Login
CGT shake-up: Why manufactured cash flow strategies may come back
Following reports that the federal government may be considering changes to the capital gains tax (CGT) discount, investors may reconsider their strategies, opting for manufactured cash flow schemes rather than selling their assets.
According to Tailored Property Group co-founder Michael Kowalczyk, if the CGT discount were halved from 50 to 25 per cent, many investors would likely hold onto their assets longer to avoid higher taxes.
“From that sense, there is the incentive of making set improvements for those who can hold throughout and don't need to sell,” he told SPI.
In light of the changes, investors may seek to improve their properties with value-add methods before either selling the property or increasing the rent to boost cash flow.
Kowalczyk said the right course of action depended on the investor’s strategy and their portfolio, but most investors should opt for a long-term plan focused on boosting rental income.
Boosting value through renovation
Kowalczyk said investors could add value to their properties through cosmetic improvements or structural upgrades, which could yield quick equity wins.
The improvements could include simple tweaks, such as painting, flooring, and lighting, or larger changes, like adding extra bedrooms.
However, before expending their properties, Kowalczyk said investors should consider the area's demographics and whether adding extra rooms would be beneficial.
“Then you've got that as an option to manufacture more growth and more equity, and also in turn, increasing your rental return from that of a three-bedder as opposed to a four-bedder,” he said.
“You also need to be able to navigate and project manage relevant trades and so forth,” he said.
“But if you're going to go to certain extents of doing it yourself, whether or not it's the best use of your time relevant to the policies is another question.”
Short-term investors affected most by CGT
According to Kowalczyk, CGT changes would mostly affect investors looking to hold property for the short term before renovating and selling to make a quick profit.
“It mostly affects the short-term flippers, those who want to get in, get out or ride particular markets in a short period of time because they’re incentivised by the fact they get that 50 per cent capital gains discount,” he said.
He said it wouldn’t only impact flippers and people who transacted more frequently, but would reduce the amount of stock in the market, which was already at record lows.
“Ultimately, that will drive the supply side lower, which will increase the demand in rentals and drive rents up.
“So from that sense, there is the incentive of making set improvements for those who can hold throughout and don't need to sell for that particular aspect.”
Long-term investment strategy triumphs
Kowalczyk said that, based on what he had learned in his time as an investor, building a long-term strategy with properties that provide sustainable cash flow was the ideal scenario.
“You don't really just want to get into a property for the sake of flipping it, mainly that's because there's high transaction costs anyway,” he said.
“If you want to build a portfolio for the long-term, the smartest way to go about it is buying the right types of assets in affordable markets with the ability of value add embedded in it.”
He said that by thinking long term, investors would see results, allowing them to build and scale their portfolio faster without paying transaction costs such as CGT, stamp duty, or other fees.