Davidsons manager Michael Rebula joined radio host Rob Cameron on 94.7 The Pulse to discuss property investing, negative gearing and franking credits. If you’re wondering if a SMSF is right for you, check out the audio recording or read the full transcript below. 

Transcript: Davidsons’s Simon Abbott speaks with Rob Cameron on 94.7 The Pulse 

Rob Cameron:  
As beautiful as the weather is, we didn’t really need to have two doses of it, but we did anyway. Now, Davidsons Accounting is a very good sponsor of the show – we love having them on. Michael Rebula has been here before – he’s in again. Michael, good morning and welcome back.  

Michael Rebula:   
Thanks, Rob. Good to be back  

Rob Cameron:  
Good to have you. We have a few contentious issues to talk about today because they’re an important part of many people’s lives. I know that I myself have purchased homes that were negatively geared, and it helped me build up a little bit of extra money towards retirement, which is looming. The other subject we’re going to talk about is franking credits, which is a thing that many retirees have, but let’s deal with negative gearing first.  

Michael, your organisation obviously advises clients on how to do negative gearing, the circumstances of which have changed somewhat as interest rates wobble around and with the controversy around the price of houses and the rent one needs to pay to get a return on their investment. What’s the environment like now as opposed to when you started as a young accountant advising clients about the pros and cons of negative gearing?  

Michael Rebula:  
That’s a good question. Before we get into negative gearing, I think the landscape with property is changing.  

When I started 14-15 years ago, property was seen as quite a good investment. The returns on negatively geared properties were really strong, land tax was lower, and the return that investors were getting on the property was quite good – around 4% to 6% or so forth. As you’re saying, with interest rates rising, the cost of having properties is getting harder. So, we can explain what negative gearing is in a moment, but the return the property investors are getting is dropping to around 2% to 3% in some cases. So, the concept of property investments is a changing landscape from when I started to now.  

A lot of people out there might not actually know what negative gearing is in a sense. So, negative gearing in its simplest concept is when you’ve got an investment property with tenants in it and the running cost of that property – so, whether it’s interest or rates and all the costs that are associated with that investment property – is more than the rental income you’re getting from your tenants, you’re essentially making a rental loss on that property. That loss that you make on your rental property can be offset against your taxable income and you pay less taxes as a consequence. So, that’s essentially what negative gearing is in its simplest terms.  

Rob Cameron:   
Yeah, and it can certainly be very helpful to change your circumstances, as I found out but when I was using negative gearing as a strategy, it was different. I recall buying a house for $300,000 and renting it out for $350 a week. Now that same house is probably worth $600,000 – $700,000 in a very short period of time.  

So, is there a line between how much you’re borrowing and the interest you’re paying on that loan and the rental income, where you as an accountant say, “This is okay” and “No, this is not okay”? 

Michael Rebula:  
Yeah, we don’t really say yes or no, most of the time it is what it is and as you’re saying, property prices have increased dramatically from 10 to 15 years ago. So, a lot of properties have high interest rates when you buy them at the moment and most of them are going to be negatively geared (depending on your location and other things), but it just is what it is.  

We don’t go to clients and say “You should do this or shouldn’t do this.” Negatively geared properties help investors by reducing their taxable income. So, they help the short-term pain of those investors having to fund the cash flow loss those properties are creating, getting a little bit of that back via their tax returns.  

Typically, the higher marginal tax, the more negatively-geared the properties. When investors offset the higher tax brackets, then they get a better return on those negatively geared properties. So yeah, it really helps.  

Where property investors get the long-term gain is in the capital proceeds of that property when they might sell it in the future. So, negative gearing helps those property investors with the slow growth in the property over the many years that they’re going to own it, via their annual tax return.  

Rob Cameron:  
I can recall that when we went into that phase, there was the comparison of borrowing money and buying shares and investing in the share market. There was that balance of long-term with the ebbs and flows of the share market, but the general consensus was that property was a little bit more consistent and the two played off together. Has that changed or is the share market a little bit more balanced and the equation between those two investment options?  

Michael Rebula:  
I think it is changing. As I was saying before, property investments and the land tax and all these economic factors are making people rethink whether property is the right avenue to go for their investment portfolio, or maybe it’s starting to look at conservative shares or whatever it is.  

If you’re comparing shares versus property against each other, within the share market itself, there’s a whole different range of investments you can do – you can have conservative shares and aggressive shares. There are very big fluctuations in whatever style of investment you like to do.  

But with the rising land taxes and interest rates, the return on properties is not what it used to be. So, we’re seeing clients start to consider their investments elsewhere, whether that’s shares or gold or whatever it is.  

Rob Cameron:  
Yeah, and that’s a very good point. You can still buy a property and negatively gear it, but it might be in Queensland, Perth or Darwin, or whatever the case may be, and that’s something that you can facilitate and manage through Davidsons Accounting.  

Michael Rebula:  
Yeah, we certainly have an awareness of all the rules around land tax and other things. We can’t advise on where to invest, but we certainly help with the tax consequences of investing in various states or if you buy a brand-new property versus a rebuilt one. There are things like getting depreciation reports that really help with improving that negatively geared property and things like that. So, we’re across all the rules and that’s the part we play – we just make sure you’re following the game.  

Rob Cameron:  
Do you have many clients who invest internationally? There’s a lot of conversation about international investors coming into Australia and buying property and just land banking it and it sitting idle. But I do remember when the housing market crashed in America, there were a lot of Australians who were buying properties in America at the time. Is that something your clients look at?  

Michael Rebula:  
Potentially. With my clients, it’s not as common. Most of my clients have either bought their first property and then moved out of it and rented it out, or we’ve got clients that have had property in the family for a while that just gets passed through the generations. So, it’s probably less common that we see clients looking overseas to get that return on property – it’s probably not at that scale yet.  

And as you said, if it’s starting to get that dire, then they’ll start to look at other investments like shares and crypto and staples like gold and oil and things like that. I haven’t seen too much overseas, it’s been more local.  

Rob Cameron:  
When I saw the brief of our discussion Michael I was a bit excited because I’m very keen to learn more about negative gearing and we’re doing that, as well as our next subject franking credits. But cryptocurrency, we’ll put that in the bank for next time (excuse the pun).  

I’d love to understand more about crypto because there’s an awful lot of information coming at me on social media and even individuals wanting to be my friend and then have a conversation about cryptocurrency.  

I’ve always been of the opinion that if it sounds too good to be true, it probably is, but I’d like to learn more about how that works because I know nothing about that.  

Michael Rebula:  
Yeah, I think it would be a really interesting topic to discuss. And when most people start dabbling in crypto, they’ll just start to buy bits and pieces here and they probably don’t understand the tax consequences because the ATO doesn’t want to miss out on their grab from it if people are making money (if they’re making money – you always hear the good stories with crypto), so there’s probably not enough time today but certainly, I think we can touch on that later.  

Rob Cameron:  
Yeah, we’ll touch on it next time because it’s really interesting.  

Rob Cameron:  
Okay, franking credits is another subject that’s highly controversial. I think it’s in the many billions of dollars that the taxation department pays out on franking credits so, it’s very attractive to investors but more importantly it seems, retirees. So, tell us a little bit about franking credits and what situation someone could come to you and talk about the benefit of that.  

Michael Rebula:  
Just so we understand what franking credits are, in the late 80s, the government brought in this concept of franking credits.  

A company – whether it’s a listed company like BHP or Woolworths or a private company such as an engineering business – typically paid a flat tax rate (in those days it was 30%). When that company makes a profit and wants to pay out to its shareholders, that profit gets paid out in the form of a dividend.  

So, what used to happen was the company would pay tax on that profit, and then when the profits were paid out to the shareholders, the shareholders would pay tax on that profit. So you’re kind of being double-taxed in the sense that the company’s paid tax and then the shareholders have paid tax. This concept of franking credits was essentially stopping the double tax of profits that are being paid out of companies.  

As an example, let’s say the company has paid tax on the profit that it’s earned and that profit gets paid out to the shareholders and that profit gets taxed at the shareholder’s marginal tax rate, but in the shareholder’s tax return, they get what’s called a credit for the tax that’s already been paid on the company.  

So that’s where on the taxpayer’s tax return, if their taxable income is at a certain level like you’re talking about, then they can either be on a lower marginal tax rate than say, 30% and that would result in a refund to the shareholder. If they’re on a marginal tax rate that’s higher than the 30% tax rate, then they’re going to have to pay some what we call top-up tax because the franking credit doesn’t quite cover the tax that shareholder’s going to have to pay at their marginal tax rate.  

So, the sweet spot that we typically find at marginal tax rates is any individual that’s got more than $45,000 in taxable income (from 1 July with the new proposed rates, they’re going to be paying tax at the 30% tax rate), so, it’s going to be pretty neutral.  

The franking credits being received from a company are going to match their marginal tax rate. Where you’re below the $45,000 taxable income, that’s where you’re typically either paying at 0% tax rate – because from $0 to $20,000, you pay 0% tax, and typically from $20,000 to $45,000, you pay about 19% tax. So, shareholders who are earning less than $45,000 will be in this refund position because the franking credits will exceed their marginal tax rates.  

Rob Cameron:  
So, when we’re comparing investing in the share market to investing in property, property investment has a clear advantage to reducing your taxable income on a PAYG system and the franking credits don’t really play in that same game as such.  

Michael Rebula:  
Well, the franking credits actually do. I’ll give you a scenario – let’s say a company has $100,000, it’s paid tax at 30%, so there’s $70,000 to pay out to the shareholders. Let’s say that the full $70,000 gets paid out to the shareholder, the single shareholder. In the shareholder’s tax turn, they will record the $70,000 dividend payment that’s made, but they would also include it as taxable income – the franking credit. So, $30,000. So, their taxable income gets grossed back up to a pre-tax number that the company would have paid. So, $100,000 in their tax turn, they pay tax at marginal tax rates on that, and then they get the franking credit based on the franking credit.  

So the franking credits do get included in taxable income for the shareholder. It’s just where the credit comes back to avoid that. To get the credit for what’s already been paid in tax.  

Rob Cameron:  
But of course, to get the franking credits you’ve got to have a lot of shares to get the dividends. So, it’s that balance as well there – so if people want to invest in property or have been investing in property and thinking it’s not really as good as it was, how else can I do it? Sit down and have a conversation with you and looking at this way of supporting their income is going to be well worth it.  

Michael Rebula:  
Yeah, definitely. And it varies depending on your life stage – whether you’re at retirement age or you’re a young family. Some of our clients who are approaching retirement aren’t going to have a salary and wages or whatever it is. So, that’s when the share returns are really strong in a sense that they might be below that $45,000 taxable income. So, they’re going to be getting refund after refund, year on year because of the franking credits.  

We do find that’s where we have important conversations around structures, and shareholdings and whether you hold your shares in a company or a trust or even a self-made super fund. We’ve been having more conversations around super funds and share investments, noting that a super fund typically pays tax at a 15% flat tax rate. So, the super fund pays 15% and if you’ve got shares in your super fund returning a 30% franking credit, those franking credits are just going to be returned to you year on year. So, the structures are really important for sure.  

Rob Cameron:  
Cost of living is spoken about a lot. People are somewhat stretched, interest rates are sort of steady at the moment but there’s talk that they need to go up again to keep things under control and there’s a lot of pressure on people spending, therefore businesses need to work harder to get their dollar. In general, what’s the mood on the street?  

Michael Rebula:  
Yeah, I think you’ve hit the nail on the head there. Cash is king – they always say that. We’re finding overall that payments of invoices for services provided might be slowing down a little bit. So, our clients are really putting a squeeze on making sure that things are collected when they’re due because we are finding cash is starting to slow down a little bit, whether it’s in a business sense or a family with the cost-of-living pressures that they’ve got.  

And you hear the prospect of potential interest rate rises coming up later on this year and you hear of families doing it a bit tough out there at the moment, so certainly that’s not going to provide any alleviation of pressure for families in a cash flow sense. So yeah, certainly feel for clients and people in general with this time that we’re in, but hopefully, we can get through and see the other side. 

Rob Cameron:  
As I go around talking, particularly agriculturally, but also in some manufacturing sectors, most people seem to be struggling to find staff so it’s looking to me like everyone who genuinely wants a job has probably got one. How are your businesses finding staffing?  

Michael Rebula:  
Yeah, it’s getting harder and harder to find staff to fulfil roles.  

Rob Cameron:  
So even in professional services as well?  

Michael Rebula:  
Absolutely. From what it was 10 years ago it was quite hard to get a job at an accounting firm but we’re finding that the landscape has changed. We talk to a lot of clients and they’re finding recruitment is a little bit challenging and so that’s where we’re finding businesses are starting to have to try to think more.

It used to be that the employee would have to do whatever they can to fit in with the firm but it’s now the employer starting to try and change. Whether it’s reduced days or more RDOs or whatever it is. They’re trying to be more flexible to the employee’s needs. So, it’s a strange time in that sense.  

Rob Cameron:  
I did advertise this morning that we were going to have a conversation in the first hour this morning about the disconnect from employment, which has changed. We’ve had the working-from-home phenomenon, there’s been a lot of argy-bargy around what a workforce looks like.  

Unfortunately, that conversation can’t take place as our guest has fallen ill, but we’re going to try and have that conversation around the changing face of the workplace because it’s certainly massively changed.  

I guess from an organisation like yours, working from home is something that you do pretty easily because the type of work you do to manage your clients’ circumstances is something that can be managed from doing it at home at the kitchen table as opposed to needing to be at the office. Has it changed the dynamic of your workplace around that?  

Michael Rebula:  
Absolutely. I think organisations are changing with things like working from home and all the other things you can bring in. If you’re not changing, you’re just going to be left behind, unfortunately. It’s just the way that the work-life balance, the priorities of people, the different demographics.  

The times that we’re in requires employees to adapt in a sense and working from home is an important part for a lot of people with young families. I know I’ve got 2 kids and working from home for me does allow me to focus on the work thing but also spend lunch with the kids and do that work-life balance and things so it’s really important  

Rob Cameron:  
Look if it makes you a happy employee. If you take out the time in the morning it takes you to look pretty to go to the office, plus you’ve got to drive to the office, that’s downtime and if that time can be spent with a young family helping your wife or your wife helping the stay-at-home husband do the work, it’s got to make a better, happier person. Therefore, if your employees are more engaged than as employer, that should be a benefit.  

Michael Rebula:  
I think it’s a win-win all around. There is a delicate balance, I think, for organisations. The other side is, there is the culture and climate element of working from home. So you don’t want employees to feel isolated in that teamwork element and certainly in our profession, there’s a lot of tax laws that are coming up and legislation changes.  

It’s discussing those things and how they apply to clients, who we’re going to contact and being on the front foot. So, do you lose some of that if you’re working from home all the time?  

Rob Cameron: 
Zoom’s fine. Face-to-face is king in those sorts of conversations.  

Michael Rebula:  
Yeah, for sure.  

Rob Cameron:  
Davidsons Accounting – we love having them as sponsors. If you’re looking for an accountant or you need some advice on the subjects that Michael has discussed this morning, contact the company, you’ll find them in West Fyans Street, Newtown or Chilwell, depending on which way you look at it, but West Fyans Street is where you live and just a simple matter of ringing the office and organising a contact with you Michael, is that what we do?  

Michael Rebula:  
Yeah, that’s right. Just call the office and they’ll get in touch with someone who can help you out, whether it’s tax, audits, or super.  

Whatever it is you need help with we can help you out and if you’re a new individual tax return customer, we do give 10% off on the first year’s tax turn.  

Rob Cameron:  
There you go – win-win! Station sponsor Davidsons Accounting. Get on board and they can help you out.  

Michael, thank you so much again. I look forward to our next chat and hopefully in amongst that there’ll be some cryptocurrency discussion.  

Michael Rebula:  
Yeah, looking forward to it. That’d be great. Thanks, Rob, really appreciate it.  

Rob Cameron: 
Michael Rebula from Davidsons Accounting. You’re listening to 94.7 The Pulse, this is the Monday Front Page.  

Need help navigating your tax obligations?  

Chat with our experienced accounting team 

Our knowledgeable accountants are here to assist you.  

You can reach out to us by:  

Stay informed with our monthly newsletter 

For the latest tax tips, financial news, and business advice from our industry experts, sign up for our monthly newsletter, The General Account.  

Disclaimer: The information provided in this article is factual in nature and objectively ascertainable and, therefore, does not constitute financial product advice. Importantly, the factual information that has been supplied does not take into account your personal circumstances, objectives or goals.