Income Tax Law &Practice Assignment

 

BULAW3731 Income Tax Law &Practice Assignment
Semester 1, 2016



Table of contents
Answer ……………………………………………………………… Page 3
Reference …………………………………………………………... Page 8

Income Tax Law &Practice Assignment
These expenses are allowed for deduction from the income which is earned from the property. The income which is earned from the property is less usually then the expenses. Therefore, it results into a loss, which is actually “negative gearing”. The main cause of it is the capital gain tax discounts. Due to the offset of the loss and the other benefits in the capital gain, negative gearing is taking place. Currently it is allowed in the taxation system to offset the property loss or the negative gearing with the other incomes.
Capital gain tax on property
Capital gain tax is a tax charged on the capital assets as specified in the Income Tax Assessment Act, 1997. Section 104 of the Act, provides the capital gain tax events which qualifies as the capital asset for taxation. As specified in the section 104 – 10 of the act, to make a capital gain or capital loss, an asset needs to get disposed. It means that an asset must be sold, or destroyed, or transferred or exchanged as rollovers, passing the title to someone else.  It must be noted here that a capital gain is charged only when the asset is purchased after 20 September 1985. If purchased before it then it is not qualified for charging of the capital gain or allowance of set off of the capital loss with the other incomes of the individual.
As per section 108 – 5 of the act, a capital asset is called as a table right which is the property. It includes something which can be owned. It can be the furniture, plant, boats, land and the house property (other than residential) shares in companies, aero planes, etc. It also includes any kind which is not property such as goodwill, collectables (its losses can be set off with its gain only), and a personal asset. To make a capital gain or loss the asset must be owned by the individual. It must be acquired in order to dispose it.
Tax on investment property as capital asset.
To calculate tax on the property which is used as investment following points need to be noted:
a.	The property should be purchased after 20 September 1985. Any property purchased before such date will be disregarded for the purpose of capital gain or capital loss.
b.	It should not be a house property which is a residential property. Under the section 118 – B of the act, a capital gain on the property is disregarded when there is main residence clause. Reason being theat the property has not been used as the investment property and it was not used to produce any assessable income like rent or lease payments, etc.
c.	Where the property is used part as the main residence and part as an investment property, there the capital gain is apportioned for such two periods on the capital gain calculated.
As per section 110 – 25 of the act, cost base is defined. The amount of sale prices if sold for more than the cost base, then there is capital gain and vice – versa. Cost base is the total of the cost price of the property, any other incidental costs on it, borrowing costs, costs incurred to improve or defend the property.
After the calculation of capital gain or capital loss, following of the given methods is applied to reduce only the capital gain. Section 114 mentions the indexation method, whereby the cost price and the other elements of the cost base updated as per the current market on the grounds of consumer price index. Thereafter the indexed cost base is subtracted from the sale price. The second method is defined in section 115, where by the capital gain for individual is reduced by 50 percent flat rate and 33.33 percent for the trusts. Companies cannot reduce by any rate. This method helps in reducing the capital gain completely at half rate. Indexation method is allowed on the expenses incurred before 20 September 1999. Discount method is only allowed when the asset is sold after 20 September 1999 and is held by the owner for 12 months or more. Capital loss if incurred it is allowed to set off with other capital gains.
Negative Gearing with Capital gain tax has the following features
A.	The rent of the properties is very low. Due to the long term investment view the rent is kept low so as to keep the property on hold. This is because the long the property is kept on hold, the more the value of it will increase. It happens due to availability of the set off of the negative gearing with the other incomes of the individual including the capital gain. Also, the discount factor in the property is available to the properties which are hold for more than 12 months period which reduces the capital gain completely by half.
B.	Supply of the properties are not more as the available houses are already used as residential property by the people of the country and people who are having the invested properties are not available for sale