, the example that I've given you is a little bit of a hard uh currency, so to speak. There is the other side of it, which is the soft currency, right? The soft currency means from an investment point of view, yeah? So when we speak the productivity, there is a micro, there is a macro level of the productivity. Let's go to the macro level of the productivity. What is a macro level of productivity? I'm a foreign investor now, yeah? I've just become a little bit less interested in Australia to invest. Because you, as an Australian nation, is that you've created so much more barrier for me. Tax has increased, yeah. You're creating all this special rule in terms of the foreign investors with the foreign investors' investments out of it. You're not giving me any more incentive. You're a small country to start with, anyway. You've got 27 million as a population. So, you know, your overall the uh collective productivity is a small, it's a small economy, yeah? And then you taking away all of this incentive out of it means that it is that much harder for a foreign investor to invest. They will just redirect that investment to somewhere else, whether it's in Asia or some of the African country, right? So that's one from their point of view. And then if we look through in terms of the domestic side of it, the uh the micro level of the productivity side of it is that when you take away that bit of the tax out of the system, it means that there is less funding in terms of the investor side of it. If they have less funding, they're investing less, they're doing less. So everything becomes a sort of a compounding impact on loss of productivity.

SPEAKER_05

Yeah, now you mentioned that some of these changes, it's not the first time that it's been tried, right? Unfortunately. Yeah, so you know, I think it's important that we try to learn from history. Um, so do you want to talk to what happened last time round? And also is like, are there any other countries actually um doing these changes or have implemented these changes?

SPEAKER_01

Okay, I want to make this point right clear right at the beginning. When you say, Do you want to tell what happened on the last time? I wasn't there. I'm not that old that I was there last time that it made a change. Yes, it was about 40 years ago. Yes, so I've only read as everyone's.

SPEAKER_04

Just so you know, when you said you invested in 1999, I was seven years old.

SPEAKER_01

Oh, thanks. Thanks, Aaron. But I wasn't there in 1985 and 1987 when all this changed. Has happened. So last time it happened was 1985. Yes, September 1985, when the CGT is being implemented for the first time. So prior to that, we had the pre-CGT asset, means that there were no capital gain tax. September 1985, they sort of imposed the capital gain tax for the first time, yeah? Now, at the same time is that they imposed the negative gearing being taken away. Exactly the same rule as it happened last time. So, what happened last time in 1985, until 1987, when they have abolished it, two years later? What happened during this point of time? Such interesting, yeah? So negative gearing was being taken away. The conversation at that stage, uh, Aaron, was pretty similar. That our first-term buyers can't buy these properties at all. I've got these investors, we've got all of those investors, they're baby boomers, and that next generation is that they're taking away the wealth from the future generation as such. We are the government, we are the Robin Hood of the government. So what we do is that we distribute from the uh rich to the poor, we make everyone being equally wealthy. Well, that sounds great in theory, right? So uh they've taken away that whole negative gearing. So the first thing what had happened is that when they're taking away, this is a real story now, yeah? When they have taken that away, is that the auction dropped. Yeah. People sort of fear factor, people say property market is gone, it's dead, it's done, right? So people stop buying properties. People try to start selling properties. Then all of a sudden the builders are sort of saying, hang on, I can't really build this new project. I can't take this new project. Whatever I've got existing project, I've probably got to wrap it up. But I don't know whether I want to take the next project as such, because I can build it, but would I have people to buy it? Is the demand is there? So the builders are starting to build less. Yeah? They started building lesser and lesser and lesser. People selling it, they're building less. What happens to the population growth? Population growth has nothing got to do with the tax change. Population growth is very independent to your all the rest of the tax changes, right? So your natural population growth was continuing. People were coming in through the immigration, your natural growth was happening. Roll forward that in about three months, six months' time is that 12 months' time, all of a sudden you've got so many more people into the market who is looking for a rental property. Why are there so many more people? Because you don't have that supply of the rental property, because the builders are not building, because there is no assurance that they can sell it. So all of a sudden is that there is so much more demand in terms of the rent side of it. So people who started to rent or try to rent is that this one property which was three applications previously, now they've got 30 applications. Now they've got 50 applications. So what do the real estate agents say? Real estate agents come in and say, Well, you know, there's about 30 applications. But you really want the property. So you sort of say, hang on, red then sort of in that time, let's assume the rent was $300, red then $300, you say, no, no, you know what? As you, month rule, the real estate agent, how about I pay you $310? I know you said $300, but I'll pay you $310. And I, as an agent, I say, Well, that's pretty good. I go to Frank, who's the landlord, saying, You've got a $310 as an offer. Someone else comes in and says, No, no, I'm going to give you $315. Someone else comes in as $320. Frank is sitting in here saying, I like this, right? He's the winner, right? He's the winner. He's sitting in there, I like it. I'm the agent. I'm sort of saying, Good Lord, how good a job that I'm doing. Look at you, Frank. How good a job that I'm doing, right? Who is the loser out of all of this? Unfortunately, it's that sort of the individual who are trying to rent and rent and rent higher as this. Now, then it goes to the next layer of the deformity, so to speak. That's the first deformity. What's the next layer of the deformity? You, as a young couple, Aaron, you reach into a level saying that doesn't matter how much more I can increase, how much more I wish to increase, I can't increase my rent anymore. My budget simply doesn't allow. I've taken away my uh the taken away my uh weekend uh the dine and wine. I've taken away my Thursday night, sort of part of the uh shopping. I've reduced that, I've reduced that, I've reduced that, but that's it. My budget is gone. I can't do it anymore. Now Frank is sitting in here, Frank saying, Oh, you know what? I've got about 320, I think 340. If I can get a 340, then I will sell it. And you say, I can't do more than 320. Then you come up with a creative idea, your creative idea, you get another mate. So you and your mate, you join your forces together, you go to Frank and you say, you know what, you want your damn 340? I'm gonna give you a damn 340. You give it 340, but you are now two families. You're paying 170 each. The problem is it has an impact on our lifestyle. So rather than you as a young family, you're living into that house with your young family, now you are co-sharing the house. That is exactly what it happened at that point of time. So this is where the government took a step back, and government saying, this is exactly opposite to what we wanted to do. We wanted to increase the living standard. Why are we trying to get that first-hand buyers to have their own home so that they have their own home, the dream home, right? And they have got their ultimate goal, that home that they have, they can live in their own. But now, rather than them having their own home, they're co-sharing with someone else. So this was the ramification that it happened at that point of time. Government says it doesn't work, they abolished this back in 1987.

SPEAKER_05

Do you think it'll be anything different this time around?

SPEAKER_01

We hear that history repeats itself, right? And it always does.

SPEAKER_04

So I'm gonna leave with Frank.

SPEAKER_01

And it always does. And I would be very surprised if it is different. You know, there's all Dalai Lama things, right? Dalai Lama is um, I'm sort of I read Dalai Lama quite a bit, and Dalai Lama says many things. And one of the things Dalai Lama says is that it never stops me to be amused to see a human being how we do exactly the same thing and we expect a different result.

SPEAKER_04

Insanity. And I I saw New Zealand did something very similar in 2021 with uh negative gearing and very exactly what you said there, Ren's Rose. You know, what else can we learn from history, Manzaro, in terms of you know, other things that maybe the government have done in the past?

SPEAKER_01

You never try to artificially play with the system as such. You let the system to run it. Supply side always works better rather than demand side. Do not look into your power that you are in the government for the next three years or five years, and I'm gonna just make whatever changes that I need to. Look through into a 40 year transition, look through into a generational transition. Supply, supply, supply, not so much the uh the your demand side of it. So, yes, New Zealand tried various things in terms of a whole lot of negative gearing side of it. You look into brand new properties as an example, places such as France as an example. You know, France actually tried exactly the same thing as the government is being trying at the moment, which is to have the brand new properties which has got the tax benefit. So people buy a lot more brand new properties, existing properties doesn't have any tax benefit. France, after about a few years, they have abolished that as well. Because it doesn't work, because the tax benefit is only superficial, it is just sort of touching the library, so to speak. You've got to look through the underlying the value of the asset as such.

SPEAKER_05

Obviously, Mansul, it's very, very hard to cut through the noise when it's all over the media. There's a lot of emotion going on. But um, one of the reasons we did bring you on is I think a lot of people will value your opinion, a voice of calm.

unknown

Thank you.

SPEAKER_05

Um so can you talk to some of the things that you're thinking personally about yourself? What are you doing at the moment?

SPEAKER_01

I think the first thing which I'm doing is that I'm doing nothing. And what does it mean that I'm doing nothing? Means don't panic, don't rush, don't try to go and sell the property, don't try to beat the system, don't try to sort of say that June 2027, I'm gonna just clear away all of those things and I'm gonna sell all of those things. Yeah? Just just sort of just sort of quieten it down a bit. Just quieten it down a bit is that when we say do nothing, read everything which you can. Listen everything which you can. Wait for it to go through with the legislation. It could be slightly different than what it is. It could be fundamentally different than what it is. I'll just give you one quick example. State planning side of it, as an example. A fundamental instrument on the state planning is a testamentary trust that you can distribute it to the uh the miners and you get the tax benefit. We have this for years and years and years, 40 years, 50 years, 60 years, we've been having this. With this new legislation that you've got a 30% minimum tax rate on the trust, that entire state planning mechanism has been taken away. And it was it was not necessarily what the government was intended, I believe, because it was never being raised at the budget. That's what we intend. But that is an unintended ramification. So you've got entire that estate planning group, they're lobbying against it, saying that that is ridiculous. Yeah, you've got to take that away, otherwise, we don't have any estate planning mechanism, well, a good portion of the estate planning mechanism in Australia. So I think there is still an argument to say some of the things will be tweaked and some of the things will be changed and how it is. Yeah, wait for all of those changes to go through. Then I would strongly suggest that once you have done all of those, when the dust sort of settle, you know everything is in there, sit down properly. Sit down properly with your professional. Yeah, sit down properly with a professional to go through your entire portfolio, saying that, okay, let's revisit that entire portfolio. All the legislation has now been settled, which could be months. All the legislation has been settled. What do I do from here on? Stay true to your longer-term goals and objectives. When do I see myself retiring? What level of income that I'm after, and what do I wish to do within that period of time? Those haven't been changed. Very important that we do not lose that sight of all of those longer-term goals and objectives. Remain those goals and objectives, remain calm, sit down with a professional so you can have a thorough review by looking through all the ins and outs. Don't go ahead and say that can I change this structure? Can I sell all this property? Can I buy commercial property simply because there's more benefit? You buy commercial property if that falls in within your goals and objectives. So if you do that, sitting down with a professional, to me, that's prudent as opposed to making a rush decision.

SPEAKER_04

You're 100% right, because having a knee-jerk reaction right now, especially with everything that's going on.

SPEAKER_03

Yeah.

SPEAKER_04

And it might get repelled, exactly like you said, and now you've made all these decisions that don't actually align. And it's very personalized. There's no blanket rule now, everyone should buy in a company. Everyone should buy a self-managed superfund. Uh, and so I think meeting your professional more than ever is really important and very funny about the state planning because the whole budget was about intergenerational inequalities. Yes. And so that directly affects that, which is um is quite interesting in itself. Is there anything else, Manzuru, that people listening should be thinking about, should be doing after this budget now as potentially going to go through? What else should they be thinking about?

SPEAKER_01

I think what they need to think about is again, is to go back with that longer-term goals and objectives, right? I sort of reiterate that that hasn't been changed. Yeah, that's constant. Is that your goal in the longer period of time? Why do you wish to retire? How do you wish to retire? What do you wish to do? That remains the same. It hasn't been changed. Yeah. On that basis, is that when you sit down with your expert, you would be asking questions, such as that, well, the future properties, do I buy it on trust or do I buy in a corporate entity? Yeah. In the corporate entity, there's a whole lot of logic now. Yeah, we didn't used to buy in the corporate entity because the tax rate was 30%, and the uh in the trust, the capital gain maximum is 23.5%, even if it's the highest marginal rate. 6.5% gap is a big difference. But now we don't have that, right? So it is trust has got minimum 30% tax, the corporate entity has got 30% tax. So corporate entity arguably is much better. Why is it arguably much better? Because you can channel through your profit from your your trading entity back to the your profit holding companies, so to speak, in different ways, whether it's lending and so and division 7a. So there are ways that you can sort of bring in a bit more funding into the corporate entity and the negative that you had previously, which is that extra tax, we don't have that, it's similar tax. So whether that your future investment structure changes, that's probably the point one that one should be really looking through. One should go back and re-look through in terms of their entire state planning, in light of everything got changed on the state planning. How do we do what do we do? One probably can also look through in terms of their investment strategy that what type of properties do we buy. You know, those sort of buy and sort of flip and sort of sell it and sort of trading it, it's just going to be that much harder. And it goes a lot more in terms of buy and hold in a longer period of time, right? The type of the property now becomes even more important, that which area that we buy, is it a bit more return? Is it a bit more rental? Is it a bit more capital gain? So many of the fundamental is that you've got to challenge those fundamental, but at the same time remembering that your ultimate fundamental, which is that long-term retirement, that hasn't been changed.

SPEAKER_05

As always, Manzarul, um, always love to hear your words of wisdom. And uh look, um we could talk about this all day, but unfortunately that's all we have time for today. So thank you very much for joining us again.

SPEAKER_02

Thank you very much. Thank you very much. Thank you. Thank you, Aaron. Thank you.