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Earnings categorized as personal

Ethan Jones a Medical Registrar in a Melbourne Public Hospital earned a gross salary of $220,000 during the year ended 30 June 2014.

He had PAYGW deducted of $73,000 from this salary.

He ‘salary sacrificed’ $10,000 of his gross salary to an ATO regulated superannuation fund.

He received interest income paid by the bank of $4,500 into his bank account. However he did not provide a Tax File Number and tax of was deducted of $3,682 from the interest derived for the year. 

He received dividends of $7,000 from fully franked distributions for the year ended 30 June 2014.

He received additional income and paid expenses as follows:

  • Unfranked dividends of $30,000
  • Partially franked dividends (franked to 20%) of $10,000.
  • Capital losses on sale of shares of $15,000.
  • Net loss from carrying on a small business of $25,000.
  • Bank charges of $50 on his investment account into which he banked his dividends and interest.
  • Tax Agents Fees of $800.
  • General Interest Charge of $550 on late payment of his income tax bill for the year ended 30 June 2013.  Amount was not demanded until December 2013.
  • Purchase of a raffle ticket for $150 from the Salvation Army.  The prize was a motor vehicle.
  • Gift to Royal Children’s Hospital of $1.
  • Subscription to the Professional Cooks Association of $300.
  • Laundry of $200 – no receipts
  • Parking meter fees on visiting clients $190 – no receipts
  • Protective clothing $290 – no receipts
  • Parking fine of $170 on expired meter while visiting a client
  • Payment of $5,000 to ANR superannuation fund. 
  • Purchase of a medical brief case costing $600 for work. The brief case was purchased on 2/7/2014.

Further Information:

Rental Property

Ethan Jones purchased a Motel during the 2014 taxation year and received rental income from the motel business operator during the year ended 30 June 2014. Details of the financial transactions for the year ended 30 June 2014 were as follows:

Motel Purchased 1/9/2013 - land and buildings   

500,000

Motel Building Construction cost – construction in 2002 

200,000

Mortgage - Period of loan is 30 years

450,000

Motel was listed by the Real Estate Agency available for Rent on 1/9/2013

Carport - built 15/05/2014 

18,000

Rented from 1/10/2013     

13,000

Net loss on rent from main residence – see below*   

10,000

Survey fees – on purchase of property

800

Stamp Duty on Transfer of Land 

32,000

Stamp Duty on Loan 

500

Valuation fees – re loan application 

500

Loan Application Fees 

600

Loan Mortgage Insurance (LMI)  

8,000

Loan Establishment fees

700

Conveyancing fees on transfer of land   

10,000

Mortgage documentation - Bank 

2,000

Mortgage broker commission

3,500

Bank fees on Transfer of Land  

1,400

Bank fees - investment account  

120


Travelling to inspect rental property using 6cylinder V6 -    3000 kms ? 

Capital Gain

Ethan has capital assets but decided to dispose of the following assets due to his debt levels due to the purchase of the motel

Asset

Cost

Purchase Date

Date of

Disposal

Proceeds

House in Toorak

500,000

15/03/2009

16/05/2014

700,000

Shares in Coles Ltd

17,200

18/06/1997

17/03/2014

23,200

Shares in BHP Billiton

16,000

18/11/2008

19/04/2014

6,800

Ultralight aircraft

13,000

18/01/2013

19/11/2013

14,000

Painting

600

03/03/1969

30/01/2014

25,700

Gold Watch

450

21/10/1985

29/12/2013

50,000

Houseboat

10,500

28/9/1987

29/06/2014

85,000

Notes:

The House in Toorak was rented out from date of purchase for the first 3 years of ownership.  Ethan then occupied the premises as his main residence. During the period of ownership the property made a loss from the rental of $10,000, which was claimed by Ethan wants to claim as a tax deduction in his tax return – see above.*

  • The Ultra-light aircraft and the Houseboat were for Ethan’s own personal use.
  • Ethan also has the following capital losses carried forward from the previous year.

Capital loss on the sale of Macquarie shares of $5,000.

Capital loss from the sale of his caravan which was destroyed in a car accident of $5,500.

Capital loss from the sale of an engagement ring that was given by his ex-husband of $3,500.

Ethan wishes to minimise his net capital gains.

Required:

Calculate the taxable income and the tax payable for Ethan Jones in relation to the year ended 30 June 2014.

Computation of the Taxable Income and the Tax Payable for Ethan Jones for the year ended 30.06.2014

Particulars

Details

Amount($)

Earnings categorized as personal

a)      Income From Salary

1

137000.00

b)      Interest Income

2

Nil

c)      Dividend Income

3

46950.00

A

183950.00

Income From Business or Trade

a)      Small Business

Loss

(25000.00)

b)      Rental Income From Motel

4

111152.00

B

86152.00

Income from Sale of Capital Assets

5 - C

77217.00

Gross Total Income

D =A+B+C

347319.00

Deduction from the Capital Gain Income

6 – E

(6541.00)

Taxable Income

D-E

340778.00

Tax Payable on Above including Medicare Levy

7

136928.22


Pay received as salary = $220000

Less : Deductions for PAYGW = $73000

Salary sacrifice as super salary sacrifice = $10000

Taxable Salary Income of the Individual = $137000

Interest Income received or accrued = $4500

Deduction at source from the above income = $3682

The above income shall not be included in the income because the tax has been already deducted from this income. Since the Tax File Number was not submitted the tax was deducted at Highest Marginal Rate of Tax.

Franked Distribution   = $7000

Distribution of Unfranked nature = $30000

Partial Part of the franked distribution = $10000(20% of the total amount)

Expenses deductible from the above incomes = ($50)(Bank Charges)

Total Dividend Income = $46950.00

Also there is eligibility of credit from the above dividend income specially in relation to the franked ones amounting to = $7000 + 10000*20% = $9000

Income from Business or Trade

Here the most important thing to note what is the intention of the assessee in relation to the property in question. We need to look at the point from where the intention is present. The intention is there from 1.09.2013. So this date forms the basis of allowance of any expenditure in relation to the property in question. Any expense incurred prior to this date shall not be allowed for deduction while calculating the taxable rental income. So there is a need for calculation of the ratio for the expenses incurred evenly throughout the year. Total number of days = 365  (Office)

Allowable period 01.09.2013 to 30.06.2014 consists of 303 days. Hence the expense incurred evenly during the year will be allowed up to this ratio.

Rental income receipt is from 01.10.2013. we can analyse each and every point as following:

a) Income from last 9 months = 13000*9 = $117000.00

b) Main residence rental loss shall be fully taxable amounting to $10000.00

c) The fees paid for survey are related with the property cost. There is not income impact.

d) Stamp duty on transfer of the capital asset (land in this case) is a part of capital gain calculation.

e) Stamp Duty on loan part is to be added with the capital assets for which the loan was taken.

f) Fees on valuation of the property shall be allowable in the ratio of 303/365 amounts to $500*303/365 = $415.

g) The fees on loan application are a capital expenditure.

h) Loan mortgage insurance is allowable in the ratio of 303/365 and since the lease period is 30 years then the amount again shall be divided by 30 = $221(8000*303/365*30)

i) Loan establishment expenses are not revenue.

j) The fees in relation to the transfer of the land shall be a part of the capital gain calculation. So there is no treatment here.

k) A proportionate deduction will be allowed for the documentation charges in relation to the mortgage $2000*303/365 = $1660

l) Mortgage Broker Commission is an indirect expense in relation to the property loan. So this is not allowable.

m) Bank fees in connection with the transfer of the land shall be dealt in the capital gain part.

n) Investment Account bank fees = 120*303/365 = $100

o) The amount for the travelling expenses incurred for Inspection of the property is allowable. In absence of any amount it is assumed to be $1000.

p) Borrowing expenses in relation to the mortgage are allowed only for a part of the 30 years and that too in the ratio calculated. $450000/30*303/365 = $12452

Taxable Rental Income = 117000 + 10000-415-221-1660-100-1000-12452 = $11152

6. a) House in TOORAK: If assessee is using the property for main residence the entire property shall be not taxable but the exemption is available proportionately if the assessee is not using the place for own residence. Partial exemption is calculated as follows:

Total Capital Gain * Number of days the property was used for own residence/ total days of ownership.

Income from Sale of Capital Assets

In this case the assessee has a property since 15.03.2009 but for 3 year the property was rented. The sale date is 16.05.2014. So the assessee is eligible for a partial exemption only. The amount of partial exemption shall be calculated as discussed in the formula.

Sale consideration of the house = $700000

Cost basis =     $500000

Capital Gain = $200000*3 years/5 years 2 months = $116129                                 

  1. b) Shares held in Coles Ltd.

In this we need to check whether the assets were acquired before 21.09.1999 or not. Since the shares were purchased on 18.06.1997, the assessee can follow either of the method(discount or indexation method) to calculate capital gain as favourable.

Sale Consideration  = $23200

Cost Basis = $17200

Capital Gain = $6000

option 1 – discounting method.

Discounting method is applicable on individuals. 50% of the net capital gain is allowed as deduction from capital gain. Net capital gain means the capital gains left after adjusting any losses. This method is applicable only if the property is held for 12 months or more.

Capital Gain as calculated above = $6000

Capital Loss in Macquarie shares = $5000

Discount = 1000*50% = $500

Net Capital Gain = $1000-$500 = $500

Option 2 Indexation  

Assets acquired before 11.45 am of 21.09.1999 are eligible for this method. Here indexed cost is to be calculated by taking the values of the Consumer Price Index. The Consumer price index of the quarter ended 30.06 are available and the multiplication factor is calculated as 123.40/82.60 = 1.4939.  (Government, 2014)

Sale Proceeds = $23200

Cost after Index(17200*1.4939) = $25695

Capital Loss = $2495.

  1. c) Share in BHP Billiton

When the cost base is already higher than the sale proceeds, then there is no requirement of the calculation of the indexed cost base.

Sale consideration = $6800

Cost Basis = $16000

Capital Loss = $9200

  1. d) Ultra Light Aircraft

Assets which are personal in nature shall be taxable only if their cost basis is greater than $10000. Here the cost of the asset is $13000. So, normal calculation of capital gain shall be there. Here the property is held for less than 12 months. Therefore the discount method is not available.

Sale Price =$14000

Cost Basis =$13000

Capital Gain = $1000

  1. e) Painting

Pre Capital gain tax assets are not taxable. The assets purchased before the insertion of the capital gain provisions are not taxable. The painting is purchased before 20.09.1985 and hence no capital gain would be there.

  1. f) Gold Watch

Gold watch is a collectible and the collectibles below $500 are not taxable. Since the acquisition cost of the asset is $450, hence the same is exempted from tax.

  1. g) House Boat

This asset is used for personal purpose but the amount of acquisition is greater than $10000. Another important thing here is the option is available, discounting or indexation (since purchased before 20.09.1999). (Property, 2014)

Option 1 – Discounting method.

Sale consideration = $85000

Cost basis = $10500

Capital Gain = $74500

Net Capital Gain = 50% of above = $37250

Option 2 – Indexed method:

Here the Consumer price index for the quarter ending on September is 119.70. the CPI in the numerator shall be 123.40. the multiplication factor is 123.40/119.70 = 1.0309.

Sales Consideration    = $85000

Indexed Cost = $10824(10500*1.0309)

Capital Gain = $74176.

Thus the discounting method is beneficial to the assessee.

Capital gain amounts to $37250 as per discounting method.

Now the overall computation of capital gain is given in the following table:

Asset classification

Name

Capital gain/(loss)$

Net Capital Gain($)

Collectables

Painting(e)

Nil

Gold Watch(f)

Nil

Personal Used Items

Aircraft(d)

1000

House Boat(g)

74500

75500

Other Assets

Toorak House(a)

116129

Shares in Coles Ltd.(b)

(2495)

Shares in BHP Billiton(c)

(9200)

Capital Loss on Sale of share

(15000)

89434

Grand Total

164934

Less: Capital Loss(NOTES)

10500

Net

154434

Discount (50%)

77217

TAXABLE CAPITAL GAIN

77217

NOTES: Capital Loss

 

Macquarie Shares

5000

Destroyed Caravan

5500

Engagement ring sale

Personal Item Loss not considered

-

Total Capital Loss

$10500

ITEMS

Amount ($)

Fees of the Tax Agent

800

Interest Charge not allowed

Nil

Raffle Ticket Purchase

150

Gift made to Royal Children Hospital

1

Amount paid as Subscription to Cooking Association

300

Parking Meter Fees are not allowed

-

Expenses in relation to protective clothing

290

Parking Fine is disallowed

-

Contribution to ANR Super Annuation Fund

5000

Briefcase purchase is not allowed as for next year

-

TOTAL DEDCUTIONS

6541

NOTES:

a) General Interest charge is not allowed since the same is made after due date.

b) Expenses in relation to the parking and the laundry expense has no receipt in connection. So they are not allowed.

c) Parking fines are specifically disallowed.

Particulars

Amount($)

Taxable Income(from Total Income Statement)

340778.00

Tax on above total income

126897.10

Levy in relation to medicare

6815.66

Budget repair levy

3215.66

TOTAL INCOME TAX PAYABLE

136928.22

References

Calculator, Tax. "Australian Income Tax calculator." 2014-2015.

Capital Gain. june 11, 2014. (accessed 2014).

Government. "Austrailian taxation office." ato.gov.au. 2014. https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/ind39784n17290614.pdf.

Office, Austrailian Taxation. "ATO, Deductions for Business." ato.gov.au. https://www.ato.gov.au/Business/Deductions-for-business/What-you-can-claim-and-when/What-is-an-allowable-deduction-/.

Property. june 12, 2014. (accessed 2014).

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