Principles of Taxation Law Major Assignment

This assignment provides a comprehensive analysis of taxation law, offering advice on property tax, capital gains, and various tax scenarios. It examines the tax implications for individuals and businesses, including rental income, property sales, renovation, and construction. The assignment also explores deductions and exemptions available under Australian tax legislation.

PRINCIPLES OF TAXATION LAW
MAJOR ASSIGNMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
Advice to Tony and Hub in relation to property tax..............................................................1
QUESTION 2...................................................................................................................................3
Taxation advice given to Monica for various scenario..........................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Taxation law is very important for an individual as well as for a company. The taxation
includes tax on individual incomes and taxes on sales of good and services. In the present case
study, the capital gain taxation will be discussed. Along with this, client Monica provides
different scenarios related with tax law where she has acquired a rental property and borrowed a
loan for the same. The following report is prepared to reflect the legal taxation advices given to
Tony, Hub and Monica.
QUESTION 1
Advice to Tony and Hub in relation to property tax
1. Whether to continue renting out of the house or not?
Rent income: Tony and Hub have a co-ownership of the house they have rented, income
earned as rental income shall be included in their particular income. The income earned as rent is
liable for taxation according to ATO. Both of them need to keep the records right from starting
and they can plan for deduction which they can claim. The rental income shall be declared in the
tax return for both Tony and Hub.
Rental income taxation: according to taxation administration Act 1953, tax on this
rental income will be added in the individual incomes of Tony and Hub and will charge normal
tax rate according to the tax slab (Austen, Sharp & Hodgson, 2015). The income earned by Tony
and hub by renting out of the house inherent from their father is $12000 for 8 months.
Rent received for a year would be 12000*12/8= $18000
Individual rental income of Tony and Hub: 18000/20 = $9000 per person.
Deduction: They can claim for a deduction for rental property expenses such as-
depreciation of rental property, advertisement, cleaning and maintenance of the house, legal fees
paid etc.
2. selling the house and invest money in another development/ shares or investment
property.
With the sale of real estate in this case, the house inherited by Tony and Hub at the time
of event (of Capital gain) is when they enter in to a contract for sale not when sale is settled
(Cobiac, TamVeerman & Blakely, 2017). The movement they enter in to a contract of sale the
event of capital gain is established.
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The house was purchased by Joe father of Tony and Hub for $70000. At present, the
value of house is $1000000; capital gain arising out of sale of house 930000.
The limit allowed under the Australian taxation legislation for exemption of tax on capital gain
is:
$250000- for a single person
$500000- for a married person and filing the capital gain jointly.
The capital gain share for each individual will be 930000/2 = $465000
The individual limits for capital gain exemption is $250000 (as the property is inherented
to them by their father so they can not apply jointly with their spouse, if they are married).
Per person taxable capital gain will be: 465000- 250000= $215000.
3. Relocation of house at back block while carrying out a renovation and build a new
house at the front block:
Relocation and renovation: (Cost $200000)
The process of renovation of a property is known as property flipping. The purpose of
renovation is to earn profits from such property and it was carried out in an organised manner so
it falls under the category of renovation as a profit-making activity (Black, 2016). They both
have an ABN (Australian business number), so it can be sold under the name of their business
CBP. They are required to register themselves under GST as the renovation amount is
substantial, that is $20000.
Construction of new house: ($250000)
As per GSTR, if a residential premise is built for the purpose of sale, sale value of the
premises is liable for GST along with a claim of a GST credit for construction cost and any
purchases made for sale of property (Fry, 2017). A residential promise is not considered as new
when it is rented for a continuous period of 5 years. A new premise if rented out that was built
for the purpose of sale and GST credit have been availed t credit that has to be adjusted
proportionately.
Interpretation: cost of renovation and construction of new building is liable to GST and Tony
and Hub can claim input tax credit. In case the property is sold then the value difference will be
capital gain and tax will be charged on the capital gain.
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4.1 Sell of both houses:
In a condition when both the houses are sold without giving them on rent. The capital
gain on the newly constructed house will be different between cost of construction and sales
proceeds received. Capital gain for the new property will be $950000 (1200000-250000).
The cost for renovated of house is 70000+ 200000=270000. The capital gain will be
(1200000-270000) = $930000; at the time of sale, certain deduction can claim incurred for sale
of property and net capital gain will be calculated and then it will be charted to capital gain tax.
4.2 Renting of both the houses: Tony and Hub can claim capital works deduction of the
construction cost of a rental property for satisfying certain conditions. Deductions available for
both new constructed properties and renovation of the already existing property has been done.
Deduction: construction cost of building, alteration cost of building, capital improvement
cost around property (Property, 2018). They can claim deduction for newly constructed house as
it was built after 17thJuly, 1985 and renovated property was built in 1974 so it was not eligible
for this purpose. After a period of 5 years, property will not be considered as new so claims will
get reduced proportionality.
The rental income will be included in the personal income of Tony and Hub on 50-50
basis and will be shown in their individual tax return.
QUESTION 2
Taxation advice given to Monica for various scenario
a) Purchase of rental property: Monica shall maintain record from starting. From the
purchase of rental property of $500000 was to find out deduction as she can claim. for the profits
made out by rental property Monica needs to make pay as you go (PAYG) instalment for the
expected tax liability.
b) Establishment fees, loan payment and interest there on: establishment cost is the
form of borrowing expense, which is incurred for taking a loan for rental property (Borrowing
expenses, 2018). Monica can claim deduction, which spread over a period of five years as
expenses is over $100. for each year, she can claim a deduction of $1000 for 5 years.
Interest on loan taken for the rental property can be claimed as deduction. The interest
amount, which is related with rental property cab be claimed only. Here, full loan is for rental
property so the interest amount is $10000 that can be claimed as deduction.
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c) Expenses paid for repair and repainting of rental property: $45000 spending was
for repairing and painting of property can be claimed by Monica under capital works deduction
(Freebairn, 2016). The deduction cannot be claimed immediately in the same income year in
which the property was purchased. The expenses shall directly relate with wear -tear and damage
of the rental property,
d) Personal advice: The advice given to Monica for her personal capacity will not be
considered as advice in her professional commitment, so it is not corrected in the creation of
provision of doubtful debt of $500 and this advice was given to her by her sister.
e) Travel expenses: $500 expenses incurred for travelling between university and her
financial advisory work that will not be charted to her professional income and expenditure
account. As providing financial advice is her profession and teaching in the local university is
her vocation. In the capacity of lectures, she can claim travel allowance of $500 from university.
f) Membership fees: the minimum exemption limit is $500 for any membership fees
paid by an individual. For the membership for Australian financial planner Association, will is
$450 that became exempted. The fees paid for the golf club $500 will be exempted from tax and
$100 is taxable and will be added in the taxable income of Monica.
CONCLUSION
From the above report, it can be concluded that taxation law is very important for
determination of tax liability if an individual and a business. For determination of income of a
person, all capital gains shall be considered in the income calculation. For Tony and Hub, it is
advised to sale the property immateriality after their renovation and construction as this will
reduce their tax liability. Monica has been given taxation advice on various matters related with
owing a rental property, expenses incurred in professional and personal capacity. This can be
finally stated that for taxable person, tax planning is very essential in order to determine tax
liability and also to reduce it by planning income and expenditures.
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REFERENCES
Books and Journals
Austen, S., Sharp, R., & Hodgson, H. (2015). Gender impact analysis and the taxation of
retirement savings in Australia. Austl. Tax F. 30 763.
Black, C. (2016). Approaches to the Taxation Treatment of Carbon Emission Allowances and
Liabilities: Comparing the UK and Australia. Pp13.
Cobiac, L. J., Tam, K., Veerman, L., & Blakely, T. (2017). Taxes and subsidies for improving
diet and population health in Australia: a cost-effectiveness modelling study. PLoS
medicine. 14(2). e1002232.
Freebairn, J. (2016). Taxation of housing. Australian Economic Review. 49(3). 307-316.
Fry, M. (2017). Australian taxation of offshore hubs: an examination of the law on the ability of
Australia to tax economic activity in offshore hubs and the position of the Australian
Taxation Office. The APPEA Journal.57(1). 49-63.
Online
Borrowing expenses. 2018. [Online]. Available through:
<https://www.ato.gov.au/Forms/Rental-properties-2007-08/?page=13>.
Property. 2018. [Online]. Available through: <https://www.ato.gov.au/General/Property/>.
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