Ordinary Income from the Sale of Apartment Block

The issue here is based on determining whether the taxpayer will be considered taxable relating to the profits derived from the sale of apartment under “section 6-5 of the ITAA 1997”?

Income obtained upon the sale of property is viewed as ordinary income based on circumstances that the taxpayer improves and develops the property for deriving profit from property development activities. Taxpayers engaged in developmental activities are generally treated as property developers. When the sale of property happens in the ordinary business, income obtained through property sale is held as assessable income in terms of gross proceeds basis under “section 6-5 of the ITAA 1997”.

As defined under the “taxation ruling of TR 92/3” any profits attained from isolated transaction is treated as income based on the ordinary concepts of the circumstances. Taxpayers that makes the profit from the isolated transaction must consider those profits as ordinary income if the objective of the taxpayer was to enter the transaction for the purpose of making profit.

Selling of revenue assets give rise to ordinary income for an individual taxpayer. The commissioner judgement in “Whitfords Beach Pty Ltdv FCT (1982)”states that an individual taxpayer is assessable under “section 25 (1)” for proceeds that are obtained from the sale of land as the activities is termed as the land development business. The commissioner of taxation held that the profits obtained from isolated transactions is considered as income based on the ordinary concepts of “section 6-5 of the ITAA 1997”since the profits derived from execution of business transaction was commercial.

In the current study of Kristie, the investment property was bought with the objective of producing profit. The services of professional property planner were sought by Kristie for drafting the sketches and proposed plans of apartment. This signifies that investment property was developed by Kristie with the intention of producing income from property development activity. Denoting the judgement in “Whitfords Beach Pty Ltd v FCT (1982)” the activities of Kristie should be treated as property developer with the sales proceeds of property reflects carrying on of land development business. The objective of Kristie was to make profit from such transaction.

Conclusion:

On a conclusive note, profits obtained from the sale of block of apartment should be treated as ordinary income based on “section 6-5 of the ITAA 1997”.

1 B: The current issue is related to the determination of whether the taxpayer will be liable for capital gains tax that is made from the selling of assets under the “ITAA 1997” 

Capital gains is applied on the taxpayers that acquire the assets or any other events that happens on or after 20^th September 1985. A person can generate capital gains or losses if the sell the assets, or. through gifts or transfer. A business asset may consist of premises, goodwill, licences or rights. A person is under the obligation of including the amount of capital gains which is earned during the income year while filing tax return.

As stated by the Australian Taxation Office a person that owns the commercial property are most probable to generate capital gains or losses. An individual taxpayer is in the probable situation of making capital gains or capital losses at the time of selling the commercial. On noticing that an individual taxpayer generates capital gains during the relevant income year, the taxpayer would be required to pay capital gains tax. Any form of capital loss or gains that is made by the taxpayer represents the difference between the costs that is obtained by a person and what is received by the taxpayer at the time of disposing the property. Any amount which a person claims as deductions for lowering the tax liability are left out from the property cost base.

Capital Gains Tax Implications Regarding the Transactions – A Case Study

The present case study of Dave introduces that he bought the business premises for $900,000 as well as a business goodwill for a sum of $100,000. Because of the poor health conditions of the taxpayer he eventually sold the business to Doors RUs for $2,000,000. Doors Ru further bought the goodwill of Dave by additionally paying him with $400,000. As an added sales stipulation, a premature end to the contract between the Doors RUs and Dave resulted in yielding a sum of $80,000 as the lump sum receipt in the form of compensation fee to Dave. 

As defined under the “section 102-5 of the ITAA 1997” Dave would be required to pay the capital gains tax for the relevant income year ended because selling of commercial premises and goodwill gave rise to capital gains and attracts tax liability relating to the amount of gains derived during the income year. The capital gains that is made by Dave constitute the difference between the purchase price and the selling price.

As defined under the “Section 104-25 of the ITAA 1997” CGT event 2 takes place when a person obtains the compensation relating to the termination of the CGT assets of intangible nature. Evidences from the case study obtained suggest that Dave obtained a lump sum payment of $80,000 for termination of contract. Citing the explanation of “section 104-25 of the ITAA 1997” the termination of contract gave rise to CGT assets of intangible in nature. The amount of $80,000 should be treated as CGT event C2 because it constituted dissolution of intangible CGT assets.

In the later part of the case study Doors RUs is found to be paying a lump sum amount of $10,000 to Dave for not competing directly in the manufacturing of door for a period of three years. A CGT event D1 arises when a taxpayer establishes a contractual right or any other legal equitable rights in alternative entity. Denoting the judgement made in the event of “Higgs v Oliver (1951)”a lump sum amount was paid to an actor for not acting in any other direction, films and production for a minimum 18 months. The court held that the amount cannot be treated as income since it constituted CGT event D1. Referring to the above decision the lump sum amount of $10,000 that would be paid to Dave for not competing in the door manufacturing business gave rise to CGT event D1. The reason for this is that the sum of $10,000 constitutes the making of contractual rights in favour of Doors RUs.

As stated by the Australian Taxation Office the main residence of an individual taxpayer is generally exempted from capital gains tax. For a taxpayer to obtain the exemption on the main residence, there must be dwelling on the property and a taxpayer must have living on it. A taxpayer can gain the full exemption from the CGT on dwelling when it forms the base for the taxpayer till the period it owned the property is owned by them. An individual taxpayer is permitted to obtain complete main residence exemption only when the dwelling is owned for a particular time period.

Arguments For and Against the Removal of Negative Gearing in Australian Taxation System

Referring to the present circumstances of Dave he bought a property in Coburg to use as his main residence. A partial main residence exemptioncan be claimed by him because the property was earlier used as the main residence from the period beginning from 20 January 2013 to 20 January 2015. Later in 2018, the Coburg property was disposed for a sum of $650,000. The property would be regarded for exemption because Dave has lived in the property from the time when he acquired. The amount of time spend by Dave is held significant and gains that is derived from the disposal of the property would be eligible for partial main residence exemption from the capital gains tax.

As stated by the Australian taxation office an individual taxpayer that hold the property for a minimum time period of 12 months it would held as eligible for 50% discount on the capital gains that is made. Evidently, a small business entity can reduce the capital gains tax liability through small business CGT concession upon selling the business premises. The current case study provides that Dave is eligible to claim a retirement exemption. The Australian taxation office capital gains that are made upon the sale of active assets are exempted till the lifetime limit of $500,000.

An individual tax payer who is under the age of 55 years can obtain exemption from the amount that is mandatorily required to be paid while complying the super fund or the retirement savings account.The disposal of business premises and gains made from thereon is eligible for CGT concession. The capital gains that is made by Dave upon the disposal of premises is eligiblefor exemption till the lifetime limit of $500,000. Furthermore, Dave ages below 55 years and exemption amount should be paid in the retirement savings and super funds.

On a conclusive note, Dave is eligible for claiming CGT concession originating from the disposal of the commercial premises and would be entitled for claiming a partial main residence exemption because Dave used the property partly until he undertook the decision of shifting to another property in 2015.

Negative gearing is regarded as the untouchable taxation policy of Australia. Negative gearing continues because of the insistent myth that it assist in enhancing the availability of housing and reduces the rent. Recently, negative gearing has attracted widespread attention from the media. Generally, there are only two sides of a story however only one attains success. The recent prime minister announcement stated that changes in negative gearing off the table has been successful in settling few nerves but also swept away few naps as well. Nevertheless, negative gearing has turned out to be costly, ineffective, and inequitable and has led to ownership of housing. Negative gearing creates severe pressure in budgets for government and it is kept on the top priority list of reformations.

Negative gearing helps the taxpayer in reducing the losses which is incurred by them during investment from a taxpayer’s taxable income. The strategy can be viewed as the attractive element for the taxpayers as they can subtract the entire amount of interest and can pay taxes only for the half-sum of capital gains. The present study would provide aargumentative analysis of negative gearing based on the fairness, efficiency and government measures as revenue protection.

Alike most of tax concession regimes on investment, negative gearing has been partial towards wealthy persons. Persons with negatively geared residential property falls in the top 40% bracket of revenue recipients. An important argument against the negative gearing is that it raises the housing prices and raises the after-tax returns of housing investors. Negative gearing makes the prices greater than it would have been or else. This helps the present housing owners in speeding up the falling rate of residential owners amid the younger age group.

The most recommended method of improving the distortion in the housing market and reduced cost of budget from negative gearing would be by eradicating the capital gains tax discount. The government would be benefited as the revenue would increase by $5 billion in the next income year which may simultaneously abolish the speculative incentive in housing prices. Nevertheless, if the policy creators are unwilling to bring reformations in the capital gains tax, reforming the negative gearing form a better alternative. In short-run abolishing capital gains would help in protecting the revenues for the government. This would enable the government in collecting greater than $4 billion over the year with taxpayer may start accumulating losses to reduce the tax liability that may be paid on capital gains.

With respect to the definition of negative gearing, negatively geared property costs higher than the revenue it derives through rent. Losses can be set off against alternative types of income. Consequently, this leads more affordable property purchase since investors can obtain long term capital gains even though the property is not producing short-term profit. Australian council of social services explains that taxes relief altogether with the discount on capital gains tax has increased the speculative purchase of housing in Australia. This contributes to higher prices for regular home buyers.  

Providing tax relief on negative gearing and capital gains fails to provide assistance in enhancement of the housing affordability as they even make it worse when there is a constant rise in the price of houses, similar to the present situation that is prevalent in Sydney. A minimum of one-tenth of negative gearing housing investment are directed towards the new properties whereas the remaining nine-tenth shoots-up the present price of the house.

Mythologies and taxpayer’s popularity cannot be considered as the better reasons for maintaining the costly, ineffective and insufficient arrangement of tax that shoots up the housing ownership by far out of the younger population reach. Therefore, negatively can be considered as the tool which should be abolished sooner rather than later.

A large number of studies have been carried out by the researchers regarding the current changes in policy setting for residential gearing. The policy setting are directed to eventually lower the housing affordability and would lower the living standards for Australia. The purchase of new residential housing is viewed as one of the highly tax environment currently in the economy however abolishing the negative gearing would result in reduced investment and may eventually worsen the housing market. There may be short supply of houses in the market and may lead to increase in rents costs.

According to the statement made by Property Council of Australia negative gearing cannot be only considered as the useful tool for rich persons but also forms an important feature for a large number Australians for their long-term plans of monetary security. The statistics can be viewed as decisive in Australia since the tool of negative gearing is used by the average workers group that mainly owns the single investment property. Empirical evidences have suggested that, abolishing the negative gearing would not only cause an effect on the regular investors but would lead to confounding effect on the private tenants. Most of the populations that are living on the accommodations could be negatively impacted due to shortage in the supply of houses.

According to the opinion of the tax practitioners negative gearing helps in enhancing the supply of houses by promoting investment. Negative gearing provides assistance in lowering down the costs of rent due to the better accessibility of the rental property. Tax practitioners have argued that negative gearing could be viewed as the tool that helps the Australian in creating wealth for themselves, for their retirement and for family. Abolishing the negative gearing may result in adverse impact as the cost of rents would increase and there would be reduced supply of houses with intense competition in market of housing property. The investors are expected to generate profit in two ways, firstly, when the net amount of rental income increases over the period and goes further than the interest expenses. Secondly, when the capital gains originating from the disposal of the property.

After the disposal of property is made, the system of taxation is such that it favours the treatment of capital gains with only half portion of the capital gains is charged as the taxable earnings if the investment property is held for no less than a period of twelve months. The system of taxation is such that only lower value of capital gains is considered for taxation. With respect to such perspective, distortions only happens from the 50% CGT discount for the income that is generated from the capital gains for the assessment purpose and not due to the negative gearing. As a result of this, abolishing negative gearing would lead to rise in the price of houses and would also result in loss of investment for the investors as well as the owners of the house. The effect of negative gearing is such that the investors may remain ahead based on economic terms and would yet be able to reduce the taxation liability.

Conclusion:

Conclusively, currently the prime minister of Australia has ruled out any further transformation in the negative gearing which ultimately contributes more in the direction of housing industry relief. Recent examples includes a notable increase in the real rents when the negative gearing was abolished in Sydney and Perth. This not only contributed to higher price but also led to greater number of rental vacancies.

The argument cannot be regarded as consistent that negative gearing formed the significant factor since negative gearing was viewed to introduce negative effect on the rental properties in all parts of the city. A rise in rental costs in two cities though matched up with the provisional abolition of negative gearing tax deductions, however it is not probable presently that negative gearing abolition would result in significant impact on the rents in any key capital city in Australia.

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