Tax Implications of Investment Property Ownership and Retirement Planning

Posted on Apr 27, 2024 in Mathematics

REVISION QUESTIONS SELECTION

QUESTION 1

Jason, a 32-year-old physiotherapist earning $65,000 annually, seeks advice on purchasing an investment property for $400,000 with a $280,000 loan. He plans to reside in the property after six years. He has $120,000 in shares (current value $130,000, cost base $80,000) and anticipates the following property income and expenses:

Estimated Rental Income: $20,000

Estimated Expenses:

• Rates: $2,000
• Insurance: $600
• Loan Interest: $25,400
• Depreciation (fixtures and fittings): $3,000
• Painting: $1,000 (capital improvement)
• Carport Installation: $8,000 (capital improvement)

Additional Expenses:

• Work-related expenses: $1,500
• Tax agent fees: $600
• Car salary sacrifice benefit: $14,000 (FBT payable by employer: $5,000)

1. Property Ownership Structure

Jason should purchase the property in his personal name to offset potential losses and claim deductions. Owning the property personally also allows for potential capital gains tax reduction or exemption when he converts it to his primary residence.

2. Tax Treatment of Painting and Carport Installation

The painting and carport installation costs are considered capital improvements and can be claimed as capital works deductions over several years. Interest on loans used to finance these renovations may be eligible for immediate deduction.

3. Net Tax Payable Calculation

Based on the provided information, Jason’s net tax payable for the year is calculated as follows:

4. Tax Implications of Converting to Primary Residence

If Jason moves into the property after six years and uses it as his primary residence, he may be eligible for a partial or full capital gains tax exemption upon a future sale, depending on the proportion of time the property was used as an investment versus a primary residence. The 50% capital gains tax discount would still apply if he has held the property for more than 12 months.

5. Tax Implications of Yacht Renovation and Sale

The tax treatment of the yacht renovation and sale depends on the purchase price and intention. If the yachts were purchased for personal use and under $10,000 each, they would be disregarded for capital gains tax purposes. However, if they were purchased for more than $10,000 each, the capital gain would be assessable. If Jason’s activities are deemed to constitute a business, the yachts would be treated as trading stock and included in his assessable income.

QUESTION 2

a) Maximizing Government Co-Contribution

To maximize the government co-contribution, Audrey should contribute $696, which will result in a $348 co-contribution.

b) Superannuation Fund Assessable Income and Tax Payable

The Stone Masons superannuation fund’s assessable income and tax payable are calculated as follows:

QUESTION 3

a) Paul’s Current Tax Situation

Paul’s current tax obligation is $29,618.

b) Tax Minimization Strategy

Paul can minimize his tax liability while maintaining his desired cash flow by implementing a strategy that includes salary sacrificing and making non-concessional contributions to superannuation. He should also consider taking out private health insurance to avoid the Medicare Levy Surcharge.

c) Comparison of Strategies

By implementing the proposed strategy, Paul’s total tax payable would be reduced to $11,483, resulting in a net income after tax of $46,217 (compared to $74,557 without the strategy). This strategy involves maximizing concessional and non-concessional contributions to superannuation and taking advantage of the private health insurance offset.

d) Transition to Retirement Pension (TTR)

To maintain his pre-strategy cash flow, Paul would need to draw $26,340 from a TTR pension. However, due to the minimum withdrawal rules, he must withdraw at least $30,390. His overall tax saving for the year would be $12,885 after accounting for the 15% tax on concessional contributions.

QUESTION 4

Capital Gains Tax upon Divorce

Angelo will declare a capital gain of $75,000 for CGT purposes, considering the 50% CGT discount. This calculation takes into account the period the property was rented out and the period Angelo lived in it as his primary residence.

QUESTION 5

Reverse Mortgage

Part 1: A prudent amount for Chris to borrow would be $188,403. This calculation considers the projected house price increase, interest rate, and Chris’s desire to retain at least 50% equity in the house after 10 years.

Part 2: If the interest rate drops to 8% after five years and the house is sold when Chris reaches 90, the equity percentage for his grandchildren would be 47.5%, which translates to $592,285. This is higher than the 50% equity target in dollar terms, despite being slightly lower in percentage terms.

QUESTION 6

Investment Calculations

a) Term Deposit: At maturity, Chris will receive $53,500. Considering a 3% inflation rate, his real gain in today’s prices would be $1,942.

b) Bank Accepted Bill (BAB): The price of a 90-day $100,000 BAB yielding 7.1% is $98,279.44.

c) BAB Yield: A 180-day $100,000 BAB sold for $97,260 has a yield of 5.71%.

QUESTION 7

Investment P/E Ratios

The fundamental P/E ratios for XXO and YOX are 7.51 and 5.64, respectively. Based on these ratios and the current market prices, XXO is classified as a ‘buy’ as its P/E ratio is expected to increase, while YOX is classified as a ‘sell’ as its P/E ratio is expected to decrease.

QUESTION 8

Retirement Income Calculations

a) Superannuation Accumulation: To fund a real retirement income of $60,000 per year for 20 years with a 4% real rate of return, an individual would need to accumulate $815,420 in superannuation.

b) Retirement Income Generation: A 60-year-old male with a life expectancy of 82.63 years and $400,000 to invest at a 4% real rate of return can generate a lifetime income stream of approximately $26,340 per year.

QUESTION 9

Social Security

a) Financial vs. Non-Financial Assets: Financial assets are indirect investments with income deemed using deeming rates, while non-financial assets are assessed on actual income earned. Financial assets in the table include account-based super, impaired gifting, indirect property trust investments, silver bullion, term deposit, and the funeral bond amount exceeding $12,250.

b) Age Pension Calculation: Based on their income and assets, Seymour and Edna are not eligible to receive an age pension from Centrelink. Their assessable income exceeds the income test threshold, and their assets exceed the assets test threshold.

c) Strategies to Reduce Assessable Income: Seymour and Edna can consider several strategies to reduce their assessable income, such as converting their account-based pension into a lifetime income stream, converting the funeral bond into a pre-paid funeral, not leasing the holiday home or rental apartment, investing in valuable artwork, or improving their residential property.