Case study Assume:
You are a financial adviser and the married couple Timothy(aged 37) and Sara(aged 38) Brown approached you for planning to save for their retirement. The following information is an extract of data you gathered as part of fact–finding during an initial client consultation. Timothy works as a human resources administrator and Sara works as a Medical Imaging Technologist.They have two children who are aged 13and 15. •Timothy and Sara would like to know how much money they will receive after paying tax for the year ended 30thJune 2021. They would like advice on how to reduce their tax liability in the future.•Sara on the advice of her brother purchased a rental property for $400,000 by borrowing $360,000 from Bank in 2015. The annual insurance, rates and costs to maintain the property is $3,900 p.a. and interest costs on her loan is$24,000 for the year.•10 months ago,Sara invested in shares. She bought 3,000shares in “IOOF Holdings Limited”at $5 a share (current market price: $3.50) and 750shares in “After pay Ltd”at $20a share(current market price: $120). She wants to sell her After pay Ltd shares to lock in her profit and has come to you for advice. Her brother advised her to use the sale proceeds of these shares to buy another investment property to avail negative gearing. This time she wants to buy the property in the name of her husband. She does not expect any major change in the prices of these shares in the near future.Income for the year ended 30thJune 2021: Income type(ownership)Amount Gross Salary–(Sara)$95,000Gross Salary–(Timothy)$40,000ANZ Savings Account–Interest 3.00%–(Sara& Timothy)$550Investment Growth Bond(Commonwealth bank) –Distribution 4.60% (Sara)$2,300“IOOF Holdings Limited”–Dividend(Sara)$490+ $210Imputation Credit“Afterpay Ltd”Dividend–Dividend (Sara)$900+387Imputation Credit Rent from rental property (Sara) $17,940 p.a.Itemised expenses:•Travelling to and from work–$2500 (Sara) and $2000 (Timothy)•CAANZ–Membership Fees $735.00(Sara)•Donations to registered Charity $1,500 (Timothy)
Page 3of 5RMIT Classification: Trusted Current Assets and Liabilities Assets (Ownership)Current valuation Liability (Ownership)Current valuation Home and Contents (Joint)$850,000Mortgage(Joint)$450,000Rental Property (Sara)$400,000Mortgage–Rental property(Sara)$360,000Cars (Joint)$35,000Credit cards (Joint)Includes the annual interestcost$6,000Bank Account:ANZ Savings Account (Joint)$15,000Investments:Commonwealth bankBond Fund–(Sara)“IOOF Holdings Limited”Shares3,000–(Sara)“Afterpay Ltd”750–(Sara)Superannuation–(Timothy)Superannuation–(Sara)$50,000$15,000$15,000$80,000$120,000Required:
A.Calculate Timothy and Sara’s after–tax income for the year ended June30th2021. Also,explain how Timothy and Saracould reduce their tax liability by splitting their income. Show the effect this strategy would have had if they had split income for the tax year ended.A brief explanation of splitting of income is required (not more than 100 words) as the major focus is on explanation by calculation on tax after splitting of income.
B.Calculate Sara’s capital gains liability if she were to sell her After pay Ltd Shares. Assume that Sara will sell her shares and advise her on a strategy she could use to minimise her possible capital gain. Also,show (calculation)the effect this strategy would have.
C.The couple is happy that they invested in the rental property, as the property market value has shown good appreciation. Perhaps that is the reason Sars is considering investing in another rental property, although this time in name of her husband. While claiming to have done this investment to save tax, they are wondering what is a “negative gearing” tax strategy. provide the couple with an explanation of gearing and negative gearing using in their current context. Whose name should the investment property and mortgage be held in and whyto avail themselves of the maximum benefit provided by negative gearing?(not more than 150words).
