 Hello ladies and gentlemen, I'm looking forward so much for the session my goal is to give you as much resources and as much tools as possible for you to pay less tax in Your property portfolio ladies and gentlemen tax is such a hot topic that even the Beatles sang about it. So We are gonna talk about tax in this session. We're gonna talk about How you can pay less tax and how what you can do to bolt a Property portfolio in an efficient manner to pay as little taxes as possible I want to start with one thing and that is a one thing before we jump into the meat and that is talking about our mindset and our approach to paying tax because and I will never forget When I was in finance I was CFO for an international wholesale firm and I had a mentor Was a CFO of a JSE listed company and he would always tell me yaku There's one thing worse than paying tax and that's not paying tax and I was well I was always confused when he said that because what does he mean by that and eventually I realized Oh, that makes sense. If you're not paying tax means you're not making money So you actually want to make money. You want to pay tax? So first and foremost before we speak In this session about all the ways in which we can reduce paying taxes Let's remember that we don't want to subconsciously limit ourselves in Expanding and growing by trying to avoid paying tax Paying taxes paying taxes should always come secondary to how do we expand? How do we bolt? How do we increase? You've heard me speak about tax deductible expenses now What a tax deductible expense is is the expenses that you can actually deduct from your income before your tax is calculated on On what is what is left? so I'm gonna run through a couple of the typical expenses that you would have in an entity that owns property So property investment entity a property investment trust or a property investment company now firstly One of your biggest expenses and believe it or not a lot of people forget to deduct this is the fact that a Big portion of your monthly bond payment to the bank To be more accurate the interest which is the majority of the bond payment in the early years is a tax deductible expense So you've got your rental income That is one of your main incomes that you will show you've also obviously got your properties that appreciate in value Value, but that is what we call the unrealized gain because you don't get taxed Underpreciation the capital appreciation of your properties until you sell those properties So your main income that would be regarded as income in your property entity would be your rental income Now you've got your bond payment and of that bond payment that payment that you make monthly Consist out of two parts a capital portion and an interest portion Obviously the capital portion is non not tax deductible because it is a loan that you are repay But as I said the biggest part of that bond payment is the interest expense and that is a tax deductible expense So we would look at the mortgage statements at the end when we prepare the financial statements and we will make sure That that is deducted then you've got repairs and maintenance Ladies and gentlemen, those are things like wear and tear upkeep electrical plumbing painting even tiling in some instances so all the things that you need to Do to keep your property to keep your properties in a suitable or in a good condition are Expenses that you can deduct from your income before you pay any taxes So obviously the improvements are excluded ladies and gentlemen So if you bolt on and it is seen as an improvement then that would not be regarded as a tax deductible expense But your general wear and tear repairs and maintenance like that those things that I've mentioned are all things that are tax deductible that you can deduct from your rental income Before taxes are applicable then you've got service costs You've got all kinds of service providers that you use in a property portfolio That could be your rental agents that commission that they charge monthly To collect your rent and to have a source tenants for you That's a tax deductible expense ladies and gentlemen That is something that you can deduct on your income statement before taxes being paid also legal consultation You might need to appoint attorneys to assist with evictions or with contracts Whatever the case may be with structuring costs all of those are tax deductible expenses ladies and gentlemen and Then of course you've got the insurance on the property and and those kind of costs as well Then ladies and gentlemen, you've got your utilities your electricity your water your rates in taxes to the municipality all of those are things that Forms part of your property portfolio expenses that are tax deductible and now ladies and gentlemen I want to get to the more creative ones things that a lot of people don't think of Think about maybe the MacBook or the iPhone that you are using to run your property portfolio on that MacBook Can be depreciated over a couple of years and that can be an expense that you put through your property entity that Item is used to manage your property portfolio. The same applies to your phone even the internet that you use To send out invoices or to look for property that is a business expense ladies and gentlemen and those are things that can be deducted we can even take it a step further if you have to get office furniture or furniture that you need to use in your office that gets used for for Running your property portfolio the depreciation of those assets is a tax deductible expense ladies and gentlemen So now I want to talk ladies and gentlemen about structuring your property portfolio because Different structures has got different tax implications and it is so important that we discuss How the different entities and the different structures is going to affect you with trust So I've got a slide up here that speaks about the three different ways in which you can buy property and what the Tax implications are so you can buy property directly in a trust You can buy property in a company and it's always advised that if you buy property in a company that are holding strust holds the shares in the company and the reason for that is you don't want any assets on your name and That and shares of a company is an asset on your name Which is exposed if something goes wrong and which forms part of your estate one day when you pass away So either you buy property in a trust or you buy property in a company But then the shares are held in a trust but then there are also people that buy property in their own name Now let's talk about the tax implications of these three approaches a trust is taxed at 45% and Inclusion rate the capital gains inclusion rate in other words the percentage of your capital gain that forms part of taxable income is 80% now most people see that and they think to themselves well, that's it that makes sense I shouldn't use a trust but that is not accurate ladies and gentlemen because if you read down you would see we refer To what is called the conduit principle and how the conduit principle works is that? any profits that a trust may can be distributed to any of the beneficiaries and that Profit or that income it retains its nature in the hands of the beneficiary and the beneficiaries then pay tax in their personal Capacity which is then on a scale of 0% to 45% depending on where your tax bracket is at or that beneficiary stats bracket is at and Your capital gain very important ladies and gentlemen your capital gain inclusion rate drops back to 40% Which means that only 40% of your capital gains if you are selling a property at a profit Only 40% of your capital gains is included in that beneficiaries income for tax purposes So even though a trust is taxed at 45% with 80% capital gains inclusion rate Often a trust is your best structure to pay the least amount of taxes because of the conduit principle and because of the fact That the profits that the trust may can be distributed to the beneficiaries and the beneficiaries then pay In a personal capacity I can give you a couple of examples it may be that you are looking after one of your parents and They already retired. They've got no other income and now instead of you Sending your parents money with after tax money in other words after you paid 45% tax on it you could send their money directly from the family trust and There will be no taxes in the trust and your parents would need to pay tax on what they have received But because they don't have any other income They are on a much lower tax bracket than you number one They are on a much lower tax bracket than a trust and they would have been on a much lower tax bracket Then even what a company would be on so that is a great way for you to drastically reduce the amount of taxes that you pay On-profit or capital gains for that matter now the same applies if you have for example children You have two children that you want to send to University Your costs for though for each of those children might be let's call it 200,000 Rand each So you've got 400,000 Rand that you need to distribute through your trusts to your children because they don't have any other Taxable income that means that that 200,000 Rand would be the only income that they need to show It has been distributed out of the trust Which means the trust is not gonna pay tax on it because the children only receive 200,000 Rand for that year and nothing else They are on a very low tax bracket and the reason for that is you've got your tax rebates And you've got all of the exemptions and when you apply all of that you will pay Significantly lower tax on that on on that method even than what you would have paid in a company So there are many distribution options in other words ladies and gentlemen when you own property Directly in a trust then you've got a company now the great thing about a company ladies and gentlemen is that you only pay 28% tax in a company the capital gains inclusion rate Unfortunate unfortunately is still 80% and you can't get around that because you can't distribute that anywhere So the problem with a company is you've got much less distribution options now What that means it's more difficult for you to get those profits out of the company Yes, the tax that you pay within the company is little but how do you get it to you you can declare a dividend But then you have to pay an additional 20% after the 28% that you've already paid on Dividend stacks you can also draw a salary from the company, but remember not anybody can just do a Salary out of a company and you need to be able to justify Why that person is drawing a salary out of your company you for example can't pay your five-year-old daughter a Salary out of your company while you can try but you're taking a fat chance So that is that is a company then and then lastly you've got yourself you can buy property in your own name Yes, your income tax rate is lower because it runs on a scale from 0 to 45 percent in your capital gain inclusion rate is Only 40% but the problem is you've got no distribution options Which means if you are on a high tax bracket You can't distribute that to your spouse or to your parents or your children or your grandchildren You have to pay the tax on your tax bracket more importantly our ever-ladies and gentlemen and that's not from a tax perspective But but from a structuring and from a protection and a state planning perspective Owning properties in your own name doesn't give you the asset protection that you need and it doesn't It doesn't assist you with proper estate planning to bold a legacy and to have continuity in your property portfolio one day when you are not there anymore, so From what we have discussed now ladies and gentlemen You are basically sitting with two ways in which you can structure your property portfolio You can either own the properties directly in the property trust That's my favorite method and for most of my clients. It makes the most sense to own properties directly in the property trust Or you could at a later stage as your property portfolio grows and you don't have that many distribution options Available to yourself anymore. You could own your property in a company But then a holding stress very important ladies and gentlemen will hold the shares in your company now Those are ways to own property the family trust which is separate from this would always be necessary because the family trust serves two functions number one or Your personal assets that you are acquired over your lifetime will be held within your family trust and number two any money That flows from you to your investment entities would flow via your family trust So you would donate as much as you can to your family trust every year 200,000 ran for a couple or 100,000 ran for an individual currently and Whatever else you push in there you would do as a loan account and then donate against that loan account annually And then your family trust which is not a charity is going to lend that money to your property trust or your companies Or your other entities and the reason why we do it like that is this is a very Effective or a very efficient method to reduce taxes Significantly because one day when your property entities are doing well And you want to move money back to your family trust where you can go and acquire personal assets and enjoy that wealth You can do a tax-free because it's a settlement of a loan account So that is a very very tax efficient manner in which you can do your structuring I'd like to move on and talk about and this is a question that I get so often ladies and gentlemen so what do I do if I have properties in my own name and I don't have the right structure to take advantage of all of these tax benefits that I can have in an entity such as a trust or In some instances a company and often we need to look at restructuring a property portfolio like that now There are advantages and disadvantages to restructuring the advantages to restructuring your property portfolio is threefold number one You can get the asset out of your name which provides better asset protection number two You can get the debt out of your name if you don't have debt in your name It enables you to build a bigger property portfolio and number three You can make a lot of capital available through the process So those are all benefits of restructuring your property portfolio But there are also a couple of disadvantages and when you restructure your property portfolio and those would be costs such as transfer fees in some instances if your Properties worth more than the threshold transfer duties Then there will be bond registration cost if you are taking out new bonds in the entities and and it could also be capital gains tax applicable So it's very very important ladies and gentlemen when you look at restructuring your property portfolio that You focus on that and that is something that I assist my clients with is I sit with them in a consultation And we actually look at their property portfolio and we look at this restructuring options that are Available and then we determine whether it makes sense for us to restructure or not And what those costs would be how much capital we can make available and we put the correct structures in place then in Order to have a more tax-efficient Vehicle and to bolt this property portfolio on now I want to talk about refinancing for a moment ladies and gentlemen a lot of times people miss the opportunity that there is in refinancing your property portfolio and how that can enable you to To save a lot of taxes. So I Said this many times before I don't like selling property Selling properties like killing the goose that lays the golden eggs But over and above that it triggers capitals gay capital gains tax So I want to make sure that instead of selling a property I would rather refinance a property and in that way access the cash now the beauty of this ladies and gentlemen is When I refinance a property and I get cash Let's say I take two three four hundred thousand rent out of a property by refinancing it The beauty of this is ladies and gentlemen that money is not taxable So I in effect access the capital of a property without paying capital gains That's on it and that money can be used to expand my property portfolio further This is how most property investors across the globe has bold Significant property portfolios with paying very very little tax. They make sure That they leverage ratio or they're gearing ratio in other words They're dead to assets ratio is managed at such a percentage that there is not a lot of realized profit In the company or in the trust that does not mean that you are not making money because you can still make a lot of unrealized profit Through the capital appreciation and you access that through refinancing that you can that that that you can access So that enables you to access the capital without necessarily paying tax So let's talk about it practically. What happens when you refinance? So we all know what refinancing means, right? Let's say you have a property that's worth a million rent and you owe 800,000 rent on that property You could go to the bank and say bank. I've got a property. That's worth a million rent I only owe 800,000 rent on it. I would like to borrow another 200,000 rent Now when you borrow that 200,000 rent that's cash that is made available for you with that cash There's a lot that you can do you can spend it if you want to you can Put it in the access bond so that you don't pay interest on it You can use it for transfer fees and registration costs for your next investment properties that you want to buy You can even use it to cover your monthly shortfalls if you have shortfalls on your property In effect, if you take that money out and you don't put it into your access bond This is what happens your bond increases. That means your cash increases Also your interest expense because you have a bigger bond now Increases and that pushes your net profit down and when your net profit goes down your tax goes down. So By refinancing you make capital available and in the same in the same time that you are making capital available You're also reducing the taxes that you are paying and that money then can be used to reinvest further To ball to property portfolio. So that's a great way For you to to to grow a property portfolio tax-free is by using refinanced funds To to expand your property portfolio. Thank you very much. Goodbye