Taxation Law And Practice

Tax implication on sale and purchase of house

Discuss about the Taxation Law and Practice.

As per the regulation of Income Tax Assessment Act 1997, an individual is required to pay tax on capital gain that arises due to sale of capital assets that includes sale of property. However, individual taxpayers are entitled to claim exemption on capital gain tax provided the required criteria under ITAA 97 be satisfied. The regulation of ITAA 97 on capital gain tax exemption provides that if the individual sells the property, which is main residence, including the adjoining land up to 2 hectares utilized for the purpose of domestic use (Ato.gov.au 2016). However, it is essential for the taxpayer to have only one residence during the taxation year while the taxpayer is entitled to own a new house against the sale of old house within a overlapping period of six months (Hulse and Burke 2015). Additionally, capital gain tax exemption under ITAA 97 provides that the taxpayer can claim exemption only the property has been used for residential purpose for minimum three continuous periods during the span of 12 months before its sale. Further, regulations under Australian Taxation Office provide that the property should not be rented in the same period of 12 months (Austlii.edu.au 2016).

It is given that; you have acquired the old house on 31 October 1987, which is your main residence at present. Cost of acquisition was $190,000 including the legal cost of $1,900 and stamps duty $4,850 stating that you stayed in the house since its acquisition except for a period 31 December 2006 to 31 December 2014.

As per the provisions of ITAA 97, it is essential that the taxpayer use the property for at least three continuous periods during 12 months time before its sale. Therefore if you sell the main residence during the month of December 2016, it is essential to use the house property for at least three continuous months between the period December 2015 and December 2016 (Rogers, Lee and Yan 2015). On the contrary, in case you acquire a new house against the sale of old one, maximum overlap period can be six months i.e. you need to purchase the new house within June 2017 to claim the exemption referring to the case of Hepples v. FC of T 91 ATC 4808, (1991) 22 ATR 465. If the above conditions are satisfied, you are entitled to claim exemption on the net taxable capital gain from the sale of house against the purchase of new one that can be determined either by using indexation method or by following discounting method @50% (Mangioni and Warren 2014). Considering the cost of acquisition and repairs cost of the old house, taxable capital gain from indexation method would be $186,827 while $ 135,525 using discounting method. Hence, maximum amount of exemption you can claim will be the total acquisition cost of new house.

Assessable Capital Gain from old house

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In view of the regulations of ITAA 97 on capital gains, an individual taxpayer is eligible to claim deduction on the expenses incurred to acquire the capital asset along with the expenses incurred to improve the property in connection with the sale. Further, it is essential to incur such expenses only for the specific property or capital asset. Therefore, you are eligible to claim deduction on the expenses incurred for acquiring the property while determining the assessable amount of capital gain. Apart from that, expenses incurred during the current year for the purpose of repairing and improvement can be claimed as deduction in connection with sale of old house (McKerchar, Bloomquist and Pope 2013). Hence, total amount of expenses to be claimed (subject to indexation) is as follows:

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Gifts received by the taxpayers are non-taxable as per the regulations of ITAA 97 if the gift has been received from the relatives or family members. However, if the gift has been received for personal benefits then the same cannot be claimed as deduction. Further, the taxpayer is entitled to claim deduction on gifts if it is received in terms of money or property as well as the value is more than $2.

It is mentioned that the gift has been received in favor of saving a boy from shark attack i.e. Apple watch worth $650 will not be included in the assessable income since there was no personal benefit. Similarly, bravery medal received for saving the boy will also not attract taxability under ITAA 97 because it was neither a property nor it attracts any personal benefit.  

In order to determine the taxable income under ITAA 97, any income received during the taxation year is included in the taxable income while expenses are deductible if the expenses have been incurred to generate such income. However, there are certain incomes received by individuals fall under the exemption criteria including perquisites or allowances received under employment.

Therefore, salary income against the occupation of teacher amounted to $72,000 would be included in the assessable income for the year ended 30 June 2016.

Franked dividends received from Telstra Shares would be taxed as per the “imputation system” since the company attributed the dividend tax to the shareholders (Ato.gov.au 2016). Further, as the dividend is franked dividend, Telstra Company is required to state the amount of frank credit to claim the difference amount.

Tax implications on the house expenditures

Holiday received for opening a new savings account valued to $3,200 will be considered as gift that does not consider personal benefit as well as it neither a monetary gift nor a property. Therefore, it will not be assessable in the taxable income.

Family Tax Benefit received for 10 years son would be attracted if the son is dependent and younger than 20 years as well as you meet the income test, in view of the case Jayatilake v FC of T (1991) 101 ALR. As per the rates provided under the regulations of FTB Part B, maximum amount to be received for 10 years old child amounted to $3,186.45 per year. Since the amount received $1,300 is lower than the threshold limit, the entire amount i.e. $1,300 will be exempted from the assessable income.

Purchase of work clothing and shoes amounted to $450 is to be claimed as deduction since it is related to the work used for generating salary income with reference to the case of FC of T v. Edwards ( 1993) 93 ATC 5162.

Cost of private car would be deductible to extent used for school purposes which was 5,600 km while the balance 19,400 km was used for personal purpose. Accordingly, the expenses on car can be deductible by using two methods i.e. cents per kilometer method or logbook method. In order to claim deduction under logbook method, it is essential for you to keep a logbook record for continuous 12 weeks while you must have the ownership. It is important to record all the trips related to work and personal use along with the maintenance of expenditure receipts. Another significant criteria required to be followed is the completion of logbook procedure once in five years or less (Ato.gov.au 2016).

As per the regulations of ATO, an individual teacher is entitled to claim deduction for work related expenses on study costs and laptops (Wilkins 2014). Therefore amount of $3,650 including the cost of laptop purchased on 1.02.16 would be deductible as decided in the case of FC of T v. Finn (1961) 106 CLR 60.

Superannuation contribution can be claimed as deduction as per the principles under Australian Taxation Office that is allowed for the salaried individual. Hence $3,000 on personal superannuation contribution would be deductible.

Tax Agent fees incurred to manage own tax is deductible as per the legislation under Australian Taxation Office that is incurred to prepare or lodge the return on tax and other taxation advice. Hence, $750 for tax agent fees would be deductible.

Taxable Income for the year ended 30 June 2016:

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Tax payable will determined based on the tax rates applicable from the year July 1 2015 provided by ATO along with the Medicare levy. Marginal tax is not applicable since the total taxable income is less than the threshold $87,000. Further, as per the legislation provided by ATO on PAYG withholding i.e. “Pay as you go” is required to be adjusted with the assessable amount of tax payable reference to the case of Chevron Australia Holdings Pty Ltd v FC of T (2015) FCA 1092. In case the PAYG amount exceeds the determined tax liability then the excess amount is to be claimed as refundable from the federal government of Australia (Ato.gov.au 2016).

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Reference List and Bibliography

Ato.gov.au. 2016. Home page. [online] Available at: https://www.ato.gov.au [Accessed 16 Dec. 2016].

Austlii.edu.au. 2016. Australasian Legal Information Institute (AustLII). [online] Available at: https://www.austlii.edu.au/ [Accessed 13 Dec. 2016].

Dridi, W. and Boubaker, A., 2015. An Assessment of the Linkage between Financial Reporting and Taxation in Tunisia. International Business Research, 8(4), p.168.

Fouarge, D., Schils, T. and De Grip, A., 2013. Why do low-educated workers invest less in further training?. Applied Economics, 45(18), pp.2587-2601.

Hirte, G. and Tscharaktschiew, S., 2013. Income tax deduction of commuting expenses in an urban CGE study: The case of German cities. Transport Policy, 28, pp.11-27.

Hulse, K. and Burke, T., 2015. Private rental housing in Australia: Political inertia and market change. Housing in 21st-Century Australia: People, Practices and Policies, p.139.

Kendall, W., 2014. A Statutory Comparative Analysis of Dividend Taxation Laws in Vietnam and Australia: Restructuring Regulatory Regimes to Attract Capital Investment. IAMURE International Journal of Business and Management, 9, p.37.

Mangioni, V. and Warren, N., 2014. Re-defining the land tax base in highly urbanised locations. Austl. Tax F., 29, p.455.

McKerchar, M., Bloomquist, K. and Pope, J., 2013. Indicators of tax morale: an exploratory study. eJournal of Tax Research, 11(1), p.5.

Nijland, L. and Dijst, M., 2015. Commuting-related fringe benefits in the Netherlands: Interrelationships and company, employee and location characteristics. Transportation Research Part A: Policy and Practice, 77, pp.358-371.

Rogers, D., Lee, C.L. and Yan, D., 2015. The politics of foreign investment in Australian housing: Chinese investors, translocal sales agents and local resistance. Housing Studies, 30(5), pp.730-748.

Wilkins, R., 2014. Evaluating the Evidence on Income Inequality in Australia in the 2000s. Economic Record, 90(288), pp.63-89.

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