At the start of the current financial year Paul decided to purchase a newly constructed apartment in the city for $400,000 which he hopes will increase his long-term wealth and create some tax deductions given that he is on a 46.5% marginal tax rate. He used $80,000 of his own money as a deposit and borrowed the remaining $320,000 from Fast Finance on an interest-only loan for 5 years at a fixed interest rate of 7% p.a.. Some additional details regarding the property purchase are listed below:
Purchase price of $400,000 consisting of $375,000 for the building costs and $25,000 for depreciable plant and equipment. A building allowance of 2.5% p.a. and plant and equipment depreciation of 20% p.a. is available for the purchase on a straight-line basis. Property rental of 6% p.a. gross (of the total purchase cost) with annual cash-based operating expenses (excluding financing) of $10,000.
a) Paul asks you to prepare a table to show how the income from the apartment would be taxed and how it would affect his after-tax cash flow. Use the information provided to complete the pro-forma table below for the first year after the property purchase.
Cash flow Details $
Gross rent
Less property expenses paid in cash
Less interest payments
Net cash outflow before tax (A)
Less depreciation of building
Less depreciation of furniture, fittings, etc.
Taxable income
Tax loss (i.e. tax savings) (B)
After-tax cash flow (B-A)
b) Paul decides to sell the property after 5 years when the sale price is $600,000 and selling costs are $20,000. Note that the value of plant and equipment originally purchased for $25,000 at the time of sale is expected to be $nil. Your task is to produce for Paul a schedule showing the taxation liability and the after-tax proceeds on the sale of the property at this time. Use the table below for this task.
Net sale proceeds before tax $
Sale proceeds
Less selling costs
Net sale proceeds
Less repayment of interest-only loan
Net proceeds before tax (A)
Tax liability:
Net sale proceeds
Less purchase price
Less accumulated building depreciation
Reduced cost base
Capital gain
(net sale proceeds less reduced cost base)
Taxable gain
Tax on capital gain (B)
After-tax proceeds on sale of property (A - B)

Question

Quizplus · Accepted Answer

The Answer of At the start of the current financial year Paul decided to purchase a newly constructed apartment in the city for $400,000 which he hopes will increase his long-term wealth and create some tax deductions given that he is on a 46.5% marginal tax rate. He used $80,000 of his own money as a deposit and borrowed the remaining $320,000 from Fast Finance on an interest-only loan for 5 years at a fixed interest rate of 7% p.a.. Some additional details regarding the property purchase are listed below:
Purchase price of $400,000 consisting of $375,000 for the building costs and $25,000 for depreciable plant and equipment. A building allowance of 2.5% p.a. and plant and equipment depreciation of 20% p.a. is available for the purchase on a straight-line basis. Property rental of 6% p.a. gross (of the total purchase cost) with annual cash-based operating expenses (excluding financing) of $10,000.
a) Paul asks you to prepare a table to show how the income from the apartment would be taxed and how it would affect his after-tax cash flow. Use the information provided to complete the pro-forma table below for the first year after the property purchase.
Cash flow Details $
Gross rent
Less property expenses paid in cash
Less interest payments
Net cash outflow before tax (A)
Less depreciation of building
Less depreciation of furniture, fittings, etc.
Taxable income
Tax loss (i.e. tax savings) (B)
After-tax cash flow (B-A)
b) Paul decides to sell the property after 5 years when the sale price is $600,000 and selling costs are $20,000. Note that the value of plant and equipment originally purchased for $25,000 at the time of sale is expected to be $nil. Your task is to produce for Paul a schedule showing the taxation liability and the after-tax proceeds on the sale of the property at this time. Use the table below for this task.
Net sale proceeds before tax $
Sale proceeds
Less selling costs
Net sale proceeds
Less repayment of interest-only loan
Net proceeds before tax (A)
Tax liability:
Net sale proceeds
Less purchase price
Less accumulated building depreciation
Reduced cost base
Capital gain
(net sale proceeds less reduced cost base)
Taxable gain
Tax on capital gain (B)
After-tax proceeds on sale of property (A - B)

At the Start of the Current Financial Year Paul Decided