In this episode of The Smart Property Investment Show, Phil is joined again by accountant Munzurul Khan to go through the questions you may consider discussing with your accountant and the questions you’re too embarrassed to ask.
Tune in to find out which structure is best to buy in, to understand your own circumstances before buying a house, to know how the ownership of a property works when referring to names, to be aware of the risks associated with having two names on a mortgage and title and which one is preferable to new home buyers.
In this episode, you’ll find out: the right balance of LVR, the ins and outs of diversification and the right time to invest into other asset clouds.
You'll hear all of this and much, much more in this episode of The Smart Property Investment Show!
If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: Facebook, Twitter and LinkedIn. If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!
Announcer: Welcome to the Smart Property Investment Show with your host Phil Tarrant.
Phil: Hello everyone, it's Phil Tarrant here, I'm the host of the Smart Property Investment Show. Thanks for joining us today, it's great to have you on board as we explore how us/we as property investors can do what we do better and create wealth through property. Now if you haven't listened to it yet, I originally caught up with my Accountant who helps me navigate property investment from a financial perspective. Munzurul Khan from Keshab Chartered Accountants. We did what we like to do and that's our regular update on our portfolio, and we shared a lot of numbers in that podcast. So, make sure you go and find it, it's must listen to. The conversations I have with Munzurul is often the most popular podcast we do, because I think a lot of people like to jump in to my shoes and start thinking about the way they view their portfolio a little bit differently.
What I've done, I've managed to persuade Munzurul to come back into the studio, to give me a little bit more of his time. He's a busy guy. Just to pick his brain around the type of questions or issues that you should be either considering, discussing with your Accountant, or these might be the questions that you're too embarrassed to ask your Accountant because you think they're so simple. So, Munzurul's back. Munzurul, how you going?
Munzurul: Very good mate, absolutely. Thank you very much, thank you for having me.
Phil: So, I've managed to jag half an hour from you to chat through these things, and I'm going to frame it as The Five Questions to Ask Your Accountant. Or, The Five Questions That You Want to Ask Your Accountant But You're Too Scared To.
Phil: Either/Or, whatever works, but I think all of our listeners will have either thought this at some point, or are currently thinking it right now, or it might just be a good refresher. This is where a good Property Accountant can come in, so question number one for you Munzurul, and we've got about five minutes to answer these each, and I know you can probably give me a half hour response for each of these so you're going to have to keep it tight and concise. What Structure do I buy in?
Munzurul: Very good, very good. That's probably one of the most common question that I hear, that "What Structure that we buy?" The reason why that question is so wide question, but at the same time so relevant, is because there are so many Structures, right. So, one can buy on his name, one can buy on her name, one can buy it on a partnership so to speak, on his and her name. One can buy it on a Trust, and there are different level of Trust. So you've got a Family Trust, Discretionary Trust, you've got a Unit Trust. Do I buy it in a Family Trust, do I buy it on a Unit Trust? One can buy it on a Corporate Entity, one can buy it on a Joint Venture, one it can buy it on a Self-Managed Super Fund, one can buy it on a Special Purpose Vehicle.
So, there are so many Structures, and that's why the question comes in. "What Structure do I buy?" And it's a question that I hear all the time. The answer to that question is, that it depends on your individual circumstances. So what you must do, is that before you sort of sign away any contract, you must speak to your Accountant saying, "You Mr. Accountant, Ms. Accountant, based on my circumstances, what would be the best Structure that I sort of purchase?"
So just to give you a few examples as an example, is that someone is buying the principal place of residence. So one probably argues that, well this is a first house, you're buying your home, your principal place of residence, you probably should be buying it. I'm generalising, but you probably should be buying it in the lower risk providers name. So the house is safe, right. So, if we just say the wife is sort of in the open world, and earns quite a bit, the risk is very high, and the husband's income is more or less reasonable. On that example, it would be bought on the husbands name, because it's the lower income earner, his risk is rather low. So that's the principal place of residence, the Golden Rule is that whoever is the lower level of risk, should own the principal place of residence.
Then we go to the investment property, and we say that, "Whose name do we buy?" Well it depends on how the property is, right. Say if the property is more of a negative viewing, if the property is more sort of your tax benefit that we're sort of expecting, buy that on the higher income earner so you get more tax benefits. But it depends what you're doing with that property, right. Are you sort of converting that into a house plus another property, let's say another granny flat, so it becomes more of a positive cash flow. Then you buy it on the lower income earner.
It could be more of an advance investor, say you've got about four or five or six or eight property's. So you might say, "Well, which name do I buy?" You might consider more of a Trust, because Trust has its own benefit. It gives you the asset protection, it gives you the longer term tax planning. It takes away the land tax benefit in some of the State, it also gives you the negative I suppose, that some of the losses on the Trust, if there is, you can't distribute the losses. Losses stay within the Trust, but you might make a conscious decision that I want to buy it on the Trust.
You may be even more advanced investor. So you say, "Well, I've got my Self-Managed Super Fund, I've got a bit of funding, and I'm sort of at a stage where retirement is not very far out, I'd like to buy it on my Self-Managed Super Fund." It could be a big Joint Venture that you're doing, in that case you buy it on a Unit Trust. So the answer is, that while there is no one answer, and there are so many different options as such, your Accountants must run through your circumstances, and sort of find what is the best Structure to buy.
Phil: So you've probably just confused a lot of people Munzurul. Fortunately, I'm familiar with all these terms that you spoke about, some more than others. For our listeners, go to smartpropertyinvestors.com.au and just Google all these different things and you'll find out how to cause around them, when to do what, we'll do whatever. But the key point I would make Munzurul, and this question is that, and I'm going to say as a disclaimer, what we're talking about here is very general stuff.
Munzurul: That's right, that's right.
Phil: Everyone's circumstance is different, so what we talk about now is very generic and hopefully it's just information stuff. That's a disclaimer to what you're talking about, is that everyone is different. Only by truly uncovering people's financial position, financial objectives, financial maturity, financial capabilities, and financial goals can you actually determine what to buy assets in. Whether it's property or shares, or whatever it is.
Phil: Only then can you actually understand how to hold the assets.
Munzurul: As a rule of thumb, absolutely, 100% agree, and as a rule of thumb that if one wants to be really, really generalised as a Golden Rule of thumb to start with, initially you buy it in an individual name, whether it's his name, her name and you build a few properties on individual names. Then you potentially go in to a Trust Structure, and once you have a whole bunch of properties in the Trust, you might consider a second Trust as such. But all should leave it nice and simple initially. Individual, potentially over a period of time, Trust.
Phil: Okay. So, the second question I'm going to dove-tail in to this first one, so question number two. I'll try and articulate this question as easy as possible. Whose name do I put on the Title of a property? So we're talking about the Structures available to hold assets, but let's just say we need to buy a family home, or we need to buy an investment property, and we need both people's service ability in order to secure it.
Phil: So therefore, our mortgage will be in two people's names. Can the actual ownership of it, be in one person's name? How does that work?
Munzurul: Yeah, very, very, very good question, and a common question that I hear all the time. That "My bank is sort of forcing us, or sort of raising us, that we need to have both my as well as my partner's name in terms of the mortgage and because we both need to be on the mortgage as part of the loan, we both also need to be on the Title as such". Perhaps it is one of the meet that you both need to be on the Title, the answer is that you both don't need to be on the Title. You could choose only him to be on the Title, or her to be on the Title, at the same time both being on the mortgage as well.
And the reason why one probably argues, one probably suggests that, that's probably a preferable approach, is that as soon as you have both of your names in to the Title, you bring in a couple of, I suppose, disadvantages. One is that both of your individual risk portfolio, is being brought back in to the asset. So what that means is, I go in to the open world, something happens to myself, some level of litigation. Well that property is subject to litigation. My partner goes in to the open world, something happens to her, that property is also subject to litigation. As opposed to just being on my name, means that the risk is a little bit lower. It's one risk as opposed to two risk, right.
So from a risk point of view, is that ideally, it should be on one name, and you can do it. Also, from a land tax point of view. As an example is that, you've got a certain level of land tax threshold. So we as an individual, we receive a land tax threshold, but as soon as we buy the investment property on a joint name, the [inaudible 00:08:37] does is that constitutes we are on a partnership. So on that example, is that rather than me having one amount of threshold, and my wife having one amount of threshold, that is two amount of threshold, we are only entitled to one threshold.
Phil: So they attribute the entire amount of land tax, even though you're only 50% holder because you're half of the Title?
Munzurul: That's right, because the land tax office sees that you are on a partnership, which is sort of a land tax entity so to speak, even though you are not, but it's a land tax entity. So that means you pay the land tax rather quickly, right rather quickly that you pay the land tax. Because of those couple sort of disadvantages such, one is a little bit from a tax side of it, second is from a little bit of asset protection point of view, is that it is always preferable that you buy it on individual name as opposed to combined name. Let your mortgage be on a combined name.
Phil: Okay. So, just to clarify. Two people are on the mortgage, one person is on the Title. If that one person gets litigated, they don't litigate the other person on the mortgage. They're untouchable. It's irrelevant.
Munzurul: I suppose nothing is ever being 100% guaranteed, but what you've done is you've sort of created a bit more mitigation.
Phil: Okay, good. That was question number two. So question number three Munzurul, what's the right balance of LVR? Now, for our listeners who are unfamiliar with the term LVR, it means Loan to Value Ratio. So, how big is the asset and what is the debt against it, is Loan to Value Ratio. Our portfolio, and we spoke about it when we last got together, it's about 64% LVR, which we're comfortable with. Some people like 80%, some people like 90%, some people like 50%. So, what's the right balance in LVR?
Munzurul: Yeah, good question again. The answer to that question unfortunately is not that there is one answer to it, right. It depends on the individual circumstances. What is the right balance of the LVR? So when someone sort of asks that question, I sort of say that, "Well rather instead of answering this question, let's take a step back and let's understand where are you at the moment. What's your income? What's your asset value?" and so forth. So I understand your financial circumstances. Then one sort of says that, "Well, what are your goals and objectives? If this is where you are financially, and this is where you would like to be financially, what's the time frame?" The longer the time frame, means that you can afford to have a lower level of LVR, that means your purchases are rather slow, but you've got a longer time frame so you can do this.
But if your time frame is rather short, then one suggests that perhaps your LVR needs to be a little bit higher, right. Naturally higher the LVR means higher the level of the risk. Lower level of the LVR, means lower the level of the risk. So one should also ask the question that, "What's your risk at the time". So how experienced are you as an investor. What's the level of the buffer that you have? So if the interest rate sort of increases, how much can we afford to sort of pay, that sort of the interest rate increases. If the tenant do not pay for two or three months, what do we do? What's the level of the buffer.
So as long as you've got some of those mitigation out there, as long as you've got some of the uncertainties in your mind, and possible mitigation of the uncertainties, the LVR arguably can be a little bit higher. What are some of the Golden Rules, again there is no one Golden Rule as such, but what I see from my experience is that the investors, when they start initially, they don't mind going a little bit of a higher LVR. They go a little bit higher level of LVR because that give them a little bit more access to a bigger fund and bigger level of growth asset. And yes, they make a conscious decision at time, saying that, well if I go over 80%, then I might pay the LMI. The Lender's Mortgage Insurance, an extra cost that I might pay. But depending on how much you're purchasing, right.
So if you sort of buy a lower level of property, say $300,000 - $400,000 purchase, the extra cost is rather low. But if you're buying a million dollar purchase, as an example, you're LMI would be about $35,000 - $40,000. So, that example of a million dollar purchase, that one probably suggests that you don't go to anything over 80%. But a lower purchase, as I said $300,000 - $400,000, if your risk profile is okay, and based on your goals and objectives, you might wish to go a little bit higher than that.
So some of the criteria, one of that your age bracket, makes a decision in terms of your LVR. Number two is your risk profile. Number three is your investment goals and objectives, and the time frame and the type of the property that you buy. So your home, as an example, I would strongly argue that perhaps the LVR would be rather low. The investment properties, one argues that well, even if it's a little big higher, everything is tax deductible.
Phil: Okay. So, LVR is the ratio of debt over the asset, but the LVR position of your individual properties and also your collective portfolio, also has a cash flow consequence. So, the higher the LVR means the higher the debt, which means that the more you need more cash to generate to service it.
Phil: Often the rent might not cover the debt and other payments, therefore you have a negatively geared portfolio, which has some tax benefits.
Phil: So, listen shouldn't just be thinking about LVR as in an equity position, they should be thinking about it as, how the LVR on a property or portfolio affects your capacity to keep growing because the cash flow consequence of holding a property.
Munzurul: Absolutely, absolutely. I suppose the calculation needs to be done instead of all-inclusive manner as well. So what that means is, that if I'm borrowing at 80% one probably should not be only sort of take 80% of the purchase price as our loan and mortgage and interest cost. One probably should explore that a bit, that where is the balance of that 20% coming in. Is that a genuine cash, is that being acquired and extracted from my principal place of residence. Either way, there is a cost involved to it, right. So in terms of that calculation of the cash flow, I agree, and the calculation of the cash flow should be done at 100% of your mortgage, even with the fact that you borrow 80% and perhaps even at 105%. So you add in all the incidental costs, right. That gives you the true, true, true cash flow. Rather conservative, but the safer.
Phil: You'd remember these days and those rules, back in the heady days as the early 2000's were. Banks were happy to lend 103% of the value of a property.
Phil: So, you would get the deposit, plus 80%, plus another 20%, plus another 3%. So, the basis was that, property is becoming valuable so quickly, that they're happy to lend you 103%. It's absolute madness.
Munzurul: It is absolutely madness, because whether the bank lends you and you're the sort of person that you're lower risk, while you look through the macro-economics as such, what you are being allowed to do it, doesn't necessarily mean that is the right thing to do in to your circumstances. So it is absolutely madness, absolutely, absolutely. You're not leaving yourself any buffer. You're not leaving yourself anything in terms of potential price correction, in terms of the increase of the interest rate and so forth.
In my sort of mind, in an ideal wish list, is that one probably starts with a little bit higher LVR initially, but over a period of time, our first target should be to go back at a bare minimum 80% LVR and then progressively move lower than 80%. So if you go in to that 70% over a period of time, if you go in to that sort of 65%, means that you've got about 1/3 of the equity and 2/3 of the banking funding, so there is quite a bit of, I suppose, buffer.
Phil: Yeah, and then over time, that gives you opportunities to draw down on that equity and use that to keep funding your portfolio, but within a framework of your risk confidence level to sit between 60 and 80. You might tip up and tip down, and tip up and tip down, that's what people do.
Munzurul: Yeah, and that's fine. That's okay that in terms of that we sort of tip up a bit, but again it sort of comes back that, what is that objective of tip up, right. So as long as that objective of tip up is to build another growth asset as such, then that's a good debt. But if the objective of that sort of tip up is that we take away a bit of funding and we go away and do other things, and we have a little bit of fun, that is a bad funding.
Phil: Good, okay. That was a good question, number three, Munzurul. Question number four, diversification. Why do it? How do you do it? When do you do it? And what do you do with it?
Munzurul: Well, diversification. All of our eggs in one basket, a different basket is the question, right. So what do we do? How do we do it? When do we do it? And what are the strategies and so forth, right? The comments, sort of the argument that I hear very often is, can you possibly have diversification with properties so to speak? It is a one asset class. It is really, a one asset class. There is no diversification. That's one argument. The contrary to that argument is that, property, while we look in to it from an umbrella view, that it is one asset class. But there are many asset class within that one asset class.
So to start with, you sort of say, well you've got Residential Property, you've got Commercial Property, you've got Industrial Property, you've got Development Property, you've got Special Properties. So you've got a whole lot of different types of properties. Then you sort of say, diversification point of view. Your diversification is also based on different States. You may have investment, as an example, in some distance of the States. You've got New South Wales, you've got in Queensland, you've got in Victoria, you might have in the Western side. You've got in Western Australia as an example, you might consider a little more of a cash flow side of things than Adelaide is, then Tasmania and different places as such.
So diversification could be within that one asset class of different sub-class, so to speak, as well as different level of the location. Very important, right. Why is it very important? The reason why it is very important is that from my experience, from what I've seen, is that over the cycle when property moves, is that not necessarily each estate moves at the same time. So New South Wales, one probably argues right now, at this stage is probably getting rather expensive. Then one sort of looks in to Queensland, and one sort of says, well the rental return is still about 5, 5.5, 6%, depending on where you sort of purchase. So there is a bit more rental as such, right. And Victoria, one sort of says again, depending on where you're considering 4 - 4.5% perhaps.
So you can see that the return are different, but this 4%, this 4.5 % is 6% are statistics that we share. That will change at a particular point of time. At a particular point of time, your Queensland would only be about 3 or 4%, and your New South Wales could be potentially 6 or 7%. How do we know? History has a habit of repeating itself. So in an ideal world, is that if you have a little bit of investment in to all of those different estates, over a period of time, the States where you see all the fundamentals are there. The longer period of time, the capital growth is there, simply because that infrastructure has been built, the population growth is there, and the jobs are there. So if those things are there, in longer period of time, your property should increase in value. If you have those properties in different level of estates as such, that gives you the diversification.
Then one can sort of consider is that, "Well, do we go even more substigation of the diversification?" So I've got some investors as an example, they've got a whole bunch of residential properties. What they sort of say is that, "Well while the growth is fantastic, but I don't really have as much cash flow." They moved in to a little bit of Commercial properties on the side, and mind you, commercial properties has a strong negative as well, that the growth is not so much based on other matters. Growth is being based on how the rent increases. Commercial property arguably quite a strong level of rental return, but when you don't have a tenant, you might not have a tenant for three or six months, so you need to be prepared for the three or six months.
Some of the investors may be willing to prepare it, and in their mind, that could be a form of diversification. So there's no question, diversification is absolutely essential, and in my view, while property is one asset class, but there are many, many asset class and there are many location that one can diversify and one must.
Phil: So Munzurul, you're reasonably unique in the Accounting space in that a lot of Accountants, and also sort of Financial Planners, typically don't go down the property path. They typically make recommendations of investments into to the rest of the classes like Super Managed Funds, crazy schemes like planting trees and benefiting from it. All these-
Munzurul: Buying emus and buying the cows in India. I've seen it.
Phil: Absolutely. So, your pro-property, right?
Phil: Obviously you frame that response in a property context, and you said and I agree with you, there's different types of assets available in property but it's all property. I can't remember the numbers, I get them all the time from Abu Gatta, I think 6.7 trillion dollars is the value of Residential Real Estate.
Munzurul: That's right.
Phil: In Australia. Super's 1 point something trillion, I can't remember the numbers. But Residential Property, far outweighs anything else. The value of equities on the Stock Exchange far outweighs the value by considerable margin. So when should you get out of property? Or, when should you also be investing in other asset classes as well as property? Cash, Bonds, whatever it is.
Munzurul: Okay. So there's two side of that question, right. When should you be out of the property and at the same time as when should you be investing on some other asset class if you do? The answer to that, the second question is, that when should you be investing in other asset class? It depends on your risk portfolio. It depends on your goals and objectives and that could be that all along you've got a different level of asset class all along. So you've got some properties, you've got some shares, you've got some Managed Funds, you know you've got your diversification.
I've got a whole bunch of clients, as an example, that they would never use this Super Fund as a Self-Managed Super Fund, because they want to leave that in to the invested fund, have a little big of Managed Funds, have a little bit of Shares. That's their safety, that's their security, that's their liquid level of asset, and that's fine. I've got a whole bunch of investors who sort of says that, "No, I've taken the financial planning advice from a Financial Planner and I want to set up my Self-Managed Super Annuation Fund and I want to buy investment property." Maybe that's okay as well.
When do you invest in to other asset class? I think my, sort of the Golden Rule, when you understand it. When you are comfortable, and when it comes back to your goal. So we don't invest for the diversification sake as such. Diversification is great, but diversification has to have a logic as well. The logic is, yes, as long as I understand those asset class, as long as the other asset class falls in to my wider goals of my own personal objective, then that could be at any time that we sort of invest as such.
Munzurul: And in terms of the exit plan I suppose, Phil my apology, you sort of asked that question. When do we exit?
Phil: That's a big, big question. So, well touch on it very quickly.
Munzurul: Not a concern. It comes back to your individual goal. What is the passive source of income that you are after in terms of your retirement. That could be any dollar value. You come up with that dollar value. I need $100,000 dollar for us to retire, from our point of view. So as long as your portfolio is providing $100,000, you have reached in to your retirement goal. Reaching in to the retirement goal also doesn't mean that we exit from it, but at least you've got a choice.
Phil: So what you're looking to achieve in retirement will determine the type of assets you want to hold, to deliver you that passive income when you get to that period?
Phil: Okay, simple. All right. I think we answered that pretty well. I'm pretty heavy on property, you're pretty heavy on property. I'm one of those guys that keeps a Retail Super Fund which I'm getting out of personally, because the return that I received on it last year was absolutely appalling. I think I've talked about it before, I'm not very happy with it, anyway. So you helped me set up a Self-Managed Super Fund now, but I've got a bit of cash and some other stuff around as well.
Phil: Some shares and whatnot, but I'm happy being property because I understand it probably as good as most do and it gives me confidence to take control. So, that's why I do it, but diversification is important, speak to your Accountant. Question number five, Munzurul, we're running pretty well on time here. I've got two question here I'm going to merger into one. It is, what's deductible on an investment property, and is depreciation still really relevant under the new budget recommendations?
So for our listeners who aren't familiar with is, in May this year, I was down in Parliament House when this was handed down, probably investors were expecting to get beaten up quite a lot under the budget with some draconian reform to try and slow down investment lending. What the government ended up doing was looking to put some new legislation in around depreciation and what you can deduct off your property investments. So what went was, travelling to Queensland to look at your investment property on the Gold Coast and having a holiday out there, and then they also took depreciation around the fixtures and fittings on exiting property. They got rid of that, right. There's still a lot of uncertainty about it, we've spoken a lot about it. Google it or go to smartpropertyinvestment.com and just search for it and you'll see so much stuff there, right.
What can you deduct on an investment property Munzurul?
Munzurul: Yeah, and look there's many things, there's many things. There are some very standard, common deductibility, and there are some of the deductibility, which perhaps one sort of needs to know that yes, those are deductible. There are sort of areas that perhaps you should not go. So it's a yes as well as no.
So we look through, what are the general deductibility? So the general deductibility is that naturally you have your investment property, you've got your interest. So your interest is deductible. All of your running costs are deductible. What are the running costs? You've got the Council Right, you've got the Water Right, you've got the insurance. You might do a little bit of repairs and maintenance, and that's deductible. Depending on whether it's repairs and maintenance, or whether it's a capital improvement.
If you buy an asset, it can be depreciated, but if it is more of a repair, you can claim that as such. Any other expenses, which are assessed, as long as you can justify any other expenses, which are absolutely, directly attributable, and, which are reasonable, are deductible. So all of those sort of are deductible. Where some of the tricky ones that comes in, and one potential tricky one that one needs to be aware of and a common thing, which I've sort of discussed quite a bit, is that when you buy a new investment property as part of the purchase, is that there is a Solicitous Settlement Adjustment.
So what that means is that, let's just say Phil, that you're buying a property right now today in September, and the vendor had happened to pay the Council Rate for 12 months in advance. So what the Solicitor does, Solicitor makes an adjustment saying that, "Well the Council Rate let's just say $1200, but the vendor should really only be paying for July and August, and he should be paying all the rest of the 10 months." So on that example, you actually pay $1000 out of the $1200 back to the vendor as part of your Solicitor Settlement Adjustment.
Now that's a common thing that people miss. Similar adjustments could be in terms of your Water Rights, similar adjustments could be in terms of your insurance, it could be land tax, whole lot of things right. Any level of prepayment that the vendor has made. Now the reason why it gets missed, is because that's been taken as part of the adjustment of the purchase and sometimes we sort of don't see it that we actually paid it. So make sure that you speak to your Accountant and that gets claimed.
The other thing that we at times sort of miss, are the borrowing cost. So I sort of financed over 80% as an example, and I pay Lenders Mortgage Insurance, that's deductible over five years.
Phil: Even if it's capitalised in to the loan?
Munzurul: Even if it is capitalised, because while it has been capitalised the view is that you have paid it, and you have borrowed it again. It is definitely being over five years as well. But it's not only the Lenders Mortgage Insurance, as a borrowing cost claim over five years, there's a whole lot of other borrowing costs. Any other costs, which are associated in terms of your getting the loan. So things such as you might have done a building report, you might have done a pest report, you might have done a strata report as an example. All of those are claimable over five years.
You may have paid an application fee, and that loan application fee is deductible. Then maybe stamped along the way in some States, depending on the States some mortgages a stamp is needed, that's claimable as well. So all of those borrowing costs are claimable.
What has been taken away? As you said, the travel expense has been taken away, right. So, you can't claim any deduction for you to visit, inspect, travel property as such. You're expected of what your level of evidence that you have, how reasonable it is, you still can't. That's the rule, and the rules that came in on Budget Night on 2017. Prior to that you still could, but from the Budget Night on, you could not.
At the same time as you suggested, as they erased, depreciated changed quite a bit. There's no change with the building depreciation. So depreciation has two things. One is the skeleton, which is the building. Then you've got plant and equipment. So the budget has changed saying the building you can still claim it, that's fine, but the plant and equipment, unless you pay it, pay for it, you can't claim it. Right, so what that means is, the second hand sort of property so to speak, which is not brand new. Then any plants and equipment you have, you can't claim it. Anything, which you may have incurred by yourself, yes you can claim it.
What are some of the tricks and what are some of the pitfalls of the area you are considering? It is very, very big on benchmarking. So say as an example, you've got an investment property that you all has been paying about 10 grand or so interest every year, then all of sudden your interest has gone up to 15 grand. That's sort of raises a concern from an investor's point of view. Why has it increased? And you might say, "Well, I generally borrow an extra say $100,000". It's not so much what you borrowed. What have you done with that $100,000? Have you used that $100,000 on that particular investment property, for some renovations or capital improvement? Then of course you can claim it. But if you used that $100,000 for private use, then you can't claim it.
So the comments that have come in, is that you have to be a little bit careful, what's the purpose of the borrowing? Borrowing is the biggest [inaudible 00:30:27] One of the other pitfall is, you've got a line of credit, and line of credit sometimes get mixed in between your private use as well as the business use. An if it gets too much mixed, that you really can't segregate your business, then we're just raising everything as non-deductible, so that's been taken away. So those couple of things that one need to be sort of rather careful what can be claimed.
Phil: Okay, so it can get quite complicated and harkens back to having a good Accountant. Also, good depreciation schedules and other stuff like that, you know scrapping reports and whatnot when you need it.
All right. Fundamentally, don't have a problem with the Government's rationalisation for removing the depreciation on existing plant and keeping properties, because what happens is that houses or properties keep selling, and then the new owner just gets a new depreciation schedule on it and stuff. It does really make sense, right. So, I'm okay with that. The whole travel to places to look at your investment property, I don't think I've ever claimed that in my life. Doesn't really matter, it shouldn't be really. The reason you should be investing in property, but the way I conceptualise what you said, is that having a property, or property portfolio, is like running a business. So, what other costs associated with running that business is typically deductible. That's the easiest way to frame it.
Munzurul: Yeah. As long as you have evidence, because your tax return should be done with an assumption that there would be an audit, there would be a review, and the question is, if there is a review, if there is an audit, do I have all the substantiation to pass.
Munzurul: That's how we do it of every single return in our office.
Phil: And that's very important. That's very important. So, make sure that what you do is the right thing to do and make sure you have evidence to support it. It's a fundamental principal for any property investor. Quick question though, can you claim a deduction for a Buyers Agency fee? So the cost to purchase?
Phil: It's always a bit of a grey one.
Phil: What's that?
Munzurul: I mean the rules, well it hasn't changed, it has changed to some extent. Buyers Agencies, there was a point of time that there was some private rulings that have came through saying that, well what does Buyers Agency fee being composed of? Is it being composed of 100% in terms of purchasing that property? Is your Buyers Agents just providing you with that one sold service, for you to buy property A. And if the Buyer Agents is providing that one sole service of purchasing that property A, then it's capital in nature. Right, so it's capital in nature, so while you can't claim it up front, you don't lose it. You claim it when you sell it. So it comes in as part of the cost base of your capital gains. So you still claim it, but it's just that you can't claim it up front.
Buying Agency services is sort of becoming a lot more privacy, right, so is it Buyers Agents just purely buying that property on behalf of you, or are the Buyers Agents also doing a review of your portfolio, also sort of finding you a property manager, also sort of project managing in terms of some level of construction, renovation, repairs need to be done. Also finding an Accountant, also finding a Solicitor. So all of those sort of services are being provided, and one may argue that if they are being segregated, of the time that Buyers Agents spent, in terms of all of those individual services, I suppose the cost involved with all of those individual services, a portion of it may be claimable up front, but if there is no segregation, everything becomes capital.
Phil: Okay. Lots of information there Manzural, but it's hard to be an expert on all these type of things so I recon every property investor needs to go to an Accountant who can cover those type of things. Just on that note, and we're going to have to wind up mate, how do you know if your Accountant is equipped well enough to be a good Accountant when it comes to property.
Munzurul: Ah yes, I sort of raised this point to myself quite a bit. Is that when I sit down with someone, I sort of say, I myself don't have a lot of shares, as an example, a lot of Managed Funds and so forth, and because I don't have my own sort of practical experience in terms of shares and managed funds and so forth, I'm not the best person to advise anything about the shares and so forth. You can listen Peter Switzer and you can listen to all those different shows all the time, and you learn a whole lot of things, but that's theoretical knowledge.
So how is your Accountant? It's all about the practical knowledge. Is your Accountant also a property investor. Is your Accountant a property investor as of now? Not so much about 10 or 15 or 20 years ago, and I suppose what's the mind set of your Accountant? You know, Accountants are generally conservative, and that's good. But Conservative at a level where it is also practical as well. More importantly, is that can you communicate to your Accountant? Your Accountant may know everything in the world, but if we don't relate to your Accountant, does that sort of reaches. So to me it's the practical experience, and to me I suppose, whether you can relate.
Phil: Okay, and they're very important points to consider when you're looking at your current Accountant, or a new one. So, Munzurul, that was good five questions. I think there's probably about 50 more questions we can go through, and we're going to do that over time, so we'll get you back in to the studio and we'll have another chat, but thanks for sharing your free advice. You don't normally get free stuff from Accountants, so.
Munzurul: Thank you very much.
Phil: Very good, very good. Thanks for joining us everyone. Pleasure to have you here. I like these types of podcasts, obviously we fluctuate quite a lot between chatting with investors and I love the storytelling of investor stories and the words of frank experiences that they have investing in property. We'll keep our pedal down and keep providing that sort of information for you. It's always good speaking to investors and I enjoy the education I get from exploring other people's stories and trying to frame that within my own context. I hope that you use that podcast in very much the same way.
There's a lot of principles and theories and strategies and experiences we do speak about, but you should be trying to apply them to your particular circumstances and situation. Use that information to become a better property investor, and if you do that, that means I'm doing my job. So that's excellent. We like getting experts in. Munzurul and some other people that we have regular on to the show, just to pick their brains and help to give you guys greater insights so you can do what I said, more effectively and that's be a better property investor.
So, thanks for joining us, Remember to check out smartpropertyinvestment.com.au, if you're not subscribing to our daily market intelligence and news in the mornings everyday, make sure you do. So you're the first to know what's going on in property. smartpropertyinvestment.com.au/subscribe. We've got all sorts of channels go and check us out, we're always posting things there. Podcasts, stories and articles and whatnot.
Any questions for me, or Munzurul, or any of other guests on the podcasts, [email protected] we'll pass them on or get them answered. If you'd like to come on the show, get in touch as well. One last thing, please keep those reviews coming in on iTunes, five stars, we like them. I'm looking to push really quickly up to 100 views by about a week or so time. So if you can be part of that, I would really appreciate it. We'll be back here next time, until then bye-bye.
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