Posted on 26/10/2023
Kim: Hello, everyone, and welcome to Show Me The Perks. My name is Kim Bigg, and I’m Business Services Director at Perks Accountants in Adelaide.
I specialise in accounting and tax to small and medium businesses and their owners this is the first episode of Show Me The Perks. And with me, I have Lee Jurga, who works with me here at Perks, and he’s going to now give us a brief synopsis of what is Lee and what he’s all about. Over Lee.
Lee: Thanks, Kim.
Yeah. As Kim referred to I work at Perks in the, tax consulting team. I’m an Associate Director with a, a mixed, a mixed history of public and private practice, all in tax. So law firms accounting firms and also a stint in Revenue SA. So in the government, and have been with Perks for five years, providing high level tax consulting advice, to SME clients, on a range of state and federal tax issues.
Kim: Excellent. Thank you, Lee.
And I’ve got a little bit of information about Lee, where I want to give him a little, give listeners a little bit more insight into what Lee’s all about.
So is Lee Haydn Jurga with no e in Haydn.
She’s a little bit strange, but..
Lee: the parents wanted to buy an extra vowel there Kim that the early eighties, the E’s are expensive.
Kim: Excellent. Thank you, Lee. That is interesting information.
Confirming Lee has filled in for the position of Deputy Commissioner of state taxation in a previous life, in a previous role.
Can you give us some insight into what’s involved of being the deputy commissioner of state tax?
Lee: Yeah. Well, it’s sort of, you almost become more of a manager and especially a person, a people manager. You know, you get away from the stuff which I enjoy doing, which is the the technical tax work. So you definitely become sort of a high level manager in cross shooting a whole bunch of issues, including HR issues in government, as you might expect.
Kim: Absolutely. I don’t, well, to be perfectly honest, I don’t know what to expect from a deputy commissioner of state tax, but I’m sure you filled the role very well.
Another other item I’ve got to run through you, you are the reigning Perks eight ball competition champion, and there’s only a couple of rounds to go. This year’s competition.
Are you confident of winning again?
Lee: Quietly, but anything can happen on that table. It’s a very, loose pocketed table. So white balls and black balls can come in at any moment. So I have to get past you as well Kim at some point.
Kim: Indeed, it’s got a warp in the middle of that table, which makes things extremely interesting. So, that’s all part of the game. That’s probably the only reason you won last time.
So this is a very first episode of Show Me The Perks.
And to give you a little bit more information around Perks – Perks is one of the largest privately owned accounting and wealth advisory firms in Australia and we believe that we have the knowledge and expertise to support small and medium business owners to understand more about accounting and tax and that’s what this podcast is all about.
As part of providing this podcast, we like to provide a an example each time, to give real life examples of what might be, what clients and listeners could be thinking about. So this week’s podcast is around how to buy a holiday home, and we’re going to use an example linked to Con the Fruiterer for those listens who remember Con the Fruiterer, just to provide everyone with a ready made example to perhaps think about how that apply to their own personal situation. So I’m going to fire some questions at Lee, and then we’re going to just talk generally around, what buying holiday house means for people in Australia, and in particular, South Australia, and see where that goes. So, If we use Con the Fruiterer as an example, Lee, and Con the Fruiterer came to you and said, I want to buy a beach house or a holiday house. What are the tax considerations that immediately come to mind?
Lee: The first is stamp duty.
So it’s not only good enough to fund the purchase price of the property, but you also have to fund the stamp duty that comes along with that. So stamp duty is normally imposed at out 4.5 to 5 percent, and an on an ad valorem scale. So it just depends on the value of the property.
Unfortunately, stamp duty still applies for residential properties. It has been abolished essentially for it could be described as commercial land.
That is. That’s in South Australia. Yep. Other jurisdictions seem to be slowly following, that’s, that line of thinking of, of, of freeing up commercial land from duty, but residential properties are still subject to stamp duty. So that’s your first, your first impost for buying your feed shack.
Secondly, you’re going to have annual taxes that are inescapable also, so you land tax and you counter rates, ESL, which is emergency services levy, you know, there’s sort of rates and taxes that are going to be imposed each year.
Land tax these days can be at a punitive which is called the trust surcharge rate. So if you’re going to put a beach shack in a trust, you’ll be incurring additional percentages of land tax each year.
The next tax to probably think about is capital gains tax because that would be also an inescapable tax if the property, raises this all in in value for your period of ownership.
So, you know, that might be something to think about with what structure you’re going to hold the property in because some entities have entitlement to a 50 percent discount, whereas a company does not.
So capital gains taxes imposed like income tax but it’s imposed on the capital growth for the property during ownership.
And then the final one, which is probably the most relevant tax to think of, especially with structuring where you’re going to put the property, is income tax.
So, you know, if you if you essentially enter property into the income tax regime if you choose to rent the property and therefore derive income from it. Otherwise, the rental property won’t enter into the tax regime where you won’t claim deductions for expenses and you won’t return income for rent. But as soon as you have a purpose to use that property for rental and income producing purposes. You have to consider the income tax issues.
Kim: So there’s really a few different places people can purchase these properties in, company trust individual names, but each of them come with their own variant on tax implications. And whilst stamp duty is probably the same across all of them, it differs on land tax and capital gains and even income tax depending on which of the other, you know, which entity you tend you choose to actually put this property into. It be individual partnership or company or trust.
So, yeah, it’s something to think about. So, and I know previously if we go back several years, it used to be fairly common to put beach houses and holiday homes into trusts. But something that changed, I think, in 2019 was the land tax rules, which essentially meant you had a surcharge on that.
Did you want to just tag us through, you know, that change in terms of what that meant for people? Cause people were targeting because they can get the fifty percent discount on a capital gains, which was attractive, but then all of a sudden they’re getting land tax on these now.
Lee: Yeah. Correct.
So that was about two thousand nineteen to twenty, when that new land tax regime came in. And so, basically, what happened is SA adopted an Eastern state model. Victoria, New South Wales and Queensland have these types of models of lands acts where SA was sort of still stuck in their 1936 regime which was introduced way back then, which was very rudimentary. So you could create a new entity and in this case trust, and essentially get out of aggregation, which is where land value is added to other land value that’s held in a family group.
And therefore, you’re in higher ad valorem rates of land tax because you’re adding value on value. So, as I say, the old regime was very rudimentary allowing, property owners to essentially acquire more and more property, stick it in a new trust, and it wouldn’t be aggregated, and there was no charge, rate of tax to put it in a trust.
Kim: So people would just have lots and lots of trusts and get around paying significant amounts of land tax that way.
Lee: Yeah. Correct. So obviously that it the the structure became messy, but it was, it saved, landowners annual taxes. So land taxes payable each year So, you know, it was very cumulative. So it was it was a great savings way.
Kim: And that’s all been grandfathered now, so existing arrangements generally people were able to nominate a beneficiary, but moving forward, that’s not the case.
Lee: Yeah. Correct. So there was a transitional period there you could, yeah, not want to add a beneficiary under just under discretionary trust because that’s where the action is.
And guess partly grandfather, your treatment, your prior treatment, but there were restrictions around how that how that could happen. But, yeah, any new lands bought now, you know, discretionary trust, there’s no obligation to, get out of the, the surcharge rate of land tax.
Kim: Thanks Lee. So just coming back to Con the Fruiterer, so back to the example. So if Con wants to buy a holiday home, and let’s say he’s trying to do it now post the changes in land tax.
These options are probably individual names, company, or trust. Given the trust now incurs significant land tax depending on the land value of the, of the said beach house, but let’s say Con’s doing pretty well in the fruit game and going to buy an expensive one. Do you, you know, how do you contemplate that between, you know, does that rule out the trust, or does that, you know, how do you differ between the two depending it also comes back to what Con’s going use it for as well, doesn’t he?
Lee: Yeah. Correct. That’s the big pivot, point with this discussion is, well, what’s your purpose behind buying the prop are going to be rented. You’re going to derive, you know, significant income for a majority of the year, and you may use the beat check only, you know, Christmas time or used to, you know, those peak periods.
Because if you are going to derive significant income, via renting the property, the benefits being able to split the income and hold it in the trust and also retain the 50 percent discount, for CGT purposes. You know, those benefits may outweigh the annual surcharge rates of tax. And this may depend.
Kim: Land tax you mean?
Lee: Yeah. The land tax. Yeah. So that and that may depend on the value, the site value, which is what land tax is imposed on.
So, you know, you may be able to stomach the detriment of the of the annual surcharge rates of land tax for the benefits of being would have split the rental income through a trust to a range of, family members.
Kim: Yep. And get the capital gains tax discount still be available down the track.
And that’s in, I guess, within the context of otherwise using a company, which wouldn’t get your 50 percent discount.
Kim: Yeah. Correct. The only problem with that is if you get capital gains discount, but you don’t tend to ever sell the property or you intend to sell it so far down the track that it’s, you know, thirty, forty years away.
The, the attraction of the discount is perhaps not an immediate benefit, but a long term benefit.
Lee: Yeah. So again, purpose of the of the acquisition and how you’re going to use the property and how long you’re expected to hold it, is it an heirloom asset, or is it something that’s going to be flipped in at some point in time for a gain, a capital gain. So again, yeah, it’s very subjective to the client’s intentions.
Kim: So in which scenario would you use a comp potentially for buying a beach house or would Con consider it Con and Marika.
Lee: Well, if you’re going to, generate significant or you’re going rent the property for most of the year, that the property may be leveraged. You don’t, you got high net worth individuals who are already in the top bracket of tax. So, you know, a discretionary trust wouldn’t be of greater benefit given just you’re just streaming income to family members that are already in the top marginal tax bracket, that a company will at least be able to, say repay debt and repay debt, with a rental income, which is capped at say a 30 percent tax rate.
Kim: I suppose the other keys, if the land value or the site value is significant, then the land tax in the trust would be significant.
So that tends to play towards maybe having it in the name of a company as well, which gets the full 450 – 500 grand sort of surcharge free threshold.
Lee: Correct. Yeah. The tax free threshold, I think, for general rates started at 450,000, one when the regime came in, I think it’s sort of escalated now to about 570,000 or higher.
We haven’t checked each year, but, yeah, you put in a company, you get that full tax free threshold because you’re not under the surcharge rates of tax.
And yeah, you may not retain your fifty percent discount, but if it’s an early mass it, and the company, the company’s loss of that fifty percent discount isn’t as much of an issue. The only one thing with land tax and companies is, the reason you don’t get surcharge rates under a company is that the companies can be aggregated, or their land can be aggregated with other companies that are in your family group. So if got companies that are commonly controlled, and they’re both owned taxable land for land tax purposes. They can aggregate that land.
So that’s why the surcharge rates of tax don’t apply. So, that just needs to be bought at front of mind with using a company.
Kim: Obviously, primary production land doesn’t incur land tax, though, doesn’t.
Yeah. If it’s outside the metro area, then it’s automatically exempted.
And buying it in individual names, anything you’d think about there?
Lee: So individual names is probably, a structure that would be suited for negatively geared, rental properties. So obviously if you’re if you’re incurring high amounts of interest, you’re doing some renovations, you’re incurring capital expenditure, etc. you may be, I guess, arriving at a arriving a loss under a negatively geared situation, you want to be able to apply, that loss on the rental property each year against the
Kim: Negatively gearing because you’ve got a loan over the property.
Lee: Yeah. So the interest, the deductible interest on that loan, so you want to be able to offset that against your income. You know if you have that loss being generated in a trust or company. It’s essentially quarantined to that that entity for future profits to offset against future profits.
Kim: Probably also gets back to asset protection in that instance as well. As in sometimes it’s advantageous not to put the property into individuals’ names for fear of, you know, trying to keep assets protected against small business owners, you know, Con the Fruiterer and Marika – they don’t want to lose their home just because he sells some dodgy fruit somewhere through his fruit stall.
Lee: But then, Marika would have something to complain about.
Kim: Outside of the ordinary
Lee: Yeah, but we focus on the tax issues. So you’re right. There are asset protection, succession, and a and a bunch of other issues that need be considered.
Kim: Yeah. One other question I’ve got, last one before we wrap things up. So, occasionally, we have people come to us and ask, can I buy the holiday house in my self managed super fund, any general thoughts on people buying beach homes or holiday homes in their self managed super fund?
Lee: Yeah, generally speaking, it’s not the best idea. And the reasons come down to just having to comply with the superannuation industry supervision regulations and act. So that that those two bits of legislative instruments, they place, super funds under a highly regulated regime.
Generally because, the super funds get the 15 percent concessional tax rate, and super funds have to be where their sole purpose has to be to provide retirement benefits to their members. So they’re a vehicle that can be exploited quite heavily by higher net-worth individuals potentially, because you can, hold away assets in those in those funds. So, due to those regulations, there are high restrictions placed on how you can use the super fund and the interactions that the member specifically can have with those super funds. So, you know, if we had a rental property that’s leased out a 100 percent, so 100 percent used for a, for income producing purposes, then it may be okay to have that, that property in the super fund, but you got to be wary with any private use by the members of that fund, especially when those private members do not pay a market value rent.
Kim: There really probably should be negligible to none in terms of private use.
Lee: Correct. And it gets tricky because it’s not only that you may be using it, for private purposes over Christmas or Easter. It’s also the work undertaken by the members to rectify, well, do repairs, undertake renovation, anything that I guess benefits the fund could be seen as a super contribution if there’s not an arms length consideration paid by the super fund.
So you need to be really careful with the sort of if whether you’re enriching the funds, so to speak, by undertaking out of pocket repairs, by the members.
Kim: So generally speaking, we would, we encourage people not to purchase holiday homes in SMSFs. I think that’s fair to say, just mainly given to the regulatory environment super funds deal with, as well as you know, the chances are most people including Con are buying a holiday home to use it.
They’re not normally buying it just purely to rent out. So inevitably having it in an SMSF is probably not ideal.
Now normally we’d like to have a question, or I’m hoping in future episodes, we can have a question from the audience.
Being episode number one, we don’t have a question today. So we’ll move on to summarise today’s podcast. So this podcast, and I should give it a date. So we’re completing this in October 2023.
We’ve highlighted some of the taxes that come to mind or should be thought through when you consider buying a holiday home. Hopefully, we’ve successfully outlined how there’s lots of different things to think about and there’s if given the right advice, you should be well equipped to purchase the said holiday house in the right place.
But we encourage anyone who’s thinking about buying holiday House to give their accountant a call, and make the right decision because there’s a lot of things to consider when you’re looking to buy a holiday home.
I’ll wrap things up there. Thank you to Lee for being the first guest on the Show Me The Perks podcast.
Really excited to start this podcast. And onwards and upwards, hopefully, we have a excellent podcast coming up next week, which I believe is with Simon Witherspoon related to the three million in super item. So look forward to running through that episode then. Thank you.
The information provided in this presentation is general in nature and is not personal financial product advice. The advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read any relevant Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this presentation. Please refer to our FSG (available at https://www.perks.com.au/perks-ppw-fsg/) for contact information and information about remuneration and associations with product issuers.
Kim Bigg is a Director at Perks and a qualified Chartered Accountant. With more than 20 years’ experience as a business adviser, Kim is highly adept at assisting growing and established businesses across a wide range of industries.