Capital Gains Tax Residence Exemption

Questions: 1. Tax implications of the Sale of First House and Purchase of New House 2. Tax Implications of the expenditure on the first house 3. The tax implications of receiving the apple watch and bravery medal 4. The assessability and deductibility of all the other items 5. Computation of Tax Payable by Jacob for the year ended June, 2016 Answers: 1. In the given case, Jacob wants to sell his current house. He is using it as his main residence since acquisition except from December 2006 to December 2014. He is planning to acquire a new house before disposal of this old one. He has not produced any assessable income from the old house during the last 12 months before purchase of the new house and he will shift to the new dwelling (Law.ato.gov.au 2017). Thus both the dwellings will be treated as his main residence for a period of up to six months as per the provisions of Income Tax Assessment Act 1997 (Ato.gov.au 2017). If the property is acquired after 20th September, 1985, a capital gain (Law.ato.gov 2017) or loss arises in case of its sale as per the provisions of Part IIIA of Section 160 M and Section 160 N. There is exemption from CGT in case of sale of main residence (Edmonds 2015). Exemption is allowed on only one property for a particular period (Ato.gov.au 2017). Mr. Jacob cannot claim full exemption if it was not his main residence for the entire period between the year 2006 to the year 2014. However, he will be eligible for partial exemption as he is single parent to a 10 year child and the provision on ownership of 2nd house by the partner does not arise. Thus when Mr. Jacob decides to sell his first house, he will have to choose one property to claim exemption and the other property will attract Capital Gain Tax (Law.ato.gov 2017). 2. Tax liability arises if any major capital improvement is done on a dwelling and any Capital Gain Tax (CGT) event arises on such dwelling (Martin, Pawson and van den Nouwelant 2016). However, the major capital improvements to the dwelling is exempt from tax if it the main residence and the improvement is part of the house (Ato.gov.au 2017). If improvement or renovation is done on part of the home to produce income or for commercial purposes, then such exemption is not allowable. In addition, the exemption is applicable only if total land is less than two hectares. Thus, if the land including the house of Mr. Jacob is less than 2 hectares or 2 hectares, the cost incurred on repair will be exempt from tax (Ato.gov.au 2017). 3. If a person makes a payment in terms of money or property voluntarily and there is not any material benefit to the donor from transfer of property or money, it amounts to gift. The person who makes the gift can claim the deduction on the gifts or donations made voluntarily subject to relevant gift conditions. The recipient must have the status of Deductible Gift Recipient (Ato.gov.au 2017). In the given case, Mr. Jacob receives an Apple watch worth $650 for saving the life of a boy. Thus it can be termed as receipt of a gift. Tax implication with regard to the tax deductibility arises for the donor of the gift. Mr. Jacob is the receiver of the gift and not the donor. Thus, the provision of deduction on gift does not apply to this case. However, the parents of the boy may claim the deduction of tax on the gift depending on the eligibility to such deduction. 4. Income Tax is deducted by the employer on the payments made by him to the employee (Ato.gov.au 2017). However, the employee may claim a refund of the tax amount if deductible expenses reduce the tax liability (Yong and Ma 2015). Thus tax on $72000 shall be deducted at source. Mr. Jacob receives dividend of $2850 from Telstra Shares that have Franking Credit. The Act requires declaration of such Franked dividends in the tax return. These are generally entitled to tax offset (Coulton, Ruddock and Taylor 2014). The allowances and payments by Australian Government are subject to beneficiary tax offset in case there is no taxable income. Mr. Jacob has received Family Tax Benefit of $1300 for his son. He has taxable salary income. So he will be liable to pay some tax on $1300. There is a provision of tax deduction on the cost incurred on buying occupation specific clothing and compulsory and non- compulsory work uniforms (Ato.gov.au 2017). However, to claim deduction on non- compulsory uniform, the design of the uniform must be registered with AusIndustry. Shoes cannot be non- compulsory work uniform. Thus, $ 450 spent by Mr. Jacob work clothing and shoes is subject to these provisions. He can claim the deduction if it is distinctive and unique to his profession. Mr. Jacob has spent $42000 on use of private car for school activities. He can claim tax deduction on this amount except on the cost incurred on private travel between work and home. The claim can be made on the running expenses excluding capital costs using any of the two methods: Cents per Kilometer method and logbook method (Ato.gov.au 2017). Mr. Jacob has incurred educational expense of $3650. Educational expenses are subject to the tax deduction if the education will result in improving the current skills and increasing the employment income. The superannuation contribution of $ 3000 will be taxable @15% if the contribution is made before tax (Ato.gov.au 2017). Tax agents fee of $750 is also liable to taxable amount. 5. The total taxable income of Mr. Jacob and the Net Tax Payable by him is calculated below. Gross salary, income from dividend and family tax benefit constitute the total assessable income. Deduction is allowed for clothing specific to the purpose and self- educational expenses. Thus, the total taxable income stands at 76471 $. Tax is charged at a flat rate of $3572 and @32.5% for income above 37000. Credit on Franked dividend has been given and Mr. Jacob is not liable to pay Medicare levy as his taxable income is below 180000 $. Total tax paid by him during the year is 13136 $. Assessable income ( in $) Gross salary 72,000 Holiday Received From Bank 3200 Australian sourced dividend income: Fully franked (net) 2850 Gross up for franking credits (2850 x 30/70) 1221 4,071 Family Tax Benefit 1,300 Total assessable income 80,571 Allowable deductions Clothing 450 Educational Expenses 3,650 Total allowable deductions 4100 Total taxable income 76,471 Tax on taxable income- $3572 + 32.5% of (76471-37000) 12828 Medicare levy (levied on taxable income above $180000) 1529.4 Franking credit 1,221 Total tax payable 13136 Figure 1: Tax Computation of Mr. Jacob Source: (Created by Author) References: Ato.gov.au, (2017). Building or renovating your home. [online] Ato.gov.au. Available at: https://www.ato.gov.au/general/property/your-home/building-or-renovating-your-home/ [Accessed 12 Jan. 2017]. Ato.gov.au, (2017). Clothing, laundry and dry-cleaning expenses. [online] Ato.gov.au. Available at: https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Clothing,-laundry-and-dry-cleaning-expenses/#Occupationspecificclothing1 [Accessed 12 Jan. 2017]. Ato.gov.au, (2017). Vehicle and travel expenses [online] Available at: https://://www.ato.gov.au/individuals/income-and-deductions/deductions-you-can-claim/vehicle-and-travel-expenses/car-expenses/ [Accessed 12 Jan. 2017]. Ato.gov.au, a. (2017). Super. [online] Ato.gov.au. Available at: https://www.ato.gov.au/Individuals/Super/ [Accessed 12 Jan. 2017]. Ato.gov.au, a. (2017). Who can claim a gift or contribution. [online] Ato.gov.au. Available at: https://www.ato.gov.au/Non-profit/Gifts-and-fundraising/How-supporters-claim-tax-deductions/who-can-claim-a-gift-or-contribution/ [Accessed 12 Jan. 2017]. Coulton, J.J., Ruddock, C. and Taylor, S.L., 2014. The Informativeness of Dividends and Associated Tax Credits.Journal of Business Finance Accounting,41(9-10), pp.1309-1336. Edmonds, R., 2015. Structural tax reform: what should be brought to the table?. InAustralian Tax Forum(Vol. 30). Law.ato.gov.au. (2017). ATO ID 2010/101 - Capital Gains Tax: main residence exemption - interaction with non-resident provisions. [online] Available at: https://law.ato.gov.au/atolaw/view.htm?DocID=aid/aid2010101/00001 [Accessed 12 Jan. 2017]. Martin, C., Pawson, H. and Van den Nouwelant, R., 2016. Housing policy and the housing system in Australia: an overview. Yong, S.E. and Ma, M., 2015. A comparative study of the Goods and Services Tax (GST) implications on real property transactions in Australia and New Zealand.