MyAssignmentHelpSG January 17, 2019
BULAW3731 Income Tax Law & Practice Assignment
Semester 1, 2016
Table of contents
Answer ……………………………………………………………… Page 3
Reference …………………………………………………………... Page 8
Negative gearing is a hot topic of conversation in Australia. It is the most talked about topic in the country as it is actually affecting the economy. It is defined as the excess of the expenses (depreciation, interest on loan, etc) over the incomes being earned from such property. TR 1995/33 states the clarity of definition on these two words as, when the investments are purchased, they may have several expenses attached to it such as depreciation which is written off over a period of time. If here is a loan attached to it then there will be interest paid on it. These expenses are allowed for deduction from the income which is earned from the property. The income which is earned from the property is less usually then the expenses. Therefore, it results into a loss, which is actually “negative gearing”. The main cause of it is the capital gain tax discounts. Due to the offset of the loss and the other benefits in the capital gain, negative gearing is taking place. Currently it is allowed in the taxation system to offset the property loss or the negative gearing with the other incomes.
Capital gain tax on property
Capital gain tax is a tax charged on the capital assets as specified in the Income Tax Assessment Act, 1997. Section 104 of the Act, provides the capital gain tax events which qualifies as the capital asset for taxation. As specified in the section 104 – 10 of the act, to make a capital gain or capital loss, an asset needs to get disposed. It means that an asset must be sold, or destroyed, or transferred or exchanged as rollovers, passing the title to someone else. It must be noted here that a capital gain is charged only when the asset is purchased after 20 September 1985. If purchased before it then it is not qualified for charging of the capital gain or allowance of set off of the capital loss with the other incomes of the individual.
As per section 108 – 5 of the act, a capital asset is called as a table right which is the property. It includes something which can be owned. It can be the furniture, plant, boats, land and the house property (other than residential) shares in companies, aero planes, etc. It also includes any kind which is not property such as goodwill, collectables (its losses can be set off with its gain only), and a personal asset. To make a capital gain or loss the asset must be owned by the individual. It must be acquired in order to dispose it.
Tax on investment property as capital asset.
To calculate tax on the property which is used as investment following points need to be noted:
As per section 110 – 25 of the act, cost base is defined. The amount of sale prices if sold for more than the cost base, then there is capital gain and vice – versa. Cost base is the total of the cost price of the property, any other incidental costs on it, borrowing costs, costs incurred to improve or defend the property.
After the calculation of capital gain or capital loss, following of the given methods is applied to reduce only the capital gain. Section 114 mentions the indexation method, whereby the cost price and the other elements of the cost base updated as per the current market on the grounds of consumer price index. Thereafter the indexed cost base is subtracted from the sale price. The second method is defined in section 115, where by the capital gain for individual is reduced by 50 percent flat rate and 33.33 percent for the trusts. Companies cannot reduce by any rate. This method helps in reducing the capital gain completely at half rate. Indexation method is allowed on the expenses incurred before 20 September 1999. Discount method is only allowed when the asset is sold after 20 September 1999 and is held by the owner for 12 months or more. Capital loss if incurred it is allowed to set off with other capital gains.
Negative Gearing with Capital gain tax has the following features
The key points of the policy.
As per the policy by the opposition the following points are stated in it.
Whether the proposed tax system is good?
It is seen that negative gearing and the capital gain tax concession are highly insufficient for the economy as they both put negative impact on the economy. The rent may be less, but the revenues for the government is also very less which otherwise can help in building the economy. It also increases the price of the house and makes affordability of it an issue.
The tax system policy being proposed by the opposition is not completely a good tax system, but yes it will create a lot of advantages for the economy and the people. It will make the house prices lower done making it easier for the people to buy it. The revenues will be generated more because of more tax charged on the capital gain than before. The policy will create investment a bigger name for the investors in terms of defining it broadly. The investors will spread themselves more on the new investment opportunities thereafter in order to make profits and will put their money efficiently than before.
The rent which is an issue is not taken into consideration, as for those who cannot buy the new properties are relying on the rented properties. The abolishment of negative gearing will create a hike in the rent. The capital gain reduction will create a lot of revenue for the government which will be beneficial for the people only as it will be used for the development of the country. There will be no adjustment of the negative gearing on the resale of the property. Therefore, this will create a hub of properties allover and people will be not interested in buying the second hand properties. It will create a congested environment. However, this will be big step in the housing market if new tax system implies. The commercial properties and share market trading losses are still not affected from the proposed policy. These two also affect the economy at a large scale. The existing property holders will invest in new properties.
It is partially a good tax system with the scope of few more changes as per the needs of all the people affected by it and harming no one.
ANON. (2016). Malcolm turnbull rules out negative gearing changes in May budget. Retrieved 11th May 2016 from: http://www.abc.net.au/news/2016-04-24/turnbull-to-rule-out-negative-gearing-changes-in-may-budget/7353652
Potter. M. (2016). Negative gearing helps low-income people most, but that’s beside the point. Retrieved 11th May 2016 from: http://www.abc.net.au/news/2016-04-29/potter-negative-gearing-helps-poorer-people-most/7369604
Grudnoff. M. (2015). How negative gearing and the Capital gains tax discount benefit the top 10 percent and drive up house prices. Retrieved 11th May 2016 from: http://www.tai.org.au/sites/defualt/files/Top%20Gears%20-%20How%20Negative%20Gearing%20and%20CGT%20benefits%20top%2010%20per%20cent.pdf
Conifer. D. (2016). Five policy battles the government and opposition will take on. Retrieved 10th May 2016 from: http://www.abc.net.au/news/2016-05-10/election-2016-policy-battlegrounds-liberals-and-labor-will-fight/7399288
Aston. H. (2016). Shorten unveils Labor election policy: No more negative gearing for existing homes. Retrieved 10th May 2016 from: http://www.smh.com.au/federal-politics/political-news/shorten-unveils-labor-election-policy-no-more-negative-gearing-existing-homes-20160212-gmsyky.html
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