Investors are looking at what can still be done within the new tax rules and ways to work around them to build wealth. Pic: Getty Images
Inside the investment sector, the smart money is already planning how to successfully invest post-budget.
Seasoned investors will know that the more you understand how the tax system works, the more you can make it work for you.
For example, did you know you can still borrow for residential property and use funds inside a self-managed super fund for a deposit?
Or were you aware that an estimated seven million people can still negatively gear older properties?
One proviso before exploring these strategies is that they are not direct replacements for the changes in the budget, and you will need to seek advice to ensure it all works for you.
You can still borrow with an SMSF
Let’s examine the politically expedient decision to ban borrowing for SMSFs. You can no longer use an SMSF to borrow to buy residential property but there is nothing to stop your SMSF providing a deposit for a new investment property while you borrow to take advantage of negative gearing.
In effect, we are talking about a joint venture between you and your SMSF.
It’s a neat workaround for investors who have sufficient funds already inside their SMSFs. Typically, a unit trust is used as the vehicle for the joint venture, with the SMSF and the private investor sharing ownership of the units.
But crucially, the private investor can provide the money in any fashion they like. In other words, they can borrow and they can negatively gear too under the new rules if it is a newly built property.
First Financial adviser James Wrigley says your super fund can own an asset jointly with you as an individual, provided it’s all done at arm’s length.
“That strategy has been a valid strategy for many years,” Wrigley told The Australian’s The Money Puzzle podcast.
The essential feature of the strategy, as detailed by Wrigley, is that the SMSF money is not leveraged or encumbered in any fashion.
On a more practical basis, sooner or later the SMSF will almost certainly have to buy the private investor out or vice versa. Either way, the transaction must be done carefully in order not to fall foul of ATO rules.
On the plus side, the joint venture strategy means the borrower can access a much cheaper mortgage than those that had been faced by SMSFs when they were allowed to borrow directly.
What’s more, negative gearing is rarely as attractive inside super as outside super since super has lower tax rates.
Negatively gearing the family home
While SMSF joint ventures are for specialists, the most widely used post-budget property strategy will most likely revolve around negatively gearing the former family home instead of buying a new investment property.
In common with the SMSF joint venture arrangement, negatively gearing your old home will not suit everybody.
Creative investing of this order may also be exploited by low-life product promoters, but they will always be with us, as the government is about to discover in the months ahead after banning SMSF borrowing in the guise of consumer protection.
About seven million people can still negatively gear existing properties because there are about seven million homeowners out there sitting pretty under a twist in the new negative gearing rules.
If you own a residential property before budget night, May 12 this year, then you can negatively gear that existing property now or in the future.
This instant, if unplanned, privilege is being passed on to the nation’s homeowners by the new legislation. In fact, it’s clearly spelled out in the budget papers. The fine print details how the rules restricting negative gearing to new builds do not apply to taxpayers who, before May 12, “held an ownership interest in, or had entered a contract to acquire, ownership in a residential dwelling”.
Harrison Kelly, a buyer’s advocate at HMK, says he is already dealing with vendors who cannot get the price they have been seeking in the current market (where clearance rates have dropped below 50%), and they are instead taking their homes off the market and converting them to rental properties.
“There was a time when you bought your first house, sold it, then you moved on and bought your second house – the rules have changed, and homeowners have a privilege now under the new negative gearing rules,” Kelly says.
“I would say if you can access this strategy, then it would make sense to consider it. People might rent elsewhere, buy another property … there are many options.”
What’s next
In a last-minute tweak to the budget legislation around CGT and negative gearing changes, which passed parliament last Thursday, independent senator David Pocock forced the government to further amend its tax legislation to allow Australians taking ownership of properties in the event of death or divorce to retain grandfathering exemptions to negative gearing and capital gains tax.
More headaches will likely emerge from such a significant tax overhaul that was so swiftly rushed into legislation. But there will also be more opportunities to come as creative investors sift through the fine print.
This article first appeared in The Australian as Property workarounds smart investors are using after budget tax changes.