Nick Lanay purchased a residential investment property on 1 July 2012 for $430,000. No other acquisition costs were incurred on obtaining the property although the purchase price of the property includes $20,000 of fixtures and fittings that are subject to an annual depreciation deduction of 20% p.a. calculated on a straight-line basis for taxation purposes. The property purchase was subject to existing property related agreements whereby both the rental income payable by the tenant and the management fee payable to the property agent were fixed for a further period of 2 years following its acquisition. The terms of these agreements were as follows:
Rental Income - 4% of the market value of the property calculated at the commencement of the financial year and payable monthly in arrears.
Management fee - 9% of the rental income plus an administration fee of $5 per month payable monthly in arrears.
For a fee of $250 for each valuation undertaken, the following amounts were assessed as the market value of the property by a local Property Services firm:
$\begin{array}{cc}
\text { Date } & \text { Amount (\$) } \
\text { 30 June 2013 } & 490,000 \
\text { 30 June 2014 } & 525,000
\end{array}$ In order to acquire the property, Nick borrowed 80% of the property purchase price from the Now Bank on an interest-only basis over a 10 year period. The interest rate charged on the loan for the first year was fixed at 6% and for the second year was fixed at 7%.
Over the following 2 years Nick incurred the following additional property expenses:
$\begin{array}{|l|c|c|}
\hline \text { Details } & \text { Year end 30/6/13 (\$) } & \text { Year end 30/6/14 (\$) } \
\hline \text { Insurance } & 1,000 & 1,100 \
\hline \text { Rates and Utilities } & 3,000 & 3,300 \
\hline \text { Repairs } & 1,100 & 850 \
\hline \text { Other } & 730 & 490 \
\hline
\end{array}$ Nick also works full-time as a stuntman for a local film studio where his salary for the 2013 financial year is $66,000 and $70,000 for the 2014 financial year. He also receives a fixed payment of $1,000 each year as interest on a term deposit he made a number of years ago.
a) Using the individual marginal tax rates included in chapter 3 of the text assuming that these rates remain constant as well as ignoring the medicare levy and any tax offsets, what are the taxation consequences for each of the 2013 and 2014 financial years of the property purchase by Nick?
b) Following from your calculations in part a) of this question, what are the after-tax cash flow consequences for each of the 2013 and 2014 financial years of the property purchase by Nick?

Question

Nick Lanay purchased a residential investment property on 1 July 2012 for $430,000. No other acquisition costs were incurred on obtaining the property although the purchase price of the property includes $20,000 of fixtures and fittings that are subject to an annual depreciation deduction of 20% p.a. calculated on a straight-line basis for taxation purposes. The property purchase was subject to existing property related agreements whereby both the rental income payable by the tenant and the management fee payable to the property agent were fixed for a further period of 2 years following its acquisition. The terms of these agreements were as follows:
Rental Income - 4% of the market value of the property calculated at the commencement of the financial year and payable monthly in arrears.
Management fee - 9% of the rental income plus an administration fee of $5 per month payable monthly in arrears.
For a fee of $250 for each valuation undertaken, the following amounts were assessed as the market value of the property by a local Property Services firm:
 $\begin{array}{cc}
\text { Date } & \text { Amount (\$) } \
\text { 30 June 2013 } & 490,000 \
\text { 30 June 2014 } & 525,000
\end{array}$ In order to acquire the property, Nick borrowed 80% of the property purchase price from the Now Bank on an interest-only basis over a 10 year period. The interest rate charged on the loan for the first year was fixed at 6% and for the second year was fixed at 7%.
Over the following 2 years Nick incurred the following additional property expenses:
 $\begin{array}{|l|c|c|}
\hline \text { Details } & \text { Year end 30/6/13 (\$) } & \text { Year end 30/6/14 (\$) } \
\hline \text { Insurance } & 1,000 & 1,100 \
\hline \text { Rates and Utilities } & 3,000 & 3,300 \
\hline \text { Repairs } & 1,100 & 850 \
\hline \text { Other } & 730 & 490 \
\hline
\end{array}$ Nick also works full-time as a stuntman for a local film studio where his salary for the 2013 financial year is $66,000 and $70,000 for the 2014 financial year. He also receives a fixed payment of $1,000 each year as interest on a term deposit he made a number of years ago.
a) Using the individual marginal tax rates included in chapter 3 of the text assuming that these rates remain constant as well as ignoring the medicare levy and any tax offsets, what are the taxation consequences for each of the 2013 and 2014 financial years of the property purchase by Nick?
b) Following from your calculations in part a) of this question, what are the after-tax cash flow consequences for each of the 2013 and 2014 financial years of the property purchase by Nick?

Quizplus · Accepted Answer

The Answer of Nick Lanay purchased a residential investment property on 1 July 2012 for $430,000. No other acquisition costs were incurred on obtaining the property although the purchase price of the property includes $20,000 of fixtures and fittings that are subject to an annual depreciation deduction of 20% p.a. calculated on a straight-line basis for taxation purposes. The property purchase was subject to existing property related agreements whereby both the rental income payable by the tenant and the management fee payable to the property agent were fixed for a further period of 2 years following its acquisition. The terms of these agreements were as follows:
Rental Income - 4% of the market value of the property calculated at the commencement of the financial year and payable monthly in arrears.
Management fee - 9% of the rental income plus an administration fee of $5 per month payable monthly in arrears.
For a fee of $250 for each valuation undertaken, the following amounts were assessed as the market value of the property by a local Property Services firm:
 $\begin{array}{cc}
\text { Date } & \text { Amount (\$) } \
\text { 30 June 2013 } & 490,000 \
\text { 30 June 2014 } & 525,000
\end{array}$ In order to acquire the property, Nick borrowed 80% of the property purchase price from the Now Bank on an interest-only basis over a 10 year period. The interest rate charged on the loan for the first year was fixed at 6% and for the second year was fixed at 7%.
Over the following 2 years Nick incurred the following additional property expenses:
 $\begin{array}{|l|c|c|}
\hline \text { Details } & \text { Year end 30/6/13 (\$) } & \text { Year end 30/6/14 (\$) } \
\hline \text { Insurance } & 1,000 & 1,100 \
\hline \text { Rates and Utilities } & 3,000 & 3,300 \
\hline \text { Repairs } & 1,100 & 850 \
\hline \text { Other } & 730 & 490 \
\hline
\end{array}$ Nick also works full-time as a stuntman for a local film studio where his salary for the 2013 financial year is $66,000 and $70,000 for the 2014 financial year. He also receives a fixed payment of $1,000 each year as interest on a term deposit he made a number of years ago.
a) Using the individual marginal tax rates included in chapter 3 of the text assuming that these rates remain constant as well as ignoring the medicare levy and any tax offsets, what are the taxation consequences for each of the 2013 and 2014 financial years of the property purchase by Nick?
b) Following from your calculations in part a) of this question, what are the after-tax cash flow consequences for each of the 2013 and 2014 financial years of the property purchase by Nick?