Taxation Planning Assignment

7/21/2019 Taxation Planning Assignment

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Taxation Planning

Question 1

a)

i. Assessable income

Salary 40,000

Non commutable pension * 18,000Fully franked dividends ** 5,714Interest 1,500

ssessable income ! 65,214

*Tax free component = 25,000 = 10%Value of the investment 250,000

Tax free component of income stream

= 20,000 x 10%= 2,000

Taxable component of income stream= 20,000 – 2,000 = 18,000

**

Franin! cre"it = 5,#1$ x 0%= 1,#1$

$,000 = 5,#1$ #0%

ii. Tax offsets and credits

Frankin"#imputation credits 1,714$ension offset * %,700

4,414

*

Taxable component x 15%

= 18,000 x 15%= 2,#00

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Taxation Planning

iii. Medicare lev and s!rc"arge

&edicare levy

! ta'able income ' 1(5)! *5,%14 ' 1(5)! #$%

Surc+ar"e! &

iv. Tax 'aable

a'able income ! *5,%14 -assessable income less deductions.

a' on ta'able income

! /,*00 -0(/0 ' /5,%14.! /,*00 10,5*4! 14,1*4

&edicare levy! 78

Surc+ar"e! 0

a' offsets! 4,414

a' payable! ta' on ta'able income plus medicare levy plus surc+ar"e less ta' offsets! 14,1*4 78 2 4,414! 1&,$2%

v. (et income

Net income! ta'able income less ta' payable! *5,%14 2 10,7%8! 54,4%6

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Taxation Planning

b)i. Assessable income

Salary 40,000Non commutable pension 18,000Fully franked dividends 5,714

Interest 1,5003apital "ain * 110,000

ssessable income ! 1$5,214

'ssessable capital !ain= capital procee"s less cost base= $80,000 – 2#0,000 = 210,000

210,000 – 50%

= 110,000


Frankin"#imputation credits 1,714$ension offset * %,700

4,414

*

Taxable component x 15%= 18,000 x 15%= 2,#00


&edicare levy! ta'able income ' 1(5)! 175,%14 ' 1(5)! %,*%8

Surc+ar"e! 0

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Taxation Planning

iv. Tax 'aable

a'able income ! 175,%14 -assessable income less deductions.


! 47,100 -0(45 ' %5,%14.! 47,100 11,/4*! 58,44*

&edicare levy! %,*%8

Surc+ar"e! 0

a' offsets! 4,414

a' payable! ta' on ta'able income plus medicare levy plus surc+ar"e less ta' offsets! 58,44* %,*%8 2 4,414! 56,66&

v. (et income

! ta'able income less ta' payable! 175,%14 2 5*,**0! 11%,554

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Taxation Planning

Question 2

cenario 1


Salary 1*/,800Interest /,000

ssessable income ! 1**,800

ii. Taxable income

! assessable income less deductions! 1**,800 2 0! 1**,800

iii. Tax 'aable

a'able income ! 1**,800 -assessable income less deductions.

a' on ta'able income! 47,100 -0(45 ' 1*,800.! 47,100 7,5*0! 54,**0

&edicare levy! ta'able income ' 1(5)! 1**,800 ' 1(5)! %,50%

Surc+ar"e! 0

a' offsets! 0

a' payable! ta' on ta'able income plus medicare levy plus surc+ar"e less ta' offsets! 54,**0 %,50%! 5$,162

iv. (et after tax income

! ta'able income less ta' payable! 1**,800 2 57,1*%! 1&#,6%

+is'osable income

! net after ta' income less ot+er payments! 10,*/8 2 0 1&#,6%

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Taxation Planning

v. (et salar 'ac-age after tax income 'l!s net salar sacrifice contrib!tions)

ross salary ! 1*/,800

a' on "ross salary

! 47,100 -0(45 ' 1/,800.! 47,100 *,%10! 5/,/10

&edicare levy! "ross salary ' 1(5)! 1*/,800 ' 1(5)! %,457

Surc+ar"e! 0

a' payable

! ta' on "ross salary plus medicare levy plus surc+ar"e! 5/,/10 %,457! 55,7*7

fter ta' income! "ross salary less ta' payable! 1*/,800 2 55,7*7! 1&%,&

ross superannuation contributions! 1*,%00 -S.Net superannuation contributions! "ross superannuation contributions less 15) contributions ta'! 1*,%00 2 15)! 1*,%00 2 %,4/0! 1/,770

Net salary packa"e! after ta' income plus net superannuation contributions! 108,0// 1/,770! 121,%&

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Taxation Planning

cenario 2


Salary 1*/,800Interest /,000

Fully franked dividends * 7,857

ssessable income ! 174,*57

*Franin! cre"it = #,85# x 0%= 2,5#

5,500 = #,85# #0%

ii. Taxable income

! assessable income less deductions! 174,*57 2 4,750 *! 1*,07

) *nterest "e"uction +mar!in loan= 50,000 x -.5%= $,#50

iii. Tax 'aable

a'able income ! 1*,07 -assessable income less deductions.

a' on ta'able income! 47,100 -0(45 ' 1,07.! 47,100 8,58! 5*,058

&edicare levy! ta'able income ' 1(5)! 1*,07 ' 1(5)! %,54

Surc+ar"e

! 0

a' offsets! frankin" credits! %,/57

a' payable! ta' on ta'able income plus medicare levy plus surc+ar"e less ta' offsets! 5*(058 %,54 2 %,/57! 56,25&

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Taxation Planning


! ta'able income less ta' payable! 1*,07 2 5*,%50! 11,65$

+is'osable income

! net after ta' income less non6concessional superannuation contributions! 11/,*57 2 %0,000! #,65$


ross salary ! 1*/,800

a' on "ross salary! 47,100 -0(45 ' 1/,800.

! 47,100 *,%10! 5/,/10

&edicare levy! "ross salary ' 1(5)! 1*/,800 ' 1(5)! %,457

Surc+ar"e! 0

a' payable! ta' on "ross salary plus medicare levy plus surc+ar"e! 5/,/10 %,457! 55,7*7

fter ta' income! "ross salary less ta' payable! 1*/,800 2 55,7*7! 1&%,&

fter ta' income less non6concessional superannuation contributions! 108,0// 2 %0,000! 88,0//

ross superannuation contributions! 1*,%00 -S. %0,000 -non6concessional.

! /*,%00

Net superannuation contributions! "ross -S. superannuation contributions less 15) contributions ta' plus non6concessional! -1*,%00 2 15). %0,000! 1/,700 %0,000! //,700

Net salary packa"e! after ta' income plus net superannuation contributions! 88,0// //,770! 121,%&

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Taxation Planning

cenario


Salary * 1%7,800Interest /,000

Fully franked dividends ** 7,857

ssessable income ! 1%,65$

) /alar less salar sacrifice superannuation contributions= 1(,800 – (,000 = 12#,800

**Franin! cre"it = #,85# x 0%= 2,5#

5,500 = #,85# #0%

ii. Taxable income

! assessable income less deductions! 1/8,*57 2 4,750 *! 1,#&$

) *nterest "e"uction +mar!in loan= 50,000 x -.5%= $,#50

iii. Tax 'aable

a'able income ! 1//,07 -assessable income less deductions.

a' on ta'able income! 17,100 -0(40 ' 58,07.! 17,100 %/,5*/! 40,**/

&edicare levy! ta'able income ' 1(5)! 1//,07 ' 1(5)

! %,00

Surc+ar"e! 0

a' offsets! frankin" credits! %,/57

a' payable! ta' on ta'able income plus medicare levy plus surc+ar"e less ta' offsets! 40,**/ %,00 2 %,/57 4&,15

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Taxation Planning


! ta'able income less ta' payable! 1//,07 2 40,/15! ,5#2

+is'osable income

! net after ta' income less ot+er payments! /,5% 6 0! #,5#2


ross salary ! 1%7,800

a' on "ross salary

! 17,100 -0(40 ' 5%,800.! 17,100 %1,1%0! /8,%%0

&edicare levy! "ross salary ' 1(5)! 1%7,800 ' 1(5)! 1,17

Surc+ar"e! 0

a' payable! ta' on "ross salary plus medicare levy plus surc+ar"e! /8,%%0 1,17! 40,1/7

fter ta' income! "ross salary less ta' payable! 1%7,800 2 40,1/7! 87,**/

ross superannuation -concessional. contributions! 1*,%00 -S. /*,000 -salary sacrifice.! 5%,%00

Net superannuation contributions

! "ross superannuation -concessional. contributions less 15) contributions ta'! 5%,000 2 15)! 44,/70

Net salary packa"e! after ta' income plus net superannuation contributions! 87,**/ 44,/70! 1/%,0//

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Taxation Planning

cenario !mmar

cenario 1 cenario 2 cenario

/ross salar 1*/,800 1*/,800 1%7,800

0nterest earned /,000 /,000 /,000

!ll fran-ed dividends 0 7,857 7,857

Assessable income 1**,800 174,*57 1/8,*57

+ed!ctions 0 4,750 4,750

Taxable income 1**,800 1*,07 1//,07

Tax on taxable income 54,**0 5*,058 40,**/

Medicare lev %,50% %,54 %,00

Medicare lev s!rc"arge 0 0 0

Tax offsets 0 %,/57 %,/57

Tax 'aable 57,1*% 5*,%50 40,/15

(et after tax income 10,*/8 11/,*57 /,5%

+is'osable income 10,*/8 /,*57 /,5%

(et salar 108,0// 108,0// 87,**/

oncessional s!'er conts 1*,%00 1*,%00 5%,%00

(on3concessional s!'er conts 0 %0,000 0

/ross s!'er conts 're conts tax) 1*,%00 /*,%00 5%,%00

onts tax 'aable %,4/0 %,4/0 7,8/0

(et s!'er conts 'ost conts tax) 1/,770 //,770 44,/70

(et salar 'ac-age 1%1,80/ 1%1,80/ 1/%,0//

3+arles can make contributions before income ta' +as been deducted from +is salary( +ese arecalled before ta' or concessional -ta' deductible. contributions( +is is also knon as salary

sacrifice(

Salary sacrifice contributions -re"arded as employer contributions. +ave a distinct advanta"e ast+ey only pay 15) contributions ta' -+en received by fund. instead of t+e normal income ta'rate 3+arles ould pay -45) plus medicare. if +e ere to take t+at income as part of re"ularsalary(

In scenario , salary sacrifice contributions of /*,000 si"nificantly reduce assessable incomeand ta' payable in comparison to scenarios 1 and %( otal net superannuation contributions andnet salary packa"e si"nificantly increase in comparison to scenarios 1 and %( 9isposable incomeis only sli"+tly less in comparison to scenario %(

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Taxation Planning

lternatively, 3+arles can make voluntary contributions after income ta' +as been deducted from+is salary( +ese are called after ta' or non6concessional -non ta' deductible. contributions(

Non6concessional contributions -re"arded as personal contributions. "enerally do not incur anyfurt+er ta' +en t+ey are made into super because income ta' +as already been paid on t+ismoney(

In scenario 2, t+e non6concessional -voluntary. contribution of %0,000 does not reduceassessable income and ta' payable in comparison to scenarios 1 and /( otal net superannuationcontributions increase and net salary does not c+an"e in comparison to scenario 1( 9isposableincome reduces in comparison to scenario 1(

+e total concessional -employer and salary sacrifice. contribution cap for %007#%008 for acontributor a"ed under 50 is 50,000pa(

:'cess concessional contributions above t+is cap are ta'ed at 45) plus medicare levy( +ismeans an additional /1(5) is levied on top of t+e 15) contributions ta' already imposed( +esee'cess concessional contributions ill count toards 3+arles;s non6concessional contributionscap(

+i"+er concessional contributions cap applies for people a"ed beteen 50 and 74 of 100,000until /0 <une %01%(

In scenario , total "ross contributions -concessional. are 5%,%00 meanin" e'cess contributionsamount to %,%00(

+e total non6concessional -after ta'#voluntary#personal. contribution cap for %007#%008 for acontributor a"ed under *5 is 150,000pa(

=p to t+is t+res+old t+ese contributions are not ta'ed +en received by t+e fund( >oever,e'cess non6concessional contributions above t+e cap are ta'ed at 45) plus medicare levy(

If a"ed under *5 t+e non6concessional cap can be avera"ed over a period of t+ree years +ic+means one could c+oose to contribute up to 450,000 over a t+ree year period(

Furt+ermore, in scenarios 2 and , t+e non6super "earin" strate"y increases assessable income-fully franked dividends., provides ta' deductions -interest payments. and reduces ta' payable-frankin" credits.(

Investment earnin"s on superannuation are ta'ed at a ma'imum rate of 15)( +is makes t+e ta'many people pay on t+eir super investment earnin"s is muc+ loer t+an t+e ta' t+ey pay on t+eirnon6super investments suc+ as mana"ed investments or property +ic+ are ta'ed at personalincome rates up to 4*(5)(

?+en it is time to access super, t+e ta' payable ill depend on a"e and t+e ay c+osen toreceive t+e benefit( It is possible to reduce or eliminate ta' payable at t+is point( Furt+ermore, t+e

"overnment from 1 <uly %007 introduced if you are a"ed *0 or over your benefits ill be ta' freere"ardless of +et+er you take a lump sum or an income stream(

+ese ta' concessions mean t+at money +as t+e potential to "ro faster in super t+an in re"ularnon6super investments +ic+ are fully ta'ed(

=ltimately, t+e type#s of contribution and investment ve+icle#s best suited for 3+arles ill dependon +is overall personal financial circumstances#re@uirements#attitudes +ic+ need to be clearlydetermined, identified, considered and a"reed before implementation(

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Taxation Planning

Question 3

a)

• epairs to the bathroom in the investment propert at a cost of 5,000

9eductible e'pense of income producin" rental property -non6capital repair.

• 3ouncil rates 2,000

9eductible e'pense of income producin" rental property

• 4an"lor"s insurance $50


• eal estate a!enc mana!ement fees 1,200


• *nterest on investment propert mort!a!e

9eductible e'pense incurred to earn assessable income

• epaments to loan principal of 10,000

Not deductible as not incurred to produce assessable income

• &rotective clothin! 00


• "ucation expenses 2,000

1,750 deductible e'pense -first %50 e'cluded. incurred to earn assessable income

• Financial plannin! revie6 fee 500

9eductible e'pense incurred for on"oin" revie to produce assessable income

• Travel to an" from 6or 2,000

Not a deductible e'pense incurred

• ravel beteen ork locations 1,500


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Taxation Planning

b)i. (et rental income

ross rental income %%,000

lloable deductions

Aat+room repairs -non6capital. 5,000 3ouncil rates %,000 Bandlords insurance 450 Ceal estate mana"ement fees 1,%00 Interest on mort"a"e -invest property. 15,000

%/,*50

Net rental income! "ross rental income less alloable deductions! %%,000 2 %/,*50! 1,65&)

ii. Total taxable income

ssessable income! salary net rental income! 55,000 -1,*50.! 5/,/50

lloable deductions! $rotective ork clot+in" /00 Self education e'penses 1,750 Financial plannin" revie fee 500 ?ork related travel 1,500

4,050

otal ta'able income! assessable income less deductions! 5/,/50 2 4,050! 4#,&&


&edicare levy! ta'able income ' 1(5)! 4,/00 ' 1(5)! $4&

Surc+ar"e! & -ta'able income D 50,000.

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Taxation Planning

iv. Tax 'aable

a'able income ! 4,/00 -assessable income less deductions.


! /,*00 -0(/0 ' 1,/00.! /,*00 5,70! ,/0

&edicare levy! 740

Surc+ar"e! 0

a' offsets! 0

a' payable! ta' on ta'able income plus medicare levy plus surc+ar"e less ta' offsets! ,/0 740! 1&,1&

v. (et income

! ta'able income 2 ta' payable! 4,/00 2 10,1/0! #,1$&

c)a' avoidance and ta' evasion is t+e difference beteen orkin" it+in t+e la and orkin"outside it(

a'payers +ave t+e ri"+t to arran"e t+eir financial affairs to minimise ta', but not to do so byavoidin" t+e intent of t+e la -ta' avoidance. or by not folloin" t+e la itself -ta' evasion.(

+erefore, ta' avoidance is t+e le"al use of t+e ta' re"ime to one;s on advanta"e, in order toreduce t+e amount of ta' payable by means it+in t+e la( a' evasion is to not pay ta'es byille"al means(

Susan could consider a salary sacrifice strate"y into superannuation to le"ally reduce +er ta'

liability(

Salary sacrifice is an arran"ement it+ your employer t+at allos you to receive part of yoursalary packa"e in t+e form of Epre6ta'; contributions to your superannuation fund(

our salary is ta'ed at your mar"inal rate, +ic+ can be as +i"+ as 4*(5) -includin" t+e &edicarelevy.( In Susan;s case it is /1(5)( >oever, +en you salary sacrifice, your employer makes asuperannuation contribution on your be+alf from your "ross salary( +is means t+at t+econtribution is made before your income ta' is calculated( In turn, as your salary +as beenreduced, t+e total amount of income ta' you pay may also be reduced(

+e contributions ta' rate of 15) paid on superannuation contributions is "enerally loer t+ant+e mar"inal ta' rate on your salary so you ill +ave more of eac+ dollar orkin" for you in yoursuperannuation savin"s(

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Taxation Planning

Furt+ermore, t+is is one of t+e fe salary packa"in" options t+at does not attract frin"e benefitsta'(

+e Federal "overnment +as introduced a cap of 50,000 as t+e total amount t+at your superfund can accept as 3oncessional 3ontributions eac+ year( +ese limits apply to eac+ individual(

ll your employer contributions includin" any salary sacrifice contributions you make counttoards t+e concessional cap(

If you are over 50, you are eli"ible for transitional arran"ements +ic+ ill increase your limit to100,000 per year until /0 <une %01%( +ese ne limits ill make it more important t+an ever tocarefully consider your options before committin" to salary sacrifice(

3oncessional contributions t+at e'ceed t+e limit ill be subGect to an additional ta' of /1(5)brin"in" t+e total ta' paid to 4*(5) -3ontributions ta' of 15) ill +ave already been paid.(:'cess concessional contributions ill also be counted toards t+e non6concessionalcontributions limit(

=nderstandin", trackin" and mana"in" t+ese limits are an important part of any salary sacrifice

strate"y(

&akin" salary sacrifice contributions may mean t+at you ill reduce your take +ome pay(+erefore, can you afford to live on a reduced amount of take +ome payH

Ceviein" your bud"et is often a useful step +en considerin" salary sacrifice(

For many people salary sacrifice is a lon"6term savin"s option as you ill not be able to accessyour superannuation savin"s until you +ave reac+ed your preservation a"e -currently 55 if youere born before 1#7#*0, but *0 if you ere born after /0#*#*4. and +ave left t+e orkforcepermanently(

Aased on Susan;s current ta'able income a salary sacrifice ill also increase +er level ofovernment Superannuation 3o6contribution eli"ibility(

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Taxation Planning

Question 4

a)7enefits of !earin!

earin" "ives you t+e potential to accumulate ealt+ faster t+an if you only used your on funds

to invest( s lon"6term returns on "rot+ assets suc+ as s+ares +ave "enerally e'ceeded t+ecosts of borroin" to invest it ill +elp you reac+ your lon"6term "oals sooner(

It also +as t+e potential to +elp you on a more diversified portfolio( ?it+ more funds to invest,you can avoid puttin" all your e""s into one basket(

ainin" ta' concessions t+rou"+ "earin" is one of t+e usual benefits of t+is form of investment(ou can usually claim your loan e'pense as a ta' deduction +ere t+e loan funds are used forbusiness or investment purposes, +ic+ can be applied a"ainst your ot+er ta'able incomereceived durin" t+e year -for e'ample your salary.( +is reduces t+e overall after6ta' cost of yourborroin"s(

iss of !earin!

earin" increases t+e returns of an investment, +et+er t+ey are losses or "ains( ?+en you"ear, you usually multiply your "ains in a risin" market, but also multiply your losses in a fallin"market(

t times +en investment returns are ne"ative, t+e value of your investment ill fall( If t+isoccurs, you may be re@uired to pay back part of t+e loan or provide e'tra security by investin"more money( +is is referred to as a mar"in call and you are "enerally re@uired to respond to itit+in %4 +ours( t+er risks include risin" interest rates or c+an"in" ta'ation le"islation( =sin" a+ome mort"a"e facility or internally "eared mana"ed fund ne"ates t+e risk of a mar"in call(

Types of gearing

Ne"ative "earin"?+en t+e interest payments and ot+er investment costs e'ceed t+e income you receive fromyour investment( ou can claim a ta' deduction for incurred losses and t+is may reduce t+eoverall ta' you mi"+t pay on your ot+er income( t t+e same time, you +ope t+at t+e value of your investment "ros -i(e( makes a capital "ain.(

$ositive "earin"?+en t+e interest payments and ot+er investment costs are loer t+an t+e income you receivefrom t+e investment( +is is less ta'6effective, but you can still claim a ta' deduction for t+einterest and investment costs a"ainst your investment income( Aut you on;t be able to reducet+e ta' you pay on your ot+er income( dditionally, t+e surplus income can be used to reduce t+esiJe of your loan(

Neutral "earin"?+en t+e interest payments and ot+er investment costs are t+e same as t+e income you receivefrom t+e investment( +is strate"y is very similar to positive "earin"K +oever your investmentouldn;t produce any additional income to reduce your loan(

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Taxation Planning

ners"i' 'tions

i. oint names

Cat+er t+an investin" t+e amount in one person;s name, splittin" oners+ip of t+einvestments it+in a "earin" strate"y could improve t+e outcome considerably(

>oldin" any un"eared investments -e'istin" capital used.. in $eter;s name bein" t+e loerincome earner could enable t+em to pay less ta' on t+at investment income

>oldin" t+e "eared investments -investments purc+ased it+ borroed money. in t+e <ane;sname bein" t+e +i"+er income earner to enable t+em to benefit more +en claimin"investment loan interest as a ta' deduction(

3onsideration could be "iven to re6invest t+e income from t+e investment into $eter;s namebein" t+e loer income earner( +is can reduce t+e future ta' payable on t+e reinvestedamount(

?it+ split oners+ip, you also +ave t+e fle'ibility to decide +o s+ould sell some of t+eir

investment to pay off t+e loan( o minimiJe 3 t+is s+ould "enerally be t+e person payin"ta' at t+e loer mar"inal ta' rate at t+e time(

+e amount of income "enerated by t+e investments can also make a si"nificant difference tot+e results( It can be more ta' effective for <ane as +i"+er income earner to invest in loeryieldin" assets -t+at "enerate a loer income.( 3onversely, t+ere is t+e advanta"e of t+e$eter as t+e loer income earner to invest in +i"+er yieldin" assets -t+at "enerate a +i"+erincome.(

ii. Peter7s name onl

If "earin" in $eter;s name only, a positive or neutral "earin" strate"y is most suitable as $eter is t+e loer income earner(

In a positive strate"y investment income e'ceeds investment loan interest( ?+ilst t+is surplusIs assessable income and ill not reduce ta' payable adoptin" it mi"+t put t+em in a betterfinancial position( :ven after ta' as been paid, t+ey could be in a better position t+an if t+ey+ad ne"atively "eared t+e investment and received t+e ta' deduction(

s t+e loer income earner -loer mar"inal ta' rate. it can be an advanta"e for $eter toinvest in +i"+er yieldin" assets -i(e( t+ose t+at "enerate a +i"+er income.(

Furt+ermore, t+e surplus funds can be used to reduce t+e balance of t+e investment loan(

iii. ane7s name onl

If "earin" in <ane;s name only, a ne"ative "earin" strate"y is most suitable as <ane is t+e

+i"+er income earner(

s investment loan interest e'ceeds investment income( +is can enable t+e benefit ofclaimin" t+e incurred loss as a ta' deduction +ic+ ill reduce ta'able income and ta'payable(

s t+e +i"+er income earner -+i"+er mar"inal ta' rate. it can be more effective for <ane toinvest in loer yieldin" assets -i(e( t+ose t+at "enerate a loer income. reducin" assessableincome(

3onsideration could be "iven to re6invest t+e income from t+e investment into $eter;s namebein" t+e loer income earnin" partner( +is can reduce t+e future ta' payable on t+ereinvested amount(

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Taxation Planning

'tion 8ecommendation

I ould recommend ne"ative "earin" in 9oint names(

Ay usin" t+is strate"y $eter and <ane can si"nificantly reduce ta' on income received#earnin"s,

accumulate a lar"er end result and minimise future 3apital ains a' liabilities(

Splittin" t+e oners+ip ac+ieves t+is by providin" structure fle'ibility to effectively utilise t+emar"inal ta' rate differences beteen $eter and <ane(

+is is clearly demonstrated in 'tion i(

f course positive and neutral "earin" strate"ies as demonstrated in 'tions ii and iii can alsobe beneficial in Goint names( >oever, t+ey ill not be as ta' effective or +ave t+e same monetaryimpact as t+e ne"ative "earin" strate"y.

ther consi"erations

• 3an $eter and <ane tolerate falls in investment markets and do t+ey +ave a lon" investmenttimeframeH

• 9o t+ey +ave a reliable income t+at t+ey believe ill continue for t+e term of t+e investmentand loanH

• 9o t+ey +ave an emer"ency fund to meet potential interest rate rises and#or mar"in callsH

• s t+ey can;t rely on t+e returns from t+e investment to pay t+e interest on t+e loan, are t+eyprepared to use t+eir income to pay t+e interestH

• >ave t+ey considered appropriate income protection#disability insurance and life cover beforeundertakin" t+e "earin" strate"yH

=ltimately, t+e investment ve+icle#s best suited for $eter and <ane ill depend on t+eir overallpersonal financial circumstances#re@uirements#attitudes +ic+ need to be clearly determined,

identified, considered and a"reed before implementation(

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Taxation Planning

b)Negative Gearing – interest costs

earin" allos interest payments on borrowings to be fully tax deductible( +erefore, youcan claim a ta' deduction for incurred losses +en t+e interest costs e'ceed t+e income youreceive from your investment -ne"ative "earin".( +is can reduce assessable income and ta'

payable(

Additionally, any imputation credits received can be used to oset tax payable dependingon individual

nancial circumstances.

Pre-payment of interest costs

s stated, +en "earin" to make an investment t+at ill "enerate assessable income, you areentitled to claim a ta' deduction for t+e interest e'pense t+at arises(

+e interest is deductible in t+e year it arises( >oever, you can pre6pay t+e interest e'pense on

t+e loan for t+e ne't 1% mont+s and receive t+e entitlement to t+e deduction today( +issi"nificantly reduces your ta'able income and ta' payable(

ou can decide to pre6pay t+e interest for a period of less t+an 1% mont+s and still receive animmediate deduction, but it cannot be pre6paid for a period "reater t+an 1% mont+s(

$re6payin" interest "ives you t+e ability to brin" forard t+e ta' deduction -you may be entitled toin t+e folloin" year. into t+e current year( +is may provide you it+ different ta' plannin"opportunities from one year to t+e ne't(

dditionally, by pre6payin" interest you are lockin" in t+e interest rate for t+e folloin" year(

It is also important to remember t+at to receive t+ese benefits you must make t+e pre6paymentbefore /0 <une(

inancial Planner : ngoing ee

Fees paid directly by $eter and <ane to a financial planner for on"oin" revie to service#mana"et+e "eared investment portfolio are ta' deductible(

+e revie fee is deductible on t+e basis t+at t+e advice is related to t+e production ofassessable income and is not capital in nature(

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Taxation Planning

c)i. Assessable income

xcepte" incomeSalary 5,500Interest -personal savin"s. 1*

5,**

9nearne" incomeInterest -"ifted savin"s. 1,410

otal assessable income 7,07


Bo income ta' offset * $5&

) increases tax free threshol" for unearne" income to 1,((#

iii. Tax 'aable incl!ding medicare and s!rc"arge)

xcepte" incomea'able income ! 5,** -assessable income less deductions.a' on ta'able income D *,000! 0

9nearne" incomea'able income ! 1,410! 0(45 ' 1,410! */5a' on ta'able income D 1,**7! */5 2 1,**7! 0

&edicare levy! 0

) applicable to earnin!s : 1#,0-

Surc+ar"e! 0

) taxable income : 50,000

a' payable! &

iv. (et income

! ta'able income less ta' payable! $,&$#

Taxation Planning Assignment

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