Your client Tony and Hub run a building partnership called Cedars Building Partners (CBP).
- CBP has an ABN.
- CBP usually build residential houses for other people as contract builders.
- CBP are not property developers and have never sold property.
Tony and Hub inherited a property at 35 Bright Street valued at $1,000,000 from their father Joe who passed away eighteen months ago.
- The house at 35 Bright Street was built in 1974 on a block of land Joe already owned. Joe paid $70,000 to the builder for the house. Joe used the house as the family home and his principle place of residence up until he passed away.
- Tony and Hub have leased the house out to residential tenants from for the past eight months and have received $12,000 rent.
- The house at 35 Bright Street in the middle of a big block of land. The land is zone R2 meaning two dwellings may be built on the one block of land.
Tony and Hub request your advice as to the income and/or CGT consequences in relation to the following:
- Keep renting out the property and leave everything as it is.
- Sell the house now and invest the money into either another development or into shares or an investment property.
- Relocate the existing house to the back of the block, and then strip and completely renovate the house to a 'like new' status for an estimated cost of $200,000; and build a completely new house at the front of the block costing $250,000.
- Tony and Hub then plan to either:
- Divide the title and sell both houses, when the project is finished, each house is expected to sell for $1,200,000 each: OR
- Retain both house on one title to rent out – maybe to sell some time in the future. It is predicted that in 5 years the houses would sell for $2,400,000 each
Tony and Hub would like to do the work themselves using CBP builder, to save money, as the total development cost cited above of $200,000 and $250,000 would likely double if they had to pay a builder to do it. Advise Tony and Hub on the consequences of doing the work themselves.
2. You run a tax practice and a client, Monica, a financial advisor, comes to ask your advice in respect to a number of outgoings she incurred in this financial year:
a. Purchase of a rental property for $500,000.
b. Obtained a principle & interest investment loan of $450,000, repaid over 25 years, to finance the rental property purchase and in relation to the loan:
1 Paid $5,000 establishment fee that she paid before the loan was granted
2 Paid loan payments of $11,250 Interest and $10,000 principle on the above loan
c. Paid $45,000 expenditure to repairs and repaint the property prior to renting
d. During the year, her sister had asked for advice in managing her financial affairs. Monica gave her advice and charged her $500. She believes that her sister will not pay the bill and so, she has raised a provision for doubtful debts for $500
e. After work Monica teaches at the local University on one day per week. Monica expended $500 to travel between the financial advising work and her work as a lecturer.
f. Monica paid $450 for her membership to the Australian Financial Planners Association and $600 to her local golf club. Monica is a keen golfer and also uses the club to entertain clients.
Answer:
In the given case, the client Tony and Hub is building development business naming Cedar Building Partners (CBP). The clients own a property in 35b Bright Street valuing $10000000 which was formerly acquired by their deceased father Mr Joe in 1974. Both of the brothers have decided use the property as business purpose, not as a residential purpose. The main idea before developing the land is to make money from the property which is being given to them from their deceased father.
The land is hugged and categorised in to R2 zone, which means two secluded buildings, can be developed in the one block land (Braithwaite 2017). In that case there are few circumstances that are to be discussed in the given case that the following are.
1. In the given case if the client Mr Tony and Hub did not invest a penny in the building and only earning the rental income form the CGT asset then they will earn $12000 monthly which amounts to $144000 per Annum. But this is not the right process as there are chances of developing the structure then they could earn more then what they are earning now. This process can cost more money for the brothers, but in long run, this expenses will be regarded as investments. This will be held as the business taxable under ITAA97 s995-1.
|
Rental income
|
|
|
Particulars
|
Amount
|
|
Rent per month
|
12000
|
|
Annual rent
|
144000
|
2. If the client sell the house then they will earn $1000000. Which will be added to the tax on the selling price after deduction of the index value of the asset. The tax will be chargeable under the ITAA 6-10 statutory income. Further the transfer from the deceased father is not taxable as the gift or inheritance dose not attracts the tax under ITAA97.
3. In the given case there will not be any taxable activity that is carried on by the client. In that case, it is an investment not an income. The income will be derived by the client as the ordinary income if they further let out the newly build property (McNamara 2018). The cost of renovation will be of $200000. Moreover, for the new construction the amount will be $250000. This will be deducted from the income, as it will hold for the deduction from the property.
|
4. Capital Gain Computation
|
|
Particulars
|
amount
|
amount
|
|
sale
|
1000000
|
|
|
Less: transfer cost
|
0
|
|
|
Total
|
|
1000000
|
|
Less : index cost of acquisition
|
|
2079683
|
|
Cost of Purchase
|
700000
|
|
|
Base year
|
37.9
|
|
|
Current year
|
112.6
|
|
|
Capital gain Loss
|
|
1079683-
|
5.
4.1: If the house or the plot is spliced into two parts after the creation of the house then each part will be valued at $1200000. In that case if any of the clients sell the property then in the case they will be charged to tax under CGT under the section 10 of the ITAA (Lobato and Meese 2016).
4.2: If the client holds the property jointly then they will be able to earn rental income from the assets and the value of the property will be increased to $2400000 after a term of five years.
|
|
|
|
|
Capital Gain Computation(house 1)
|
|
Particulars
|
amount
|
amount
|
|
sale
|
120000
|
|
|
Less: transfer cost
|
0
|
|
|
Total
|
|
120000
|
|
Less : index cost of acquisition
|
|
103984.1689
|
|
Cost of Purchase
|
35000
|
|
|
Base year
|
37.9
|
|
|
Current year
|
112.6
|
|
|
cost of renovation
|
200000
|
200000
|
|
Capita Gain
|
|
-183984.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Gain Computation(house 2)
|
|
Particulars
|
amount
|
amount
|
|
sale
|
120000
|
|
|
Less: transfer cost
|
0
|
|
|
Total
|
|
120000
|
|
Less : index cost of acquisition
|
|
103984.1689
|
|
Cost of Purchase
|
35000
|
|
|
Base year
|
37.9
|
|
|
Current year
|
112.6
|
|
|
cost of renovation
|
200000
|
200000
|
|
Capita Gain
|
|
-183984.17
|
Further the brothers Toney and Hub decided to build the house by own motion without appointing a builder then they could reduce the amount of the construction. They expects that the cost of development of the new house will be $200000-250000. It will be double in case it is transfer to the builder.
In that case there are some problems that required to be kept.
- The responsibility of the construction and the structure is to be borne by the builder. In case of any problem, the matter is to take care of by the builder.
- Secondly, in the case if the brothers develop the property then they have to indulge a huge time worth money.
- The biggest problem is that the clients are not professional in the construction business. In that case they might have calculated the estimated cost in a wrongly manner.
2. In the given case, Monica a financial advisor seeks advice on the financial activated that is performed by the clients in the financial year. In the given case, it is assumed that the assesse is an ordinary resident individual according to the ITAA97.
In the given case the assesse has acquired a rental property for $500000. This is will be treated as a CGT assets according to the ITAA.For the acquisition, the assesse has acquired a loan of $4500000 for 25 years.For the initial grant of the loan, the assesse has paid a loan amounting $5000 for the establishment fee. This is to be held as the processing charges of the financial institutions (Vann 2016).
The loan is repaid by the monthly instalments. The amount of the EMI is $21250 per month. In that case, the EMI is contributing to the principal payment amounting to be $10000 and interest on the loan of $11250. The interest amount is to be deducted from the income of the client if the acquired property is fully used for the business purpose. In case of any partial use the interest is allowable as deduction under ITAA 1997.
|
loan repayment
|
|
Month
|
Due
|
PRINCIPAL
|
Interest
|
total
|
closing due
|
|
1
|
450000
|
10000
|
11250
|
21250
|
440000
|
|
2
|
440000
|
10000
|
11250
|
21250
|
430000
|
|
3
|
430000
|
10000
|
11250
|
21250
|
420000
|
|
4
|
420000
|
10000
|
11250
|
21250
|
410000
|
|
5
|
410000
|
10000
|
11250
|
21250
|
400000
|
|
6
|
400000
|
10000
|
11250
|
21250
|
390000
|
|
7
|
390000
|
10000
|
11250
|
21250
|
380000
|
|
8
|
380000
|
10000
|
11250
|
21250
|
370000
|
|
9
|
370000
|
10000
|
11250
|
21250
|
360000
|
|
10
|
360000
|
10000
|
11250
|
21250
|
350000
|
|
11
|
350000
|
10000
|
11250
|
21250
|
340000
|
|
12
|
340000
|
10000
|
11250
|
21250
|
330000
|
|
13
|
330000
|
10000
|
11250
|
21250
|
320000
|
|
14
|
320000
|
10000
|
11250
|
21250
|
310000
|
|
15
|
310000
|
10000
|
11250
|
21250
|
300000
|
|
16
|
300000
|
10000
|
11250
|
21250
|
290000
|
|
17
|
290000
|
10000
|
11250
|
21250
|
280000
|
|
18
|
280000
|
10000
|
11250
|
21250
|
270000
|
|
19
|
270000
|
10000
|
11250
|
21250
|
260000
|
|
20
|
260000
|
10000
|
11250
|
21250
|
250000
|
|
21
|
250000
|
10000
|
11250
|
21250
|
240000
|
|
22
|
240000
|
10000
|
11250
|
21250
|
230000
|
|
23
|
230000
|
10000
|
11250
|
21250
|
220000
|
|
24
|
220000
|
10000
|
11250
|
21250
|
210000
|
|
25
|
210000
|
10000
|
11250
|
21250
|
200000
|
- In the given case the property required modification and repair therefore the amount spent by Monica is $450000, which will be added if the asset is used for the residence. In case the CGT asset is held as the business assets then it will be deducted form the income.
- In that case, the amount receivable for the sister of Monica who has obtain the financial advisory service from her will be treated as the doubtful debt. As there are reasonable grounds for that. In that case, the provision is deductible Expense according to the ITAA. Further, if the due is received in the future then it will be taken as the income and chargeable as income (Edmonds 2018).
- In that case, the traveling cost from the home to the university is a deductible Expense. In that case, the Amount of $500 will be deducted form the income as an allowable Expense according to the ITAA 1997.
- In case of membership fees to the Australian Financial Planners Association Monica spends $450. These fees are paid to build and maintain an elite class and the recognition as the financial advisor. This is a deductible expense according to the ITAA.
The fees paid to golf club of $500 is not a deductible expense, as this are only for the hobby of Monica and has a partial impact on the clients. But this are not to be taken as the deduction as these are personal spending.
|
Allowable Deduction
|
|
Particulars
|
amount per month
|
year
|
|
Interest
|
11250
|
135000
|
|
Repair
|
45000
|
45000
|
|
PBDD
|
500
|
500
|
|
Travelling
|
500
|
26000
|
|
membership fees
|
450
|
450
|
|
Total
|
|
206950
|
|
|
|
|
Reference:
Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.
Edmonds, R., 2018. Resource Capital Fund IV LP: The issues on appeal?. Taxation in Australia, 53(1), p.22.
Lobato, R. and Meese, J., 2016. Australia: Circumvention goes mainstream. EDITED BY RAMON LOBATO, p.120.
McNamara, J., 2018, June. Geoblocking in Australia: Intellectual property rights versus consumer freedom-where does the balance lie?. In Intellectual Property Forum: journal of the Intellectual and Industrial Property Society of Australia and New Zealand (No. 112, p. 38). Intellectual and Industrial Property Society of Australia and New Zealand Inc.
Vann, R., 2016. Hybrid Entities in Australia: Resource Capital Fund III LP Case.
