Acc304 Taxation Law: A Case Assessment Answers

Elwood Blues and his wife request that you provide them with tax advice in the form of a single business letter addressing the following taxation issue that they have raised.

Elwood Blues is one of your new clients. Elwood has the following questions and he requires your analysis and advice as to the application of the law.

Task: Negative Gearing

Jake while talking to a friend (Max) at a party is informed about a topic called “negative gearing”. Tax advantages were discussed so Jake is seeking your advice. He was also told about potential changes should there be a change in Government. In your own words, explain “negative gearing” to Jake and the potential changes that may occur. In your own words, students should discuss the potential tax benefits for someone earning $100 k per year.

Negative gearing can be defined as the type of financial leverage where an investor borrows the sum of money to purchase the revenue generating investment. The gross income derived from such investment is lesser than the cost of acquiring and administering the investment together with the depreciation and interest that is charged on the loan. The strategy offers the taxpayer with the exposure of probable gains and losses (Pawson 2018). This strategy is very popular for the taxpayer as the tax losses can be lowered by the investors in respect to their taxable income. This would help the investors in benefiting from the reduced income tax bill.

Recent reformation in negative gearing might offer the investors with the tax concession. The changes that is proposed may provide the taxpayers with the tax breaks which would reduce the negative gearing deduction by 57.3% (Rogers, Nelson and Wong 2017). The changes in the model proposes that investors under 50% income distribution slab or those having modest income would obtain the benefit of receiving 100% deduction.

The proposed future changes would provide the investors in claiming an allowable deduction for majority of the outgoings together with the interest on loan as the taxpayer can produce more income. Probable changes in negative gearing may enable the investors in experiencing progressive rental deductions whereas a less wealthy investor might witness a noteworthy decline in tax savings (Cho, Li, and Uren 2017). Further changes that may happen in negative gearing policy is that the CGT tax discount may be cut up from the current 50% to 25% by restricting the negative gearing to new rental houses.

An individual taxpayer with the taxable income of 100k in the income year may experience certain tax benefits (Chappell and Campbell 2018). Taxpayers at 30% marginal tax rate can obtain the benefit of 2.5% allowance under division 43. The taxpayers can obtain reduction in cost base leading to larger taxable income capital gains or reduced capital loss.

References:

Chappell, J. and Campbell, N., 2018. The Housing Gap—Sydney, Australia. In Sustainable Development Research in the Asia-Pacific Region (pp. 293-304). Springer, Cham.

Cho, Y., Li, S.M. and Uren, L., 2017. Negative Gearing Tax And Welfare: A Quantitative Study For The Australian Housing Market.

Pawson, I., 2018. Reframing Australia's housing affordability problem: The politics and economics of negative gearing. Journal of Australian Political Economy, The, (81), p.121.

Rogers, D., Nelson, J. and Wong, A., 2017. Full House: how property pressures impact intercultural relations. Disruptive Asia: Asia’s Rise and Australia’s Future, pp.47-50.