Negative Gearing Investment Analysis

The assignment delves into the complexities of negative gearing in property investments. It outlines the benefits of negative gearing, such as leveraging capital growth for expansion and targeting high-growth areas. Conversely, it highlights the risks associated with negative gearing, including potential financial strain from increased interest rates or decreased income. The assignment also examines the tax implications of negative gearing, suggesting that investments be held in the name of the main income earner to maximize tax benefits. It provides a numerical example illustrating how negative gearing can reduce taxable income and subsequent tax payable.

ADFP Module 3 Taxation Assignment1707
ADFP Module3
Taxation Assignment – Version B
Submission Instructions:
Key steps that must be followed:
 Please complete the Declaration of Authenticity at the bottom of this page.
 Once you have completed all parts of the assessment and saved it (e.g. to your
desktop computer), login to the Monarch Learning Management System (LMS)
to submit your assessment.
 In the LMS, click on the file ”Submit ADFP Module 3Taxation Assignment” in the
Module 3section of your course and upload your assessment file/s by following
the prompts.
 Please be sure to click “Continue” after clicking “submit”.This ensures your
assessor receives notification – very important!
Declaration of Authenticity*
I certify that the attached material is my original work. No other person’s work hasbeen used without due
acknowledgement. I understandthat the work submitted may be reproduced and/or communicated for the
purposeof detecting plagiarism.
Student Name*: Date:
* I understand that by typing my name or inserting a digital signature into this box that I agree and am bound by
the above student declaration.

ADFP Module 3 Taxation Assignment1707
Important assessment information
Aims of this assessment
This assessment focusses on taxation in a financial planning context. Tax on superannuation
lump sum withdrawals is covered, as is tax on the receipt of an account based pension prior
to Age 60. Various tax implications across different ownership structures is addressed, as
are tax deductions available under negative gearing scenarios. Capital Gains tax is also
covered.
Marking and feedback
This assignment contains 2 assessment activities eachcontaining specific instructions.
This particular assessment forms part of your overall assessment for the following units of
competency:
 FNSFPL601A
Grading for this assessment will be deemed “competent” or “not-yet-competent” in line
with specified educational standards under the Australian Qualifications Framework.
What does “competent” mean?
These answers contain relevant and accurate information in response to the question/s
with limited serious errors in fact or application. If incorrect information is contained in an
answer, it must be fundamentally outweighed by the accurate information provided. This
will be assessed against a marking guide provided to assessors for their determination.
What does “not-yet-competent” mean?
This occurs when an assessment does not meet the marking guide standards provided to
assessors. These answers either do not address the question specifically, or are wrong from
a legislative perspective, or are incorrectly applied. Answers that omit to provide a
response to any significant issue (where multiple issues must be addressed in a question)
may also be deemed not-yet-competent. Answers that have faulty reasoning, a poor
standard of expression or include plagiarism may also be deemed not-yet-competent.
Please note, additional information regarding Monarch’s plagiarism policy is contained in
the Student Information Guide which can be found here:
http://www.monarch.edu.au/student-info/
What happens if you are deemed not-yet-competent?
In the event you do not achieve competency by your assessor on this assessment, you will
be given one more opportunity to re-submit the assessment after consultation with your

ADFP Module 3 Taxation Assignment1707
Trainer/ Assessor. You will know your assessment is deemed ‘not-yet-competent’ if your
grade book in the Monarch LMS says “NYC” after you have received an email from your
assessor advising your assessment has been graded.
Important: It is your responsibility to ensure your assessment resubmission addresses all
areas deemed unsatisfactory by your assessor. Please note, if you are still unsuccessful in
meeting competency after resubmitting your assessment, you will be required to repeat
those units.
In the event that you have concerns about the assessment decision then you can refer to
our Complaints & Appeals process also contained within the Student Information Guide.
Expectations from your assessor when answering different types of assessment questions
Knowledge based questions:
A knowledge based question requires you to clearly identify and cover the key subject
matter areas raised in the question in full as part of the response.
Skill based questions:
Where you are asked to write as though you are speaking to a client, your answers must
show your ability to:
 understand your client’s concerns/perspective/views
 show empathy
 display a professional response
 explain ideas clearly and simply so your client can understand the issues
Good luck
Finally, good luck with your learning and assessments and remember your trainers are here
to assist you 

ADFP Module 3 Taxation Assignment1707
Unit: FNSFPL601A
Activity instructions to candidates
 This is an open book assessment activity.
 You are required to read this assessment and answer all 4 questions that follow.
 Please type your answers in the spaces provided.
 Please ensure you have read “Important assessment information” at the front of this
assessment
 Estimated time for completion of this assessment activity: 1 hour
Assessment Activity 1
Case Study
Taxation Planning Strategies – Sean and Pam

ADFP Module 3 Taxation Assignment1707
Unit: FNSFPL601A
Background
Sean and Pam are new clients. They purchased a 1 hectare block of land 8 months ago with the
intention of building a house. They paid $300,000 for the land. They have been living with Sean’s
parents in order to save as much as possible for their new home. Pam has recently been offered a huge
promotion which would mean moving interstate for at least six years. She has accepted the new job
and she and Sean have decided to sell the land which is now being valued at $410,000.
Required:
In providing advice to Sean and Pam, consider the following questions:
1) If Sean and Pam sell the land this month, will the land be exempt from capital gains tax? Why or
why not?
Capital gain tax is exempted for mainly for pre-CGT assets, acquired before 20th September,
1985, main residence and assets, used for generating exempt or non-assessable non-exempt
income and depreciating assets for taxation purpose.
Sean and pam have acquired the land after 21st September, 1984 and therefore, it would not be
considered as pre-CGT asset. It is a vacant land and cannot be used for main residence. It has not been
used for generating income purpose also. Moreover, being a vacant land, it would not be considered for
depreciating purpose also.
Hence, If Sean and Pam would sell the land this month, they will not get any tax exemption for the capital
gains, earned from the selling of the land.
2) To attract the discount of 50%, what strategy could you suggest to Sean and Pam?
50% discount on capital gain tax is available for the individuals, trust or complying super fund.
Apart from the that, the CGT event should be occurred after 21st September,1999 and must be
possessed by the owner at least for the period of 12 months before the CGT event.
Sean and Pam are individual taxpayer and they plan to sell the land after 21st September, 1999. Hence,
they are eligible to get 50% discount on CGT. However, they have acquired the assets only for 8 months.
To avail 50% discount on the capital gain tax on the sale of land, they should delay the sale for next 4
months and sell it only after completing the 1 year of ownership.
3) If Sean and Pam had bought the land, built a house on it, lived in the house and sold it 3 years
later what would be the capital gains tax from the disposal? Explain.
The land, including the house, built on it, is exempt from capital gain tax for the shorter period
of the following:

ADFP Module 3 Taxation Assignment1707
Unit: FNSFPL601A
a) 4 years immediately before the house is used for main residence
b) The period between the acquisition of the land and the house becomes the main residence
If Sean and Pam built house immediately on the alnd and moved in the house immediately after
completion within 4 years after the acquisition of the land, then they can get full exemption on the capital
gain, from the sale of the land, including the house.
However, it should be noted that they would be eligible for full exemption only if they would use the
house as their man residence and not use it for any form income generating activities.
4) Sean and Pam have sold some shares which resulted in a capital loss. Can they use these capital
losses as a tax deduction to reduce their assessable income? Explain.
As per the Australian tax regulations, capital loss, incurred from selling of any CGT assets can
only be set off against any capital gain of the taxpayer.
Shares are considered as CGT assets. Therefore, the capital loss from the sale of shares are can be used to
decrease the capital gain. However, it is not specified whether the assessable income of Sean and Pam
includes any capital gain or not.
If the assessable income includes any capital gains from general CGT assets, like real estate, other shares,
units and similar investments then the capital loss can be used to reduce the assessable income.
It cannot be set off against the assessable income, if the income does not include any capital gain from the
general CGT assets or include capital gains from CGT assets, like collectables and personal assets
Activity instructions to candidates
 This is an open book assessment activity.
Assessment Activity 2
Calculation Exercise
Taxation

ADFP Module 3 Taxation Assignment1707
Unit: FNSFPL601A
 You are required to read this assessment and answer all 10 questions that follow.
 Please type your answers in the spaces provided.
 Please ensure you have read “Important assessment information” at the front of this
assessment
 Estimated time for completion of this assessment activity: 3 hours

ADFP Module 3 Taxation Assignment1707
Unit: FNSFPL601A
Question 1:
Simone is 57 and withdraws a lump sum of $230,000 from superannuation as a lump sum which
comprised $10,000 tax-free component and $220,000 taxable component. This is the first
superannuation withdrawal she has made. If her Marginal Tax Rate is 37% + 2% Medicare Levy, how
much tax payable will apply on her $230,000 superannuation withdrawal?
Particulars Amount
Tax-Free Component A $10,000
Applicable Tax Rate B 0%
Tax on Tax-Free Component
of Lump Sum Super C=AxB $0
Taxable Component D $220,000
Marginal Tax Rate E 37%
Low Rate Cap F $195,000
Applicable Tax Rate for
Taxable Component upto
Low Rate Cap G 0%
Tax on Taxable Component
upto Low Rate Cap H=FxG $0
Taxable Component Over
Low Rate Cap I=D-F $25,000
Applicable Tax Rate
J= Lower
of 17% or
E 17%
Tax on Taxable Component
over Low rate Cap K=IxJ $4,250
Tax on Lump Sum Super
Payment L=C+H+K $4,250
Question 2:
Mal is 56 and receives account-based pension income of $20,000 comprising $2,000 tax-free
component and $18,000 taxable component. His Marginal Tax Rate is 32.5% plus 2% Medicare Levy.
How much tax will Mal pay on the $20,000 pension income?

ADFP Module 3 Taxation Assignment1707
Unit: FNSFPL601A
Particulars Amount
Tax-Free Component A $2,000
Applicable Tax Rate B 0%
Tax on Tax-Free Component of
Super Income stream C=AxB $0
Taxable Component D $18,000
Marginal Tax Rate E 33%
Tax on Taxable Component of
Super Income stream F=DxE $5,850
Less: Tax Offest @15% G $877.50
Net Tax on Taxable Component
of Super Income stream H=F-G $4,973
Total Tax on Super Income
Stream $4,973
Question 3:
Would your answer to question 2 change is Mal was 54? Explain.
If Mal was 54, then he would not fall under preservation age and therefore, he would be liable
to pay tax on the taxable component of income stream from his superannuation at his marginal tax rate.
In that case, his total tax expenses would be:
Particulars
Amoun
t
Tax-Free Component A $2,000
Applicable Tax Rate B 0%
Tax on Tax-Free Component of
Super Income stream C=AxB $0
Taxable Component D
$18,00
0
Marginal Tax Rate E 32.50%
Medicare Levy F 2%

ADFP Module 3 Taxation Assignment1707
Unit: FNSFPL601A
Tax on Taxable Component of
Super Income stream
G=(DxE)+
(DxF) $6,210
Total Tax on Super Income Stream $6,210
Question 4:
Would your answer to question 2 change if Mal was 60? Explain.
IF Mal was 60, then he would not have to pay any tax either on the tax-free component or on
the taxable component of his income stream from superannuation.
Question 5:
Nathan earns $62,000 p.a. employment income as well as $3,000 p.a. cash interest from his savings
account. He donates $4,000 p.a. to a tax-deductible charity and he also pays $2,000 p.a. in tax-
deductible work-related expenses. How much total tax and Medicare Levy will Nathan have to pay in
the 2017/18 financial year?
Assessable Income:
Employment Income $62,000
Interest Income $3,000
Total Assessable Income A $65,000
Deductible Expenses:
Charity $4,000
Work-Related Expenses $2,000
Total Deductible Expenses B $6,000
Net Taxable Income C=A+B $59,000
Tax on Taxable Income
D=3572+[32.5%x(C
-37000) 10722
Medicare Levy @2% E=Cx2% $1,180
Total Tax Payable F=D+E $11,902

ADFP Module 3 Taxation Assignment1707
Unit: FNSFPL601A
Question 6:
Fiona is 43 years old. Among her assets is a parcel of XYZ shares which she acquired for $19,000 on
3rdJuly 2000 and which are now worth $42,000. If Fiona sells the shares now, how much capital gains
will be assessable at her Marginal Tax Rate?
Particulars Amount
Current Value of Shares A $42,000
Purchase Cost of Shares B $19,000
Assessable Capital Gain C=A-B $23,000
Question 7:
If Fiona died on 2ndNovember 2014 and the shares were inherited by her sister, Barbara and
subsequently sold by Barbara on 28th November 2014, would Barbara be eligible for the 50% Capital
Gains Tax discount?
Fiona had acquired the shares on 3rd July,2000 and owned it for more than 12 months. As Fiona
had died after 21st September, 1985, the actual acquisition date of the shares would be considered for
CGT purpose, which was 3rd July, 2000. Hence, Barbara can claim for 50% discount method, as the
shares were held by Fiona for more than 12 months, though Barbara had inherited the share only few
days before.
Question 8:
Instead of owning the original $19,000 XYZ shares in Fiona’s personal name, if Fiona had owned the
shares via her superannuation fund, how much capital gains tax will her superannuation fund pay if the
shares are sold for $42,000?
If Fiona would own the shares through superannuation fund and sell the shares after the period of 12
months or more, then also the sale would be also considered as CGT event. The superannuation fund
would be eligible to get one-third discount on the capital gain and liable to pay 15% tax on the capital
gain.
Particulars Amount
Sale Proceedings from Share A $42,000
Cost of Shares B $19,000

ADFP Module 3 Taxation Assignment1707
Unit: FNSFPL601A
Capital Gain on Sale of Shares C=A-B $23,000
Less: 1/3 Discount
D=Cx(1/3
) $7,667
Net Capital Gain E=C-D $15,333
Capital Gain Tax F=Ex15% $2,300
Question 9:
As part of an Estate distribution, Tara receives a parcel of 300 shares in HTG Ltd. Her grandmother
acquired the shares in July 1987 for $4 per share. The date of death of her grandmother was 16
May2008 and at that date, the shares were worth $11 per share. Tara sold the shares in December
2014 for $15 per share.
Calculate the taxable gain which Tara would need to include in her tax return (ignore brokerage costs).
Tara’s grandmother had acquired the shares after 20th September,1985 and Tara had inherited
the shares after 21st September, 1999. Therefore, the actual purchasing date of the shares would be
considered as the acquisition date for calculating CGT. However, though the acquisition date is before
21st September, 1999, Tara cannot apply indexation method, as her grandmother died after the
specified date. She can apply for 50% discount on capital gain as the shares had been owned by Tara’s
grandmother and Tara for more than 12 months. The cost base would be the actual purchase price of
the stocks.
Particulars Amount
Sale Proceedings from Share
A=300x1
5 $4,500
Cost of Shares B=300x $1,200
Capital Gain on Sale of Shares C=A-B $3,300
Less: 50% Discount D=Cx50% $1,650
Net Capital Gain E=C-D $1,650
Question 10:
Background

ADFP Module 3 Taxation Assignment1707
Unit: FNSFPL601A
Mark would like your advice on the tax implications of borrowing funds and investing in the stock
market. Mark is an aggressive investor and is looking at using his savings and borrowing further funds
to acquire stocks in the technology sector. Mark earns $50,000 p.a. and maintains a dependent wife
and 3 children. Mark is looking at borrowing $40,000 and investing $80,000 into the stock market.
Assumptions:
Dividend yield on average is 2%
Mark’s savings $50,000
Mark’s marginal rate of tax is 30%
Interest rate on borrowed funds 8%
a) Discuss the benefits and disadvantages of Mark undertaking negative gearing including margin
lending.
The benefits of undertaking negative gearing are as follows:
- Negative gearing helps the investors to reduce their tax expenses. For negatively geared
properties, the deductible cost for generating income from the property is used to be higher
than the assessable income, generated from it and therefore, the investors incur loss on such
property. This loss can be used to reduce the total taxable income by deducting it from the
assessable income from other sources and decrease the tax expenses, in return.
- The other benefit of negative gearing is that if investors actually achieve the capital growth that
they want, there is the opportunity to leverage against that in order to get larger returns and to
expand their portfolio.
As the property goes up in value it may be possible to borrow against that increased value in
order to use that as a deposit on another property and expand the portfolio without actually
injecting anymore cash into these investments.
- One of the advantage of negative gearing, which is probably the reason why most people choose
to go down this path, is that one can target high growth areas.
Australia is very much a growth market, meaning that even if investors invest in positive cash
flow property, chances are that they want to achieve some capital growth in order to get the
great return on investments, which is desired by the investors.
The disadvantages of negative gearing are discussed below:
- As a negative geared investment is ultimately costing money to hold, if circumstances were to
change such as interest rates increase or the income from other sources decrease, then one
might struggle to afford to pay the loan repayments. If things got really bad, then the investor
might have to sell the investment, which again is not a quick process as it takes time to sell a it
and one might end up losing money overall by selling at a lower price.
- To reap in the rewards, the investment should be included under longer term strategy. The

ADFP Module 3 Taxation Assignment1707
Unit: FNSFPL601A
longer one hold on to the investment, the greater the chance the investment will grow and
double in value, particularly if it is held for ten years over a full investment cycle. It will not work
if it is hold for one year or so
- If any investor is making a loss, then if he/she requires future loans, then a lender might be more
reluctant to increase the borrowing capacity as the investment in not generating any positive net
income.
b) In whose name should the acquisition of a negatively geared investment be generally held
within the family? Would it make a difference if the investment were positively geared?
Explain.
Mark is the main income earner in his family. Hence, the negatively geared investment should
acquired by Mark. It would help him to reduce his taxable income and tax returns subsequently.
The calculations are shown below:
Particulars
Without
Investment
With
Investment
Income from ordinary sources $50,000 $50,000
Dividend from Investment $1,600
Interest on Borrowed Fund -$3,200
Taxable Income $50,000 $48,400
Marginal Tax Rate 30% 30%
Tax Payable $15,000 $14,520
If the investment would be positively geared, then it would be better to invest it by Mark’s wife. As she
does not have ant other income sources, the marginal tax rate on the income from investment would be
lower than Mark’s marginal tax rate.