Understanding Negative Gearing And Potential Tax Benefits Under Australian Income Tax Law

The Definition of Residency under Australian Income Tax Law

On the  basis of details provided here-in-above, our advisory is as under:

In terms of subsection 5 (1) 10(1) and 10(2) of Section 6 under the Income Tax Assessment Act, 1997 of Australian Income Tax Law it shall be pertinent to note that  for an individual  resident in Australia for Tax purposes his/her pan world income is taxable while for a non-resident only Australian sourced income taxable.

Further, under Section 995-1 of Income Tax Assessment Act 1997 the term resident has been defined which includes any person who is Australian resident under Income Tax Assessment Act 36.

In addition Income Tax Assessment Act 36 provides three tests for determining of residency of a person. The same has been detailed here-in-below:

• Resides Test: Under this test, the Australian Tax Office (ATO)/ Commissioner generally harps on the dwelling place of individual or one’s settlement or abode. The same has been dealt in the judgement of Levene v IRC [1928] AC 217, IRC v Lysaght[1928] AC 234https://law.ato.gov.and TR98/17 where in it was held that if one has a habitual abode or family connection in Australia, his tax residency shall be in Australia. 

• Domicile Test: Under this test, the office generally considers the location of permanent house for determining the residency. The relevant case laws detailing the term permanent includesFCT v Applegate 79 ATC 4307; see also FCT v Jenkins (1982) 12 ATR 745; 

• 183 Days test: Under this test, ATO generally harps on the number of stay day in Australia. If the day count, exceed half years then the individual is considered a tax resident. Further, the 183 days test shall hold good unless any of the following conditions are satisfied:- 

• the house of permanent nature is outside Australia;
• there is no intention to take up residence in Australia.

 The same has been detailed in Case S19 85 ATC 225;

In the present circumstance, since You and your wife satisfies more than one test.  Thus, You and Your wife shall be considered tax resident of Australia and the provisions of act shall apply accordingly.

Regards,

Tax Advisor,

Disclaimer: The above advise shall be useful for the person intended to. The same may change with change in circumstance. Further, the firm shall not be held responsible if any other person act on such advise without proper consent.

1.PAYG(Pay As You Go) is generally collected on the basis of individual estimated tax liability and the tax so collected  will always be differ from the actual tax liability and the taxpayers is required the pay the extra amount as tax or refund after assessment. In the given case Jake worked for MD & A Architects and received salary of $ 86,000 and Payg tax withheld amounted to $19.820, salary received will be shown under income and tax liability will be computed on the basis of income arrived at and from that tax liability withheld PAYG tax will be deducted to arrive at any additional amount to be paid as tax or any refund for the same.(BDO, 2017)

1. If the employee travel as a daily routine from his place of work to residence than this is normal routine work and personal expenses and cannot be claimed under deduction but if the employee travel to another workplace not the normal place of his work than the employee is eligible to claim deduction to a maximum of 5000 business kilometers and maximum of 66 cents per kilometer.(Commonwealth of Australia, 2018)

Assuming Jake has used the car from home to office as a daily routine so full travelling expenses will not be allowed as deduction and will form part of his income.

1. An Australian resident has also to provide Tax File Number known as TFN to bank, failure to do so bank will with help from any interest paid to you at the highest marginal tax rate.(BDO, 2017)

As Jake has earned interest from the bank and has forgot to provide tax file number to the bank than the tax will be deducted on the basis of highest marginal rate.

1. If one is an Australian Tax resident and has earned unfranked dividend under dividend reinvestmentschemethan that dividend will be assessable to income tax and if that dividend is also reinvested under dividend reinvestment than it is deemed to be an earned dividend and will be eligible to tax(BDO, 2017).

As Jake received an unfranked dividend amount to $3500 and investment in 198 shares, it will be deemed to be dividend earned and accordingly tax will be charged.

1. Purchasing of shares and selling it at profit will lead to capital gain and tax will be charged on such capital gain

As Jake has purchased 1000 ANZ bank share on 1 March 2015 at $ 22 each with brokerage cost $50 and sold 500 shares on 1 June 2018 for $ 24 each and brokerage cost $55.

Total Selling price of 500 shares= (500*24-55) =    $11945

Total Purchase price of 500 shares= (500*22+25) =$11025

Capital Gain                                                                  =$920

Further, discount of 50% shall be available under discount method as holding period is more than 12 months.

1. If an Australian resident sells something which does not form part of a normal business activity and is a hobby of a particular person than any income or loss arrived at will be treated as capital gain or loss from such activity.

As Jake bought cricket bat between 1999 and 2004 which cost him $2600 and he had sold the entire collection at $900, soJake has capital loss amounts to $1700.

1. To claim car expenses under logbook method one must have a printed records of all the distance travelled for business and personal use.

As Jake has failed to keep a log book but is maintaining diary in the form of record , so he will be eligible for travelling expense deduction.(Commonwealth of Australia, 2018)As the total car expenses including depreciation are $6200 and if his estimation is proper based on proper documents than Jake can claim for travelling expenses amounts to=$6200*95%=$5890

1. If the employee is using mobile phone for office purpose than he can claim deduction on the mobile bill expense provided he keeps a proper record for the same.

As Jake owns a mobile phone which he uses for work but the same time does not have any receipt or supportive material documentation to claim the mobile phone expenses, so Jake will not be entitled to claim mobile phone expenses.

1. Payment to accountant and tax agent is treated other expenses and is allowed as deduction under S25-5 ITAA97.

As Jake has paid the invoice which he received from the tax agent amounted to $400, Jake will be entitled to claim such deduction.

1. According to Australian Tax if one does not hold private medical insurance than Medicare levy surcharge is imposed dependant on the income of the individual.

As Jake is not married and does not have a health cover medical surcharge will be imposed on the basis of taxable income of Jake.

The final computation has been tabulated here-in-below:

Computation of Taxable Income
Sl. No.	Particulars	Amount	Amount
1	Salary		86000
2	Un franked dividend		3500
3	Capital Gain Income	920	460
4	Travelling expense		-5890
5	Payment to tax agent		-400
6	Taxable Income		83670

Negative gearing is a way in which the investor borrows money from the outside world so that the investor can get an income generating assets but the cost is always more in acquiring the investment than the income generated from it,than the investor may enter into a negatively geared investment  as the negative gearing benefits a lot to  salaried middle class employees and negative gearing benefits can be taken in wide range and through negative gearing property losses can be set off from other types of income such as wages or income  with a few restrictions on it.(Finder AU, 2018)

Further, there are two types of tax gearing negative and positive.

Advantages of Negative Gearing:

• In terms of Australian Tax Law, an individual can claim deduction for interest portion of loan undertaken;
• Other ancillary expense related to rented property can be claimed as expense;
• Any loss that has been incurred by the individual can be set off against other income earned like salary income. Thus, the taxable income shall be reduced and correspondingly tax liability.

Thus, negative has an impact on reducing the tax liability by devising a smart tax planning mechanism while acting within the four walls of Australian Taxation System. Further, there is other kind of gearing which is positive and has its own impact on the assessable income and tax liability of the individual.

In short both gearing i.e. negative and positive has its own positivity and negativity depending on how efficiently utilize this mechanism while planning taxes.

References:

BDO, 2017. Employees Tax guide. [Online]
Available at: https://www.bdo.com.au
[Accessed 5 September 2018].

Commonwealth of Australia, 2018. Car expenses. [Online]
Available at: https://www.ato.gov.au/individuals/income-and-deductions/deductions-you-can-claim/vehicle-and-travel-expenses/car-expenses/
[Accessed 5 September 2018].

Commonwealth of Australia, 2018. Logbook method. [Online]
Available at: https://www.ato.gov.au/Business/Income-and-deductions-for-business/Deductions/Motor-vehicle-expenses/Claiming-motor-vehicle-expenses-as-a-sole-trader/Logbook-method/
[Accessed 5 September 2018].

Finder AU, 2018. What is negative gearing and how does it actually work?. [Online]
Available at: https://www.finder.com.au/what-is-negative-gearing
[Accessed 5 September 2018].