.png)
The Finance Show With Joe
Welcome to the Finance Show with Joe hosted by It’s Simple founder, Joseph Daoud. We chat about the financial issues facing ordinary Australians from managing the cost-of-living to investment strategies in order to help you make more informed financial decisions.
Join us as we discuss finance, mortgages and home buying in Australia!
Follow us on our pages;
www.itssimple.com.au
Instagram: @itssimplefinance
Instagram: @thefinanceshowwithjoe
Linkedin: www.linkedin.com/company/itssimple
The Finance Show With Joe
Small Business Heroes: Navigating Tax, Structure, and Australia's Dream Problem
In our conversation with Jacob Fahmy, Client Director for Latitude Accountants, the boys discuss all things small business - the backbone of the Australian economy.
Australia's small business owners are facing unprecedented challenges through increasing regulations, proposed tax changes, and economic policies that favour large corporations over local entrepreneurs.
Jacob explains how structuring is the cornerstone of tax and accounting for small businesses (as well as employees) by helping you save significant money and headaches by getting things right at the start.
Elsewhere we discuss productivity, working from home, and death taxes.
Book a free discovery meeting with Latitude Accountants if you're an ABN holder to ensure your business is structured correctly for your goals.
Contact Jacob Fahmy:
Instagram: https://www.instagram.com/jacobfahmy
TikTok: https://www.tiktok.com/@jacob.fahmy.tax
Website: https://latitudeaccountants.com.au
Follow us for more property news and mortgage advice!
▸Website - https://itssimple.com.au
▸Instagram - https://www.instagram.com/itssimplefinance/
▸Facebook - https://www.facebook.com/itssimplefinance/
▸LinkedIn - https://www.linkedin.com/company/itssimple/
DISCLAIMER This podcast contains general financial information only. That means the information does not take into account your objectives, financial situation, or needs. Because of that, you should consider if the information is appropriate to you and your needs before acting on it.
The concept of taxing unrealized gains is ridiculous, so we are forcing people to make financial decisions simply to pay their tax.
Speaker 2:What have you seen over the last three to four years, especially across the small?
Speaker 1:businesses. All we've seen is legislation after legislation and absolute battering ram plowed through the small business owner. If you increase a tax or introduce a tax on death, you're disincentivizing someone's core motivation to do or build anything that is productive and that creates a lasting impact. There's an excellent video on YouTube by Matt Barry and it's called Put Another Aussie on the Barbie and it talks about this thing that we have in Australia, where we are a lucky country because we are so endowed in natural resources, so much so that one of our biggest exports is natural resources.
Speaker 1:It is our biggest export. We sell them our coal, our gas and all of our resources, and the irony that the Australian people pay more for their energy than the people that we sell it to is preposterous.
Speaker 3:Welcome to the Finance Show with Joe. He's Joe, I'm Michael, and today we have a very special guest, jacob Fahmy. Hi, how are you, hey, good.
Speaker 2:Thanks for having me on. You know I've been trying to drag you on here for about three months now, so I'm extremely excited to get you on here because there's a lot of things that are actually going on in the economy right now. So before we kick off, I just want to give everyone a brief introduction into who Jacob is and where Jacob has come from. So Jacob started off as a cadet at Nexia.
Speaker 1:Am I correct in saying that, mate, you've done your LinkedIn research?
Speaker 2:You know I'm on there stalking all the time, so you were there operating as a cadet for 10 years. Am I correct in saying that?
Speaker 1:No, if I was a cadet for 10 years I'd be doing that he hasn't promoted me beyond cadet, no, no. So I was a cadet at Nextyap for a while, and I'll take you back to the reason. I actually even got into the industry. I'm in year three and I wanted to become a doctor. I wanted to become a doctor because in Egypt I'm Egyptian Well, in Australia, but I'm Egyptian the only things you can do is become a doctor, engineer, pharmacist or accountant. Right, I've got a couple pilots as well but it's crazy.
Speaker 2:They're crazy specialists it's those like five things and then nothing else. Like that's it. You're on the dole, that's it, that's it.
Speaker 1:So, um, I knew I wanted to be an accountant from a young age. I want to be a doctor, but then I did this maths test and I did really well in a maths test. I've got a distinction. You pay five dollars. You, university new south wales do this test for you. I've got a distinction you pay $5, university of New South Wales do this test for you. I've got a distinction and I've said that's it. If I'm in numbers, I'll do something numbers related. I then do business studies in year nine, say, donald Trump doing the apprentice. We had a rowdy class so they just played reruns of the apprentice. We weren't allowed to do actual business studies work.
Speaker 3:No, no, no.
Speaker 1:Public school. And anyway, I said, if someone in business and someone in numbers had a baby, what would that be? And it was an accountant. So I started my cadetship in Next Year. I spent three or four years at Next Year building up my skills and then realized I was just dealing with a lot of old money being moved around in various structures. It wasn't my thing. I really wanted to get into business to help the small business owner. So I worked my way from NextYard to Latitude Accountants, which I joined in 2016.
Speaker 1:At Latitude Accountants, I finally saw what it was like to help up-and-coming small business owners with a couple of guys who had started the firm out of nothing and really were a part of my community that I had looked up to for a long period of time. John, tufik, the founders yes, were a part of my community that I had looked up to for a long period of time, john and Tufik the founders. So I worked there from 2016 all the way up until about 2019, 2020, and I thought I was so inspired by the boys and their efforts I thought I could probably do this myself. I might go have a crack. So I got my own tax agent number, told Tufik, I was doing it and went out and started my own firm Advisory Corporate Accountants. I did that for three years, scaled very quickly, put on a lot of, built the ledger and all of a sudden realized like most business owners I think go through this journey where I was very much a technician but I had to figure out how to actually run a business. So I figured it out on the fly but then realized I need systems, people and resources to help take this to the next level and support my clients in a more effective manner. That doesn't sound relatable. So there's a book called the E-Myth. It's a great one that takes you from technician to operator.
Speaker 1:And I joined back in with Latitude Accountants who were still mentoring me throughout that part of my career John and Tufik. We got together and we said what are we trying to do here? And we set a vision and a mission. We quickly go through the vision and mission and so we believe that the small business owner is the hero of the community. Our vision is to help 1500 heroes make their dreams a reality. Why are they the hero? Because they're the ones who sacrifice their jobs to create jobs for others. We do that in three ways, help you understand your numbers, manage your tax and navigate the small business journey. We encapsulated that, put all over our walls in our own unique way, and we were the fastest growing accounting firm in australia last year. So that's the long-winded story of my career but I there's.
Speaker 2:there's so much to unpack there, especially with the story behind latitude accountants how you want to help you know 1500 small businesses or individuals that own small businesses, grow and prosper. A lot of people think that accounting is all about your rear view mirror, when in reality you actually need them to be your high beams at certain points, because if you want to spend the next financial year growing, you need to make sure that your books line up so that you could possibly borrow business loans, so that you can make sure you have enough resources for these individuals. Or you need to make sure that, let's say, your payroll is in line, that you're under that $1.2 million threshold, so you don't have to pay that payroll tax. That's right. Was that the right number? That's pretty close.
Speaker 1:Yeah, very good.
Speaker 2:Not just the broker over here. But what I'm just trying to say is a lot of people don't understand that accountants just aren't about tax. It's all about structure as well. Take me a little bit through some structures that you've assisted people with in the past to really help them thrive in the future.
Speaker 1:Absolutely. That's a great point, joe. And yeah, we're hiring accountants.
Speaker 2:No, no, joe, and yeah, we're hiring accountants.
Speaker 1:No, no, no, I've got enough studies done. Very good, look, we always say structure is like the cornerstone of everything tax and accounting related. If your structure is right, it will grow and it will help you manage your taxes effectively and move money around your family group and grow wealth in an effective manner. So a classic example. I'll give you two. But let's say you're a small business owner, you're sole trading and you want to take things to the next level. Well, as a sole trader, there's two issues with that. You have. Number one unlimited liability. You're exposed from day one. And number two as soon as you start earning really good money, you're on top marginal rate, and so there's no real way to either manage your taxes effectively or protect yourself from some of the liability you're exposed to. So, right from the get-go, if we have a business owner who's in an industry that's a bit riskier and who is starting to make a bit of money, it would be prudent to have a think about. Okay, maybe you need to go into a company structure, because having a company gives you the corporate veil, protects you from the risk of the business and also gives you a 25% tax rate if you meet certain conditions. But then okay, we set up the company, but who's going to be the shareholder of the company? And that's really important because a lot of people get this wrong and to undo this later down the road costs you a lot of money Capital gains tax to move the shares around. So from day one and I always say this if I were a small business owner and I wanted to grow my business beyond myself and have systems, people and processes, I would set up a company and I would have the shares of that company owned by a family trust, and that gives me the best of both worlds. A company is a nice commercial structure to protect me and to help me manage my business, but on the back end I have a family trust and, where I meet certain conditions, I can pay dividends out to that family trust and disperse it throughout my family group. Obviously, I've simplified it a lot and there's a lot of things you need to go through with your account to make sure that's possible for you.
Speaker 1:But that is, for example, a really good structure for a small business owner. Now that's again, it's horses for courses and it's so unique to each business owner and their goals. So don't just rush into that structure or the structure Bob at the bar told you to do, but that's the prime example for a business owner. If you want a property investor, you really need to think about what is your long-term goal, which I'm sure, joe, you work with your clients on and for different structures there is different lending, which I'm sure you're very well across.
Speaker 1:And not only that with each structure comes different tax advantages and disadvantages. For example, you want a negatively geared rental property, potentially your personal name, but it depends. What do you do for a living? Are you taking on risk in your personal name? Are you a director? Is the property positively geared? Then we might put that in a family trust. However, family trust might be exposed to land tax in certain states. So there's so much that goes into structuring. There is no one structure for each individual. It's really unique to every business owner and it's really important that we say, before you transact, get in touch with your accountant, get in touch with your broker and get in touch with your trusted advisors, so that they're all on the same page and that you have a structure that supports you and achieving your goals, which are unique for every person.
Speaker 2:I love everything that you've said there and I want to highlight something in regards to making sure that your structure is in place and making sure that you have the discussion with your advisors. The reason why I'm bringing this up is because I've gone through a lot of changes recently.
Speaker 2:okay, so I got married at the back end of 22 and then I've recently had my first child congratulations, thank you, thank you um, as you've all seen on social media um, but my thought process behind the way I would acquire property, or the properties I would look at, are very different to what they were three years ago, even a year ago. And this is why it's important to speak to an accountant regularly. And I don't mean regularly like call them up every week, I mean quarterly. Speak to your accountant quarterly and have an accountant that contacts you quarterly, because if you have those items, your values, your risk assessment, everything changes in a heartbeat.
Speaker 3:for example and, michael, I know you want to say something, just give me one second no, yeah, oh no, I was just going to ask is this more for, like, business owners, or this advice for everyone, both okay.
Speaker 2:so think about my personal situation. Okay, just taking on 64 square meters here, 12 square meters here, 76 square meter office in braggaroo not cheap, okay, that's one risk I've taken on. Another risk that has occurred recently is my wife is is no longer working the hours that she was working before, so our income level has dropped on her side. Thankfully, I'm able to assist in my ways. I've got my staff. Everyone has stepped up. We've got the resources to do so. But when it comes to spending the properties that we were looking at previously, I was thinking to myself you know what we can take that hit. Now I'm thinking to myself no, maybe not, because negative gearing doesn't really have its effect until the end of financial year. You've still got to manage the cash flow. So let's say, my interest repayments are $10,000 a month. Okay, just for example, I'm spending $120,000 a year on interest repayments. Okay, people are like, oh, but that's negative gearing, you can get that back when it comes to tax time.
Speaker 1:No, it doesn't come back to me, it just reduces my tax liability.
Speaker 2:You're loving everything I'm saying right now. All it's doing is reducing. I still have to have the cash flow to pay that. All it means at the end of the year my personal tax bill is going to be less. That's all negative gearing means. So for me to say, oh, you know what $10,000 in interest repayments every single year I can afford that. No, it's got to be different. Now I've got a baby at home that needs to go see the doctor right now I've got a baby at home that needs formula, bottles, clothes.
Speaker 2:He's going to outgrow very, very quickly because the kid's a unit. For those not from Western Sydney, that means he's large. But what I'm trying to say is okay, you know what, Instead of us looking for a mortgage or a property that's $10,000 a month in interest payments, we've got to go find something that's $5,000 but might have more growth down the road and possibly closer to that positive year ratio. It might not be able to grow exponentially like a $10,000 a month one, but it fits our profile. And this is going back to Jacob and why you need a good accountant, so that's really good advice.
Speaker 1:The worst advice accountants give, in my opinion, is hey, you're making a lot of money, you should go and buy a negatively geared rental property to reduce your taxable income. And it's so consumed by the everyday person that it's almost like oh yeah, I want to buy a negatively geared rental property. But, to your point, no one understands that if you're negatively geared, you are losing money every month and that actually has a cash flow impact. You are actually losing that money every single month and, yes, you get a tax advantage, but I would never tell you to spend $1 just to save $0.30 to $0.47. So you really need to reassess whether buying a negatively and here's the other thing that irks me with that advice is that's not tax advice. That's actually financial. It's not.
Speaker 1:I don't know if it is or not financial advice, but we're teetering the edge there, because for someone to buy a negatively geared rental property, you need to understand what are your goals in terms of wealth? What are your goals in terms of how much you make? Where your money is going? Super overall investment strategy. Blah, blah, blah, blah, blah. And it's part of the overall picture. It's a financial strategy with tax consequences. It is not a tax strategy, a pure tax strategy. In fact, very little are tax strategies. They are always commercial decisions you make with a tax consequence. That comes with it good consequences and bad consequences, and so the right advice like you so eloquently put it is really assessing where you want to be and what works for your family in that scenario, and then thinking about the tax consequence on how you can mitigate or position yourself differently.
Speaker 3:That's fascinating, because I have only heard the opposite of that Like everything that you like what you were saying, like that standard advice, that like, yeah, just get it and make it negatively geared and you'll be fine. Yeah. But it's just not the case. I'm just I'm glad to hear it.
Speaker 2:No, it's something that a lot of people don't really listen to and they just this is the fucking thing that shits me about this industry. And yes, I did curse because I am so agitated by it. And I actually said it to Jacob when we first met on Zoom and he's like, well, this guy's intense. Okay, I said to him, brokers can now get their certificate for a diploma on a one-day course, chachi PT assignments. Okay, all right, you go to a third party distributor of these certificates, you go online, you do their quick course Three, four hours. You are now able to handle tax file, numbers, passports, everything. Those individuals out there are like oh, you could service the debt. Oh look, yeah, you just negative gear the property. Don't get your tax advice from a broker. Oh my God, what are you guys doing? Doing? There's accountants for a reason, and accountants have to do three to four years of university just to be able to provide this advice, and then, on top of that, to become a chartered accountant is another year afterwards two, three years two, three years.
Speaker 1:And then uh, cfpa there's one level above chartered account there's a fellow fellow which currently John in our firm is, and that's you've got to spend actually 15 years as a chartered accountant, so it's quite a thing.
Speaker 2:Yeah, it's ridiculous that these things are occurring, and I'm just going to highlight something right now Don't get your tax advice from a mortgage broker. They are there to help you borrow money. Always get your tax advice from a mortgage broker. They are there to help you borrow money. Always get your tax advice from an accountant.
Speaker 2:Now we're going to take a quick break and I want to touch on something that's very important to both of us, and that is productivity. The reason I wanted to bring Jacob on today. He is helping small businesses. He wants to help 1,500 small businesses thrive and over the last three years, or even more, I want to say the last four or five years we've actually seen a small business collapse in Australia. We've seen multinational corporations make record profits, but we've also seen over I want to say 2,800 builders and developers go bankrupt. We've seen restaurants closed down. We've seen empty office space all over Victoria.
Speaker 2:Yeah, and currently in the federal government they're discussing how can we increase productivity and you could see the visceral reaction I have right now and they're having an economic roundtable discussing inheritance and death tax. The second one is the cost of electricity and power bills, and you can see how happy I am to discuss that one. The third one is this new increase in superannuation tax as well as unrealized gains, and the fourth one, if I am correct in saying this, is the death tax.
Speaker 1:It was the third, but the fourth one would be the work from home legislation that they're talking about in Victoria.
Speaker 2:Okay, so, the reason why I took a deep breath there is because they want to increase productivity. Let's revert back. I'm just going to take everyone back a little bit. So they want to increase productivity all across Australia and the Victorian Labor government actually lost a lot of votes over the last I want to say year or so because they introduced all these new taxes. I want to say year or so because they introduced all these new taxes. And then to increase productivity, they've now also put in legislation, or they've proposed a legislation, where it would be required that you work from home two days a week.
Speaker 2:Okay, so we want to increase productivity, but people get to work from home two days a week and I'm not opposed to working from home. We want to increase productivity, but people get to work from home two days a week and I'm not opposed to working from home. I am opposed to. We've got this requirement in place. You have the right to switch off, but also you're working from home two days a week. How am I supposed to, as me a small business owner, how am I supposed to visually see if someone has actually completed their requirements and if they have not completed their requirements? I'm not allowed to contact them after 5pm to say hey, did you complete what you had to today, so let's get into everything. Jacob, sorry, I'm going on my rambles.
Speaker 3:Okay, we'll save that for my own personal Instagram stories and reels and let's get into this.
Speaker 2:So what have you seen over the last three to four years, especially when it comes to small businesses?
Speaker 1:Absolutely. I've said this a million times on a million different podcasts, but I want to keep reiterating this. In Australia we have a dream problem. I always say the American dream is to start a business, the Australian dream is to buy a home, and I say the Lebanese dream is to build jupies, as you once said. The Egyptian dream is to go to uni, get educated and become an engineer, doctor, lawyer, insert any other profession.
Speaker 1:Now, the problem with this is that it's created a culture that doesn't lift the small business owner up into hero status. And there's a reason we're really specific on heroing the small business owner, because when you become a small business owner, you provide jobs to other people and increase productivity. Small business owners are the ones that innovate. Small business owners are the ones that create careers and small business owners are the ones that create community feel and fabric. So think about the local cafe you go to that's vibrant and buzzing, the local club you go to on a Friday night. All those sorts of things drive the community and drive the economy. All those sorts of things drive the community and drive the economy.
Speaker 1:But unfortunately, over the last four to five years, all we've seen is legislation after legislation and absolute battering ram plowed through the small business owner, whether we're talking about things like working from home two days a week. Now, like you, there is no issues with working from home. That's not actually the issue. The biggest issue is when a government gets involved in the relationship between an employer and employee. It takes two to tango. If you're working for someone you don't like, you should reconsider why you're there working for them. Vice versa, if you're an employer and you can't trust your employee working from home, maybe that's not the right employee for your business. But I'll tell you what's not right. What's not right is that we have an external party get in the way of two people that have shook hands and said okay, I want to take this job, you're going to pay me X, y, z. These are the conditions we're going to set yes, I agree, or no, I don't agree. There's two parties at that deal.
Speaker 1:So when we force the small business owner to say, no, your staff have to work from home or have the right to work from home two days a week, we've destroyed that relationship between them. We've created an unfair playing field for small business owners, because every resource is limited for a small business owner, but if you're a big corporate, you have not basically unlimited resources, but you have a lot more resources to be able to handle changes. Do you know who licked their lips at the proposals of the two-day work from home? It's big corporations. It's an unfair playing field for small business owners who are trying to manage staff, who are trying to grow, who are trying to innovate, and we're absolutely destroying them and allowing the big corporations Every time we increase the minimum wage.
Speaker 1:Do you know who licks their lips? It's the bigger corporates with thicker profit margins who can increase their prices. If Nike increases their prices, nike's still going to make money. If the small business owner has their minimum wage of their staff increased, they have to push that on because they can't afford to reach into their back pocket. Most small business owners don't make a crazy amount of margin as it is now. They have to force the consumer to pay more and that creates friction. So it all sounds good and noble for all these things that we're putting in place, but is it the right move for a small business owner?
Speaker 3:it could be argued completely opposite would it be a better recommendation like it, because it, because it's obviously going to be talked about in parliament and such Would it be better to put a company size limit on this work from home stuff? So if you're I don't know like 50 below this legislation does not apply to you and above it does, would that be a better solution? Or would it just be better to scrap it entirely?
Speaker 1:I would. Honestly, I'm opposed to most. I uh very um, I don't want to say conservative, uh, there's a more libertarian on this one. Yeah, I believe the employer and the employee should come to their own agreement. I, because what's right for you is not right for the next person, and I don't believe in mass legislation to just decide.
Speaker 1:Australia is so good at doing this, by the way, australia is so good at saying this. Little one thing happened. Therefore, the way we do everything is going to change. Oh boy, we're like we throw the baby out with the bathwater.
Speaker 3:Jesus yeah yeah yeah, too close to home right now. Yeah, yeah, yeah.
Speaker 1:This one small thing happened and it may be serious. I'm not saying it's not. I'm not mitigating or downplaying the seriousness of one bad employer-employer relationship. I'm not. But what I'm saying is that most people can come to an agreement between their employer and employee and they don't need the government stepping in and acting for that. You may feel differently, michael.
Speaker 2:I actually like that suggestion. I actually think that imposing it on all businesses is a bad move. So I actually really like that idea and I also really like what you said. I like the fact that we shouldn't have the government getting involved in saying, hey, you have to work from home two days a week and go to the office three days a week. I want to give you an example.
Speaker 2:What about the companies that went and built these sky-rise towers and then the small businesses that took a punt, went and bought a commercial suite and now all of a sudden it's empty. And guess what? The person that's walking past that saying oh no, that's an empty shop, I don't want to go in there, I don't want to visit, because I don't think there's many people that are there that are going to be able to help them. It's not fair. Who it is fair to is PricewaterhouseCoopers, and I keep bringing them up and I promise to God I love them, but I shouldn't be bringing them up. Pricewaterhousecoopers downstairs they might have 100 staff, 30 desks, but because they have the resources, they can accommodate this.
Speaker 3:I'm in agreement that the government shouldn't be in, involved in the personal relationships essentially what yeah that you're creating, or professional relationships and stuff like that. Like mandating, uh, work from home days should not be the case. But is it like better to be like, yes, you have the right to bring up with an employer, but that already exists, that already. That's what I'm thinking, right, an employer, but that already exists, that already exists.
Speaker 2:That's what I'm thinking. Right, that's what happened. That already exists within contractual law where, every single year, your employment contract, I'm pretty sure you have the right to be able to renegotiate with your employer and then discuss those things. But if I have someone in an interview with me and this isn't me discriminating, this is me just knowing the productivity level I need from the individuals in my team. If they say to me, oh, can I work from home four days a week, all I'm thinking to myself is how are you going to learn?
Speaker 2:Learning is done via osmosis a lot of the time, and what osmosis is is when you are sitting in a group of individuals and hearing how they talk. You know a lot of the slogans or a lot of the ways that I was taught mortgages was by listening to the people four rows away from me, having them say oh, we base our interest rates on LVR tiers. I thought you know what? That's a great way to be able to explain it to people, so I'm going to start using that. I wouldn't have learned that if I was told, hey, just work from home four days a week and you're going to write mortgages, and guess what I wouldn't have performed. And, on top of that, would have been fired. So you need to be able to create those environments, that cultures for individuals. I agree with what you've said, and I've agreed with what you've said, and I also think it's absolutely stupid that they're trying to make this legislature yeah it just seems like they're fiddling with something that doesn't need to be fiddled with.
Speaker 3:Yeah, 100%, as I see it. Okay.
Speaker 2:The next thing that I want to discuss is the new inheritance and debt tax. Yeah, absolutely, what's your opinion? I don't have a strong one yet. Okay, yeah, it's going to come, don't worry.
Speaker 1:Yeah, yeah yeah, so, yeah, there's been talks around all these productivity roundtables and economic roundtables, much you know, new stuff that's being should we do this, should we do that? Everyone's trying to figure out their way and trying to come up with a solution. Now, part of that is obviously our government has a one. I think it's a $1 trillion deficit on the budget at the moment, or at least leading up to. So we're trying to find a way to, you know, pay that off and manage that as well. And one of the proposals or one of the ideas that have been floating around is a death tax.
Speaker 1:Now, to give you a little bit of context, australia, I believe, did have a death tax once upon a time. That changed, I believe, in the 70s. I could be wrong, but it did change in the 70s and they want to bring one back, and I'll give you the pros and cons and then I'll sort of maybe tell you my thoughts as well. So the pros of a death tax is that wealth is distributed upon death, basically. So if you have a high net worth individual, they've built their wealth using the Australian system, using the Australian economy, using, you know, the productivity of employees and whatnot. So upon their death, there should be a 2% tax and we get to use that money to fund services and pay off our debt and create a better Australia. That's one side of it, okay.
Speaker 1:The other side of it is that hang on a minute, if you tax someone upon their death, it creates two issues. The first is there is generally an intrinsic motivation to create wealth and create a legacy for those beyond you. Okay, and so, and the later you go in life and as you build a family, you start to realize that it's not all about yourself and you want to maybe do things for others. Some people are driven like this, some people aren't. Okay, that's fine as well. But if you increase a tax or introduce a tax on death, I'm almost left feeling I'm going to go and do all these things and what the heck is even the point of leaving a legacy if it's going to get taxed and washed down anyway? So you're disincentivizing someone's core motivation to do anything or build anything that is productive and that creates a lasting impact. Okay, that's number one.
Speaker 1:The second argument against a death tax is that if someone's accrued their wealth, they have already paid taxes to accrue that wealth. So that money that sits there has already had income tax paid on. It has already had GST go through. It has already had the super fund 15% tax and maybe even unrealized in the future. They've already paid all their council rates, their tolls, and I know these aren't taxes, but they're all on cost for the everyday Australian, and so there's so many. I could be here if you gave me 10 minutes. I reckon I could fill it with the amount of taxes we pay already and to then slap on another tax right at the end of their life. What are we doing here? So that's sort of the um. They're both ends of the spectrum. How do I feel about it?
Speaker 3:I think less tax is better yeah, realistically, it's always going to be the economies often thrive when uh the government is less involved and uh, there's a limited tax.
Speaker 2:And I bring this up because you look at, you know uh states like the emirates. You look at uh other states. You even look at singapore. Singapore's got less tax than we do, okay, but they are still performing quite well economically. And then you look at places like norway, who benefit quite a lot of their resources and which we have in aust. They're going to be started on that too.
Speaker 2:But you look at places like Norway where you know they're not as entrepreneurial thinking as we are here in Australia, but they also have a really you know great way of life. They actually I'm pretty sure students get paid to go on a gap.
Speaker 1:If there is yeah, there's heaps of quirks around that.
Speaker 2:And they also get paid for their university if they go offshore and complete their degree overseas, which is ridiculous. And then we're here in Australia and we have all these other taxes. The reason I bring this all up is we're reducing the motivation, or the intrinsic motivation, to go out and build something. But then you said something else where, well, you used the Australian system. You did use the Australian system to be able to create this wealth for yourself. So me, on both sides of the coin, I'm sitting there and I'm going to myself. Well, hold up.
Speaker 2:I do like that thought, because if I've used the Australian system to accumulate my wealth, I want to be able to make sure it's distributed to my kids, but at the same time, I should have to pay a little bit extra. And that 1% to 2% range. I was thinking okay, the core issue that I have is I already know how this tax is going to be avoided. This is going to be stuff that's in personal name, the moment that you go and you set up a family trust or a discretionary trust and you appoint different beneficiaries and that upon your death, you will no longer be the trustee and instead one of the kids would become the trustee or something like that. The inheritance tax is avoided. So all I'm thinking to myself now is this is going to sell headlines, but the people that are extremely wealthy have already figured out how they're going to avoid this.
Speaker 2:Instead, what's going to happen is it's the people that have accumulated a bit of wealth, don't have a good accountant like the person on my right to be able to structure certain things, and their kids are the ones that are going to get hit.
Speaker 3:Yeah, that makes sense to me. I'm also hesitant about talking about a death tax and whether or not it's going to happen, because I do remember when Bill Shorten was trying to go for the election.
Speaker 3:I think that was 2018, it doesn't matter, regardless, it was a while ago yeah yeah, and they were saying that there was going to be a death tax, but that wasn't. That didn't end up being true. I just think it's like. It's a bit like negative gearing. I think it's political poison. I don't think. I don't think anyone will touch it.
Speaker 2:Yeah, regardless of their motivations no, it's, I just think it's silly. But even even at its core, just bringing it up gets the average punter, or the, as we're all called now for some reason. Thanks, instagram, hey that's the average australian revved up and if anything and you know, in our arab culture, I know my dad, my dad has worked his ass off all of his okay, the moment that they're going to try and introduce this, the first thing that's going to happen is people are going to go to their accountant and say, hey, no.
Speaker 2:I don't want this to go. You know, I worked my ass off and I don't want my kids to be forced to sell something, because that could happen too Be forced to sell something so that we could bring this in. It's also got a scary name like death tax. I just think they're thinking of anything to try and repay their failed ideas or projects.
Speaker 3:Well, it's also taking the burden off, like people's personal incomes and small businesses right, because that's where most of Australia's tax income comes from. Right, like it's personal tax, right Income tax.
Speaker 2:Wait, wait, wait. You think they're it's personal tax.
Speaker 3:Right yeah, income tax.
Speaker 2:Wait, wait, wait. You think they're going to introduce a debt tax and reduce the tax? No, no, no, I did not say that, okay.
Speaker 3:I'm saying trying to increase overall revenue, then I'm going to try to reduce the tax. I don't want that money, but just to like reduce the burden on like personal taxes. So instead of having to increase personal tax, they get it from elsewhere.
Speaker 1:Look, I think as well. There's just two coins and there's two ideas that are clashing here, and one of them is that, hey, should we tax our way to repaying this debt? Or? B, should we increase productivity so that, with increased output, we can get more revenue and just tax it in the same way? And so more revenue, same tax, or same revenue, and so more revenue, same tax, or same revenue, more tax?
Speaker 1:They're the two ideas that are clashing here, and so someone like myself and I always reference this the american system was set up. The literal reason, one of the reasons that country was started was it was a t-tax and and the revolution against T-tax, and that's how they declared independence, and they have built one of the most successful economies of all time. Love them, hate them, think what you want, just based on the fact that they have the biggest economy that has ever been built of all time. How did they do it? Lower taxes, increased innovation, motivation for someone to go and create and to innovate and to be rewarded for their efforts, and not get taxed in every which way, just to, you know, um, just to crush them so I've got a conspiracy theory that's just built up in my head.
Speaker 2:No, it's just all of a sudden. Okay, so do you think that they've increased all these regulations around building and construction to actually drive people away from focusing on using housing to increase their wealth and instead start focusing on different businesses? And the reason I bring this up is we've seen you know, senator bragg uh always posted there's 5 000 new regulations in the last three years um, and we've seen a lot of developers actually exit the industry or, if they haven't exited, they've started to look at regional areas and it's cheaper and it's easier to build there and stuff. Do you think that that's a possibility? They've instead decided to disenfranchise people that were in property, development and construction and instead got them to focus in on creating businesses. Do you think there's a possibility? Nah, I think that's terrible.
Speaker 3:I think you're overestimating their own competence, and their own interest in the property market.
Speaker 2:That is true.
Speaker 3:With increased demand and less supply. As we see, prices go up.
Speaker 2:It's not rocket science, basic economics, you know, and I don't think it's that crazy.
Speaker 3:I'm about to shed a tear.
Speaker 2:I'll give you guys a moment.
Speaker 3:He's going to get so excited when he finds out that I'm planning to build a duplex.
Speaker 1:Okay, okay, laughs aside.
Speaker 2:The thing that has irked me the most is on today's economic roundtable. The first thing that brought up was electricity and power and we saw, you know, every Australian will pay $250 less for their electricity bills. They went up and everything. But the truth of the matter is electricity and power bills let's say and I might even be overextending here about $2,500 a year. Let's say for the average Australian it's about $2,500 a year. Is $2,500 a year really going to affect people if they drop it by 20%? So they're going to have $500 extra in their back pocket when all the prices and everything's gone up by 41%. Should they be discussing this or should they instead be discussing transparency?
Speaker 1:This is a great point, and you're absolutely right to question the ridiculousness of the fact that we're getting assistance, and it's such immaterial assistance to the. It's almost a slap in the face to the everyday Aussies honest truth. There's an excellent video on YouTube by Matt Barry and it's called Put Another Aussie on the Barbie and it talks about this thing that we have in Australia, where beneath us. There's a reason we're called the lucky country. We are a lucky country because we are so endowed in natural resources, so much so that one of our biggest exports is natural resources. In fact, it is our biggest export, and we can trade it not to someone halfway across the world, literally to our neighbours in the APAC region. We sell them our coal, our gas and all of our resources, and the irony that the Australian people pay more for their energy than the people that we sell it to is preposterous.
Speaker 1:This is the hardest part to understand about Australia is the way our mining and the way our energy sector has managed to hurt the Australian, the everyday Australian, more than they've been able to help them. There's a core link between the productivity of your country and the price of energy, because energy is literally everything. It powers everything around you and it moves everything around you, and there's so much like. Every time we check inflation, it's one of the core indicators of inflation how much you pay for energy, right, and the idea that we oh we got a $200 saving, dude, we shouldn't be even paying that much for our electricity to start off with. It's not about how much we're saving. It's about getting back to the drawing board and saying how am I letting myralian people suffer with high energy prices, but the our, our competitors in in countries, um, not far from us are building their economies off the back of our natural resources.
Speaker 2:It's ridiculous and they're not paying tax on it either yeah, and, and and and.
Speaker 1:you've nailed it. Yeah, yeah, sorry.
Speaker 2:Sorry, I've never seen you lost for words. I can't believe I did that for a second.
Speaker 3:I have a question. Is that as a result? Because I've heard this spoken about? I'm not particularly educated on the subject, but is it because of our privatized energy grid and things like that?
Speaker 2:No, that's all it is how it came in in 96, 97, 98, decided to privatize all of it, sell it off, and then that was it. Oh, okay. Well, there you go Okay, but this is the thing, you can reintroduce laws, yeah, of course.
Speaker 2:You can introduce laws. You could say hey, guys, you know what, give us our tax money. Hey, you know, want to build a new highway. I don't want to have to privatize that and send it to someone. And then, all of a sudden, the m5 only has two roads, two lanes on their, on their street, and there was gridlock traffic. So we had to build the m8 to get around it. No, there's a way to do this. Yeah, it's called having balls. That's all it is, and we're going to cut jacob out of that clip so he's not included, but that's all it is it the final question that I want to ask.
Speaker 2:So we've brought up the death tax, we've brought up the um, the uh, possibility of sorry, let me. We did death tax, we've done electric vehicles work from home.
Speaker 3:Work from home. Okay.
Speaker 2:And the last one, the unrealized gain status, yeah so, um, I want to move on from this topic because we've got one more to discuss, and it's my favorite one. But we've got the death tax, we've discussed working from home, we've discussed electricity bills. The final thing that I want to discuss is the new unrealized gains tax and the possibility of increasing the amount that you pay tax in your super from 15% to 30%. Now, this has been a massive debate all over you and I had an argument about this a few weeks ago. It's all about it's a good now. I had a kid, but this has been brought up time and time again. Have you had clients approach you and say, hey, I need to protect myself from this tax? What's going on? What are you seeing on your side and what do you think is going to actually happen?
Speaker 1:Because they haven't brought the legislation in. That's right. That's exactly right. So it's a good note you make. This isn't legislation that is in at the moment, but it's very, very hotly debated at the moment and, with the Labor and the Greens controlling the rooms, there is a likelihood that this can definitely come into play.
Speaker 1:Now two things. First of all, unrealized gains. Nothing irks me more than tax on unrealized gains, because of a few things. Number one it's touted to only be for super fund balances above $3 million. However, they have left the door open. Why? Because it is not indexed and, with all things, tax and government, once they get it in, it's almost. It's not impossible, but it's very rarely ever removed. Okay, so, first of all, it's not just going to be for people with $3 million of assets, because in future, that $3 million, with the power of inflation, is going to be $2 million, it's going to be $1 million, it's going to be whatever. It is right. And so, all of a sudden, you have everyday Aussies and everyday workers that are going to accumulate wealth through inflation and are going to exceed the threshold. That's number one.
Speaker 1:Number two the concept of taxing unrealized gains is ridiculous, because there is no liquidity when you have not realized the asset. So we are forcing people to make financial decisions simply to pay their tax. So, for example, you have an apartment that's gone up in value through inflation that well, let's just go to a house in Western Sydney. House in Western Sydney is typically double what we've seen double over the 10-year period. So eventually these houses, according to the data, may be worth $3 million. Go seek financial advice for that, but it may be worth $3 million. You may then have to sell that asset simply to pay a tax that has been imposed on that asset. Do you understand how ridiculous it is to enter into a property transaction just to satisfy a tax payment that you have to make? I think that's ridiculous.
Speaker 1:And then my final problem with this unrealized gains tax is that it starts in the super fund and then it ends up to the individual. There we go, and so I see it as this Trojan horse that, yep, we're going to tax super funds and it's only for the mega rich and it's only going to affect a few people anyway, and we don't even whatever this is, we should tax the rich, and blah, blah, blah. And then all of a sudden it finds its way into. Okay, let's do the same thing for structures, trusts and companies. And then, okay, we're done with taxing trusts and companies.
Speaker 1:And then who's next? Let's go to the individual and say to the individual owner hey, you own some crypto that's gone up in value. Sorry, sorry, mate, got to sell the crypto to pay the tax. Hey, you own a property. Most property investors are mom and dads. We know that because that's what the data suggests. Hey, by the way, yep, we know you're trying to accumulate this wealth and for your kids and whatever. That's great, but you're going to have to sell that because you need to pay some tax on it, or you can just find the cash elsewhere, which they may not necessarily have. So it starts at the super fund and it's a slippery slope very quickly to the everyday Australian person and, before you know it, two generations maybe from now, you have an unrealized gains tax for regular, everyday Aussies who are just trying to make ends meet. It's the boiling frog, that's right.
Speaker 2:Yeah, it's. Keep them in there, slowly, turn the temperature up. The frog has no idea. And then all of a sudden the frog is born. That's right.
Speaker 2:I actually really like the points that you bring up when it comes to unrealized gains tax, because now you have to sell the property to potentially be able to just pay a tax and there's so many things around this. My key issue with it is this tax, I'm almost certain, was introduced by Labor. Not sorry, superannuation was introduced by a Labor government. It was Keating in the 90s that came up with it. So he brought in this superannuation and Liberal was against it. Liberal was against it. And then you've had people go oh you know what, if I purchase this in my super fund, I'm not going to develop it, I'm not going to do any construction, I'm not doing anything like that. This is just my block of land that I am now using to be able to own a farm, okay, to be able to provide resources in Australia. Now, all of a sudden, that has changed. I do not like the fact that we have a government bringing in an extra 15% for unrealized gains, whether this comes in or whether or not I understand the indexation and everything. I think that this is a silver bullet for Labor to get voted out, because if they bring in more taxes, do you know what's going to happen? Victoria is going to be like, yeah, we get to work from home 30 days a week. Everyone in New South Wales is going to vote the other way. That's all that's going to happen, because eventually, people are going to get sick to death of it.
Speaker 2:People want to make money. People miss the fact that we had a prosperous economy back in 2018, 2019, 2020, even during COVID, I understand we were printing money like no, tomorrow we have to pay it back. But people miss being able to go outside and have opportunities, okay, and by having this economic roundtable to discuss productivity. I think that is the discuss productivity. I think that is the right move. I think that is the right move because these guys they did everything they could to get voted back in and now they want to introduce all these things. No, get fucked. Sorry, I keep cursing. I understand that I've got a son. He's going to see this one day, but get fucked, okay, because it is not fair to the average Australian punter and with that, we'll be right back. So the government wants to bring in all these new legislations? What are the top three mistakes business owners will be making that will end up affecting them in the long run, if any of these things do come in Absolutely?
Speaker 1:I think, look first. Ultimately, like we say with everything, it comes down to your structure. You need to structure yourself in the best way for the goals that you are trying to achieve. If you are, you know, low risk and you just want to go out there and do something to earn a little bit of money, yes, maybe a sole trader side hustle is the right structure for you. Maybe a sole trader side hustle is the right structure for you. But if you're someone who wants to move and shake, who wants to put on people, who wants to employ, having a company structure, having a trust structure in place, own the shares potentially, you know, potentially having a trust structure in place, whether it's discretionary, or a unit trust or a family trust.
Speaker 1:Absolutely, but just making sure you have the conversation with your accountant before you transact so that when you do you're in the best possible position, because it's very expensive to go from structure to structure. I will go through a couple of like two more, diego.
Speaker 2:I just want to ask you why is it expensive? Can you explain the capital gains tax and why it is expensive?
Speaker 1:Absolutely so. In Australia we have this thing called capital gains tax and it doesn't matter generally. It doesn't matter who is transacting. As long as there's two parties transacting and we have a capital gain event triggered, you pay capital gains tax. Let me give an example. You are trading your company. The shares of that company are owned by you as an individual. If you want to restructure your shares of that company to a family trust that owns those shares for distribution reasons, you have to pay capital gains tax when you dispose of your shares and sell it to your family trust, even though you're related people. And so a lot of times people get tripped up where they go out. They build this company, it's making money and it's good, it's got value in it and they have to now pay capital gains tax for them to restructure their affairs when, if they won, the company had no value. You could have set it up with a trust owning shares and mitigated a lot of that headache laid down the road. If you do, it's not the end of the world, but it is going to cost you more, because you do have to go and get a valuation for your shares, you do have to pay capital gains tax if there is any. And then you have to weigh up hey, is the capital gains tax I'm paying now better than the taxes I might pay down the road, or not?
Speaker 1:One of the second mistakes business owners make is not paying themselves in the correct way from their entity. And I'll give you an example of this. A lot of people start companies and say, yep, I'll just start the company and they're used to being a sole trader where they can just move money around, throw it around, no one really cares. Then, all of a sudden, they've ripped out money out of their own company. They've never paid a wage, they've spent a lot of their personal. They heard Bob at the bar saying, yeah, just put everything through the company and you'll be right. And they've built up this massive director loan. Because that's what money that you take out, that you haven't declared a wage or a dividend is. It's a director loan. So you've taken that money out of the company or you've spent it personally on the company's from the company's funds. So you have this director loan to accompany yourself and there are tax consequences that go along with having this money that you've taken out because you haven't paid a wage, so there's no tax that's being paid on it. You haven't paid a dividend, so there's no top-up tax that's been paid on it. So now you are forced into this Div 7A loan agreement. It's a big headache for me to go through. It's complex, but ultimately make sure when you start up a company, pay yourself a wage. Then, out of your profits, consider paying yourself a dividend. Do not just go and rip out money and think that it has no tax consequence and that it's never going to come back to bite you.
Speaker 1:That's number two and number three know your numbers. You would be shocked how many business owners I speak to every single day that say hey. I say hey, what were your sales last week? And they say, oh, I actually have no idea. If you don't know what your sales are, how can you know that you're running a business that is profitable, that can grow, that can pay staff, that can pay overheads, that can do all these things? What the heck is the point of getting into business when you don't understand the finances? Warren Buffett says that finance, or accounting, is the language of business and unfortunately, when you get into business, you have to be across this and you have to understand your numbers.
Speaker 1:Because I'll give you a quick example, and then I'll wrap it up. I had a client book me in two weeks ago and they say, jacob, I feel like the wolf of Wall Street. I've put out this ad on Meta and it's blown up and I'm selling like crazy and I don't know what the heck I've done and I'm just selling so much and I said, okay, just do me a favor and book me in for a meeting so we can go through these numbers with you. We went through the sales price, their direct costs that go into producing the product or service that they were making, and then we went through the overheads. Do you know what happened by the end of it? They were actually losing money on the sales that they were making and they were sending these ads to the moon. And so if we hadn't got in in that two week period, they would have booked up two years of revenue, making a loss. Do you know what's worse to making no money, losing money? Okay, so imagine you go.
Speaker 1:It's better to just stay at home and do nothing than it is to make a sale or make a loss on that. Anyway, by the end of the conversation we rediscussed their margins. We went through it all. We negotiated their direct costs and they had a plan to go back and negotiate the direct costs. They had a plan to increase sales. I said listen, you know what's funny? I said how many people were saying yes to your offer? And they said all of them. Whenever that is the case, you have a pricing problem Because you price too low, correct, so not everyone should say yes to your service or offering. So anyway, we rejigged their pricing, we rejigged their direct costs, we rejigged their overheads. Luckily they had low overhead business and now they can go and scale in a profitable way with numbers that they understand and that reward their good work and their hard work running this business.
Speaker 2:That's a fun example. I love that story because when I first started, I didn't know my numbers.
Speaker 2:Yeah, now I've had to build out a full break-even analysis every single time I hire someone, every single time. Well, you know we get around bonus time every single time that you know we're about to invest. You know purchasing furniture. It's knowing your numbers and knowing what you have to work with and what your operating costs are. If you don't know what your operating costs are, you're going to get hit, and you're going to get hit hard. Okay, if you don't make sure you make sense of everything along the way. And I absolutely love that key bit of advice. It's general Don't go and you know, changing anything without speaking to your financial professional. But I absolutely love that. The last question I do want to ask you today if you were to see something? Okay, and they approached you and they were a sole trader, okay, and they said to you jacob, I really want to buy prada sunglasses and I want to claim it in the business.
Speaker 2:What would your reaction be?
Speaker 1:uh, you know what's so funny about prada sunglasses specifically? Yeah, that if you're a construction worker out on site and you're in the sun, or if you're a teacher and you're out on school duty, maybe the full amount may not be deductible, but if you're in the sun and they're protective and they're not just designer, they actually have some function to it. Part of it could actually be tax deductible. So on that specific example, I would go through those facts now. If that same person came to me and said, hey, I've got a trip to europe booked or I'm going out and buying my c63 or my whatever it is, insert m3, you know all the cars us people in western sydney love to buy we would have a different conversation and and that would be, let's make some money first.
Speaker 3:Yeah.
Speaker 1:Let's make sure your business is profitable first, let's make sure you're achieving your goals and dreams, and then we can think about buying the you know, all these things, the fancy stuff, the fancy stuff, and the fancy stuff isn't tax deductible. Okay, because if it was, well, it would add value to the business. And again, I can tell you it's not going to.
Speaker 2:I do have to make you laugh. My wife told me the other day she's got a conference in Paris and she turns to me. She goes it's a tax expense, it's tax deductible. And I go, alison, I love my wife to the heart. Do you know what that means? That's all I said to her. Jacob, it's been absolutely fantastic having you on. I know we've gone over time. Your phone has gone off. I don't even want to look at that absolutely so.
Speaker 1:Uh, on instagram and I'm now on tiktok. Uh, I've held it off for as long as I could, but I'm a tiktok. Apparently you still don't know how it works yeah I'm still trying to work it out.
Speaker 3:I'll give you guys a a lesson, don't worry.
Speaker 1:That's it, so jacobfarmy on Instagram, and then my TikTok is jacobfarmytax.
Speaker 2:I need to rejig that username, but that's what it is for now, Anybody who wants to book in with Latitude Accountants or yourself what's the fastest way for them to be able to reach out?
Speaker 1:to you Absolutely. Check out the website wwwlatitudeaccountantscomau. You can book in. You'll get a call from our BDM who will sit down, discuss your scenario and book in a call with one of our lovely client directors and you'll be able to get in touch and we'll go from there. But whatever your situation is, if you're an ABN holder, you get a free discovery meeting to go through and make sure you're taken care of.
Speaker 2:Thank you so much for coming on and, as always, if you need help with your finances whether it's your sorry if you need help with your lending, whether it's purchasing your first home, purchasing an investment property or purchasing within a trust, you can contact us at wwwitsimplecomau. I want to thank you all for listening and Jacob, looking forward to the next podcast, because that was too much fun Pleasure.
.png)