Taxation Major Assignment
Your client Don comes to see you in December 2015 asking for advice about various income tax issues that have arisen during the 2015 tax year, as well as issues in the future. You are required to analyze each issue and provide appropriate advice to him about the income tax implications.
He provides the following information;
a) Don purchased a house on 31 May 1987 for a cost of $280,000 and also incurred legal costs of $1,400 and stamp duty of $6,100 in relation to the purchase. Don lived in the house as his main residence until 31 October 2006, at which time he moved interstate for work and the market value of the house was $450,000. Don is now considering selling this property. The current market value is approximately $670,000.
b) Since 1 November 2006 the house has been rented out to different tenants. The following costs were incurred in May 2015 in relation to the house;
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$
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Replacing broken tiles in the bathroom
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1,100
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Repainting the entire inside of the house
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5,700
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Underpinning the foundations in one corner of the house where an external wall had cracked from subsidence (from dried out subsoil)
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3,400
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Replace hot water system
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1,420
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c) Don also sold on 1 June 2015 his 880 shares in Westpac for $27,280. Of these shares, 800 were originally acquired in September 1994 at a cost of $4.50 per share. The remainder was acquired in a 1 for 10 bonus share offer in September 2002, which were issued from the company's share capital account. Brokerage of $400 was incurred on the sale of the shares.
In addition to the above transactions, Don had the following income and expenses for the year ended 30 June 2015;
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Income
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$
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Salary (occupation - motor mechanic)
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64,000
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Tool allowance
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3,600
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Rental income from the house mentioned above
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19,200
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Reimbursement of water rates for this property (by tenant)
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430
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Franked dividends from Westpac shares
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1,602
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Family Tax benefit (for his 14 year old son)
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5,200
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Cash received from deceased grandmother's estate
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25,000
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Expenditure
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$
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Use of 1.6litre Corolla to occasionally take customers to their jobs while their cars are repaired (1,600km) Purchase of work clothing and boots
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480
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Purchase of tools to be used in his job as a mechanic
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1,250
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Expenses incurred in undertaking a mechanical engineering Degree
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(including $290 for a new desk to study at)
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1,850
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Cost of accommodation and meals attending a mechanics conference
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(Don's son accompanied him on the trip)
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600
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Rates and insurance on the rental property
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3,260
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Income protection insurance
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450
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Life insurance
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180
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Tax Agent fees
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700
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Medical expenses for himself and his son (including $1,200 hospital costs,
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$900 doctor visits, $2,800 dental work, $420 injections prior to an
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overseas holiday, $400 prescription sunglasses)
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5,720
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Amounts refunded by health fund and Medicare $400
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Don's PAYG Payment Summary shows PAYG withholdings for the year
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13,627
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Don is 59 years old.
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REQUIRED: Prepare a Letter of Advice to Don that outlines/discusses/explains the following:
1. The possible tax implications of the sale of rental property, including any exemptions available. Calculate the assessable gain, if any.
2. The deductibility of the expenditure on the house incurred during the 2015 tax year.
3. Tax implications of the sale of the Westpac shares. Calculate the assessable gain, if any.
4. The assessability and deductibility of all the other items listed in the information.
5. Calculation of Don's taxable income for the year ended 30 June 2015.
6. Calculation of the tax payable/ (refundable) for Don for the year ended 30 June 2015, including all additional levies and tax offsets that could potentially apply to him.