What Real Budget Reform for Young Australians Would Actually Look Like

Unknown · 00:00Jase: Welcome to another episode of The Numbers Game. I'm Jase. I'm here with my dear friend Nick Riley. How are you, mate?

Unknown · 00:06Nick: Going well, mate. Just ducking and weaving at the moment. It's a busy time of the year for you and I.

Unknown · 00:14Jase: So yeah, just, just it's all happening.

Unknown · 00:17Nick: Just ducking and weaving, mate. But all is good. All is good. How you going?

Unknown · 00:22Jase: Mate, really well. Bit the same. It feels like, you know, you get 2 steps forward, you get someone takes a swing, you got to duck and weave and take another step back. But look, Look, for every positive thing there's a challenge, but with every challenge is the opportunity, as we know. So trying to keep a positive and optimistic outlook on life.

Unknown · 00:40Nick: Great attitude, mate.

Unknown · 00:41Jase: You know, there's such a great attitude. There's just, there's always learnings. And like, I think, you know, 10 years into running a business, like, you know, we got a letter from the ATO on behalf of a former client and had to read through it and you go, it's a lot to learn here. There's a lot to learn. So we'll learn, we'll adapt, we'll respond.

Unknown · 00:57That's all you can do. And then share the story about, you know, what to do, what not to do and roll forward. So, but mate, we're here for a fun and interesting discussion today. I think anyone who's on social media, anyone who's watching the news, there's lots going on in reform land.

Unknown · 01:16What are we talking about?

Unknown · 01:17Nick: Yeah, well, and you know, we're mindful not to pick apart the budget because it's been done everywhere. Yeah, for good reason. And I'm sure, you know, in some future episodes we will do that. But I guess what's made me irate in this week, or this week is, I read an article in the AFR and that's, whether it was that article or not, but just this pitch that's coming from the Labor government at the moment around reform and, you know, the intergenerational

Unknown · 01:48inequity, you know, baby boomers versus younger people and how this budget is trying to close that gap. I just think it's a crock of shit, to be honest, because I can't see anywhere in that budget that spells out that younger people are going to be better in the future in this country.

Unknown · 02:10I can see some areas where older people will be worse off, but at the same time, that impacts their ability to help the younger generation, their kids, which is what we see happen a lot at the moment. We've done an episode before on intergenerational wealth. Changing hands organically without the government getting involved.

Unknown · 02:29Yep. And I just think there's a couple of really basic things that get missed and, you know, in particular, just income tax and, you know, the tax bracket creep. Like, you know, we're at 40— what's the top tax rate?

Unknown · 02:45You're the accountant.

Unknown · 02:46Jase: 47% is the highest tax rate in the tax bracket.

Unknown · 02:48Nick: Correct. You know, and we've got crazy inflation. Not just at the moment, it is coming back these days, but it's been pretty bad. So you've got wages that continue to go up, but the tax rate stays the same.

Unknown · 03:04Jase: That top bracket's barely moved for a very long time.

Unknown · 03:06Nick: Correct. And yeah, we'll go into a couple of things, but the reality is the biggest income earners in most cases are the young people. So the young people that are continuously trying to get ahead, trying to do more things, just get smashed with income tax. And a lot of these changes that have happened in the budget, inverted commas, reform is really just impacting those that want to start investing now.

Unknown · 03:31Now, of course, there's some things that might impact those that are already investing, but those rules fall onto the current young generation who want to start and who are apparently so far behind. So these changes impact everyone. Not just the older people.

Unknown · 03:49Jase: Yeah, I'm certainly with you. And again, this isn't a bash Labor, bash budget, but it's— Yes, it is. Well, okay, it is. You're right. I appreciate the bit of energy and bit of venom there, Nick. I sat there and had the same thought. I'm like, I hear the words saying we want to create a fairer playing field for all young Australians and we want it to be a fairer tax system.

Unknown · 04:08And the word, you know, I want to make it fair and I want to make a place where young Australians can buy a house. But in all of the things and the scenarios that you model out, it's not actually helping young people or the everyday Aussie battler to get ahead and have more of a chance than the boomer or somebody already in the market that has had CGT discounts, that has benefited from negative gearing and that has used a family trust to distribute wealth across their entire family.

Unknown · 04:35If you take that all off the table moving forward, it doesn't make it better for the next gen coming through. No. Like at all. No. And you know, again, it doesn't seem like rocket science, but if you wanted to make a change that made it easier for that next gen, you'd say all changes apply to people over X age with X wealth structures moving up existing structures.

Unknown · 04:56And anyone under a certain age with whatever wealth or structure, you know, again, it's not that simple, but levelling, like doing the tarring the brush across the whole economy and saying we're making it fairer, not buying it, unfortunately.

Unknown · 05:10Nick: And you know as well as I do that the super wealthy, they've got structures in place. They'll get around a lot of this stuff. They'll find a way. And a lot of these changes don't really impact them. And I'll tell you what these changes also don't do. They don't take some of their money and tax it more and put it in young people's pockets.

Unknown · 05:28It just goes to the government.

Unknown · 05:31Jase: So— Obviously, we've talked about how great they spend that money as well. And how good their fiscal—

Unknown · 05:35Nick: They've got the worst productivity out of, you know, compared to private, their productivity is shocking. So all they're doing is they're taxing more, their productivity is not getting any better. And then how does that then filter down to young people? And there's, you know, they've thrown a few bones that are actually laughable, like the $1,000 write-off that we spoke about.

Unknown · 05:58Jase: The instant tax deduction.

Unknown · 05:59Nick: Yeah. So that's something that's helping young Australians put more money in their pocket. It's bullshit.

Unknown · 06:03Jase: And for anyone who hasn't gone through that app, I mean, we broke down how it's probably a bit of smokes and mirrors as well, that if you actually kept your receipts and did your tax return properly, most people who either work from home a lot of hours or use their car or move around or buy some work supplies or, you know, wear a set of boots on site, whatnot, they're going to have more than $1,000 of deductions anyway, which means they would have got a better outcome without using the government's $1,000 button.

Unknown · 06:27They're going to get screwed.

Unknown · 06:29Nick: Yep. 20% discount on the HECS or they're wiping 20% of the HECS debt.

Unknown · 06:33Jase: That's gone. That's done.

Unknown · 06:35Nick: But they need to do something about HECS in the first place. Like you're, you'd be across this bit in an eye because you've got clients are paying HECS debts. But what's the average HECS debt that you see now?

Unknown · 06:44Jase: Yeah, still tens of thousands.

Unknown · 06:46Nick: Isn't it ludicrous that you've got to pay that to get educated? And in these current times, that education might not even get you a job.

Unknown · 06:54Jase: Well, and that's the thing. Once education was privatised essentially and that we didn't have free education or access to cheap education, our country overall, we don't have the educated people coming through to take those high-end jobs. And then that's why they've relied on immigration bringing in skilled workers rather rather than self-developing our own skilled workers.

Unknown · 07:15The other thing, again, there's the tax on gas set, but somebody I saw, it was along the lines of all of the revenue from taxing gas, some places like Norway, free education. If you then had free education and we had people that can then take the high-end jobs and skilled jobs, again, a much better place.

Unknown · 07:33And on the HELP thing as well, the other big one on HELP debt is the indexation. So obviously, you know, if I've got a HELP debt or I look at one of my clients with a HELP debt, all year money is being taken out of their pay and it goes to the ATO.

Unknown · 07:49Now they don't apply that to the HELP debt balance. So if you, if your HELP debt balance is $30,000 and your employer will maybe hold, I'm going to use higher numbers, it might be $7,000 or $8,000, the repayment depending on what you earn overall. Now instead of them applying that all year so that it brings the balance down.

Unknown · 08:07In June, they index it first. So they've already got your money. They've already got the person's money in their account. They will index it so it goes up. So let's say it goes up to $31,500, call it a couple of 8% or 6%, whatever the indexation rate is.

Unknown · 08:23They index it first and then apply the money they already had to bring that balance down when you do your tax return after 30 June. Yeah. Now, in my mind, a much fairer and better way. You've already got the money. Take it off the balance of the HELP debt first and then index it.

Unknown · 08:38You've already got the money. It is the most unfair, wild system that that isn't the simple change they do to help Aussies with HELP debt and HECS debt to pay it off. Otherwise, it feels like 2 steps forward in repayments and a step back in indexation rather than making it fair and equitable.

Unknown · 08:55Nick: 100%. And it's all just convoluted rubbish. And let's have a look at some of the changes that they propose will reduce the gap, you know, the intergenerational inequity. And there's this big portion, it's just a vote grab around making housing more affordable, as we know.

Unknown · 09:15So the big thing they're talking about there is negative gearing. You know, you can no longer negative gear on an established property. Now, clearly these reforms are proposed at the moment, but that's probably one that's definitely gonna get through. Now, the key thing to remember here is that if you have an existing property that you're negative gearing, you can keep that and continue to negative gear.

Unknown · 09:41So the one thing that never gets, well, it does get focused on, but they clearly can't do anything about it, is to reduce the property prices in this country. It's just basic macroeconomics, supply, demand. That's it.

Unknown · 09:57You just gotta create more property. And they think that reducing or eliminating negative gearing is gonna do that. Well, the first thing it's gonna do is it means people that have existing property is gonna sit on them. So it's not gonna free up supply. The other thing not thinking about is if someone now buys an investment property, and most smart people, in my opinion, don't buy an investment property based on the tax.

Unknown · 10:21Consequences. Most people that want to invest decide they want to invest, buy the best asset and get the structure the best they can to make sure they're in the best tax position they can.

Unknown · 10:34Jase: But if you start— It's buying a good asset first is the fundamentals. And we've covered that before. Correct. If you're buying something that's junk, but you get a $10,000 tax deduction and a $4,000 refund, but 10 years later that property was never a great asset, you're not really ending up ahead. 100%. It defeats the purpose. So I agree with you.

Unknown · 10:49It's the smart investors and the ones that we usually work with, they're buying a great asset. Asset. And then if there is a good tax outcome from that as well that benefits them to make it affordable or work, great. But that wasn't the starting motivation, was never, I need to buy that property so I can pay less tax.

Unknown · 11:08Nick: Now, if you buy an established property now and you can't negative gear it, I'm not saying negative gearing should stay. I'm just explaining how this is not the answer. All of a sudden your cash flows don't look as good. So what's the one thing you're always gonna be looking to do?

Unknown · 11:24You're always gonna be looking to increase your rental income to close the gap between what you're paying out from an interest or a loan point of view and what's coming in from a rental point of view. Now, the one thing that will stop people being able to do that, continuously increase it, is supply.

Unknown · 11:40But the reality is they're doing nothing about supply. So if they're doing nothing about supply and investors are now, got a worse cash burden, what are they going to do? They're going to increase the rents and they're going to have the ability to because renters aren't going to have an option. Who's renters generally?

Unknown · 11:55Young people. This whole capital gains thing, I can tell you in 20 years of being in a mortgage broking business, 18 years in our business, 2 years prior to that, rarely, I couldn't even count on 2 hands the amount of times that clients have considered capital gains when they've bought investment properties.

Unknown · 12:17They do consider negative gearing. I'll definitely say that. They do not think about capital gains. Most people don't know how it works. So although, you know, the capital gains changes are going to mean the government takes more money for sure, I don't think that's gonna have a massive impact on whether or not people buy residential property.

Unknown · 12:38There's other issues around, you know, startup businesses and stuff, but that's really not what we're talking about here. We're talking about, you know, making it easy for people to get into houses.

Unknown · 12:47Jase: You know, at least with indexing, if you've got a value that you've purchased and it's a big enough number, or whether it's not big enough, it's relative. Indexing means that's going up year on year based on an indexing figure. Whereas, just to touch on why the business gets a lot of attention for anyone who's seen it and thought, why are business owners going off?

Unknown · 13:04Most startups issue $100 worth of shares for $1 each because that's your startup capital. It's a brand new company with with an empty shell, it's $100 worth of shares. If you then turn that into a million-dollar company and sell it and you've worked your ass off and you've built a million-dollar business and you've not taken a wage and you've done the struggles and the hard time, your CGT event is $100 worth of shares indexed over the 10 years it took you to grow the property.

Unknown · 13:31And then you've sold for a million. Now, the bit that a lot of people go on about is you're not taking into consideration the small business CGT concessions and other things that business owners get. But on the raw value of the shares, indexing value you sell it for, that's where there's a lot of noise going.

Unknown · 13:47Indexing doesn't work like that, as opposed to a 50% CGT discount where it's a million-dollar gain, half to $500,000. Yeah. Minus the $100. Oh, the $100 comes off the million and then you pay tax on the $500,000.

Unknown · 14:00Nick: But the other thing is negative gearing is now available on brand new properties. I'll tell you what that's going to do. And you may have even experienced this, I know I have. I've been in this mortgage game a long time. I know how it all works.

Unknown · 14:15That is now a perfect selling point for a property marketing group. They're everywhere out there. They've been around for years. They market townhouses, they market off-plan apartments, and they market house and land packages. Now, some of those properties are great properties, but how that system works is you go to a builder, the builder builds a property, gets the land from a land developer, the property marketer sells that property, and the property marketer in most instances will take anywhere from $30,000 to $40,000 as a marketing fee.

Unknown · 14:45So they will now start telemarketing to mum and dads. I've been telemarketed to myself. Online ads, "Hey, you should buy a brand new property because you can negative gear it." All of a sudden, those businesses get flat out. Those businesses get flat out, the builders get flat out building, these new investment properties.

Unknown · 15:05What happens then? Developers put their prices up because everything's busy. Builders put their prices up. So you're creating supply of rental properties, possibly. In most cases, mum and dads pay too much for them because of the marketing fee. And now the first homeowner is up against mum and dad investor who still get the negative gearing.

Unknown · 15:24Jase: Yeah. Doesn't sound like a whole solution, does it?

Unknown · 15:26Nick: They actually have no idea. Like it's actually, It's laughable that this is modelled. It's laughable and it makes me angry because—

Unknown · 15:32Jase: This was modelled by experts behind the scenes.

Unknown · 15:34Nick: They're not experts. They've got no idea how things work.

Unknown · 15:37Jase: Experts with the quotation. But people at home are listening, not on YouTube. I can't see my little quotation fingers, but—

Unknown · 15:43Nick: Anyone in our industry knows exactly what's going to happen here. These property marketers are going to start selling subpar properties for, you know, high-rise properties in the middle of the city. They'll sell them on the negative gearing benefit. I've seen it over and over again.

Unknown · 15:58They don't grow. They might grow over time, but nowhere near what an established piece of land will. And you get these people that are stuck with high-rise apartments in their retirement. They bought it on the fact that the cash flow was really good because of the tax rebates. But now they've got this dud asset that's stopping them retire.

Unknown · 16:15See it over and over again. That's what's going to happen here. And that means, again, it'll get harder for people to buy these properties 'cause they're up against investors on the one type of product that's gonna increase supply.

Unknown · 16:32They're inviting investors to start competing on that. It's just absolute madness. So what they're doing here to fix things, what they've done over here is only gonna make things worse. So I just don't understand why they don't simplify. And we've spoken about this before.

Unknown · 16:47Two things they should do. They should reduce You can't come in here and rant like I am and not have a, you know— Of course. —some kind of solution. They should reduce income tax, in my opinion, because most people earning really good money are young people trying to get ahead in life.

Unknown · 17:06Really wealthy people earning a shit tonne of money, they will have structures in place that will minimise their tax. We know that. That's always been the case. You've always had the wealthy paying. I'm not saying the wealthy don't pay enough tax.

Unknown · 17:22I think from a dollar point of view, they generally pay enough tax, but they will never pay the same percentage that a PAYG income earner will. Yep. That's a fact. So, you know, these days you could be, you could be in the tunnel in Vic in the last few years, or you could be working on infrastructure programs in Brisbane or projects in Brisbane, you're probably on the top tax bracket.

Unknown · 17:49You're probably on top tax bracket and you've got a trade and you are now paying, you know, for some of your money, 47.5% in the dollar. So the simple solution is reduce income tax, increase capital, not capital gains, GST, we spoke about that, pure consumption.

Unknown · 18:09Because the wealthy consume. So the wealthy consume, they're going to pay more GST. It's simple. It's the only way to do it. And I've just got—

Unknown · 18:17Jase: It's a pity that it's not more understood and more spoken about and that somebody is not leading genuine reform because this reform that they've put forward, I don't see it as the genuine reform that our country needed. Let me give you some numbers here.

Unknown · 18:31Nick: Okay. So I found another article this morning by chance, actually, that backs up everything I'm talking about here. Let's go. Top 10 postcodes by taxable income. The reason I saw this article is because Victoria, believe it or not, has a suburb that now in the country has the highest taxable income on average.

Unknown · 18:53I've got the top 10 here. Okay. So Portsea, Victoria, not surprised. The average taxable income in Portsea, number 1 in the country. $321,000. Portsea. So you're talking about multi, multi, multi-millionaires.

Unknown · 19:10Yeah. The most, or the highest income earners in this country are now in Portsea with an average taxable income of $321,000. Bellevue Hill in New South Wales.

Unknown · 19:26Tommy, have you got a minute? Can you look up the average house price in Bellevue Hills? Average taxable income, $250,000. Now I would suggest that you would have mum and dads earning that, trying to get ahead in life. Darling Point, Edgecliff, Rushcutters, Point Piper, like incredible suburbs with incredible properties.

Unknown · 19:50Average taxable income, $238,000. Number 10, Mossman. Good friend of ours lives in Mossman, great man, earns a lot more than this. Average taxable income, $208,000. Yep. Now, does that not back up what I'm saying? Yep. That the wealthy find ways to reduce their taxable income and create wealth in other ways.

Unknown · 20:07Jase: And all the people that I know that are earning good money like that, they love— they spend, they're happy to spend. They'll invest and then pay extra taxes on their investments if that was the way to kind of restructure things. But because they earn good money, they're outspending it.

Unknown · 20:23And if they're outspending it, we're collecting more revenue through GST. Yep. So like it balances out. Yep. I think, Tommy, we do have an answer. $11 million average house price. What was the suburb?

Unknown · 20:34Nick: Bellevue Hill. Bellevue Hill. So most people are sitting on a hypothetically an $11 million house. And you know, if that's $250,000, that could be the same as someone sitting in the southeast or northwest in Melbourne trying to educate their kids, paying exactly the same tax.

Unknown · 20:52Yeah. Now I'm not saying the Bellevue Hill people should pay more. I'm just saying that the tax, the income tax rates are just wrong.

Unknown · 21:01Jase: But the other thing as well, I'll go— I've got to be careful how I word this, but I would dare say that from an investment structure point of view, what they're showing as taxable income, let's say the average of $250,000, that doesn't even scratch the surface of what's in an investment company or a or a bucket company or whatever, which to the point, I mean, as long as you're paying the full whack of tax across that group, that's one thing.

Unknown · 21:25But the GST, it's been 10% since the year 2000. We are the only developed economy that has never moved the rate of GST or consumption tax, VAT, sales tax. And you sit back and go, the rest of the developed world have moved the needle on that to balance out income tax, you know, whatnot.

Unknown · 21:43What? We've never changed it. We've never looked at it. Any time it's been entertained, what you end up having happen is the lower income earner, because they don't— it's not promoted enough to bring down income tax. But even then, it's— let's say you're on $50,000 and you pay $4,000 tax, $5,000 tax, give or take.

Unknown · 22:02If you then have to pay more GST, even if you lower their tax to zero, bring the income tax threshold up to $50,000, zero, the thought process there is that they still need to spend that entire $50,000 to live. And if they've got to pay more in GST and whatnot, that they'll end up impacted.

Unknown · 22:19So, you know, there is a fine line and a balance. So we're not saying that this is the perfect outcome, but I also still heavily advocate and believe that a change and reform in GST and a lowering of income tax— I think you've said it before, a flat rate of 30% once you go over a certain amount.

Unknown · 22:35And then those people that, you know, let's say those tunnel workers that are earning $200,000 to $300,000, the extra $15,000 or $20,000 they've got, maybe they can throw some extra money into super if they've got carry forward concessional cap and then it gets taxed again in super. Great. Win for the government. Or the extra $30,000 they've got, they buy a caravan, they buy a new car, they spend some more at the shops.

Unknown · 22:56They like whatever they do, whatever they're spending because they've got more disposable income. But that also then helps the small business down there selling the new clothing or the café that gets the extra avocado and coffee sale on the weekend. So the more you then spin that money back into the economy, a better outcome for our business community as well.

Unknown · 23:16Nick: Yeah. All that's happening at the moment is people's salaries are going up and what they give the government goes up and what the government does with that, i.e., their productivity goes backwards. And, you know, like if you want to be real tinfoil hat, you'd suggest that— I think personally the government enjoys inflation as much as they might admit they don't.

Unknown · 23:36Because all it does is it devalues the value of their debt. So as inflation goes up, value of money goes down, and the massive debts that they're creating don't look as bad. That's pretty much what happens. So, you know, I think, I think it's all smoke and mirrors.

Unknown · 23:53To change the GST, you know, is going to be possibly, even though most smart people will know it's a great move. A lot of people won't think that way. So it's political suicide. So, you know, it's going to take a real strong individual to do it.

Unknown · 24:13Yeah, we don't have strong individuals running this country at the moment. You know, everything that they're doing now is making it harder for younger people, not to mention the fact the debt that they're creating, who's going to pay that off? Not you and me. It's the people that are born today.

Unknown · 24:28So if they don't make changes that are significant now, debt gets bigger, the problem gets worse, and that's all just gonna fall on income earners in the next 20, 30, 40 years. So that's it, mate. So a bit of a rant. And I know that a lot of people have been talking about this stuff, particularly in relation to investment properties and, you know, the moves they're making are not actually going to have a significant impact.

Unknown · 24:54If anything, what they're doing now is they're hamstringing people from getting ahead. So, you know, people are thinking twice about taking on extra work and pushing themselves into that top tax bracket, you know. Which is counterintuitive to productivity and creating wealth.

Unknown · 25:11Counterintuitive. So, you know, what they don't understand— well, surely they do understand, I don't know— but by people pushing and trying to get ahead in life, it actually creates it creates more for everyone else, you know. So I don't know, just a little bit confused about it all at the moment.

Unknown · 25:30And disheartened could be the word. Worried? No. I think you can always create your own destiny. But at the same time, you do wonder where we are actually heading. And, you know, I know, you know, I don't want to get on the political path at the moment, but, you know, One Nation in this country at the moment is getting a lot of traction.

Unknown · 25:50And the reason they're getting traction is because they're saying radical stuff and stuff that is radically common sense. So, you know, I think we need a massive change and I hope we get it in some way because what we're doing now or what they're doing now just, you know, simply isn't working.

Unknown · 26:13Yeah. Yeah.

Unknown · 26:13Jase: And we definitely don't want to have a situation where it's, you know, business owners versus the pay-as-you-go withholding taxpayers. I definitely don't think that's what this is about. But I do think that every politician selling fairness is selling a story. You need to read the balance sheet and not the headline. Game over.

Unknown · 26:29This podcast is for educational and informational purposes only. The conversations are of a general nature and do not qualify as financial or tax advice. We recommend before you make any financial decisions, you consult a licensed professional. Individuals on the podcast may hold positions in the companies discussed. ---