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Taxation Law - Part A

Issue-

  1. Tax implications on either of the property of Philip (P) and Kim (K)

Legislation-

Income Tax Assessment Act (ITAA), 97

Application-

As in the first case scenario, where P inherited a property situated in inner Sydney at 151 Temple Street from his aunt, the property was used for commercial purposes. When P inherited it he thought it to convert it in residential accommodation as the area was a central location for his job as an interior designer. The value of the property was $3,70,000. Wherein P borrowed $1,00,000 from a bank as a loan to renovate the property o 1st April 2012 at 5.5% per annum for a period of 20 years. As per the Australian Taxation Policies, if a person inherits any dwelling property and later want to sell or dispose of it, it may be exempt from Capital Gains Tax (CGT) (ATO, 2020). CGT was introduced in Australia in 1985 and applies on each and every property that a person acquires unless exempted. According to Australian Taxation Office, any capital gain or loss on an asset is due to the difference between what is had costed the acquirer and when he disposed it or sold it off (Mirams, 2020). One pays tax on capital gains which is a part of one's income tax and is something is separate from it. If an asset is held for at least a year then any gain is discounted by 50 % firstly for individual taxpayers or 33.3% for superannuation funds (Mirams, 2020). 

A person inheriting any dwelling property is exempted of CGT on following grounds (ATO, 2020)-

  1. When the deceased acquired the property
  2. When they died
  3. Whether the property was used for rental purposes or for any income purposes
  4. Whether the deceased was an Australian resident at the time of his death
  5. Whether the person selling the property was an Australian resident while selling it.

If one is not exempted or partly exempted, then he needs to know the base of the dwelling to figure out the capital gain. The cost base is calculated by calculating the value of the dwelling when the deceased bought it or when he died. Another thing that is of importance in calculating the CGT exemption in such cases, is knowing the whether the deceased died before 20 September 1985, or the deceased had the dwelling before 20 September 1985 and died after 20 September 1985 or does the deceased acquired the property after 20 September 1985 (ATO, 2020).

When it comes to property, one of the major exemptions could be if the person is able to prove that the place is their home or principal place of residence (PPOR). This could be established if (Mirams, 2020)-

  1. One and his family live in it
  2. His personal belongings are there in the place
  3. It is the address where the mail is delivered too
  4. It is the registered address on the electoral roll
  5. Additional services like phone, gas, power are connected there.

As per the Australian Taxation Office, if a beneficiary or legal personal representative, acquires an asset of his principal, it is supposed the asset is acquired on the day the principal dies. CGT shall not apply if the person acquires the asset but only when later the person wants to dispose of it. it is applicable if the asset is transferred to a tax-advantaged entity like a charity or to a foreign resident (ATO, 2020).

Conclusion-

In the given facts, for our first scenario to decide that the property of P's aunt is subject to any tax implications, so as per the rules of taxation it is not provided with the five credentials are known and undisputed. However, there is certain missing information that is essential to be required to decide whether the asset is exempted from tax (CGT) or not. The first thing is the date of acquiring property by the deceased is unknown. Second, it is unclear whether P and his aunt are Australian residents or not. Third, the date of the deceased (the aunt) is unknown. As for his loan amount so the interest on the loan is deductible as it is a standard procedure and any loan taken, so its interest is deducted. Ure v. Federal Commissioner of Taxation., Federal Court of Australia, 11 February 1981, it was held that the interest on loans will be deductible only when the taxpayer derived the assessable income from the funds. 

Since this information is missing in the given facts, it is difficult and shall be wrong to conclude that P shall not be liable to pay any tax on his acquired property. As his advisor, I shall advise him to fetch for all of the above information and then only can he plead that his acquired property does not fall under the ambit of CGT and hence he cannot avail the discount on the money that he borrowed from the bank.

Taxation Law - Part B

Issue-

  1. Tax implication on the second dwelling property

Legislation-

Income Tax Assessment Act, 97

Application-

As for the second dwelling property, P and K jointly bought the property at 153-155 Temple Street for $8,50,000 in July 2017. They bought it through their savings of $30,000 and availing a loan of $9,60,000 where $40,000 were the legal costs to purchase the property and the remaining they used for its renovation. The loan they took was availed at 4.7% of fixed interest, per annum for a period of 30 years. They lived in their first property, that is of their aunt's till the renovation was completed. It cost them around $1,00,000. Being over-satisfied with the renovated property they rented their aunt's property to their cousin at $759 per week from 7 august 2019 and started living in the 153-155 Temple Street one. After all this, they decided to sell their aunt's property because they wanted to undergo a second renovation for which they needed cash. So a local estate agent offered him $1 million for the 151 Temple Street one and $1.3 million for the 153-155 Temple Street one.

So as per the above connotation, the amount of renovation that is spent is deductible from the tax for that year. However, what he used for renovation was the amount that he borrowed as loan. Therefore the interest payable on the loan amount at the rate of 4.7% is to deducted and not what is remaining out of $9,60,000 subtracted $40,000. The rent that he received from their cousin for the time he stayed there at $759 per week, so that is going to be included as per section 6-5 of ITAA and TR 98/1. The legal costs that he spent that is $40,000 are going to deducted as per section 25-25 of the ITAA. The loan application fees are considered as borrowing expense and hence shall be deducted (Real estate, 2020). Similarly the legal costs for buying the loan and for buying the property, these both are legal expenses and hence are deductible. The stamp duty generally is not deductible as they are not considered as an expense when a person utilizes the property for his personal use (Real estate, 2020). As long as the property is under his possession, and the amount that they both spends on a renovation, except what is borrowed is deductible. But the moment when they decide to sell the property, then the tax is applicable and they come within the ambit of it. Therefore to avail more money for renovation, they both decided to sell off their first dwelling property, so as per that they have to pay CGT for that respective year when they plan to sale off.

Conclusion-

so to conclude the second dwelling property, so he is coming under the ambit of taxation as he is now selling the property for-profit purposes. He is investing in the property to sell it off and that is making profits. Therefore as per the taxation norms of Australia, when any residential property is acquired, so any renovation or investment done on it is not taxable. But as one decides to sell it off, then it does come under the ambit of CGT. When P and K bought the second property they both intended to keep the 151 Temple Street property and 153-155 temple Street property for residential purposes. Thye invested their money and loan for the renovation of the second property and let off the first one to their cousin. This shows their intention that they bought the first property and renovated it but they never intend to keep it. hence they let it off to P's cousin. That's when P came under the purview of profit-making activity business (ATO, 2020) and therefore now when they decided to sell the first for earning money for the renovation of the second, so that is making a profit by selling a property and hence it shall be counted under tax limits.

Bibliography for Income Tax Assessment Act

Online articles-

Mirams, A. (2020). A complete guide to capital gains tax. Retrieved from https://propertyupdate.com.au/a-complete-guide-to-capital-gains-tax/ 

Australian Taxation Office. (2020). Inherited dwellings. Retrieved from https://www.ato.gov.au/general/capital-gains-tax/deceased-estates-and-inheritances/inherited-dwellings/

Australian Taxation Office. (2020). CGT exemptions for inherited dwellings. Retrieved from https://www.ato.gov.au/general/capital-gains-tax/deceased-estates-and-inheritances/inherited-dwellings/cgt-exemptions-for-inherited-dwellings/

Australian Taxation Office. (2020). Deceased estates and capital gains tax. Retrieved from https://www.ato.gov.au/General/Capital-gains-tax/Deceased-estates-and-inheritances/Deceased-estates-and-capital-gains-tax/

Real Estate. (2020). Is stamp duty tax deductible? Retrieved from https://www.realestate.com.au/home loans/stamp-duty-tax-deductible

Jolly, W. (2019). How is rental income taxed? Retrieved from https://www.savings.com.au/home-loans/investing/rental-income-tax#:~:text=The%20ATO%20states%20that%20investment,costs%2C%20borrowing%20expenses%20and%20depreciation.&text=Legal%20expenses%20and%20land%20tax

Australian Taxation Office. (2020). Building and renovating your home. Retrieved from https://www.ato.gov.au/General/Property/Your-home/Building-or-renovating-your-home/ 

Legislation-

Income Tax Assessment Act 1997

Case laws-

Ure v. Federal Commissioner of Taxation., Federal Court of Australia, 11 February 1981

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