Unlocking Tax-Free Income in Australia: Insights from Accountant Nick Hill

is one of the biggest sort of loopholes it's pretty much

you tell me but it must be the only way in australia to make tax-free income you'd be surprised a lot

a lot of people do it um and i've very rarely seen the ato kind of come down on it

tax-free money in australia at the moment in today's video we have account nick hill taking us through the one way

you can make income in australia without having to pay tax he also takes us through if you think about buying

investment property the things you need to be aware of if you think about turning your current home into an

investment property what to do and how to correctly structure your portfolio if you're looking at making wealth from

property investment it's an action-packed video so i hope you get lots of value from it let's jump right

in moment like a lot of people have bought properties over the last two or three years have sort of built up a lot

of equity and and the question i'm getting asked a lot is like if i'm thinking about turning my home into an

investment property and then buying anything to live in potentially what should i do like what's some

questions you should think about and they're shifting like a main residence to an investment property yeah

so it's a pretty pretty big topic that one uh there's a lot of benefits that can come out of it but there's also a

lot of risk areas as well um ultimately

uh with with uh with your main residents there's uh there's this um amazing tax incentive called the main residence

exemption where effectively if you choose to sell your property um that you lived in um

you ultimately pay no tax on the gain which is which is amazing so uh it's a little bit different for

rental properties where ultimately any capital gain you earn on the rental property is taxed again at the rate

that your personal position falls into however if you're shifting a main

residence to an investment property one of the big ones you need to consider is obviously this main residence

exemption there's this great rule called the six year main

residence exemption where ultimately

if you shift your main residence to an investment property you could still claim

um ultimately you could sell this property within six year period of doing this

transition and still pay no tax on sale which is amazing like that's that's awesome like a six year growth

can't beat that so that's a great part the double-edged sword there is you've got

to be really careful if you go and do that but then decide to declare another main

residence during that period and pretty much wipes that out so you've got to be really careful for example perfect

perfect scenario you go you've got a house in brisbane but you want a sea change you want to go live on

the sunny coast and rent out your your home here you shift it to an investor property you take out

a rental at the sunshine coast so you don't own it it's not your main residence and you could effectively live

live there for six years paying rent building the equity in your brisbane property and then say five years in you

go yeah time to sell prop the market's hot make a big gain a zero tax brilliant then you go out take

that money say you want to then shift into our main residence in the sunny coast damn that's a perfect thing to

consider when you're shifting from uh main residence to investment property for sure

yeah i think let's come back to that but um more on the the capital gains exemption for a home because i think

this is one of the biggest it's a loophole it's there people know about it but in the case where um you

know in that example where say you're moving from brisbane going to the sunshine coast um potentially so if you

bought a home on the sunshine coast is there anything you should do like getting evaluation on your previous home

the time you leave like what's some stuff that you should yeah essentially think

about doing so at that point if you do do kind of uh a jump between main residents

that does obviously that that puts you into that risk area but what you can do is at that point you

can if you shift from one main res to another or declare a new main residence you can actually organize a valuation at

that point in time on the original property uh to then lock in that

increased value like you do this on the basis that the property's gone up in value and so you can lock that in which

in in fact will increase your cost base which will then in the future if you do

go to sell it uh minimize your your capital gains tax so yeah that's a perfect way to do it if

you kind of don't fall into that perfect scenario of being able to claim the full six years uh you can ultimately look to

trigger evaluation once you do shift one from one main residence to another so yeah it's a it's a huge win as well yeah

that's a huge one i see it a lot you know where you might have bought a property originally for three hundred

thousand you move out five years later it's worth five hundred thousand um you get a valuation when it's worth 500 so

when you go and sell it it's not you know the capital gains aren't calculated on the original 300 purchase prices on

the 500 it's kind of can help you save tax on that um absolutely i guess you can get a you can get stuff it's harder

to get back dated i suppose it's a point in time so it's definitely something you probably want to think about

when you're doing that yeah absolutely uh you know when it comes to the ato the owners of proof is always on the

taxpayer unfortunately so getting valuations dated back three four five years

traditionally you know it loses a bit of credibility but if you get the valuation

yeah at that point in time when you're looking to do the transition it definitely stacks up a lot more

effectively so yeah 100 yep and so that back to the capital gains tax exemption i think this is one

of the biggest sort of loopholes it's pretty much

you tell me but it must be the only way in australia to make tax-free income um

so like i guess practically how does that work is there a limit do you have to live in the home for a

certain amount of time to claim to be able to sort of profit like what if you bought a home off the plan

it settles tomorrow and i move out the next day for a hundred thousand dollars profit do

i get to keep that hundred grand like what are some of the rules around that that you know tax-free income

yeah it's uh it's great there's there's a rule of thumb of six to 12 months um

like the longer the longer you're in there the more it's going to stack up well

but that's not it's not the be-all and end-all it it really comes down to intention as well um if you can

obviously live in there for a minimum of six months that kind of works really effectively

uh but sometimes you find that you've chosen to uh buy the family home and then there's

some personal circumstances that are kind of blown up in your face and you've got to

make a transition out you do the one thing that you do need to do though is you need to make sure you move

in straight away right that's that's actually one that catches a lot of people out

i've seen i've come across scenarios where individuals have purchased their main residence but it was rented

and so what's happened is uh following the data settlement it was rented for three

months and a lot of people actually believed that um

as long as you can move in at the earliest like the convenient time that that period doesn't count but it does if

you have that someone renting from date of you settling that actually

throws the main residence out which is a huge huge punishment to the person moving in

so the one thing you want to do is move in straight away the longer you're in there the more that

works in your favor by general rule of thumb six to 12 months gets you the win

um but yeah if you move in for three months and then personal circumstances have you having to jump ship

that can work in your favor you just need to prove intent though

and i guess like if if you're doing this once you buy a house you move out in 12 months and you move to another one it's

like it's generally okay but for people that do this as a profession um

yeah surely the ato be on that right like if i bought a house every 12 months and one day

sold it for a massive profit and then did it rinse and repeat every year and every year like although i'm

gonna be tax free as like living in you know you'd think um

you'd think the ato would be more on it but it's a common practice i especially see it in construction the construction

game people that do this for a living ultimately if um yeah you have your main residence you move in um

they traditionally do a little bit of it up be able to sell it for a profit um

it me it meets the rules and uh at the end of the day uh yeah it's it's a tough argument for the ato

the more you do it the more argument you give to the ato to obviously investigate and question what you're doing

but you'd be surprised a lot a lot of people do it and i'm very rarely seen the ato kind of

come down on it wow so arguably it's the only way to make tax-free money in australia at the moment clearpoint like

i do see a lot at the moment where um first home buyers home buyers are buying a home to live in but it's rented for

three or six months um then they're going to move into it so are there any risks of buying a property

in that circumstance like say if you if it was rented for three months you move in there you still meet the bank's own

occupied rules the stamgy exemptions et cetera et cetera are there any risks for when you go and sell it in like five

years that it was technically an investment property do you have to do anything differently because you're a

landlord for three months what's some stuff look at technically uh you've got a three-month

period which is effectively taxed so i sell it you sell it at the five year mark um

three months like what's that that's or something like five percent of the whole ownership period technically you should

be paying tax on the five percent wow yeah it's a bit of a bit of a sneaky one

um but you know that's

that's a five-year period a lot happens in five years uh it's tough to track

to be honest uh but it is technically a risk area you need to be careful of

so what you ultimately want to do is get the get the renters out before you move in

okay no that's that's interesting yeah or extend settlement i've had some clients do that because it does cause

issues with like the first home loan deposit scheme you have to move in within six months so if there's a lease

in place like it causes dramas um so that's that's probably the first way

to save you know to pay no tax and the second way to pay tax is is depreciation and sort of running expenses on there i

know you're not a depreciation expert per se but it's something you deal with a lot do you want to explain yeah

definitely how that works because obviously there were some rule changes a couple of years ago where

this this was changed pretty dramatically but how does it kind of work today on an existing property on a

property yeah yeah so uh there's two different types of uh depreciation i keep it fairly simple you know you've

got your your standard depreciation which is um i know fridge freezers uh lounges all of the the kind of things

you could take away with you uh the furniture effectively um and then you've got your capital works deduction which

is um depreciation of the physical properties so the house itself

um the you know the bedrooms the the infrastructure effectively so there's these two different deductions that are

available to you uh they work they work quite differently uh

the depreciation of furniture uh you can write that off a lot more aggressively so you're looking at

uh effective life which is the life of the furniture let's just use a fridge for example could be four years pay a

thousand dollars for a fridge you can claim a 250 deduction each year for four years

right um so that's pretty straightforward one the capital works on the other hand uh being on the house

itself uh is at a flat 2.5 over 40 years so it's not a massive

deduction uh but it's consistent for the life that you're kind of renting out the property

uh both these the deductions uh what i call notional so you're not physically paying for them every year but you're

getting the deduction because you've pretty much paid for them you know either on purchase of the

property or you've gone out and bought the furniture um

both of these deductions work against bringing your taxable income down and that's where this this one is probably

the biggest one other than interest that helps you drive a positively geared property into a negatively geared

property it helps you cash flow and like i guess it helps yeah withholding at the end of the year

because you might get a refund um yeah i guess down that similar vein like what are some other expenses that you can

claim on a property that you're renting one of the big ones that people don't

know about which is a bit of a win is obviously to be able to claim depreciation and um

capital works you need to the ato requires you to get a quantity surveyors report now

and that's pretty much a report that tells you what you're allowed to claim based on the the assets in the house the

furniture in the house and then the value of the house that quantity surveyors report is going

to cost you money but that's fully deductible so

basically you can claim a deduction on getting a deduction which is pretty cool um so that's typically a win and when i

tell most homeowners about that they pretty much go and get the report straight away because why not

beyond that interest is your second biggest deduction nine times out of ten uh so the interest on the home loan that

you paid throughout the year great deduction and sometimes you can get a win on that by doing prepayments

of interest i don't see it very often anymore but um it is a a nice little windfall but

you've got to consider the year-on-year effect of that interest because if you do a prepayment what you're effectively

doing is you're bringing next year's deduction 40-year so you just got to be careful with that

you want to do it when your tax rate is at its at its peak or maybe you just want to kind of double

down on you on your refund so you do it in that that year so those are the two biggest deductions then from there you

know you've got your council rates you've got your body corps for your town houses and

apartments uh you've got insurances so you want to take insurance out over the property

which is fully deductible you might have to pay some bank fees throughout the year again deductible

water rates utilities another big one one that can be potentially big is

repairs so you could one year have a repair of 100 bucks fully deductible you might

have to go out and do some pretty significant repairs one year they can really add up and you can

pretty much get a really good deduction in that instance i'd probably just disclaim you've got to

be really careful with repairs they can transition into what's called renovations or improvements once it

falls into that realm it goes under this quantity surveyors report concept that i've spoken about so

if that's the case a repair is 100 deductible but if it falls under a renovation

it falls under that depreciation rule and ultimately is depreciated over a period of time so you should be careful

with that but those are those are the big big deductions that are available

i don't like to talk about what we miss out on but uh unfortunate rules changing a few years ago a lot of people used to

travel to their rentals and claim uh flights and and uh you know car allowances and stuff

like that the ato pretty much ripped that out so if anyone's telling you you can claim

travel to rental properties they're living in the past unfortunately um and it was a big loss for a lot of

people you know they were actually using the gold coast tourism market yeah yeah the interstate travel uh to go

check out the rental and do repairs um it's a big loss but um it is what it is yeah john i used to fly up every year to

sydney or from sydney the gold coast and that was his thing but yeah like it changed a couple of years back um find

their first investment property a lot of times you kind of just go in there without thinking don't talk to an

accountant don't look at stuff like what's why would you talk to your accountant

before you buy an investment property what's some stuff that you've seen that can go wrong

and i guess stuff like tips that you give to people to try and maximize the tax deductions overall

big big one that i deal with a lot is the structure the structuring side of things um purchasing in the right

right entity uh even if we don't overcomplicate it and

do like a review of companies and trusts even looking at the individuals so uh you know you might have a mum and dad

team where dad ultimately has a effective tax rate of

47 which is huge um and then the wife uh makes no money stay at home with the kids for argument's sake uh has no

taxable income now you know talking really in isolation and obviously this is general so each

circumstance is different but if you were to say have a positively geared property

and you put that in the husband's name you're paying 47 tax so for every dollar you earn positively gear wise you're

pretty much paying the tax man 47 cents all right so in that case it's a no-brainer you'd be

putting it in in the wife's name where she's not making any money on any income you pretty much probably paying no tax

on the positive with your property which is awesome flip side on that if you're looking at

negative gearing same scenario and then you put it in the wise name or even if you split it 50 50

right so we want to hedge our beds that's all well and good but you've now lost 50 of the deduction going into the

wife's name because she has no taxable income right and so you're kind of losing out

on a tax saving in the husband's name or the dad's name which so you'll be really careful with that that's a lot of

advice that we give is finding the right place because each each circumstance is different

sometimes people want to look at investment trusts as well

got to be careful with that because if it's a negatively geared property the losses get captured in the trust you

can't use them so again like why would you put it in the trust in that case um you've also got to be careful land

tax land tax in the individual's name is quite high throw it in a trust it pretty much halves it goes down to like 350k

which if you've got a land rich property and a family trust or or a company you're paying land tax every year that

you wouldn't have otherwise paid if it was in your personal name so you'll be really careful with with little things

like that um big things like that to be honest land tax is a bit of a nightmare

yeah yeah i guess there's a lot to consider there because even the common thing is you know buying first

investment property current properties in both our names we're going to buy it together you go

and sign the contract put in both names and the simple thing of just putting two names on the contract to sale like

you said can have pretty huge impacts on tax even in the future um you know any

ongoing cash flow depends on i guess the aims of that property so it's pretty big yeah

yeah and you've got to i guess also consider the long-term perspective as well you know when i was talking

about the husband and wife team um you know you've got your short-term strategies but you've also got to

consider long-term as well so yeah gotta make sure you consider quite a number of things not as simple

as just buying a property um in so-and-so's name thinking you can fix it later because the transfer out

actually costs a lot of money the only way to avoid transfer duties or costs of transferring is uh separation

so family court which don't necessarily want to go down that path not ideal

so it's the most expensive way to get out of a property it's pretty much pretty much

um mate that's awesome i think we might wrap it up there so um if people want more information on you and your

business walking hill do you want to um tell us a bit more about what you guys do and where we can find you

yeah no worries so walker hill we deal with small businesses and high net wealth individuals looking to

get into the property market as well [Music] we do our backbone services compliance

and tax but we do a fair bit of advisory and uh structuring so you know we've got a couple of clients that uh you know

we've kind of helped with their property portfolios getting into the company's trusts and even just looking at

splitting it between mom and dad teams so we do a variety of that kind of work and help people

ultimately get the right structure based over uh petrie terrace just around caching street in brisbane

and you know if you're ever interested in finding out a little bit more about how

we can help you nick walker hill.com best bet or three three six seven three one five five

cool thanks your time mate appreciate it no worries thank you