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Contributing to Your Life
KHI Partners has spent 18 years helping Australian families build wealth, protect assets, and navigate life's biggest financial decisions across accounting, financial planning, law, mortgage broking, insurance, bookkeeping, and property. This podcast puts their partners in front of the microphone to share real client stories, hard-won lessons, and the kind of advice that usually stays in the boardroom.
Hosted by Aaron Sim and Frank Wong. New episodes fortnightly.
Contributing to Your Life
Wealth Creation in Australia: Tax, Structure and Long-Term Thinking | Ep. #05
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In this episode, we're joined again by Munzurul Khan, Chairman and Founding Partner at KHI Partners.
We discuss the importance of tax efficiency in long-term wealth building, specifically why your tax structure matters most, and how to know when it’s time to change structures as your business and wealth grows.
Munzurul also dives into the philosophy behind long-term wealth building, how successful individuals balance leverage, risk and diversification, as well as the role of discipline, patience and consistency in long-term financial success.
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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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At KHI Partners, we’re not just a global firm; we’re a dedicated community of professionals committed to making a meaningful impact in the world.
With a diverse portfolio globally spanning accounting, financial and wealth planning, legal services, lending, property development, and more, KHI Partners is your one-stop destination for all your financial requirements. Whether you’re an individual seeking personal financial guidance or a business aiming for strategic growth, our expert team is here to guide you every step of the way.
The counters are facts and figures. We can't make up the numbers. The numbers are the numbers. We cannot play around with the numbers, change and manipulate, none of those things, right? That's not law.
SPEAKER_04Investors always think about the risk of a property, its type, its location, the investment structure, but often overlook the risk of inaction.
SPEAKER_00I would much rather have all my eggs in one basket, as long as I know exactly what the basket is, exactly all the eggs attached to it, and I've got my heart and soul and the knowledge and the in-depth understanding it in terms of that entire protection of it.
SPEAKER_04In this episode of Contributing to Your Life, we sit down with the chair of KHI Partners, Manzurul Khan, to break down some key fundamentals behind successful property investing.
SPEAKER_00Those people who are very successful, I find them to be action takers and I find them to be constantly learning.
SPEAKER_03This isn't about picking the right suburb or property type, it's about how you set everything up.
SPEAKER_00It all comes back to doing the right thing, not in the paper, but in the spirit.
SPEAKER_03We go through topics such as how to think about trust versus individual ownership, what determines true tax deductibility and how structuring decisions impact your ability to keep investing. Manzura walks through real client journeys from first property to multi-property portfolios, highlighting the key decisions, mistakes, and turning points along the way.
SPEAKER_00My fundamental role is to understand what you wish to do and to give you absolutely every single positive or negative from a tax and accounting point of view without any opinion. It's the science and not so much as the art. As much as I can is to give you all of those information so you make that final decision.
SPEAKER_02Before 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_03Today we're going to go a little bit deeper, a bit more technical on your field, which is the accounting side, and specifically how I guess clients build wealth through property. Frank and I see it from a finance side, and uh I know we work very closely with you from an accounting side. Uh so I guess there's you know many questions and technical questions that we like to get deep into it uh in terms of the property side. But just from your perspective, you've been in the the property game a long time. You've seen multiple clients over the years. What would be to start off with? Just some real simple mistakes up to big mistakes when it comes to property investing from an accounting side.
SPEAKER_00Yes, I've seen many, many, many clients over the years, 18 years that we're sort of running uh care partners, and then uh we've seen many of our clients are 15, 16, 18 years as such. Many of the clients that we've sort of seen that they started with sort of very mum and dad, and very mum and dad means the principal place of residence, maybe one investment property. And we look back now and we say that wow, there's so much wealth is being generated by those clients over a period of time. I think probably one of the very first points that I want to make it very articulated, if I may, is that we as an accountant, we can't give any financial advice. So we don't sit around and say that, okay, let's have a look through and give you all the sort of financial advice as such. Accountant's role, yes, we can ask the client what your goals and objectives are. We're not establishing, we're asking the client, right? We can ask the client saying that, okay, that's what you want to do, what are the pros and the cons, and and and for you as a client to be informative. And I always say that. That is my fundamental role. My fundamental role is to understand what you wish to do and to give you absolutely every single positive or negative from a tax and accounting point of view without any opinion. It's the science and not so much as the art. Yeah? Without any opinion, as much as I can is to give you all of those information so you make that final decision in an informed manner into your circumstances. Uh, I suppose at a high level, Aaron, uh, Frank, what are some of the things that I've seen over the years, right? People look into and people say there are risk to any investments. Of course there are risk to any investment, right? 101 different things can go wrong. You could buy a property at a higher price, you could you could sort of buy in the wrong place, you could buy into the wrong structure, you could buy with the wrong finances, you know, uh, you could buy without having a proper level of uh the due diligence, the building report, the pest report, the strata report, you didn't realize, you haven't done the strata report, you didn't realize that there is a massive one-off strata costa coming through. So hundreds of different things can go wrong. Yeah. But where I actually say is that I go back to this very old author and some of the younger generation whether they know, an author named Jan Somers. And Jan Somers, many, many, many years ago, is that she wrote two books, and one of the books is called More Wealth, and the second book is 101 Stories. So Jan Somers, uh, I still remember that in More Wealth, Jan went through with a whole lot of a theory. This is a book which was written in the mid-80s, it's still all-time classic, right? Wrote many things that Jan went, and right at the end, uh, for a whole uh massive chapter, Jan says that I'm going to do all the what if calculation. What if that goes wrong? What if that goes wrong? What if that goes wrong? What if that goes wrong? What if we have a war? What if we have stagflation? What if if we have interest rate going up, right? Many of those what if we may not have control to ourselves. She went through all the different what if, and right at the end, she asked us, she's saying, okay, I've given all the what if of the client. I'm going to just give one what if from me as an author. And that one what if, what if you do not do anything? What is the cost of that opportunity gain over a period of time? What if we do nothing? What if we never take any action behind it? What is the cost? How do we quantify? And what Jan Samus was arguing, which I absolutely wholeheartedly agree, is that one would look back and say, you know what, the cost of that what if of not taking any action, that arguably is the biggest cost. Because each action, while there are risk attached to it, there is a mitigation to it. Yeah. And even with a almost a secondhand product, there is still a product that you can build it, nurture it, right? But if you're starting with zero, staying with the zero, you are at zero.
SPEAKER_04Quite often there's a lot of media about the trust at the moment, trust lending, trust borrowing. Um, when would you say a trust might be appropriate for a client and when do you think it's over-engineered?
SPEAKER_00Um hard question in the sense that uh there is no one answer to it. Yeah. Uh like I've got a client as an example uh that he wants to have each property on a separate trust, and and he's got about 30-odd trusts with 30-odd properties. I've got a client as an example who's got about 30-odd properties, which are all individual names. And my personal opinion is that they're both overdoing it. Yeah? They're both overdoing it. So rather than going into the conclusion that when the trust is right, it's sort of more understanding what are the pros and cons of trust. And then looking into our individual circumstances, then say, how does that fit in? When does that fit in? Does it ever fit in? Yeah. So what are the pros and cons? Yeah. So trust has got a bit of a setup cost. That's a negative. Yeah. Trust has got a bit of a running cost, that's a negative. Trust, arguably, land tax would be higher. Yeah. So each estate is different. In South Wales, as an example, you pay land tax from $1.1 as opposed to individual, is that you've got a threshold over a million dollars. Yeah. Queensland and the impact of that is significant, right? So uh Queensland as an example is that threshold is lower. So land tax is much higher on a trust. Yeah. However, there are positive to a trust. What is the positive? Number one is that it gives you an asset protection. So you don't own things on trust, you control. Yeah. So you control through this concept called a pointour. A pointeur is the ultimate controller. Uh, you have the right to distribute the profit in a flexible manner within the rules, within the regulation, within the trusteed, but you can distribute to uh spouse, kids, and grandkids and parents, grandparents, brother, sister, nephew, niece, uncle, aunt, any other entities that you've got ownership or control uh within the trustee. So those are benefits, right? Is that the asset protection, the tax flexibility? There is some financing benefit, arguably as well, arguably, on a few circumstances. So there are some benefits. So it's a matter of sort of looking through all those positive and negative, and sort of say which one is, I suppose, more livid into my circumstances, and that's where I make the decision. But from my experience, for years and years and years doing it, what I've found, this is my experience purely, is that the first one or two properties, first property, principal, place of residency, always buy it on his name or her name. Yeah. First few properties, arguably, you buy it on individual name. Why do you buy it on individual name? First few properties, you get the tax benefit and you get the land tax threshold, and so you give away asset protection, tax flexibility, but you get those initial benefits. After you utilize four, five, six properties that you buy, you arguably have utilized all the threshold, both from a land tax as well as the tax benefit. That's when one argues that is the right time to go to the trust. Because all those negatives that are said about the trust is that those negatives have been absorbed, so to speak, i.e., even if you were to buy it on an individual, is that you would still pay land tax because he utilized the threshold. So we might as well go to the trust in there. And what is that threshold? I've sort of found about four to six properties. After that, there could be an argument. No one rule, but this is a basic sort of a back of the envelope, sort of a rule of thumb, about four to six properties, then on a trust.
SPEAKER_04Okay, Tri, I think a lot of us get the benefit that we literally get to see thousands of lifetimes play out. Right. So for our listeners, what I'd like to do is maybe bring this back to a real life example and uh perhaps walk us through some of the key fundamentals of how someone started their investment journey. Yes. And how they built that up from there and some decisions that were made along the way and why.
SPEAKER_00Okay, lovely. Good question. This oh good Lord, there's just so many examples, Aaron, that one goes through. So many examples. Why don't I use the example of one of our partners and maybe two of our partners, exactly the same pathway, uh, without, of course, uh confidentially you don't disclose the uh the partner's name. Um but these are our partners, two of our partners, yeah? So if I utilize them, and there's both of those partners being on those two examples, two partners, they're both being my client over many years, many years, many years. So both of those people is that I met them when I was in different layer of the property seminar, right? And both of those persons, they've got a similar journey, yeah? Both of those persons is that they had their principal place of residence, and uh they uh I think in one gentleman he had one investment property, the other gentleman didn't have any investment property at all. They were in the property seminar, and the property seminar was a good seminar uh in those days, right? It was a physical seminar, and they're sort of like we want to buy properties, how do we do it? So we sat down with the mortgage broker. They actually sat down with the mortgage broker by themselves, and and this is many years ago, I'm speaking, probably about uh 16, 17, maybe even 17, 18 years ago, I'm speaking, right? Knowledge was not as widespread at that stage, yeah. So they sat down with the mortgage broker, the mortgage broker says, yes, you've got quite a bit of an uh equity in your property. Your LVR, loan to evaluation ratio is lower. And and those days we also have the DTI debt-to-income ratio, and your debt-to-income ratio is is good, i.e., is that two fundamental things with the servicing side of it, loan side of it is your serviceability and your deposit. Of course, your character comes in as well, your habits and all the rest of it. We set that aside for now. Let's assume that's all being met, which it was, right? So it's all about that. Do you have the deposit to buy the property? And do you have the cash flow to service it? Now, in their case, they didn't have the cash, but they had plenty of equity in their home. So I sat down with the mortgage broker, mortgage broker looked into it saying, you know, we can quite easily go up to 80% without paying any LMI, lender's mortgage insurance, right? And without paying any LMI, we can easily go up to 80%. You sitting as much lower percentage. The number is escaping me at the moment. For argument's sake, let's assume that it was about 60%. So that means we can draw down the 20%. Yeah. And that 20% that we can draw down, we can use that 20% from this particular property as a deposit for your subsequent property. Right. So, yes, you still need to meet the serviceability, and they've done the serviceability test and they could do it. So both of those, uh, the partner, if I look back now with the memory, is that they sat down with the mortgage breaker, draw down the equity, bought one investment property, and this and uh they did their cash flow well. So they knew exactly how much they're out of pocket if they're out of pocket. Over time, is that both of those properties have gone up a little bit more? They went back and recycled that whole matter. They've drawn down the equity again to both the third and the fourth and fifth properties over a period of time. I roll for those both of those partners now, and they're our partners, and I look back into them and I say that, wow, good Lord, they've done well, right? They've got a whole lot of properties on their individual name. Then at the right point of time, they set up their trust, and they've got multiple trusts, and each trust has got a number of properties as well. They both set up their self-managed super fund and they set up the self-managed superfund with the right process to get an SOA statement of advice with the financial planner after having a certain amount of sort of deposit. That's what they did, the self-managed superannuation fund. And they're naturally both on the business because they're part of us as part of the care chair partners, right? And I sort of look back to some of those sort of the partner side of it, and I say, wow, they have done really, really well. This tiny little example coming back. I'll give you one last example. I was sitting down with a client last night, and the client was sort of saying that I want to really set up the superanation fund, I've got this funding. I was like, good. If that is what you want to do, I'll send you to a financial planner. We do the SOA. Client's saying, tell me one example. I just can't seem to figure this out on top of my head. And this gentleman is a big banker, big banker, right? Like with a large banking institute. If I give the name, everyone knows it. He's a large banker and he's the uh leadership team, and leadership team in the sense that he looks after anything outside New South Wales and Queensland. So he looks after Melbourne and Adelaide and Perth and everything else for a large international bank. So he's the leader. He looks after all of those, a big guy, right? And he was like, I still sort of can't just figure out this one thing that if I'm having all my cash is being invested into that one asset, tell me about this diversification and the level of the return that I would be receiving. Is that how am I receiving the return? And every time a client asks this question, I love it because I sort of say, give me an example of one of your property. I'm not gonna give you any hypothetical example. I'm gonna give your property as an example. You are the one who's gonna give me the statistics, I'm gonna just do the numbers, right? List I knew that he was in Perth, and Perth didn't do it very well for the first two or three or four years.
SPEAKER_01I was like, oh damn, I got myself in a bit of trouble. I picked up the wrong one. I was like, no, no, no, I'm gonna stay quiet, stay calm. I'm gonna go with his part example.
SPEAKER_00Perth did very well in the last two, three, four years, right? But as he appreciated that prior to that, there was a big period of time. Perth didn't do very well, right? I was like, okay, I'm gonna stay true to the number. I said, tell me about your property. He said, well, I bought this property about 560 odd thousand. I said, okay, uh, what's the value now? And he said, about 1.2 mil. I was like, okay, so what was your increase in value? It was like 1.2 minus 560. I was like, no, let's say 600 minus 1.2, because you've got some buying cost, you've got some selling cost. So you had a 600,000 increase, right? And he says, okay, that sounds pretty all right. And I was like, no, no, let's get the numbers down in the right way. Let's have a look through how much deposit you paid. So it's not 560, a lot of things, a lot of leverage. How much was the deposit? And he said, well, I paid about uh 100 grand all up. So I said, okay, in my mind, the maths are is that for a hundred thousand dollars has gone up to six hundred thousand dollars over what period of time? 10 years that he said that it's gone up from 100,000 to over 600,000. So I said, now we do the maths that what is the return of that six-time increase over that 10 years period? What's the return? Yes, there is a bit of a flaw in the equation that there was some cash he had to put in and there was some tax benefit that he would have received. So it's not strictly 100,000, it's probably a bit more than 100,000. But if you do the math of your 100,000 going up to 600,000, and he was doing the math in his mind and he was like, that's a pretty good return. And I said, there's no hiding to it, it's a leverage, which has a double-edged sword. So you still need to buy the right property. And I said, arguably, is that rather than Perth, because he bought it at a point of time, first two, three, four years, it did nothing, and it really did well in the last few years, in that some of the other places it probably would have done better. But even on that example, the numbers really work out. So that is our typical client that we see they're starting with one or two properties, and we look back to them after about 10-15 years, and we say there is so much wealth is being amazed. Now, we we don't do any of those, they're the one who does it. We sort of more sort of, I suppose, the support group in terms of the technical skills.
SPEAKER_04Now you mentioned diversification, right? So obviously the property is a very concentrated asset. Yes. So how how did you meet that part of uh the the requirement?
SPEAKER_00Uh I've got a psychological answer to it, and I've got an answer to it with the science. You know, I'll just sort of say that the old Warren Buffett sort of says is that uh sometimes we overestimate this whole concept of diversification. You know what? I as a Warren Buffett, this is Warren Buffett's, I as a Warren Buffett, I would much rather have all my eggs in one basket. As long as I know exactly what the basket is, as long as I know exactly all the eggs attached to it, and I've got my heart and soul and the knowledge and the in-depth understanding it in terms of that entire protection of it. Right? So that's sort of one side of the answer. However, of course there is a merit to diversification, right? Uh, two ways that I try to um say it, yeah. I say that arguably in that one big asset, you're gonna still have diversification. Let's go through the property side of it as an example. If you buy it in different states, New Southwestern Queensland and Victoria as an example. Well, that's a diversification. That's a geographical diversification because I would have strongly justified that not necessarily each state goes up exactly in the same cycle, right? So, right now, as an example, 2026 is that if I look back and I say that Melbourne has got a lot of prospect. Yeah. 2026, I look into New South Wales and I say Sydney is always pricey, probably still pricey. I look into um the Queensland and I say, wow, Queensland really had a go in the last few years, right? I look into Perth, I look into Adelaide, and I look into some of those places, and I said they really had a go in the last few years. Melbourne did not have as such a go in the last few years. Now, at different points of time, that could be completely different. So diversification is that if you've got properties into different estates, then what it does is that you would always have one or two portfolios which is doing really well, and the others probably not, but it comes in into cycle. Yeah, that's first off diversification. Second, the property is also wider, right? You can have residential, you can have commercial properties. That gives you diversification. Residential is about growth, commercial property is about cash flow. I'm generalizing, yeah. That gives you a diversification. We go deeper to it, yeah. In terms of the property side of it, you can also have different layers of diversification. You can have houses with land that you can subdivide and you can sell it. There's a development potential, right? Whereas you buy some of the properties which has got granny flat. There's a more cash flow property. So now you've got a diversification in between the growth and the cash flow. So there's many layers of that onion, so to speak, that you can go deeper and deeper into the layers of knowledge and the understanding of the diversification. Now, saying all of those, I'm a strong fan to say that you still need to have some level of cash flow attached to it. You've got to have some liquidity attached to it, you've got to have some contingency attached to it, you got to assume that the interest rate will go up for a period of time, a different period of cycle. So if I cannot afford my portfolio with 1% at a bare minimum higher level of the interest rate, then I'm over-leveraged. It means that I need to have that layer of the cash flow beside it, right? That cash flow could be form of your uh liquid cash, it could be shares management, it could be redraw facility, it could be some line of credit, right? But you need to have that layer of the mitigation. So diversification, I'm a big fan, really, really big fan. As long as we don't do diversification for the sake of it, we do diversification with a very clear understanding exactly what we're doing.
SPEAKER_03And I think we, you know, with our clientele, we deal with investors. Yeah. Your typical clients are, you know, anywhere between you know five to ten investment properties. And I think the statistic is 10% of Australians hold, you know, one investment property, and only you know, 1% hold five or more in properties. You've seen of a lot of people, a lot of clients. What separates the people that are in that 1%, um, maybe from a tax side, maybe a mindset side? You've seen many of these uh portfolios. How do they get there?
SPEAKER_00Yeah, really good question. Yeah, because what makes a successful person successful? Yeah. I suppose having the inquisitiveness in terms of sort of um just just having your mind open in terms of learning and adaptability with time, a layer of risk tolerance, saying that something will go wrong. Does the Murphy's law of average, right? Whatever is supposed to happen at some point of time, it does happen, right? But it's sort of not so much that we try to avoid every single risk in the world. We try to, but we know that some of the risk will come in. It's more in terms of how do we mitigate each one of the risks and how do we resolve each one of the risks, right? So those are the mindset. But you know what? If there is a one mindset that I will say, it's about action taker. Yeah, they're all action taker. Yeah. Many of them, if not pretty much all of them, they create a group, a team around it. Yeah. They have to have the right accountant who gives the tax and advice work, right? And in my uh in my view, is that more importantly, they need to have the right mortgage broker. And why? Because accountant can give you all the structure and pros and cons of the tax. Until you get the funding, you don't get the loan. So you need a good mortgage broker. They also set up say, okay, so I need an accountant, I need a good mortgage broker. Great. Ideally, we need an insurance broker who looks after all the insurance. What happens is the house burns out, right? So we need the right level of the insurance. We need the right level of the lawyers, right? And the convincing team, right? And we also need the right level of the uh account keepers, bookkeepers who sort of keep the record. Um we may need the bias agencies in terms of buying this. They have their mind open saying that, well, what are the costs with the bias agency, right? Bias agencies sort of quite easily sort of looking around with all the different bias agencies that are around. I think they sort of charge anywhere between 15 to all the way to 25 grand or or more that have sort of seen it, right? Very often you look into that cost and you sort of say, good Lord, that's quite expensive. And you know what? It probably is. But what those uh investors they do is that they have this sense of pragmatic wisdom. And the pragmatic wisdom, they sort of say, understand I'm paying $17,000. But if I get a property which is bare minimum, say $20,000 below the value, plus the time and the cost, is that that by itself in day one, I'm sort of probably break-even if not ahead to it. Uh, and what is the cost of missing things? What is the cost of experience? Someone who does it for years and years and years and years and does it 24 hours as opposed to me looking into some of those, right? They have this sense of pragmatic wisdom as such, right? But at the end of the day is that that those people who are very successful, I find them to be action takers and and I find them to be constantly learning.
SPEAKER_03Yeah, and I think, you know, go going more technical now in terms of uh finance. So Frank and I, you know, we have self-employed clients that come and they're very proud their accountant has saved them, you know, 50 grand on tax. Uh, and they've declared a zero profit in their in their business. And from our perspective, it said it's really good, you should thank your accountant because now you can't borrow at all. So I guess how important is having an accountant that is actually thinking, I guess, about investing and when's the time to save tax? When's you know, when's that question need to be asked? And how important is that teamwork?
SPEAKER_00Look, I think uh first comment which I want to say is that accountants are facts and figures. Yeah. So we don't we can't make up the numbers. The numbers are the numbers. Yeah. So we walk through within that layer of the numbers, right? We cannot play around with the numbers, change and manipulate, none of those things, right? That's not law. I was speaking to a client yesterday, and the client was like, Oh, can you please give me an accountant's letter saying that my trust is self-sustaining and it's profitable? I was like, I would love to. Problem is the trust isn't. So what do we do? And he was like, Can you still give the letter? I was like, No. The answer is I would love to, but I can't, because uh my license would be taken away, and you should not be asking me this. And even if you ask this, and if you do it, it would get audited from the ATO. Straight line. Yeah? Always, always, always, always a straight line. Doing the right thing doesn't have an exception attached to it. Yeah. So that's sort of from there that accountants are facts and figures. Very, very, very important, right? Now, within the facts and figures, Frank, is that there are things that can be done. And I'll give you an example. What other things can be done? I can do the financial set of accounts based on how large the client is on a cash and accrual basis. Yeah, that's fine. Under the law, we are allowed with cash and accrual. We can't change it every year. We can't manipulate that. We've got to be doing it for a commercial reason behind it. So I get that. Now, the tax and accrual basis means that accrual basis means that on the 29th of June is that there was an invoice of 30,000, which I genuinely send out that invoice, right? On a cash basis, I haven't received that payment on the 30th of June, I don't record it. On an accrual basis, I have done that invoice, I record that 30 grand. That 30 grand is an extra revenue. So if I use the DTI upset five, five and a half times, that 30 grand arguably gives us quite a bit significant additional level of serviceability. First example. Second example, yeah. That in terms of my PL is that we look into the PL and we say that, okay, so we've got a uh $5 million top line revenue, we've got lots of different expenses, we got a you know, 20% margin, net margin, and we've got a million dollar profit. Yeah. And you set up say, well, based on the circumstances, that sort of a steal doesn't work because of the client's circumstances. You've done well, you, Mr. Klein, Mrs. Klein, you've done very, very well with that million dollar, but it just finance-wise, it doesn't work. This is where the right accountant comes in. They don't manipulate the number to set up say, how do I make it from million dollar to 1.2 or $1.3? What they do is that they say million dollar is a million dollar profit being made. However, let's do analytics of that set of accounts. Now I'm coming back to you, Aaron, as an accountant saying, you know, this uh $1 million, which is your top line revenue, and you've got $4 million, which is your uh expenses being attached to it, and your net profit, which is sitting as a million. But rather than giving you that one million dollar as a net profit, what I do is that I sort of come back and said, break down that $4 million. Out of that $4 million, you know what? There was about uh $50,000, which was a one-off expense, which was one-off expense, which is being incurred because the client has relocated. Client has moved from location one to location two. And that location two, client has got a five-year lease, right? And there is some option. He's not going to change it every year. So it is a one-off cost. I give you a second example. I say, hang on, there's there's about 45,000, which is your depreciation expenses. And that depreciation expenses, which is that 45,000 uh depreciation, I set up say, well, Aaron, that is an expense, but within that expense of that um the 45,000 as the depreciation, can that be added back? Because it's a paper expenses, right? So now you've got a 95,000 extra service ability. Point number three as an example. I come back and say, Aaron, the client has paid the maximum super contribution. Under TSJ, the client was supposed to pay 15,000, but the client has actually paid 30,000. Yeah, client has paid 27,500. They paid 27,500, but they were supposed to pay 15,000. So there is a 12,500 of extra that perhaps one should be adding back. Yeah. So we do this, and the list goes on and on and on and on. Now, where I think the right accountant comes in is that one is that for us to have enough level of knowledge to sort of understand what are the addbacks. And second is that for us to sort of keep giving this pointers to you guys as the mortgage breaker side of it, Aaron, it is the same number of a million. But if I can draw and draw and draw, and this summation of that number sort of comes in in here, let's are let's argue, say it comes in for 200,000, then all on a sudden, Aaron, you don't have a million dollar serviceability, you've got a $1.2 million of serviceability. And that $1.2 million of serviceability makes a world of difference. So we don't need to go around and say, how do I get a client to pay zero tax? The client pays the tax whatever the right number is, but we need to give a story. And a story to the credit officer. And the story comes in with you and me, two of us together as the mortgage broker, as well as the accountant. We combine our knowledges, we give that a story. We give you the instigation, you create that a story.
SPEAKER_04Yeah, and look, just on that depreciation as well, now that you mention it, that's also something that we've probably got to be careful as mortgage brokers as well, because we need to ask the question when we see something like that. Is that actually all genuine depreciation or is any part of that accelerated depreciation? Because that will be looked at differently by the bank.
SPEAKER_00Yeah, and a good point. And you know what, Frank? That was my learning as well, right? Because there was a point, well done. There was a point of time that we were sort of because we can do accelerated depreciation, whereas under the rule that we can sort of write off everything, right? With all of our excitement, is that there was a point of time that we were sort of writing off things, that we're helping out the client. And with all my lack of knowledge and ignorance, I was going around saying, oh, don't worry about it. He can add this back, right? Until it went back to you guys saying, hang on, I'm so sorry.
SPEAKER_01I can only get back that much, right? So you're right. You're right.
SPEAKER_04Now you mentioned um that you would ask for an accountant letter to say that a trust was self-sustaining.
SPEAKER_01Yes.
SPEAKER_04Um one of the common things I see is that what often gets missed is that if someone has taken equity and lent it to their trust to borrow, how is how's the interest on that equity actually taken? Because effectively borrowing 100% plus cost of the property they're buying, right?
SPEAKER_00Such a good question. And such a good uh such a, I suppose, timely question, if I may use the word, right? Because I get that all the time. Yeah, I get that, okay. So I bought my property for a million dollars in the trust. I've only got about, you know what, about 600,000 as a borrowing, and and it's a commercial property, so my rental return is probably it's okay. And overall it's sort of almost self-sustaining. Yeah. So I've got 600,000 as sort of borrowing, and I'm sort of self-sustaining. If anything, I'm probably a little bit positive cash flow. What's the interest rate on 600,000? 7, 7,5%. You've got a 40 odd grand is the interest. And as long as your return is sort of higher, then 4.2% on that example, 40, 42 grand, 4.2 means that you're positive cash flow. So I'm not sure. Why can't you give a trust as a self-sustaining letter? I was like, well, what happened to the other 400,000 that you borrowed? What happened to the incidental cost, which is another 50 grand, so 450, right? Oh, I can claim that on my individual name because I borrowed on my individual name. The answer is no. I would love to, but the answer is no, because the rule is it is all about the purpose of the borrowing. The purpose of the borrowing means is that whatever the borrowing that you do, it's not the nature of the borrowing, it's the utilization of the borrowing. What have you done with that 450? On that example, that my client has borrowed that from the individual name, lend it over to the trust, and then utilize that as a deposit to buy it on the trust, means that the answer is the deductibility of that interest is on the trust. On my individual name, it can be a break-even, right? But on the trust is the one where it's deductible because it's the true nature behind it. Underlying cost, the purpose is the word that we use, right? The purpose is we use to buy this. And if you all on a sudden, if you use 105% on that borrowing, is that your trust becomes negative, uh negative cash flow, right? And it's not as self-sustaining. At times we get the question, oh, can we not claim it? And I was like, well, it's also falsifying the circumstances because he going to the bank instead of saying, well, I've only got 600,000, which is deductible, um, you you don't. You've got to hire. So yes, absolutely. The purpose is the one that we need to follow through. And and remember the last comment, if I may, is that anything which we do, we must do it saying that everything is subject to review and audit by their statutory authority. If it gets audited, is it going to pass? And if it's not going to pass, don't do it. It's not the right thing.
SPEAKER_04Yeah, now just connected to I guess borrowing the deposit to buy property. Yeah. If if you're someone that has the cash available, but you've also got the borrowing capacity to borrow, what's your view on the right approach there? Would you still borrow it?
SPEAKER_00Look, there's a different angle to answer that question. And I've got to be careful that none of this are financial advice here. And we say that every time we get a chance, I love it. And none of this are financial advice at all. Not at all. It's perhaps that if anything, it's an opinion, right? I mean, in one way you look into it and you sort of say, well, if I use that cash as a deposit, then on that example of a million dollars, six hundred, I'm borrowing, I've got a $400,000 cash, it would genuinely become a positive cash flow, right? And while you become a positive cash flow, it means yes, you can get an accountant's letter and you can go ahead and use that trust as a self-sustaining trust under the lease stock. We ignore it. We can go into more purchase. We understand that, right? But what you're giving away on that example is in my mind, is that arguably you're giving away that $400,000 of cash and sort of the bargaining power of that $400,000 of cash, let alone the bargaining power, we speak about the safety and the security of that $400,000. You know, old analogy cash is the king. It is the king, right? That $400,000 cash that you're sort of giving away. So the answer is, in my mind, is that as long as you look back into a very longer period of time and you sort of say your individual decision, these are all part of that bigger puzzle that you are trying to build, then there is no one answer. What is right to you on that bigger puzzle, as long as an informed decision is being made, that's the right decision.
SPEAKER_04Right. Is it also the case of if they do use that cash, they are actually for foregoing the future deductibility of that potential debt?
SPEAKER_00True. Uh true in the sense that, good question. True in the sense that on that example for a million dollar ride, is that you use 400,000 as a cash and he borrowed 600,000 is is is sort of your borrowing, right? And then what your comment is is that, well, if I go back to the bank and somehow I can draw down that 400,000, uh, it comes back to what would you do with that 400,000 in future. So you took 400,000 and you sort of say, I paid up my principal place of residence. Well, we can't claim that as a deduction because the purpose was the principal place of residence. You draw down that cash and he sort of say, you know what, I just reimbursed myself. My 400,000 cash, which I used to buy it, I've just drawn it back and I've reimbursed myself. He can't claim it as a deduction. Because he's starting with that property with the 60% LVR, you've just drawn down, and the purpose is to pay off you as a personal reason. So you can't. So you're right, is that unless there is a very specific subsequent objective of that redraw for another investment purpose, um, we would struggle to claim it.
SPEAKER_03I think on deductibility there, uh, we have a lot of clients, exactly what you're saying, going back, going to their property, revaluing, extracting the equity to then you know purchase subsequent investment properties. Can you just define clearly deductibility? Because we've got many clients, for example, say extracting equity. Some might be buying cars, some may be buying certain, you know, different uh uh commercial property businesses uh they might be putting into uh you know debt recycling, for example. Uh can you define clearly what is deductibility so that a client listens to this and goes, okay, I know this is deductible, whatever where I'm about to put my funds to.
SPEAKER_00Yeah. So ETIA goes through with a uh with a, I suppose, linear approach of the purpose, as we were speaking, right? That when we draw down a particular fund, what have we done with that drawdown? If that drawdown is being done in relation to any income production activity, then the interest arguably is tax deductible. But if the drawdown is being done as a non-income producing activity, then the answer is it's a private. I mean, one can go legislation and one can say section 8.1 of the Income Tax Assessment Act 1997, set that aside. Yeah, we sort of say that that's sort of the uh the purpose behind it, right? So that's where the deductibility comes in. Now, Aaron, if we look back into the investor side of it here, that ATO sort of looks into the rental property, and ETO said, what is the biggest expense for the investor on the rental property? It's the interest cost. So if there is a review and audit, is the interest is the one which always comes in as first in the sort of the consideration, right? And ETO knows it, that that's what people do. People buy a property, they draw down a fund, they buy a second property, they draw down a fund, they buy third and fourth and fifth. And you know what? The reality of it, in the longer period of time, it becomes convoluted. Yeah? Because by the time is that when you go into that 15, 16, 18 years of your investment journey and you ended up buying a whole bunch of properties, residential, commercial, in different structure, in the individual trust and corporate entity, maybe when you uh uh contributed on the super fund and you bought it on the super fund, whole bunch of different structure that you do, it does get convolated. Maybe he borrowed it, lend it over to her, she purchased the property, she borrowed it, lend it over to him, purchase property. So it gets convolated. So what ETO says is that the Australian tax system is a self-assessment system. Means that you do what you what you believe is the right, as long as you know that if ETO has got a full right to review and you can justify it. Yeah? So that's why what we say to our client, I say that always keep a track in terms of all of your funding. Keep your proper level of track, do a summary Excel, and underneath that summary Excel, you've got to have all substantiation. You know, how many times we go back to a client and say, give us that interest on this particular loan? I can't because I've just refinanced. Well, before you refinance, print out all of your statements, keep that as a substantiation. Yeah? So your loan was about 600,000, but now you're giving us 750. Yeah, yeah, I've done an equity drawdown. Yeah, good. But what have you done with that 150? Oh, yeah, we wanted to go into the holiday.
SPEAKER_01Sorry, can't buy a butt.
SPEAKER_04Yeah. So just on that note, um, when someone has refinanced, just a little tip, your mortgage broker most likely has collected all your bank statements. So if you ever need those, collect them.
SPEAKER_00Yeah, good point. Good point. Good point. And good point.
SPEAKER_03The deductibility there as well, people need to be aware. If they've got an investment property paying principal and interest, only the interest permanent. 100% right. Not the principal.
SPEAKER_00Yeah, and 100%. It's the principal permanent. It isn't, right? And the deductibility, you know, I use the term saying that the uh general deductibility and maybe some of the sophisticated deductibility. What's the general deductibility? Well, we all know the interest, we all know council rate, water rate, estrata, cost repairs and maintenance, right? Where it becomes a little bit more uh tricky is that when a client buys a property, yeah, you get a solicitor settlement adjustment. As part of the solicitor settlement adjustment, there's a whole bunch of adjustments being done. So you bought that property in, say, October, yeah, and the vendor who sold that property is that vendor uh has paid the counsel rate for the 12 months. So you instead of coming into me saying, no, no, there's no counsel rate I paid. Uh, you did. It's just that you haven't paid it. You made that adjustment as part of the solicitor settlement adjustment. It means that you paid it as part of the buying cost. So we as an accountant, we extract that information from the solicitor settlement adjustments, right? That what are the counselors, what are the water rates that you may have paid? You may have some borrowing cost. So when you have the uh loan and you pay the LMI, lender's mortgage insurance, that borrowing cost we claim it over five years or terms of the loan, what is uh whatever is the lesser. There are some substigated borrowing costs, such as your cost involved in terms of the uh the building and the pest report, yeah. Your loan application fee, all of those we can claim it as a borrowing cost. Yeah, there's all those bank charges and so forth that you did, right? Your solicitor has charged you a $2,500 fee. And you sort of say, well, that's capital, isn't it? So I really can't claim it. I claim it when I sell it. Uh yes and no. A portion of the two and a half thousand the solicitor has utilized in relation to getting your mortgage. So if the solicitor subdivides that two and a half thousand, saying that five hundred dollars of my fee was incurred in terms of assisting of getting the mortgage and reviewing the mortgage, and two thousand was being used in terms of buying the property, that two thousand would be capital, but the $500 would be tax deductible as a borrowing cost because that's being utilized over that period of time. On the other side of the equation, client comes in and says, Look, I've just changed the carpet and I spent $5,000 and I'm claiming it. Here's the proof. You can't deny it. I've got a receipt. Yeah, true, but what is the useful life of it? So on that example, it goes the other way around. Yeah. So, yes, they spent five grand, but you've got a carpet which has got a useful life of, let's say seven years as an example. You can run that carpet for seven years, right? And if you run it for seven years, I can't claim everything up front. Yeah? I got to depreciate that over a period of time as such. So if I summarize all of those points, it comes back to the point that you've got to have the right accountant who's sort of not so much talking, sort of who watch the talk, right? And the right accountant also needs to have a system and process. In our office, as an example, when we do the return, we've got a concept called three pairs of eyes. Someone drops the return. Uh, we always get a senior uh to review it or a manager to review it, and then we always get a partner to review it. So by having that three pairs of eye, in theory, we should not miss much. Then what we do, we don't email that tax return to the client. We pick up the phone saying, uh, John, we've done this tax return. Can we go through the numbers with you? We've done that, that, that, that, that. Have we missed anything? This is where John sort of says, hang on, I just paid that other uh repair cost that you haven't included. How did you pay it, John? I paid it by myself. Oh, I'm so sorry, I didn't give it to you. Oh, okay. All right, good, not a concern. Give it to us and we claim it. Our accountant may ask the question to John. John, you've given us uh three lots of cash. Council rights, but you gotta pay four, right? What is the fourth one? Oh, did I give you three? Sorry, I may have missed it. Here's the fourth one, right? That communication is fundamental. And how many times that I see many of us, many accountants at times, do the return, send it out to the client. And you know, I mean, how many clients actually goes up there and cross-checks every one of them? It's our responsibility to sort of cross-check it. And that's why we have that three pairs of eye and the client discussion as well.
SPEAKER_03Just to bring this to a controversial question.
SPEAKER_01Controversial. I don't like my question. I went black and white, can you see?
SPEAKER_03I know you like answering these kind of questions, but look, there's a lot of buzz going on with social media, what's happening? This term, dirty word, debt recycling. And so we have a lot of clients coming and say, look, we want a debt recycle. You know, we've got a 500,000 home loan, we've got 500,000 sitting in the offset. You know, our buyer's agent told us to do this. From an accounting side, please tell us the risk, please tell us everything uh around this term.
SPEAKER_00Debt cycling as a concept is illegal.
SPEAKER_03Full stop. Full stop.
SPEAKER_00I'm sorry. Unless and until you genuinely have a practical reason behind it of doing it. Unfortunately, anything which sounds to be too flashy and really is Einstein's invention is that it is probably flaw. Because if it were really an invention, it probably would have been done by now, right? With all those different people. The ATO has got this rule called part 4A, which is a tax avoidance. Tax avoidance means that if we do something which is purely 100% for a tax reason, with no commercial reason behind it, then it is not within the spirit of the law. And while it is not within the spirit of the law, it means that it is not legal. That's what the ATO says. But if you have got a genuine commercial reason behind it, as long as you can prove you've got a commercial reason behind it, then there is a then there is a tax deductibility. I'll give you an example of a uh I'll give you an example of a Joe and a Mary. Make names made up, of course. Right. Joe is sort of the uh is set up the person who set up says, you know what, uh that I've got a um uh $500,000 as a cash and my home loan has got about $500,000 mortgage attached to it. You know what? I've sort of decided that I'm gonna pay off that home loan. Yeah? Mary does the same. Mary set up says, I'm gonna use my $500,000. Mary also has independently $500,000 and got a $500,000 home mortgage, and they both paid it off. Now Joe then sort of decides, you know what, I've got uh Frank coming up with this wonderful mortgage opportunity. I'm gonna borrow $400,000 out of that $500,000, use that as a deposit, and buy that property on the trust, as we discussed. And Mary sort of does exactly the same thing, Joe and Mary, right? Mary does exactly the same thing. Mary also re-borrows that from the principal place of residence to buy that property. Now the question is, is it tax deductible? Right? They both have done exactly the same thing. They used $500,000 to pay off their principal place of residence. They both borrowed a $400,000 out of that $500,000 and used it to buy an investment property. Is it tax deductible? They both have done exactly the same thing. If Etio does the audit, Etio will ask the question, what was the intention of Joe and Mary on this case? If Joe always his intention was, is that I'm going to pay off the home loan, so my non-deductible loan absolutely disappears, knowing that loud and clear, I'm going to use that money the next day, or as within a certain period of time to buy an investment property. And if that was always the intention, then ATO will say, it is not in the spirit of the law. Joe, you are wrong, unfortunately. Yeah. If the ATO sort of comes in and ATO sort of says, Mary, we understand you have substantiated us enough that you are always intending to pay off your home loan. It's just that your intention has now changed because of a change circumstances that you've got an opportunity where to borrow your funding to do an investment property, you are doing it. Then in your case, Mary, it is tax deductible, right? So you can see that it all comes back of doing the right thing. Yeah? Not in the paper, but in the spirit. That's all the ATO says. That we as an ATO, as the authority, our responsibility is to make sure that you do the right thing, we stay as the watchdog, that you are doing the right thing. So on that example, that Joe was, his intention was always to buy the investment property, but he wanted to be smart, he wanted to pay off his principal place of residence to redraw, ATO will say you were wrong. Mary, who actually wanted to pay off the principal place of residence, but how circumstances changed, she borrowed the money to buy the investment property, Mary's would be deductible, right? So it comes back to that underlying nature. Where I've got a little bit of a struggle, is that many of the professional they've really taken it to a really deeper level, and they are utilizing that is to say, this is so smart, keep doing it, pay this off and do this as such. And they're missing the point that ATO can question the intention. And the intention, as much as it is subjective, is that ATO has got many benchmarking that ATO can prove it. What was your intention? So I'll give you one example under different circumstances. I've got a client who thinks he's a very smart right, and I think he's very smart, but he's slightly out of law. So what the client does is that the client sort of says that I'm gonna buy a principal place of residence, I'm gonna do a whole lot of renovation, and I'm gonna sell it. It's tax-free. And I said, yeah, that makes sense. Uh and then he started doing that every six months. And then I sort of say, hang on, if you keep doing it every six months, Etio will question you. Etio will say, you never had an intention of a principal place of residence. You only bought that home so that you can do the repair and sell it. You are a flipper of a property. It's just that you're changing your electoral address and trying to prove that you're a principal place of resident, which is a smart, right? But it's not within the law.
SPEAKER_03Yeah, I think that's that's really key. It's always going back into the spirit of the law, which is really important. And over your years, I imagine you've seen many audits and things, you know, happen through the ATO. Um, just before we wrap up, Manzural, there's a bit of fear in the market at the moment. You've been in the property game a very long time. You've seen GFCs, you've seen financial crisis, you've seen wars happen through your journey. What's your personal opinion of what's happening at the moment? Should people be scared? What should people ground themselves in if they're looking to invest in property?
SPEAKER_00You know the beautiful of making a prediction? You always got a 50% chance of getting it right. 100%.
SPEAKER_01You always got a 50% chance. You cannot have less than 50% chance of getting it right. So I'm going to go with my 50% probability. Yeah. I can get a 50% chance of getting it wrong, but we'll set that aside.
SPEAKER_00Yeah. Okay. So I think I think we start with the preface, uh uh Aaron, that this is 2026. And why do I start with that preface? Is that then we'll look back and say that that was the circumstances. Yeah. We're sort of right in the middle of it, uh, Frank, is that there is a bit of a war. Whether the work is going to be short-term, long-term, we don't know. Yeah. We're right in the middle of it where we sort of saying, well, uh, the inflation seems to be a bit of a challenge at the moment. Yeah. Uh see, last year when we were in 2025 at the beginning of last year, we were like, this inflation is done. We got it sorted. We've done so well, right? Inflation, we sorted this out, interest rate is going down. And then we realized in the second half of the year is that good lord, this inflation is very sticky and it's coming back. And we started increasing the interest. And we were sort of saying, okay, look, a couple of increases of the interest early this year. We'll have just one or two, then we'll get this sorted, and then we'll sort of come back and reduce the interest rate as such. At least we knew that there would be a war, right? And with the war side of it, is that now everything is sort of getting increased in the price. And if the price gets increased, then you do expect, unfortunately, that the interest rate will increase. But we're living at a point of time which is uncertain. Now, again, as it is in life, is that I can take this. Is this class this is a perfect example, right? Is it half full or is it half empty? Half full. Depends on our perspective, right? I would love to say this is half full. Why? And why do I say it's half full? It is half full to me, right? And why is it half full? Because you, as a property investor, you as an investor, is that you always do against the herd mentality. Because your mindset, my view, is that for a very long period of time, you're not doing it for the next six months to sort of make profit or lose profit. Yeah? You're doing it for the next 20 years, 30 years, as a long period of time. It's a lifelong investment journey. And in the lifelong investment journey, everything balances out. Point number one. Point number two is that one argues is that if you buy it, if you do the investment at a point of time when no one is doing the investment, you have the biggest level of leverage. You've got the more bargaining power. As long as you do it in the right way, i.e., to make sure that if the war continues, if the interest rate increase, if we have stagflation, we don't want a stagflation, if we have a stagflation, if we have all of those and if that's sustained for a longer period of time, do we have enough buffer to keep us running for a long period of time? As long as your safety and your measurement is there, don't worry about the noises. Stay true to your goals and objectives and look into the longer term.
SPEAKER_04Yeah, some good takeaways there. So this is clearly not going to be the last time in our lifetime that there's going to be some uncertainty. Yeah. But you know, as long as you understand the risks and you put those mitigants, you talked about the role that liquidity plays in uh helping you hold on during the hard times. Um, and lastly, um, you know, life tends to reward the ones who act.
SPEAKER_00So that's right. That's right.
SPEAKER_04All right, it's been a pleasure, Munzeru.
SPEAKER_00Thank you very much. Thank you, Frank. Thank you, Aaron. Thank you. Thank you, brother.
unknownThank you. That's it, that's it, that's it.