In this episode of Property Investory, join us as we chat with Drue Schofield, owner of a business called 4Front Accountants that act as accountants and advises clients on business strategy. Learn how he researches by going to seminars, the apt reason why he chose the name 4Front and how he sold his first property for 50% profit more than he paid for it.
Having grown up in Central Queensland, Drue Schofield did one year full-time of a Bachelor of Commerce majoring in Accounting before he landed his first job in the accounting space. From there, he managed to obtain a job in London when his employers in Brisbane went to an international conference and whilst based in the UK, managed to travel to many countries, allowing him to visit 24 countries before he was 30.
Find out about the fork in the road he came to before he started the firm that became 4Front and the circumstances he overcame at the time and the learning experience that came out of buying a car when he was younger rather than a property that would have doubled in value. Also, come along with us as we discover how letting one of his biggest investments go to auction was both an ‘aha’ moment and a struggle and much, much more!
Schofield is owner of a business called 4Front Accountants that acts as accountants and also advises clients on business strategy.
Predominantly, we’re business advisors and property investor slashes property developer accountants. I mean, that’s who we deal with day today. We offer taxation, accountancy, business strategy, advice around those kinds of areas. Yeah, I mean, day to day, that’s what I do. I meet with clients. I talk with clients, we work on strategy. We talk about what they’re doing, how they’re doing it. I guess my role or my purpose in life is to be two things to clients: one, a conduit, so I like to be I guess the person that clients pass through to get to that need or that person, they really want to talk to, be it a solicitor or anybody in particular really. It doesn’t really matter what they do. I sort of got a pretty thick black book with lots of different people doing lots of different things and I seem to be pretty good at hearing people’s needs, letting that trigger and then passing that information on. And then the second thing I guess I like to do is I like to be as a sounding board and offer advice to clients, and I really like to put myself in their shoes and say, okay, well Drue, if this was you, what would you do? And that’s kind of my philosophy on providing advice.
Our clients range from people buying their first property that they’re going to probably renovate cosmetically and add some value and then sell for hopefully a profit through to clients doing this first major renovation or substantial renovation as the ATO calls it, where they’re really changed in the characteristics of the home and turning into new home through to small subdivisions, largest subdivisions and then a substantial land development with some clients moving into 20, 30, 50 lot developments and above. So our clients range at the moment from…I was talking to a client this morning, they’re looking at buying their very first property to renovate and then sell and make a profit through to another client I was talking to yesterday whose got a $20 million development and sort of everything in between. So we’re pretty well versed in that whole…what the taxation and the strategy, income tax structuring, joint ventures, how all those things come together.
In order to cater to such a wide range of clients, Schofield stays on top of things by undertaking research on the internet and going to seminars.
Some of it is a little bit like eating cardboard, but it’s essential. People say how would you describe yourself? Sharp. And that’s how you gotta be. You’ve gotta be sharp. You’ve got to know what it is. Now, I don’t like to just rattle off things to clients on the phone or on an email. I’ll always give clients my opinion, but I’ll always premise it with, but just let me check on that. Just let me make, go and do the research just to be 100% certain that what I’m saying is the most current up-to-date thing and process, etc. But I mean, when you’re doing it all the day, every day like we are, and that’s literally what we are doing with clients and all the different ranges of investment and development and property you can do, you start to pick out one or two things.
He then goes on to talk about why he chose the name 4Front, giving us a little background story behind it and how it reflects his business.
4Front came along…it’s interesting, we almost became Schofield and Associates, but I spoke to, believe it or not, a solicitor, who sometimes aren’t known for their creativity, apologies to all the solicitors out there, but this particular mate of mine said, look, great, name Drue, but what do you do? Who are you, I don’t care. What do you do? Put something that you’re doing there. You have to have a story. You’ve got to have a narrative, he’s a bit of a marketing sort of guy, this solicitor friend of mine. So yeah, I tossed around a heap of different names and I ended up with 4Front. I’ll do like a pun. Anyone that knows me well. So I’ve put the word the number four and then the letters ‘f r o n t’ after the end.
Essentially just the story is to tell clients that we’re at the forefront of affairs, that’s where we want to be. We want to be at the forefront with you, guiding you, helping you and our tag line is ‘your key partner in business’. I mean that’s interchangeable with your key partner in anything. But I mean most clients that are doing investing and developing in property, whether they appreciate it or realise it or not, they’re probably acting in a business-like manner a lot of the times. So, no, the fundamentals ring true, whether you’re a butcher, baker, candlestick maker or doing a 10 lot subdivision, you’re still business. But that’s where 4Front comes from, we like to think we’re at the forefront of client’s affairs and things in general where we can help and add value.
Having grown up in Central Queensland, Schofield had a great childhood and upbringing. However, as he grew older, he was eager to leave his hometown.
I grew up in a place called Rockhampton in Central Queensland, which most people know because it’s on the weather map on Sunrise, which we’re all very proud about in Rockhampton. That’s where I grew up. I went to Franksville State primary school up there. And great primary school, state school. Then I went to a Catholic co-ed college up there, called Emmaus College, which again, another really good school. But yeah, I loved Rocky, loved growing up there. I always say Rockhampton is a good place to be from. Not necessarily a good place to be, so apologies to anyone from Rockhampton that are listening, but people, friends of mine that have moved, say the same thing. It was a great childhood and a great place to grow up, I thought.
I moved out of a Rockhampton I guess as soon as practicable. Not because I didn’t like it, I just wanted to sort of go and explore other places with my now wife and I moved to Brisbane when we were 21, having both never lived out of home, we had to get a lease, we had to work out how to use public transport because that’s just not a cultural thing in Rocky, using public transport and all these different things. And then we went overseas together for two years and I think between us we’ve been to 24, 25 countries around the world. So you sort of come back to Rocky at Christmas and that kind of places and it’s really nice for a couple of days, but after that you sort of, not that I’m terribly cosmopolitan, but there are certain things you miss that a big city—not that Brisbane is a huge city—but the biggest city can offer I guess.
After leaving Rockhampton, he and his wife decided to base themselves in the UK, from where they traveled to many other countries.
We moved to London ostensibly and that’s where we lived and based ourselves. My wife’s a teacher, I’m an accountant obviously. And we both took up our professions there and it’s such a great place London, it’s such a harbor, it’s easy to go to Paris for the weekend or Germany for the weekend or the Czech Republic for three or four days or grab a cheap flight to Greece or Spain or go and see Monaco or go to Ireland, go to Scotland. I mean, it’s all just there. Morocco is a place I’ve been to in northern Africa, it’s easy to get to all these places and once you sort of go to one or two places, you really get a travel bug. It’s really good to meet different and interesting people that have different upbringings I guess, and different sort of cultural backgrounds and doing different things that I guess you realize that we’re all fairly same at the end of the day, we’ve all got hopes and dreams that aren’t probably too different to each other. It’s just we might just live in a different place and eat different food, I guess. No, I really enjoy travel.
After finishing high school, Schofield applied for university and he did one year full-time of his degree. Then for the rest of the time, he was working part-time in the accounting space.
When I finished high school, I only applied for one thing at university and that was to Bachelor of Business or a Bachelor of Commerce, majoring in accounting. Now I did one year full-time. I ended up getting in the top 5% of my degree or my course that year, I remember the Golden Key international society, I think it’s called, something like that. Anyway. it’s probably not an exclusive, it just sounds good. The letter sounded pretty good. So I paid my one time fee of $80 and I still get the newsletter today, so that’s going on 17, 16 years now, whatever it is. I did one year full-time and then I sort of got to the end of the year and not because of but mates of mine had done trades and were earning money and I’ll sort of got to the end of my uni, had a really good time, did quite well, worked hard, played hard, thought, there’s gotta be a bit more than this. I mean I’m just sitting here doing university studies and whilst that’s enjoyable and I’m working part-time and taking on work experience jobs, I thought, well, might as well try and get a real job. People won’t like this but I applied for a job and I had one interview and I got it.
Literally it was in the paper. If people out there remember that, when you used to go into the paper and apply for a job and send a letter. Well, I did that and I’ve got an interview and that was with Christmas and Bowling in Rockhampton. And yeah, I think I was there two and a half years and really enjoyed it. Learned a hell of a lot there from Dale and Joe. Really good times.
As a junior accountant, he was quite ambitious and was eventually allowed to take on more responsibility.
I was probably a little bit maybe overconfident and I think I was there six months and I said, when’s my first client interview? And they told me to calm down, but I just kept badgering them until I got to talk to somebody about something and then I think from memory they gave me an individual tax return interview and I must’ve done okay with that. Then my wife got a job, she’s a teacher and she finished it. She did a uni full-time, whereas I did my first-year full time and then I did the rest of my degree part-time. She got offered a job in Brisbane, so we moved down here.
It was after my studies. So I was working as an accountant in Rockhampton for about two years and I moved down here and worked for about another two and a half years, and then, probably about two years actually it was, and then we went overseas. I turned 24 in the air, flying to Thailand. Very late flight.
Schofield managed then to land his London job when his employers in Brisbane went to an international conference…
Another funny sort of thing. So my employers in Brisbane, Hog Lawson, a great firm, great guys, still talk to them to this day, really good chaps. They were part of an international group and they gone to one of the conferences, this particular international accounting group offered and they were talking to one of the directors of the firm in London and they said, all, we’ve got a young bloke coming over, do you want to give him a job? And that’s again, I just got the job.
I went there, I landed in London with a job. I sort of gave myself a couple of weeks to enjoy the place and then I pretty much jumped straight back into work. And I think I was there six months and they were talking about offering me to sponsor me and do my chartered accountant studies and those sort of things. And I was like, oh, well, sorry guys, I’m just sort of here to have a good time. And they were pretty disappointed. They thought I was there to really put down roots.
Schofield and his wife ultimately decided, especially since they planned to have children, to come back to Australia instead of staying in the UK.
We only had a two-year work visa. We’d both been offered opportunities to stay in the United Kingdom in England and work or stay in London and work for our employers. My wife was working for the—I can’t remember what they call it—the equivalent of Brisbane Catholic education in London. So, you know, the London archdiocese or whatever it’s called, I’m not sure. But we both got offered opportunities, but we sort of decided that if we stay here, it will be nice, but it’ll be very hard to leave and we’ll probably end up at some point having children. Do we really want to raise children in here or near family and support? So we kind of, which was a really mature thing I guess to think about when you’re 25, 26, but we did that.
What is more, Schofield much preferred the weather in Australia.
We decided to come back and I mean I always wanted to be a partner in an accounting firm and whilst I probably could have done that in the UK eventually, because I’ve seen other people I’ve worked beside at the particular firm I was at sort of elevated to that point now and I believe I probably would’ve got there, I would’ve put the work in, I wanted to come back to Brisbane and live here and be in Australia and know what it’s like to see sunshine more than five times a year.
It’s great place London, but I mean from October through to February, it’s pretty tough going, the sun whimpers its way up at about nine-thirty. Then it retreats promptly at about one-thirty and it’s cold.
If you’re going to travel there, go there in April, May, June. They’re the best times. Even July is not too bad. By the time August comes around, August, September, it’s starting to get cool, we’ve probably all seen the cricketers on the ashes at the moment with their jumpers on playing you know vigorous, sort of aerobic type sport with jumpers on. It doesn’t make sense. But when you’re there he’ll realize how cold it is 12 or 15 or 14 or 12 some days, you know, you think gees. So that’s cool.
Once he came back to Brisbane, he got back into work quite easily and after going to another firm to progress in his career he came to a fork in the road.
I actually came back to my old job essentially, albeit slightly with the people I was working for when I left Australia or left Brisbane. Albeit at a slightly higher station, I was senior accountant by that point. I was in that as far as I could. And then I got to a point where I thought, well, I really wanna make the leap to being a manager now and I want to manage people and manage a team and clients and sort of
to run my own race a little bit, that sort of career progression, which, I’ve always been an ambitious person, I’ve always pushed myself. So I set a goal and I could see that wasn’t going to happen at the firm I was that. So I had to make the tough decision to leave that firm, to go to another firm. And I was the inaugural manager at the firm that I worked at here in Brisbane. I did that for about two years. And I sort of got to the point and said, “Okay, well the fork in the road’s here, I either become a partner here or I start my own firm.” So I wrote down a date that I was prepared to accept with myself in consultation, obviously with my wife, I didn’t just go to do something reckless, but I think I got to January—
not that I’m a big New Year’s Resolution person, I think I like to set goals and objectives more, but I sort of got to that point and said, “If I’m not any more advanced than I think I should be toward being a partner by 31st October 2013, I’ll resigned. And essentially what I did, I started 4Front on Monday the 4th of November 2013. And my wife wasn’t working and I had a six week old. I had no Plan B Tyrone, I think that you back yourself into the corner. And you back yourself I guess.
Yeah, tell me a little bit more about that story.
It probably sounds a bit more cavalier than what it really was.
I’d planned things fairly well, as well as you can, but I mean you still sort of taking a punt, I still had no clients so that was interesting. I’ve always been a pretty good networker. I’ve always enjoyed networking and meeting people and getting to understand their story and hearing the opportunities where I might be able to help them. So I’m not about helping myself—I think if you can listen to someone, understand his story, hear where their pain point is and find someone that can help that, I think you go a long way to developing a good relationship and occasionally you will be the person that can help that and that’s where you will be.
Schofield, growing up, was always around property in his hometown. As a result, when he got older, he bought his first property in Queensland, which he sold for an excellent profit.
My dad’s a builder up in Rockhampton in Central Queensland and he’s been a builder since I can remember. I mean, before I was born, he was an owner builder, working for himself, a small businessman. He’s had up to 8, 9, 10 blokes working for him at different stages. So I’ve always been around the property. I can always remember holidays where we went to the Gold Coast and places we looked at, we’d always end up doing the obligatory drive around the display village. So Dad would get, pick up all ideas and new, different ways of designing homes. So I’ve always been around and around property and I guess just by happenstance, my wife’s father is a real estate valuer.
Talk about that, serendipity I don’t know. Funny coincidence. But I guess our first—I always say our because I can say my, but, and really, my wife and I do everything together, we’re a partnership and we make decisions together. So I guess I have our first delve into property was pretty good. We bought a property in a suburb here in Brisbane called Mansfield. We chose to live in that and we did a fair bit of cosmetic renovation to it over the years we were there. And we sold it for about I think 50% more than what we paid for it. So we did pretty well.
What kind of timespan was that over?
That was over three and a half years. It was fabulous. Fabulous return that we got and living in it at the time as well, which was really good. Yeah, that was one of my biggest properties but certainly my most successful property investing story. Got a bad one. Well, if you want to hear it, it’s not really bad, it didn’t cost well. It was more of an opportunity cost than anything.
Okay, well let’s go into the story then.
My old man still brings that with me every now and then. But when I was 18, all of Australia through a bit of a property boom as you might recall, and certainly your listeners will Tyrone, around about when I was 18, 19, 20, which was that early two thousand, properties kind of really leaped.
Anyway, there’s a suburb in Rockhampton called Depot Hill. It’s not, and I don’t want to be derogatory, it’s not a particularly desirable suburb but you could buy a home and I think still you to this day for about 50, 60, 70,000. So there was an opportunity that I got presented with dad and dad found this property for me to buy for my very first home. I think it was 60,000 for this property in Depot Hill. And he said, you got two options. You can buy that stupid car that you want to buy for 20 grand or you can use your 20 grand and I’ll go guarantor and I’ll back in and we’ll buy this property and we’ll do some stuff to it. You’ll do really well out of it. Which way do you reckon all went?
I’m not going to guess.
I bought a stupid car.
There was a point in time where I could’ve sold that property for more than double than what I bought it for. And I’ve done very little to it. So to this day that, I mean, not that I sort of lived through that experience or whatever you want to call it, but it still pops up with me every time. But it did teach me two important lessons. One, you’ve got to make a decision, so you can’t sit on the fence. And I guess the second thing is you can’t hesitate if your gut says yes, you’ve got to go with it. And my gut said yes at the time, that was a much better idea, that all my friends had four-wheel drives and I thought I needed a four-wheel drive as well.
I took the material possession over the investment, which is very rarely a good idea I guess.
It’s all part of growing up and learning. And I guess I think you know that that’s why it’s an interesting story because it’s an opportunity cost. I guess if you had done that, I wonder what path you would have gone down the track.
Well, that’s right. Correct. I might’ve have ended up staying in Rockhampton and you know who knows. I guess you can’t look back with regrets. I’m a bit of a fan of John McGrath, the real estate guru from Sydney, and I’ve read his book, You Inc. heaps of times, and there’s one little thing that always jumps out at me and that find the gift, every situation presents you with a gift and you’ve got to find the gift. So I’ve always looked at that and my gift from that go with your gut, and that’s helped me a lot.
Growing up, Schofield always had ambitions to leave school and work for his father.
I had sort of haboured ambitions to work for Dad. Maybe just more just to work with work or for dad then maybe, I guess I was certainly always admired my father, what he’s built and what he built was literally with nothing. I mean he didn’t come from wealth or anything like that. Everything he’s got is through his and my mom’s hard work. I mean everything they’ve got just through back and bone and muscle and sinew, just working really hard. So I used to go to work with my dad a lot, from as young as I can remember. You know, mom and dad tells stories of me go into work with dad when I was three and four, I can’t remember back that far.
However, he was discouraged from becoming a builder’s apprentice by his parents and was sent to university.
I’ve got sort of glimpses of memory and I wouldn’t say I’ve always liked it, no one likes digging footings and pouring concrete and that kind of stuff, which is all essential in any kind of project. But I guess working with timber and putting bits of timber together and that kind of thing’s always appealing. And I guess I have always admired dad because when he finishes something, like he can go past that years and years and he can look at that and say, I built that, regardless of how many times people buy, sell, change it, he knows he’s built that property. That was a big influence on me. And I guess maybe as an ethos or as an attitude, maybe more than anything, but I’ve got to a point where I think I was in year 10 and I was probably at a crossroads and I said to mom and dad, I really want to work for dad as an apprentice.
And they said, no, your grades are too good. Not that if you’ve got bad grades, you do a trade, of course. That’s not what I mean. But they just that they’d neither them had been further than year 10. No one they knew it had been to university other than the professionals probably that they used. They looked at my grades and said, we really think you should go onto your 11 and 12 and into university and then dad said something like, you should become an accountant because you see how much I’m paying. Not that that influenced me. So I sort of said, “Okay, I’ll do that,” reluctantly then, so I did some work experience and I mean the actual accounting, the business of accounting and the numbers and that kind of stuff hasn’t always appealed to me hugely. It’s more dealing with people that I enjoy and helping them achieve a result.
I think that’s probably the bit I like about it. So it’s probably more the advisory point. I’ve done lots of accounting and it’s always good to make sure your clients are looked after and they don’t pay a dollar more or less tax than they should and all those kinds of things, but it’s really that sitting down with people and achieving a really good result that they’re happy with and they see value in, being that key person in their business or their particular life or life stage or project or whatever it might be. That’s the attraction for me. So I’m glad I went to work with dad so much. I might not be here where I am today if I hadn’t.
Experience, I think that that comes back down to experience and also seeing what potentially could be because yeah, I mean I had a friend who very similar to you whose father recommended exactly the same thing and he said, look, rather than labor himself out, because he you get to a certain point in your life and age that you can only do so much manual work. As they said to me one time and I said, yeah, I can can kind of see why I think our parents recommended it for us to do those kinds of things as well.
I see my dad now he’s similar age to my business partner and both two men I respect quite highly an one can keep going, my business partner and he could probably go into it well until his seventies if he likes, he always says, provided I’m fit and healthy, and the mind’s well, I’ll keep going. I hope you that he does because he’s a credit to the industry. And then I’ll see some, like my father who would love to do more stuff and he’s got a hell of a lot more to give, but you know, he’s worked so hard that his body starting to give out. So it makes it really hard to go and take on the projects that he would have when he was in his late thirties to mid-forties and even 50s. You know, cause he’s the early sixties now and you just can’t do the stuff that he used to do. You cannot be a master craftsman and do the things that you do that you once did and that must be torturous.
For Schofield, letting his one of his biggest investments go to auction was both an ‘aha’ moment and a struggle.
When you sell your property, there’s always the option to go to auction. A good mate of mine was a real estate agent at the time when we decided that we were going to sell our place in Mansfield and he said, have you thought about going to auction? And I said, look, really, don’t want to do that. And he sort of really encouraged us to do it. If we hadn’t have, I strongly believe we wouldn’t have got the price we did because ou place ended up going to a bidding war between three people and I think we got an extra 30 or 40 or 20 or $30,000 more than what we would have. So an ‘aha’ moment I guess in the property senses. Don’t be afraid to go to auction. You never know what result you might get. You might just get a really good one like we did. So that’s a bit of an ‘aha’ moment, if that’s what you mean.
If I’ll be honest, when the auction was happening, I was in the kitchen with my fingers in my ears. I lost control I think Tyrone and I didn’t like that. When you work for yourself and you’re the master of your own destiny and all of a sudden you’re handing a major investment, one of my two biggest investments I had at the time I had someone else to transact for me. There’s a bit of a loss of control there, but he was very good. He just said the whole way through trust the process, trust the process, trust the process. My wife was all for it by the way. She goes like, this is great. And she was in the loungeroom riding every, and yeah, I was pacing in the kitchen, like a wimp with fingers in my ears.
Gaining An Advantage When Property Investing with Drue Schofields
Schofield starts off by telling us about some of the properties that he has in his portfolio at the moment.
We’ve bought and sold, but at the moment I’ve only really got two properties that I’m holding at the moment. One, our principal place of residence, so our family home, which is in Cannon Hill, which I think we bought really well. We’re right near a really good school, we’re right on the Cannon Hill Morningside cusp. So I think we’ve bought quite well there and I’m a big believer in, you don’t always necessarily buy exactly in the suburb you want to be and maybe buy one suburb back and make some changes to that property because there’ll always be people that can’t afford to get into that other suburb. So they’ll go to the next suburb along. And that’s sometimes where you see the growth. So that’s kind of the gamble I’ve taken there, not that that’s really a gamble because it’s our home.
And then the other property is the property my business partner and I own together that we run an accounting practice from—the main reason we bought that is it’s in the suburb in Brisbane called Woollongabba near the Gabba. At the time when we bought it, they were talking about the Cross River Rail happening and then that’s now been sanctioned or that’s going to be legislated. So I guess I’ve tried to find that upside and it’s got approval, it’s zoned for 13 stories where we are as well. So there’s upside here. So whilst it’s an accounting firm at the moment, I haven’t bought it for it to be that forever, if that makes sense. You got to have options. So I always tell clients, you got to have options and we’ve got options as well. So if we outgrow this place, it’ll rent very easily and at some point we might develop it well into the future, or we may sell it to somebody who can realize the upside themselves and we’ll take a capital gain from that, whatever that might be.
He goes on to elaborate a little bit more about his strategy when buying property in order to gain the most out of his purchases.
Our first property we wanted to be our home, which we bought outside of the 12k radius because we thought you’re better off to be just outside than just in because of the price differential. And that worked really well in our favor. We’d probably prefer to be in living in a suburb like Hawthorne or Balimba or Balmoral or that sort of area there. We’re so close to it it’s not funny, but the price differential is so huge. So my strategy there is again, buying us one or two suburbs away from where you really want to be not because of affordability but because I think you’ve got better chances of getting capital growth. And I think that’s probably working already because there are properties in our area where the land is selling for not too far away from what we bought our property for.
So you’ve got to look at that and say, okay, our home’s quite nice and it’s fairly brand new. So you’ve got to look at that and say, okay, well we’ve got value there straight away. And then I guess with our commercial property that my business partner Carmen and I own, it’s just looking to that upside. Yes, we’re gonna run an accounting firm from it. Yes, it’s a really nicely well-presented professional office that we fitted out well, it’s got really nice street appeal, it’s well signed and it looks really good and professional. But there’s that upside there as well. So I think you’ve got to chase upside, don’t just buy something, you don’t fall in love with things. It’s an investment and you’re going to buy it. There’s got to be an upside there.
Schofield then talks a little about how the rental income works in regards to his commercial property and how this helps him act as a good example for his clients too.
Our accounting businesss is our leasee. And we’re the lessor. So, yes, we’ve got another entity that we’ve established that owns the property and then we pay ourselves market rental to that from this business. So it makes sense. We’re going to have to be somewhere so we might as well invest in ourselves rather than somebody else is my view.
It makes sense and you’re then sort of a living testament to your clients when you’re encouraging, which I do, particularly my business clients, hey, you know, you’ve got to invest outside your business. You can’t just invest in just your business. I mean, it’s the next logical thing. You buy well, it’s a no-brainer, pay rent to yourself, not to somebody else.
When it comes to structuring businesses or properties for clients, Schofield has a particular strategy which can make a huge difference.
We’ve structured in lots of different ways depending on the clients’ I guess appetite for risk, what they want to buy, where they want to buy it, but we always make sure that clients buy their properties separate to their trading entity because there’s a risk, what I call a risk mismatch. So the risk in operating a business first versus the risk of receiving passive rental income is totally different. So you want to make sure that you don’t want to put both eggs into one basket, you want to put an egg in either basket. I always tell clients you should only ever do anything from a structuring point of view or a strategy point of view to mitigate risk. That’s why you do things. Everything else after that is windfall gains.
So you don’t structure things just for tax, you structure things for risk, always for risk, to mitigate risk to the lowest possible level that you’re comfortable with. And I guess the analogy I’ll give there is you’re better off having one egg and 12 baskets and 12 eggs in one basket because if you dropped one or two baskets along the way, you’ve still got ten. You drop one basket with 12 eggs, you don’t know how many times they’re going to rattle together and you might lose the whole lot. So I guess when you’re structuring any sort of property, you really need to look at what does your current structure have and should we put it somewhere else? And there is sometimes with clients I’ve seen over the years an inhibition there because of the cost of setting up different structures.
It is costly, it does cost money to set up companies and trusts, unit trusts and self-managed super funds, if you go down that road as well, there is a real cost to that. And then there’s an ongoing admin administrative cost as well, the counts and people like that. But I always say don’t risk it for a biscuit. There’s no point saving a couple of thousand dollars now then looking back and thinking I wish we’d just segregated things here, would have been much easier because you just don’t know what’s around the corner and you hope that you never need that. The risk mitigation you do, you hope you never really need it. But when you do, and I’ve seen clients need it, I mean that’s when they look at that and just think boy, we’re glad we did that.
He provides us with an example of how not putting all your eggs into one basket or mitigating risk can mean the difference between losing or keeping assets.
You’re running a business, you’re dealing with the public, you’re dealing with suppliers, you’re dealing with lots and lots of different people that you don’t always necessarily know well. And then things can just happen in business that are out of your control, that you’ve got to deal with, that can present issues. So you don’t want to get to a point where a particular company might be operating has to be liquidated or something like that happens and you’ve got a really good commercial property asset with upside that has to go down with the ship. So that’s where you want to make sure that you’ve got that segregation between an operating trading company and an investment trust or it can be an investment company as well. We’ve had clients that have put commercial properties in companies for various reasons. But in the main, we tend to focus on trusts because of the ability to just distribute income and also to get access to capital gains tax concessions. And I guess those kinds of arrangements as well.
And I think a lot of people have probably raised this question up and I’m pretty sure this is probably a common question is, I’m putting a, say for example, commercial property in a trust and also distributing income because that’s one of the benefits as well. Say you’re running a company and you want to actually distribute the income but not pay, for example, you want to hire an employee to pay maybe a family member and stuff. Is that something you would distribute through a trust through the company? Like how does that kind of structure?
Potentially, yes, there’s a few steps you’ve got to follow, but in the main you’re paying rent for the exclusive use of that property to your trust, the trust if it has a profit at the end of the year, it has to distribute that income to its beneficiaries. And so at that point in time, prior to 30th of June that you make that decision on where you’re going to distribute that income to, and then if there’s a taxation benefit from that, then that’s all the better.
So basically before the 30th, say for example, of June, before the tax has to be completed, can you distribute those funds to family members before then or does it have to…?
You don’t always have to distribute the income straight away. So whilst you distribute the income through the financial statements and then report whatever income you receive as a beneficiary from a trust and your income tax return, you may not actually physically cash receive those funds. So they get segregated into the accounts and they’re called an unpaid present entitlement them or a beneficiary entitlement and they form part of what’s called the beneficiary entitlement account so that if you like the equity of the trust, so that’s often a thing. The way trust is is money can come and go at the trustee’s discretion and to whoever they like. It’s just at some point in time prior to 30th of June, they have to make a decision on where the net income of the trust is going to be distributed for the year. And who’s going to pay income tax on that money.
Schofield highlights the importance he places on making sure that tax is paid properly in regards to his clients.
It’s something that we do well and truly before 30th of June. So one thing we’re very strong on at 4front accountants and I’ve always been strong in it, and my business partner has particularly strong on it, and I’ll give him credit for this because–I mean we’re both very good at what we do—but he’s been in the industry longer than me. So, but he’s always fought really hard and made sure that all our clients and the people that work for us understand tax planning and how crucial it is; we’re really of the opinion that you get more bang for the buck for every dollar you spend on tax planning than you do on compliance. So many clients that have any sort of situation whatsoever, we do our level best to meet with them in May and June before the end of the year.
so we can make some big decisions on where the money’s going to ultimately land and who’s going to pay income tax on it, whether that’s a company or a trust or whatever that particular arrangement is. And that’s just so crucial to have that meeting because once the 30th of June rolls around, it makes it really hard to…well, it’s impossible to go back in time. It makes it really hard to make decisions so we really like to make sure we’ve made all those crucial decisions for those clients that want to take up and understand the value of tax planning, prior to 30th of June and lock them in and make the notes and make sure that’s what’s administered.
Schofield tells us a bit more about situations where you have to physically transfer money from a trust and how this has changed over time.
One of the times that you do actually have to physically transfer the money or cash flow the money from a trust is if you distribute to a company, so once upon a time when you distributed to a company, it wasn’t a problem. You could accrue that beneficiary entitlement account or that unpaid present entitlement that I was talking about before where you record the money as being received by the company. The company would pay tax, but you wouldn’t actually have to physically cash transfer the money to the company similar to what we do with individuals. But there was a tax ruling some years ago where the ATO looked at that situation and said, well this is an unfair advantage to individual beneficiaries because they’re distributing all the income from the trust or company
then they’re using the money personally anyway. So they put a stop to that. That’s not the end of the world. We often have clients that distribute to companies and it’s part of a broader tax and operational strategy. And we might have a client that’s made a particularly good profit in a trust and they want to distribute that income to a company. The benefit of that is you’re locking in a fixed percent, provided that money is transferred from the trust to the company, there is no problem there at all. And then that money is then used to re-invest in and do other things. So that’s one of the things that may come out of a tax planning meeting.
As an example, say someone has made $1 million in their trust and from the trust, x amount of dollars are distributed and a flat rate of 30% on tax is paid inside the company, and from there the money is reinvested into whatever they need to do for the company. In regards to this scenario, Schofield tells us to get money out of the company to spend it on things like houses or holidays is not an easy thing to do.
Look, the strategy you’re talking about is great there. So you might have a trust, you might have a property or another investment or could just be a business profit for that matter, and you distribute it to a trust. So in the case where you’ve got $1 million profit, taxable profit, you’re paying tax at 30 cents in the dollar, so you’re going to have $700,000 leftover. Now you use that $700,000 to then reinvest in whatever it is you choose, and buying properties in a company isn’t a bad strategy sometimes because you’ve got a fixed, you’ve got to look at your after-tax cost. Don’t look at your tax before tax costs. No one talks about before tax, profit, and property and they shouldn’t. What’s left at the end for me?
What do I have to reinvest? Because you can’t reinvest the tax money, because you got to pay that to the taxman. That’s the same as paying the builder, call the plumber, it’s no different. So that strategy can work where you’re left with that money. How do you get the money yet? There’s, there are only two ways to get money out of a company: to receive remuneration for services derived so in the form of salary or wages or director’s fee or to receive a dividend. So in that situation where we have individuals that want to get access to that money that’s now in a company, again, it comes down to go tax planning. We’d have to have good strategies in place to either make sure all those people receive a frank dividend upfront, which probably wouldn’t be the best idea in that situation because they will be paying more tax anyway. Or you have it structured in a way where you end up structuring what’s called a division 7A loan and then that money’s repayable over a seven-year period. So that’s how they get access to money and some developers I’m sure just take it out and just wear the tax, which is never a good idea.
Everything’s got to be done in consultation with a good accountant that understands property, understands tax and how the two working together can ensure the best outcome for me, the taxpayer.
He then goes on to tell us whether there is a difference between a director’s fee and remuneration through a salary or as an employee.
It’s called a director’s fee because they’re a director more than anything. It’s no different. The income still earned by the individual, they still have to pay income tax on it and superannuation is still payable on that amount as well. It’s just something that you can use as a, I guess as accounting or a tax function whilst you’re preparing a client’s records rather than doing it all through the year. I mean we’ve got clients that are directors that pay the director’s fee much like a salary and wage. There’s no real difference. It’s more just a title.
There’s no income tax benefit or anything to it. It’s still just ordinary income.
In regards to a director’s fee, Schofield elaborates a little bit more about instances where you would and would not pay it.
You’ve got to be paid remuneration commensurate with the services they provide. It’s a pretty easy argument in most instances to make where a client has a company and they’re doing a development project, they going to be putting the time in. You can’t pay an outlandish amount of money. You can’t pay a director’s fee. And nor would you anyway, of four, five, six, $700,000 in a year. If you can substantiate that person’s worth it then by all means, pay it. But if you can’t, you wouldn’t and you probably wouldn’t anyway because that wouldn’t be of great tax value to your client, to pay them a director’s fee like that. You’d be more going down the frank dividend road if you could, where there’s a bit of tax paid on the income that that person’s receiving as a dividend.
When it comes to distributing income through a trust as a tax strategy, Schofield shares with us what is needed.
In that situation, I think there’s nothing stopping anyone paying family members from a company. But I mean the principles in place, the people that are doing that are being paid have to actually do work. You can’t just pay people for the sake of it and say they did the work. There’s gotta be some demonstration that they’re an employee, they’ve got a tax file number declaration. They’ve got a job title, they’ve got a job description. They’ve got tasks they’ve got to complete each week, each fortnight, each month. You know, they’ve got to be, it’s gotta look like a duck and quack like a duck to be a duck, otherwise it’s not a duck. And then it’s not a tax deduction. So it’s gotta be hunky dory. You’ve got to make sure that everything…it’s gotta be what it says it is on the label, I guess is what I’m trying to say.
Delving further into distributing income from a trust amongst family members, Schofield lets us know more about who you can divide the funds. He also informs us about rules about distribution have changed over time.
A really wide group of people. The way the trustees we use are written in such a way that they all-encompassing from many different family members, generally two generations up and two generations down. It is required that you need to have a family trust election on the tax return and a few other things. In the main, generally speaking, there is a very wide group of people you can distribute to in a family trust and that’s where you get the benefit of a large group of people’s marginal rates of tax, which is where you can add some real savings.
Once upon a time, you could distribute up to $3,000 to children under the age of 18. It’s now $416. I did have a client once, he’s an anesthetist, and he had a very good investment trust with quite a good portfolio of shares, and he had 10 grandchildren and it used to make in the vicinity of 30 to $40,000 a year of net income. So most of the income it distributed was tax-free and they changed it to $416 and that sort of trimmed his sails a little bit. It probably was a tax rule and the ATO jumped all over that.
For Schofield, there are quite a few reasons why he went into property rather than put his money into other investments such as shares.
You should have some diversity. You shouldn’t put all your eggs in one basket. You don’t buy one $10 million building and cross fingers and toes that it’s going to rent. You’re better off having five $2 million buildings or two $5 million buildings. But I think you should also have some diversification and it’s probably a good idea to hold other asset classes if that’s what you’re into. But why property? I still think they’re still the greatest Australian dream in Australia or probably in most western countries that have a freehold land system where the government doesn’t own the money and you don’t lease it from them, you physically own the dirt and you physically own the property.
There’s something about property again, you can hold it, you can touch it, you can see it, you can drive past it. You can tell your friends and your family to drive past it. You can build stuff on it. You can add things to it. And being a builder’s son, property is always going to be probably ingrained in me and an attraction to me as an asset class. And then working with people that are property investors and developers, they’re good people, they’re out just trying to get ahead like everybody else and they’re taking risks. And sometimes they take the biggest risks and I’ve got a lot of a time and a lot of respect that people that are going to take a risk, a sensible risk obviously, and calculated risk, planned risk, but a risk nonetheless. I’ve got a lot of time for people that are gonna go out there and try and make something out of nothing because I like to think I’ve done a little bit of that, not much, but I’ve had a crack and you become a bit of a kindred spirit with those sort of people.
Working with people on a regular basis in the property business is a privilege for Schofield and he delves a little into not only how much he enjoys it but how he interacts with his clients.
And I don’t just say that as a cliché or a throwaway, it really is a privilege to work with people. Business clients and property developers, property investor clients. I really enjoy it. It’s really good fun. It’s great sitting down with a client and I don’t think I’ll ever lose the belly for it. You sitting in it with a client that’s looking at their very first property to do something with and you just think this is great and just taking them through the journey.
I’m sitting them in the room with my whiteboard drawing stuff. When I look back and go, I can understand that perfectly, but if anyone else looked at it, it would look like a three-year-old drew it with lines and squares and triangles and dollar signs and things going every way, but just sitting down with people and getting them…the most important thing for me when anyone leaves my office, and I always say it to them, even if we have a meeting, I say, look, if there’s anything you don’t understand, call me, text me, email me. The most important thing is that you’re comfortable with what you’re doing. You understand it as much as your comfortable with, you’ve mitigated that risk in your own mind. And if you don’t, let’s go through the whole thing again until you are. Because if you’re going to go and make a big decision and you know, spend 3,4, 500,000 plus 20 million, you need to understand what you’re getting yourself into and you feel as though you’ve got the best person in your corner advising you at that particular time for what they’re good at.
He goes on to impart some important advice for those who are looking to invest in property themselves.
It’s easy to say because I’m an advisor and I do get paid to work with clients, but I can’t stress enough. Don’t risk it for a biscuit. Don’t scrimp and save on a solicitor or an accountant. If you’re working with an accountant, someone like myself, and I say to do something, it’s not because I’m trying to gad or make more money. It’s because I think that’s genuinely what I would do. Here’s this is what I would do. And if I recommend you go and talk to somebody that was not a solicitor or a town planner or somebody is because I genuinely think that is who I would use as well. There’s that principle, would you introduce this person to your mom? And if the answer’s no, then you don’t do it. So I sort of take it one step further and say, well, would I talk to this person about this particular thing? And if the answer’s no, then I’ll wouldn’t recommend it. I wouldn’t for one second recommend a client did.
On his property journey, Schofield cites two people as his main mentors and believes books and various other people he has met have helped him as well.
Definitely my dad. Definitely my father-in-law, Nick, between my dad, Eddie and Nick, you pick up a lot of stuff from them. Nick’s in his seventies now. He’s a real estate valuer and he started his career with the Valuer-General and then started his own business. And when it comes to real estate property values, he’s a bit of a Duan and I think he’s a bit of a myth. People still can’t believe he’s still working I think half the time when they see him. He’s in his seventies and always the oldest of the property things he goes to. But certainly, those two men have been massive influences anytime I’ve ever done a property. Even when we bought this, I still ask them the question, what do you think?
What would you do? Here’s the plans, here’s the location. And if I hadn’t received a green light from either of them, I probably wouldn’t have gone ahead with it. So them, and then mentors as well to get going with that. My clients and mentors, I pick up stuff off them. People in general, reading stuff. Look, from a property point of view, whilst you mightn’t like the guy, a lot of people don’t, you’ve got to admire someone like Donald Trump. You really do, for what he’s built and what he’s done. I think as a human being, maybe he’s not the best guy in the world. I don’t know. I’d never met him, so I can’t really make that judgment. But people might say, well, he’s never really built anything. He’s had other people do it for him. Well, that’s pretty smart isn’t it? You wouldn’t say he’s been a massive influence on my life but reading his books and just other people and people in general.
Schofield shares with us one piece of advice that he believes is the best advice he has ever received and a book that has made a big difference in his life.
Bite off more than you can chew and chew like bleep is always a good thing to do. Provide you do it sensibly and carefully, take a risk. Don’t just what you think you can do, do a little bit more. Stretch yourself. I know one of the other questions will be what’s a book you might recommend I read, I’ve taken some good advice from that. I’m jumping ahead slowly here, but you become what you think about. If you really truly want to do something and you sort of obsessed over it in a sensible way, you can get there. And there’s a book that I really adore and it’s an old book.
It’s not one of the New Age, I guess sort of Gary Vaynerchuk type books, but I’m sure, or Tony Robbins, all that kind of stuff. But it all harks back to that. It’s by a guy called Earl Nightingale and it’s called the Strangest Secret. It’s a really good short, sharp little book. It’s really good. And his book can be pretty much bold, some down to one line. And that’s what you become what you think about. So I guess that’s a good piece of advice that I’ve always followed as well.
When asked what he would say if he met himself ten years ago, Schofield mentions quite a few things that could be relevant to many of us.
If I met myself 10 years ago, I’ll probably have said buy more property because it will never be as cheap as it is today. Do more things, work harder, focus on clients more, exercise more. That’s one thing I should probably do. Cherish. I don’t want to get to too woo-woo here Tyrone, cherish the relationships you’ve got with people.
In the next five years, Schofield is most excited about purchasing and renovating property with his wife.
I’d like to buy a property that I could cosmetically renovate myself and sell it and make some money on, and then go from there. That’s probably what I’m most excited about. That’s something I’m working towards doing in the next probably 12 months. My wife’s got a really, really keen eye for finishes, colors, interior design type stuff. She’s very good at that. I’m not very good at that sort of thing. That’d be something nice that we could do together and make a little bit of money off, pile a bit away to pay for the oncoming onslaught of private school fees that we’ll have.
Schofield firmly believes hard work beats talent and luck any day of the week and cites some of his own life experiences and the advice of others as proof.
I’ll say two things. Hard work beats talent every day of the week and these are just quoted that you have read anywhere now. Once upon a time, you had to read them a book. Now you’d probably get it at a meme on social media, but hard work beats talent every day of the week. And luck is just preparation meeting opportunity. So I’d say a lot of this stuff I do is down to hard work. Upbringing, having a good influence in my home and the people I grew up with, my mom and dad and the people I’ve surrounded myself with plays into it. But what’s luck? What really is luck, Tyrone, I don’t know? Are you lucky if you throw $20 on a…one of my hobbies is horse racing. I love horse racing and I’ve owned shares in horses and I do at the moment and sort of a little guilty pleasure that I’ve got.
Is it lucky if you put money on a horse and it wins? Well, yeah probably. Is it lucky that you start an accounting firm when you’ve got no income, no clients, your wife’s not working and has a six week old and it works out? And I would say no. I’d say that’s hard work and that’s just becoming what you think about every day and just keep telling yourself and maintaining not positive thoughts but positive actions. There’s another book I’m reading at the moment, it’s by a guy called Phil Jauncey, and he’s worked with the Australian cricket team and the Broncos and a lot of sporting teams and people like that. And he says he doesn’t believe in positive thinking, he believes in positive doing. So do things that are positive and it’s all those healthy habits, probably the seven habits of highly effective people. It’s probably all of those things that are wrapped up in it. Skill and intelligence certainly get you so far, but hard work in channeled in the right direction, in the right area for the right intentions I think trumps everything, to be honest.
If you would like to contact Drue Schofield, you can do so through the following avenues…
This episode was produced by Annie Gao with narrations and interviews conducted by Tyrone Shum.