Taxation

Question 1

Explain the tax implications if land was bought for use not business initially but ended up venturing into business activity?

Answer 1

Taxpayer gets to elect if land was sold at mkt price or its cost (at commencement of development) : taxpayer with pre-CGT would elect mkt val as that gives the highest value for deduction when land is sold; taxpayer with large unrealised CG would elect cost to defer tax on gain (although given avail of discount on CGs, calc needs to be done to see which election is more beneficial)

Question 2

Can a taxpayer claim tax deductions for expenses incurred outside the process of earning assessable income?

Answer 2

NO! outgoings must be incurred in gaining or producing assessable income, or incurred in carrying on a business for the purpose of gaining/producing assessable income.

Question 3

Briefly describe how foreign resident individuals pay tax on their income derived from re investment in Aus?

Answer 3

Not entitled to tax-free threshold; generally taxed at 32.5% (aus source of income $90k, excess gets taxed at aus resident rates) ; income from re, gains from selling re -> treated as aus source of income

Question 4

Margin Scheme: GST = 1/11 of the margin payable instead of 10% , define margin?

Answer 4

• if bought pre 1/7/2000, then margin = sale price incl. GST - value of land at 1/7/2000
• if bought after 1/7/2000, then margin = sale price incl. GST - acquisition price incl. GST
• if supply/acquisition between members of the same GST group, then may have to use deemed market value rules

Question 5

How is land treated for tax purpose if it was bought for development but development didn’t proceed?

Answer 5

Then that land is not trading stock, and profit on sale is assessed under the ordinary income section (as per s6-5 ITAA1997)

Question 6

If re is sold under a contract and CG/CL is concerned, when is the profit assessable? When contract is entered? or when settlement happens?

Answer 6

When contract is entered is when when profit (calculated under CGT provisions) becomes assessable.

Question 7

Timing of GST i.e. when is GST accounted for by the supplier?

Answer 7

• cash basis -> GST payable on receipt of consideration
• accruals basis -> GST payable on receipt of part of consideration or issue of an invoice, whichever comes earlier.
• supplies made for a tax period/on a progressive basis -> supply is deemed a separate supply attributed to each period/progressive component (think rental payment under a lease) -> this is so that we ensure matching b/w GST liability and consideration (otherwise GST is payable right when the lease is granted rather than over the life of the lease). supplier then get to work out net GST liability over a tax period by offsetting GST paid for business inputs against GST payable on supplies

Question 8

If commercial lease is being supplied, when (timing issue) is GST applied?

Answer 8

Lease is supply of re. a prop can be leased out for many years, so what’s being supplied is a continuous service and rental payments are continuous too. this means in each supply period, landlord must remit GST liability to the ATO

Question 9

Why is it important that the owner of the re knows if the tenant is a domestic residential tenant or carrying on a business?

Answer 9

owner of the re must know if the tenant is a domestic residential tenant (cannot claim refund of GST paid for the prop) or carrying on a business (entitled to refunds of all GST paid on goods and services for commercial re but commercial re owners are also obliged to charge GST on rent and on sales of prop, purchaser entitled to refund of that GST paid though)

Question 10

What makes the supply taxable supply?

Answer 10

• Consideration - payment of money or property or any act of forebearance in connection with a supply (so payment of land purchase price, paymen of rent, payment under construction contract each constitute a consideration making supply of the goods taxable supply
• Enterprise - supply must be made in the course of furtherance of an enterprise i.e. any activity that in the nature of trade on a regular or continuous basis .
• Connection with Australia - supply must be connected with Australia (goods delivered/made avail in aus to supplier’s customers , or supplier imports goods to aus , or installs or assembles goods in aus, or there is supply of re in aus
• Registration - supplier must be registered /required to be registered (person carrying on a business with annual turnover > =75k , then required so that business can claim input credits )

Question 11

If a re developer sold some props and became entitled to income in June FY20 but not receiving it till July FY21, in which FY is that income assessed?

Answer 11

FY20 income it is

Question 12

How is GST applied to Sales of Commercial RE?

Answer 12

Generally vendor liable to pay GST on sale of commercial re i.e. 10% of value of consideration for the commercial prop unless prop is a going concern.

As per GST legislation, **Deposit** - has to be either forfeited (at termination of a K of sale) or applied as all/part of consideration of supply (of commercial re) to be treated as actual consideration for a supply

• **Vendors collect GST** -> vendor requires payment of GST on the deposit when deposit is paid . if deposit is forfeited, then GST collected on the deposit will be payable by vendor to the ATO.
• **Time of supply** / when is the commercial re actually supplied? -> **occurs at settlement**

Question 13

What makes a tst incentivised to fully dist income to unitholders?

Answer 13

if tst doesn’t dist income, then tst is liable to pay tax on the income at the highest rate for the individuals

Question 14

What is the main advantage of using a trust structure?

Answer 14

Generally popular to hold prop in a tst over the long term. and tst’s taxable income is distributed directly to beneficiaries/unitholders. where there’s dist of excess though (generally not taxable , and known as tax diferred dist ), you check if that excess amt exceeds cost base of units, if so, then the tax-dferred dist may reduce unitholder’s cost base in the units (taxable for CGT purposes)

A tst can make a gain on prop sale and get the 50% discount to CG , which gives rise to tax-deferred component of CG - main ADVANTAGE of tst structure is that tax-deferred dist is **not assessable** income in the hands of the beneficiaries.

Question 15

individuals with >$180k income pay 45% in tax (ignoring medicare levy), so would be better off using a coy structure from a taxation point of view. BUT then holding the prop in individual name or in partnership still has pros. What are these pros?

Answer 15

• losses from holding the prop (think negative gearing) can be claimed as tax deduction to offset other assessable income like salary and wages
• for Individuals and TSTs: asset sales after 21 sep 99 -> only 50% of CG (or 33% for super funds) on sale are assessable (long as asset was held >12 mos) .
• **no discount CG for coys !** recall that coy doesn’t get to enjoy discount treatment to CG at all, they either get to index up the cost base for assets bought pre-21sep99 to reduce cg or include whole cg as assessable gain. but individuals holding prop get to choose either index up cost base or discount cg by half (if bought b/w 20 sep 85 and and 21 sep 99 ) or disc cg by half (if bought on/after 21 sep 99) even if individual is receiving the cg as a beneficiary from a tst

Question 16

In general, how are lease incentives treated for tax purposes?

Answer 16

Lessor/owner generally can claim the actual cost of the incentive incl. fit-out costs (paid by the owner and ownership is retained) which will be just as depreciable as plant and equipment or as part of the capital cost of the building. Incentives received is assessable in the hands of tenants.

Note: Landlords do generally own the fit-outs although there are also cases where tenants own the fit-outs

Question 17

When there is lease incentive offered by the landlord, who is the supplier and who is the recipient of supply under the GST legislation?

Answer 17

Lease incentives are paid by landlord to tenant i.e. tenant makes a supply to landlord, meaning GST is payable by tenant on the incentive (if tenant registered or required to register for GST)

Question 18

In timing income and determining when/which FY income is assessed, which does the ATO permit? Cash basis or accruals basis?

Answer 18

generally, biz income’s returned on an accruals basis (ATO does not permit cash basis but in some limited circumstances yes e.g. small business, individuals not carrying on a biz or some sole practitioner)

Question 19

What is statutory income?

Answer 19

All amounts that are not ordinary income but are included in your assessable income e.g. tst dist.

Question 20

How may lessee claim capital works deduction?

Answer 20

if lessee incurred expenditure on construction, then lessee may qualify for deduction, as do assignees of the original lease based on original cost of construction incurred by original lessee.

Question 21

If sale proceeds not considered income, how will it be treated for tax purposes?

Answer 21

if sale proceeds not considered income, a CG will be assessed or a CL allowed (if prop bought on/after 20 sep 1985), net CG gets included in assessable income and subject to the same rates as other income (discount may apply tho for individuals and superfunds)

Question 22

Rationale for choosing coy as the legal entity for tax purpose?

Answer 22

if you are making large amounts of profits (e.g. huge profits from land development) then better to go with coy structure than individual as coys pay 30% flat tax rate and don’t have to pay divs
note: coys are usually preferred by non-residents, as coys shelter non-residents from tax in their home jurisdiction till profits are paid out as divs

Question 23

How can we depreciate plant and equipment for tax purposes?

Answer 23

2 methods of depreciation: straight line basis and diminishing value basis

• *straight line basis** - item cost $100, 10 yr life -> deducted at $10 p.a.
• *diminishing value basis** - bought on/after 10/5/06, cost claimed at 200% of the straight line basis -> item cost $100, 10 yr life, deductible at $20 in yr1, then 20% of $80 in yr 2, 20% of $64 in yr 3…) depreciation calculated on the written down amount (undeducted balance of expenditure)

Note though: if bought for <= $300, then can be immediately written off
small buys $300-$1,000 - can aggregate these to a low value pool, depreciate under the diminishing value method at 37.5% on the pool value. but assets added to the pool will be depreciated at 18.75% in yr 1

Question 24

If re is sold under a contract and CG/CL is concerned, when is the profit assessable? When contract is entered? or when settlement happens?

Answer 24

When contract is entered is when when profit (calculated under CGT provisions) becomes assessable.

Question 25

A commercial re owner received rent in the form of cash, and there is no provision for refund or abatement in the lease contract. In this case, when is the income assessable?

Answer 25

The rental income becomes assessable as soon as the cash is received.

Question 26

What’s the rationale for a negatively geared prop to be held outside a trust?

Answer 26

If it is losses tst has made, then can’t be passed onto unitholders for use against their other income. tst losses only to be utilised against tst income - that’s why if you wanna get the benefits of negatively geared prop then that prop shouldn’t be held in a tst.

Question 27

In general terms, how does GST apply to businesses? Name some common examples of taxable supply?

Answer 27

Supplier of goods and services are liable for remitting 10% on the non GST inclusive value of a taxable supply to the ATO.

Most forms of economic activity are taxable supply: supply of goods/services, sale of land, construction contracts, grant, assignment or surrender of a lease, dealings involving creation of rights and obligations .

All biz >75k turnover needs to register for GST

Question 28

Regarding income-producing prop, there will be repairs and improvements being carried out from time to time. Explain if the costs associated with these are deductible or not?

Answer 28

Repair costs (long as it’s for restoring efficiency of function) are deductible;

Cost of improvements (which can be virtually endless) are NOT deductible, hence have to be added to cost base.

Question 29

Explain if finance costs i.e. interests are tax deductible?

Answer 29

comes down to the purpose of loan. if money was borrowed for constructing or financing acquisition or holding of income-producing prop, then yes **interest costs** deductible. **But if loan secured over income-producing prop but used for non-income producing purpose, then interest costs NOT deductible**

Question 30

What is tax ‘ flow through’ status?

Answer 30

The tax ‘flow through’ status describes how tst income is not taxable at tst level and flows right through to unitholders and only get taxable in their hands.

Tst (if a public trading tst) then will be treated as if it were a coy, hence loses its tax flow through status, and ofc lose discounted CGT treatment on sale of prop, and also ofc tax deferred component also doesn’t flow through to unitholders.

Answer 31

not a separate legal entity for tax purposes, hence dist of income to unitholders not taxable at tst level, only taxable in the hands of unitholders at their individual marginal tax rates. as a unitholder you can use your own losses to offset the income you get from the tst though.

Question 32

Give examples of ordinary income?

Answer 32

salaries, sages, trading profit from carrying on a business, sale of goods, trading stock, lease rental, interest, passive prop income, divs

Question 33

Who pays the GST?

Answer 33

supplier “whoever made money hands over a cut to the govt. you can’t pass that onto a recipient of a supply, but the supplier can recover its GST liability by imposing a contractual obligation on the recipient “the customer” to pay GST
* note: as at 1/7/18, buyer (supply recipient) of new resi or potential resi land required to withhold GST of K price, pay the GST directly to ATO as part of settlement process

Question 34

What does it mean ‘indexation stays frozen at 30 Sep 1999’?

Answer 34

indexation stays frozen at 30 sep 1999 (end of q3 of that yr) at 123.4, even if disposal is way later. This is the max the taxpayer can index the cost base up to when calculating CG using the indexation method.

Question 35

Is it possible for a gain (from RE disposal) to be ordinary income as well as a capital gain?

Answer 35

Yes, it is possible for a gain (from RE disposal) to be ordinary income as well as a capital gain. But ITAA 1997 ensures taxpayer is not taxed twice, just on the larger amt .

Question 36

Explain how the Main Residence Exemption works? What if the taxpayer is absent from the main residence?

Answer 36

Individuals: main residence as in family home/dwelling (can be houseboat, units, houses, even land of up to 2 hectares if used as part of main residence for private purposes), if sold, then exempt from CGT

If the taxpayer is absent from the main residence-

• *Absence and Not rented out** : you can even be absent from the dwelling indefinitely , still get CGT exemption at disposal
• *Absence and Rented out** : 6 yr absence permitted. Gain apportioned equally over period of ownership and period of rental, and gain applicable to the period of main residence is not taxed i.e. 6 yr exemption is added to the period of ownership.

Question 37

If a CL is made, can the indexation method be applied?

Answer 37

No, indexation does not apply if calculating a loss, and old cost base is used for calculating the loss.

Question 38

How is a trust treated for tax purposes?

Answer 38

A trust is not a separate legal entity for tax purposes, hence dist of income to unitholders not taxable at tst level, only taxable in the hands of unitholders at their individual marginal tax rates. as a unitholder you can use your own losses to offset the income you get from the tst.

Question 39

Who actually is entitled to depreciation?

Answer 39

taxpayers who hold depreciating assets

note though fixtures in a leasehold prop may not always be held by the prop owner but the lessee who paid and installed them on the prop and will be removing them when they leave the lease.

Question 40

In relation to capital works deduction, why is it important that new owner must find out (with or without the help of a quantity surveyor) the original cost of construction, when prop first started earning income?

Answer 40

Capital works deduction is calculated on the original cost of construction. When a subsequent owner claims deduction, deduction is then calculated based on balance of undeducted portion of the original cost incurred by the first owner. That’s why new owner must find out (with or without the help of a quantity surveyor) the original cost of construction, when prop first started earning income to determine how much deduction can be claimed.

Question 41

If RE acquired or deemed to be acquired ON/AFTER 20 sep 1985, how does CGT apply?

Answer 41

CGT applies on disposal. Also subject to income tax if RE was bought with the intention of selling it for gain or as part of land trading business in the first place.

Question 42

Explain how CL vs revenue losses is utilised for tax purpose?

Answer 42

CLs can offset only CGs, whereas rev losses can offset both CGs and ordinary income .

Residual CLs get carried forward to future FYs where CGs may arise again.

Question 43

Explain if capital receipt is taxable income?

Answer 43

Capital receipts are NOT income, but taxed under the CG provisions (CG/CL forms part of your assessable income)

Question 44

what makes a business a small business entity taxpayer ? How does a small business entity depreciate assets costing very little?

Answer 44

if aggregated turnover < $2m, then pooling rules apply, the small business entity taxpayer can write off depreciating assets costing less than $1,000 imediately. (write-off as in cost of the item is deducted from rev so as to reduce assessable income)

other depreciating assets can fall into either the **‘general** small business pool’ (life <25 yrs, depreciate at 30%) or the ‘**long life** small business pool’ (life >=25 yrs, depreciate at 5%)

Question 45

Briefly describe what capital allowances are and the different types of capital allowances.

Answer 45

Capital allowances are annual tax deductions for a % of the capital cost of prop, plant and equipment.

2 types: 1. depreciation 2. allowances for capital works

1. Depreciation - generally applies to plant, equipment, elevators, air conditioning equipment etc. (each of which has a limited life)
2. Capital works deduction - generally applies to building and other capital works write-off tax provisions permit annual straight line deduction for costs of construction, alteration, extension or other structural improvement to an income earning building, at the annual rate of either 4% or 2.5% (depending on date of construction commencement, and type of building /improvement)

Question 46

How can depreciation allowance and capital works deductions be claimed if prop is held by company?

Answer 46

depreciation allowance and capital works deductions flowing from the prop are **locked into** the coy structure i.e. can only be claimed against coy income (and carried forward deductions against future income of the coy)

Question 47

What supply (economic activity/transactions) are exempted from GST?

Answer 47

domestic rental accomodation, supply of certain foods, medicine, school fees, some financial transations (e.g. interest on debt)

Question 48

What are some common tax considerations when deciding which entity (i.e. individual, company, tst, stapled entities, partnership
) should be set up to own a prop?

Answer 48

Financial considerations, cost and admin, stamp duty implications, limited liability, ease of introducing new parties/buying out new parties, policy on distributing profits, tax implications, tax profile of the individual investor.

Question 49

Briefly explain how input tax credits work?

Answer 49

creditable acquisitions accompanied by valid tax invoice made? then as a registered entity, you r entitled to input tax credit for GST paid on **business inputs**

Question 50

What make up the framework of the tax system?

Answer 50

main provisions of income tax legislation are in ITAA 1936 and ITAA 1997 (itta = income tax assessment act), plus the ATO creates a tax **ruling** system via publishing both public and private binding rulings on how to interpret tax legislation.

Question 51

Name some examples of property transactions that are subject to GST

Answer 51

Rental/sales of commercial re, sales of new residential re, purchase of all goods and services for re incl. repairs and construction.
GST is charged by supplier on each transaction.

Question 52

How do we establish if business is being carried on (so as to treat income/gain from selling re as ordinary income)?

Answer 52

We look at frequency of trans, the way trans are conducted, intentions and conduct (of taxpayer in buying/selling), accounting sys and records kept.

Question 53

How is the partnership structure treated for tax purposes?

Answer 53

like tst, partnership is also not a separate legal entity for tax purposes. so each partner is taxable on its share of partnership income and gets deduction for its share of partnership loss too. partner’s share of partnership profit/loss gets consolidated with his/her other sources of income/losses.
* if partnership is a **Limited Partnership**, then generally taxed like coys

Question 54

If a re developer sold some props and became entitled to income in June FY20 but not receiving it till July FY21, in which FY is that income assessed?

Answer 54

FY20 income it is

Question 55

What type of lease incentive has no tax impact?

Answer 55

**rent-free periods** -> generally no tax impact (i.e. not deductible to owner, not assessable to the tenant either)

Question 56

Which dates are the key dates that guide the calculation of CG? Explain in relation to the different types of taxpers (i.e. individual, tst, complying superfund, coy).

Answer 56

20 sep 1985 and 21 sep 1999 and 30 sep 1999

1. No CGT applies if bought pre 20 sep 1985. But even if re was bought pre-CGT, it still can be deemed to be acquired post CGT by coy/tst if there’s been >=50% change in ownership of that coy/tst.
2. If re was bought between 20 sep 1985 and 21 sep 1999, then

• individual/tst/complying superfund get to choose either disc CG method (individuals/tsts: only 50% of cg or 33.333% for complying supers is taxable provided assets held for at least 12 mths) or indexation method;
• coys must apply indexation factor to cost base.

Question 57

How does the introduction of GST (1/7/20) affect commercial re?

Answer 57

no big impact on commercial re, most commercial re get refunds of gst paid on their re purchase and re outgoings, but also are obliged to charge GST on rent and on sales of prop.

Question 58

Why is it important that the owner of the re knows if the tenant is a domestic residential tenant or carrying on a business?

Answer 58

owner of the re must know if the tenant is a domestic residential tenant (cannot claim refund of GST paid for the prop) or carrying on a business (entitled to refunds of all GST paid on goods and services for commercial re but commercial re owners are also obliged to charge GST on rent and on sales of prop, purchaser entitled to refund of that GST paid though)

Question 59

Give some examples of input taxed/GST-free supplies

Answer 59

resi rents, resi sales of used premises and financial supplies .

“input taxed supplies or supply is input taxed” just means no GST payable on the supply hence supplier cannot claim input tax credits

Question 60

In terms of timing issue - WHEN are the expenses (associated with acquiring and developing and holding) deductible?

Answer 60

acquiring and developing - costs associated with these are deductible ONLY when the prop is sold

holding - costs (incl. interest) incurred while holding the prop to earn rental income or while making it ready for sale are deductible. But **if prop is vacant land / a development site that is trading stock in a business dealing, then holding costs incl. interests, council rates, land taxes UP UNTIL 1/7/19 are tax deductible. Note though: If you paid outgoings in holding UNDEVELOPED land where you as the taxpayer had no current, clear, formed plan as to how that prop produces income, then NO, holding costs not deductible. Post 1/7/19, costs incurred will just be added to the cost base instead for calculating profit on sale.

Question 61

Under what conditions is land treated as trading stock?

Answer 61

Land is treated as trading stock if bought for purpose of resale/development or held for that purpose); and,

there is business activity (dealing in land, continuous cycle of operation leading to sale of land) -

Both purpose and business activity must be present for that land to be regarded as trading stock.

Question 62

If RE acquired or deemed to be acquired ON/AFTER 20 sep 1985, how does CGT apply?

Answer 62

CGT applies on disposal. Also subject to income tax if RE was bought with the intention of selling it for gain or as part of land trading business in the first place.

Question 63

When is sale of re recognised? When the contract is entered? or at settlement?

Answer 63

When settlement occurs?

Question 64

What is the tax implication for a prepayment of expense?

Answer 64

That expense is deductible over the period it relates to i.e. the eligible services period. deductible amount in current yr =

Note applicable to sml biz and individuals though.

Question 65

With partial sales (e.g. sold 6 out of 20 units still being developed, subdivided land for sale), when are sales/income recognised? In the case of selling 6 out of 20 units, how is profit/loss calculated?

Answer 65

sales are recognised as settlement occurs, but to calc profit /loss, it comes down to apportionment method i.e. you can on a reasonable basis apportion costs to 20 units in the FY of sale, then profit is sales price of the units sold minus apportioned costs of the 6 units, but you can’t defer profit on sale (applying sales proceeds against total costs of 20 units)

Question 66

Name all 4 classes of taxpayers?

Answer 66

1. coys (30% or 27.5% for small coys i.e. turnover

Question 67

Explain if recipient (whom prop is sold to) using the margin scheme is entitled to input tax credit .

Answer 67

No, recipient under margin scheme is not entitled to input tax credit . thus why margin scheme only likely to be used if recipient is NOT using the prop in connection with an enterprise/business to generate any taxable supplies (coz spending on business inputs deserves input tax credit)

Question 68

How can tenants be protected in regards to outgoings under a net lease?

Answer 68

A clause needs to be in the lease contract to protect the tenants. Think landlord pays $110 for an outgoing bill ($100 + $10 gst), then tenant should only have to reimburse the landlord $100, landlard gets the $10 back as input tax credit on the expense.

Question 69

Explain if borrowing costs (i.e. costs of obtaining loan) are deductible?

Answer 69

Generally not deductible unless you are borrowing as a finance business .

Instead, borrowing costs are deductible over either loan term or 5 yrs, whichever is shorter .

if loan paid off early, then balance of undeducted borrowing costs may be claimed

Question 70

Name some examples of lease incentives.

Answer 70

cash, gifts, rent-free periods, reimbursing fit-out costs, interest-free loans, assistance with relocation costs, free travel tickets

Question 71

A commercial prop owner received rent in cash but that rent is refundable on some condition. Is that cash assessable?

Answer 71

No (provided that there is provision in the lease contract that allows refund/abatement of rent).

Question 72

How does the indexation method apply if re assets were acquired by a coy post 21 Sep 1999?

Answer 72

Coys simply cannot use the indexation method after 21 Sep 1999. Whatever gain made on sale of re asset is taxable CG. Essentially, coys do not benefit from the discount concessions for taxing CGs at all, and only get to inflate cost base up to indexation as at 30 sep 1999 to lessen the calculated gain.

Question 73

Explain what black-hole expenditure is and its tax implications? What is an example of a black-hole expenditure.

Answer 73

certain **black-hole capital expenditure** incurred on/after 1/7/01 whilst business is carried on for taxable purpose -> deductible (expanded in recent times too) -> **can be deducted over 5 yrs, straight line,** long as it’s incurred w.r.t. business (whether business used to be carried on or is proposed to be carried on, or liquidation of a coy/partnership that carried on a business where taxpayer was a member of) . e.g.
certain costs associated with starting or ceasing a business like cost of feasibility studies and setting up the business entity

Question 74

How may individuals receive CGT discount from a trust in which they are unitholders?

Answer 74

If a tst made a cap gain, it can flow through to beneficiaries by way of distribution. That means 50% tax concession for cg also flows through.
* Note though, only apply disc rate (50% or 33.333%) AFTER CL (current yr and prior yr) utilised against CGs (i.e. against undiscounted gains, indexed gains, discounted gains , in that order)

Question 75

Give some examples of deductible expenses? What happens when there is excess deductible expenses?

Answer 75

rates, land taxes, interests, repairs and maintenance, depreciation of plant and equipment, capital allowances (amortisation) on construction costs, removal of site pollutants, mgmt expenses, black-hole’ expenditure.

excess deductible expenses can be carried forward to the following FY

Question 76

if at the time of purchase (and substantiated by a survey), there are areas identified to be in need of repairs, will the initial repair you carry out right after buying the prop be tax deductible?

Answer 76

No, in this case cost of the initial repair will NOT be tax deductible. Instead, they are capex to add to the cost base.

Question 77

When a property is not in need of repair, yet expense is incurred carrying out extra work i.e. capital improvement. How will such expense be treated for tax purposes?

Answer 77

this cost is capitalised into the cost base for a potential depreciation or capital works tax deduction .

An example of capital works is refurbishment for aesthetic reasons (vs operational necessity) - costs can be capitalised into the cost base Note however such improvement must still be reflected in the state of the asset at disposal for improvement cost to be included in the CGT cost base. If non-capital costs, also add to cost base on disposal for calculating CGT.

Question 78

A property was acquired for investment on 1 oct 1990 for $1,000,000, when the inflation index was 103.3. By June 1999, the index had climbed to 122.3. What would be the cost base of the property?

Answer 78

The property would have had an index cost base of $1,000,000 x 122.3/103.3 = $1,183,930 by June 1999.

Question 79

What is /Why negative gearing?

Answer 79

Negative gearing is when there are tax losses arising from high interest deductions (i.e. property expenses exceed annual income from the prop). Negative gearing is okay if you:

• believe the prop income will eventually increase over time, or
• there will be a CG on sale, which will recover the losses. and meanwhile the losses can offset against other taxable income (e.g. salary, wages, business income…)

Question 80

What does a revenue neutral process mean?

Answer 80

means that you as a tenant pay GST to landlord (e.g. rent is $110 where gst is 10% of $100 = $10 i.e. your input tax credit) you then (in carrying on your own business on the leased premises) charge gst inclusive price to your customers (e.g. $150 + 10% x %150 = $165, so GST here is $15 i.e. your liability to the ATO) Hence, you only need to deposit $5 to the ato as your liability of $15 has been offset against by $10 already paid for business input.

Question 81

Briefly describe what capital allowances are and the different types of capital allowances.

Answer 81

Capital allowances are annual tax deductions for a % of the capital cost of prop, plant and equipment.

2 types: 1. depreciation 2. allowances for capital works

1. Depreciation - generally applies to plant, equipment, elevators, air conditioning equipment etc. (each of which has a limited life)
2. Capital works deduction - generally applies to building and other capital works write-off tax provisions permit annual straight line deduction for costs of construction, alteration, extension or other structural improvement to an income earning building, at the annual rate of either 4% or 2.5% (depending on date of construction commencement, and type of building /improvement)

Question 82

How is GST applied to Commercial RE Leases?

Answer 82

10% GST applied to value of commercial rent - landlord does not have statutory right but contractual right (put a GST recovery clause in the lease contract) to recover GST liability from tenant. Tenant, (if not making input taxed supplies) can claim GST paid on commercial rent as input tax credit

Question 83

How is the going concern exemption?

Answer 83

sale of a going concern (e.g. hotel, leased office block , shopping centre) proceeds under the going concern exemption i.e. treated as GST-free supplies. -> rationale being: GST already being charged and remitted on the tenancy rents
* but for the going concern exemption to apply, there are certain requirements , the most important one being that the K of sale explicitly note the sale is a going concern.

Question 84

Explain the difference between depreciation and capital works deductions (aka capital allowances)

Answer 84

depreciation generally relates to property, plant and equipment that has a limited life other than land or buildings. Such items can be depreciated over the life of the asset, provided it is used in an income-earning capacity or an income-earning business.

Capital works deductions generally relate to buildings and other structural improvements. The capital works provisions permit an annual straight-line deduction for capital expenditure incurred in the construction of a building or structural improvements or any alteration, extension or improvement to a building and other structural improvements. A capital works deduction is only available if the capital works are used in a deductible way i.e. used for the purpose of producing assessable income or carrying on R&D activities.