Taxation Solutions

Topic 5-6 Taxation I Solutions
Question 1
(a) Tax on $50,000 of taxable income for Mrs. X

Taxable income	50,000
Gross tax payable: Use tables = $5,092+ 32.5% of ($50,000-$45,000) =$5,092 + $950 = $6,042	6,717
LITO (Low income tax offset): $325 – ($50,000-$45,000) x $0.5 = $175	-250
LMITO (low- and middle-income tax offset): 1080	-1,080
Add Medicare Levy @2.0%	1,000
Net tax payable	6,387

(b) Tax on $55,000 of taxable income for Mrs X

Taxable income (due to 6.25% income on $80,000. ie $5,000)	55,000
Gross tax payable	8,342
LITO [325 minus (55,000-$45,000 x 1.5%)]	-175
LMITO	-1,080
Add Medicare Levy @2.0%	1,100
Net tax payable	8,187

(c) Mrs X

Interest income of $5,000 split between Mrs. and Mr X

Taxable income	52,500
Gross tax payable	75,29.5
LITO [325 minus (52,500-$45,000 x 1.5%)]	-2,12.5
LMITO	-1,080
Add Medicare Levy @2.0%	1,050
Net tax payable	7,287

Result

Investment name	Overall tax for couple
Mrs X only	$8,187
Mrs and Mr X (half each)	$7,287
Savings using income splitting strategy	$900.00 ($8,187-$7,287)
All in husband’s name	$6,387

More savings can be made if the $80,000 in invested in Mr X’s name only as he is entitled to
received $18,200 before having to pay tax.

(d)	Techniques to minimise tax • Split income

• Negatively gearing
• Invest investment funds in fully franked shares (dividend imputation)
• Salary sacrifice
• Additional contributions to superannuation fund
• Investment in insurance or friendly society bonds where investment is tax paid (no tax if funds
are retained for 10 years).
• Invest just in low income earner’s name
Question 2
Tax payable for Mr. J

Assessable income ($45,000 + $250 + $5,000 + $2143)
Gross salary	45,000.00
Interest income	250.00
Cash dividends	5,000.00
Franking credits	2,143.00
Total Assessable income	52,393.00
Allowable deductions
Subscriptions to professional journals	250.00
Home office expenses	85.00
Tax preparation expenses	500.00
Total Allowable deductions	835.00
Taxable income	51,558.00
Gross tax payable	7,223.35
Add Medicare Levy	1,031.16
Total tax and levy	8,254.51
Offsets
LITO: $325 minus (($51,558 minus $45,000) x 1.5%))	226.63
LMITO	1,080.00
Health care rebate ($2,600 x 25.059%)	651.53
Shares Imputation Credit-Telstra	2,143.00
Total Offsets
Less PAYG from wages	12,000.00
Net Tax payable	-7,846.65

Question 3
Deidre would have the choice of determining the gain based on
-CGT discount (half the realised nominal gain as she owned the shares for more than 12 months); or
-frozen indexed cost base method at 30 September 1999.
(i) Frozen Indexed cost base method:
Indexed cost base = 16,400 x 68.7/66.7 = $16,892
Capital gain = $22,000 – 16,892 = $5,108 taxable capital gain
(ii) CGT discount method
$22,000 – $16,400 = $5,600 x 50% = $2,800
CGT discount method provides for smaller taxable capital gain.
(b) Capital loss = $15,500 – $16,400 = -$900
Note : The frozen indexation method cannot be used if there is a capital loss.
(c)
As shares were disposed of within 12 months (2019) of acquisition, cost base is not indexed nor is CGT
discount of 50% available.
Capital gain = $22,000 – $16,400 = $5,600
Question 4
Capital loss on sale of unit trust: $150,000 – $180,000= (-$30,000)
Capital gain on disposal of shares:
CGT discount method: 50% of net gain
However, the gain and loss must be combined BEFORE the 50% discount is applied.
Net capital gain:
Gross capital gain $40,000
Less capital loss ($30,000)
Net capital gain $10,000
Taxable capital gain @ 50% =$5,000
Frozen indexation method:
– $45,000 x 68.7/61.9 = $49,943
Note: 61.9 is the indexation factor for June 1994.
$85,000 – $49,943 = $35,057
Gross capital gain $35,057
Less capital loss ($30,000)
Net capital gain $5,057
Use the method that gives the lowest capital gain i.e. CGT discount method which is $5,057.
Question 5
(a) Margin lending allows an investor to borrow money to invest, with the lender agreeing to lend up to a
specified percentage value of the investment. Margin lending thus enables an investor to gear their
investment, giving him/her the means to multiply the gain if the asset increases in capital value.
Under margin lending, the loan is secured against shares or managed funds. An investment will consist of
a portion of the owner’s equity and the balance being the amount borrowed under margin lending. The
amount of funds lent by the financial institution will be based on an agreed lending ratio, typically around
70% of the worth of the investment. If the lending ratio exceeds the agreed figure, the borrower is required
to remedy the situation through a margin call. Eg. paying off some of the loan, selling part of the investment.
(b) The benefit of borrowing to invest is that Malcolm may be able to magnify his gain when fund increases
in value. Interest paid to lenders can be deducted from his income from the fund, thus reducing his taxable
income.
The drawbacks are that if the fund decreases in value, his loss is also magnified. If the loan is by way of a
margin loan, the lender will make a margin call if the portion of borrowing is higher than a specified
percentage. If Malcolm is unable to satisfy the margin call, he will be forced to liquidate a part or whole of
his investment, which may result in large losses.
(c) Other products could consist of:
-secured loan on property
-unsecured loan
-instalment gearing (warrants, options)
-shared appreciation loans
Question 6
(a) Benefits of negative gearing:
• loss is a tax deduction
• magnifies gains
• enables purchase of an asset without having to wait until whole purchase price has been saved
• enables better quality asset to be acquired due to the additional funds involved
Disadvantages of gearing:
• magnifies losses made
• only attractive for growth assets
• increases risk of investor (fall in asset value, margin call, loss of income, increase in interest rates)
(b) Negatively geared investment may be advisable to be held in the hands of the taxpayer paying the
highest MTR to take advantage of tax deduction of losses. However, also need to consider any CGT payable
upon disposal.
If the investment was positively geared, investment would most probably be best held in hands of taxpayer
on the lowest MTR.
(c) Debentures would not generally be suitable for negative gearing because of the lack of capital growth.
They only provide fixed interest.
Question 7
A) Statutory formula method:
ABC -E
D
(($30,000 x 20% x 365)/365 – $1,000) = $5,000
Operating cost method:
(**C x (100% – BP*)) – R
($18,440 x 20%*) – $1,000 = $2,688
*Note Business percentage (BP) 17,600/22,000 = 80%
**C = -operating costs as detailed in question $ 9,500
-deemed depreciation ($30,000 x 25%) = $ 7,500
-deemed interest ($30,000 x 4.8%) = $ 1,440
= ($9,500 + $7,500 + $1,440 = $18,440)
Operating cost method ($2,688) would provide the lowest taxable value and therefore would be preferred.
The Statutory method came to $5,000.
b) Tax Payable= Fringe benefit x gross up factor x fringe benefit tax
$2,688 x 1.8868 x .47= $2,383.71

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