TAXATION LAW AND PRACTICE

Taxation Law and Practice

Taxation Law and Practice

Introduction

Taxes on income and sales taxes are levied at the federal and the debate between levels of government - central and federal - on the distribution of these revenues and duplication of expenditure functions is a perennial issue in Australian politics. Australian public services are funded largely by general taxation, much of which is achieved through a tax from the income of citizens. However, in recent times, the Australian government has made significant reforms in the tax system, in order to reduce income taxes by increasing the indirect tax base and improving tax fairness (Leow, Murphy & Hooper 2009). In this paper, I compute total and taxable income of James, a truck driver in Australia.

Case

James is a truck driver, aged 35, who is living at home with his parents in Mt Cooke in Western Australia. He wants to start saving for his future so he purchases a house as a rental property on 1 September 1995 for $85 000 with purchase costs of $5 000. In December 1998 James constructs a pergola on the property at a cost of $15 000. The tenants have trouble with the roof leaking in January 2001 and James replaces the roof the existing tiled roof for a new Colourbond roof at a cost of $8 000. James is getting married in 2012 and he wants to sell the property to free up some money to buy a marital home. He puts the house on the market for $350 000 in December 20 11. The market is slow due to the volatility on the world financial markets but he eventually sells the house for $305 000 on 1 March 2012. Agents commission on the sale amounts to $6 000 and legal costs amount to $600.

Total and Taxable Income for James

In computing the taxable income for James, we must first categorize and total his total income for the year 2011-2012. Moreover, we need to ascertain the true value of his property i.e. house from which he has got income from sales. The following table sums up the house value and the gain from property sales.

Particulars

$

Totals in $

House Rental Property Price

85000

Purchase Costs (i.e. legal fees, documentation)

5000

Pergola construction

15000

Roof

8000

Total cost prior to sale

113000

Add: Agent commission from sale

6000

Add: Legal cost for sale

600

6600

House Cost Total

119600

Less: Sales

305000

Gain from House Sales

185400

Less: depreciation

828

Net Gain from House Sales

184572

Details of the deprecation amount have been presented in the table below. The depreciation is calculated using the diminishing balance method. This method assumes that the cost is reduced period wise, implying more deprecation in the early years of asset life and lesser depreciation in later years of assets life.

Asset

 

 

Effective life

Depreciable cost

Depreciation for 2011-12

Book Value



Cost

Opening adjustable value

In years

 

$

$

 

 

 

970

6

1030

171.67

858.33

Curtains and drapes

2000

 

 

 

10

2550

255

2295.00

Air conditioners

4000

1 450

 

 

 

10

1012

101.2

910.80

Floor coverings

5600

4588

 

 

 

12

3300

275

3025.00

Gas hot water system

4 000

700

 

 

 

12

300

25

275.00

Stove

1 200

900

Total

828

7364.13

The above table sets the depreciation, book value and cost of the added parts of the house. The figures are computed using the diminishing balance method (Gittins ...