Mpa109 Taxation Law And Practice: Assessment Answers

Your firm has a client who has been a management accountant for many years and is now also teaching part-time at TAFE and has recently acquired a rental property.  We prepared his Tax Return, sent it out for signature.

He has sent the Tax Return back to us unsigned, saying that we had made an error in claiming a tax deduction for the interest and expenses for the first four months that he owned the rental property, as it was not earning income at the time, as it runs counter to the matching principle.

Required: 

Answer:

Introduction

The report explores the terms that are used when defining a tax return (Australian Taxation Office, 2013). It gives a brief importance of the tax return form as well its compositions as it is used in the line of sale and purchase of rental properties with Australia. The different ways or conditions through which the Tax Return form may be invalid are also presented in the report. These described ways in the report are following the terms and conditions of the Australian Tax Office (ATO) a body which is responsible for levying and organizing taxes within Australia (Thorpe, 2012).

Secondly, the paper describes the different terminologies as explained by the Australian Tax office (ATO) when dealing with rental property taxes. The different condition and advice granted to the rental property owners about tax before and after purchase of rental and land properties within Australia are also described. Some of the conditions include;“not declaring a non-available and unready rental property by the owner as available for rent “. That’s because it will be subjected to "Capital gains tax (CGT)", and claimed income deductions may not be possibly applied by the ATO.  The other condition stated by the body is “it’s necessary to keep records safely from the time of purchase so as to possibly make necessary deductions on the rental property income tax”. The different situations where necessary deductions on tax by the ATO to the rental property owners are also described within the paper. Expenses where deductions on income tax for rental are made as well as those expenses where it’s very impossible to make deductions on income tax are explained within the paper. Some of these expenses include expenses on electricity and water, expenses on maintenance, expenses on advertisement, mortgage expenses, and so many other expenses.

Analyzing the condition where the firm's client returned the Tax return unsigned thinking that an error was made is also explored in the paper. The client suggested that an error was made by firm by preparing a Tax return including claims for tax deductions on interests and expenses.These claims are paramount because the client never made any profits for the first four months from the time he was owning the rental property due to the expenses and interests he was incurring.

Following the different conditions and terms as explained by the Australian tax Office, the client has to understand the different circumstances according to the “Income Tax Assessment act 1997” why claim for deductions on tax from rental properties was made by the firm and possibly is not an error.  There are rental property expenses and interests where there is need for claim for tax deductions and the Australian Tax office renders these claims valid (Thorpe, 2012). There are also certain claims where a deduction on the income tax from rental properties due to expenses cannot be granted by the tax body. There is a possibility that the expenses and interests claimed by the firm are the major reason as to why the client didn’t make profits within the first four months of ownership of the rentals. Therefore this calls for a need for claim for tax deductions on our client. Therefore, it’s advisable for the client to sign up the Tax Return Form as issued by the firm due to the explained terms since there was nothing wrong in making the claims.

Body

A tax return refers to a form filled and filed by a taxing organization or authority reporting pertinent tax information, income, and expenses. The Tax Return is very important, it helps taxpayers to schedule tax payments, calculate tax liabilities, and also requesting refunds for overpayment on taxes. In Australia, Tax returns are filed every after a given gross period under the terms of the Australian Tax Organization (ATO). There are number of different ways where the Tax return form is made Invalid and one of these reasons is when the necessary signatures to approve the tax leverage are absent. Therefore, the client after refusing to make signature on the firm makes the form invalid. The form will only become valid after the client makes his signature inorder to agree with its content.

The ATO (Australian Tax Office) clarifies Taxes and their deductions as levied on the residential rental properties(Edmonds, 2010). The different circumstances where tax is levied by this tax body is during the selling and purchasing of the rental properties. According to Australian Tax office, some of the conditions that need to be understood before purchase and sell of rental properties to fully understand how tax is levied are described below. One of the conditions is, it’s needful to take records and keep them safely right from the time of purchase so as to be in position to understand the expenses where deductions can be claimed and also help in preparing tax returns (Australian Taxation Office 2013). In regard to our subject, the records of purchase of the available rentals was kept by the tax firm on client’s behalf (Slack & Bird, 2014). The ATO also declares that any gains on capital achieved through disposing or selling rental properties will be subjected to "Capital gains tax (CGT)" excluding given circumstances of renting out a home one has been staying in (Local Government Association of South, 2018). The Australian Tax office also states that “in case one has an Investment property that's not available for renting or not rented for example a hobby farm, holiday home, or another place for dwelling it’s advisable to choose not rent it because: The property would be subjected to "Capital Gain Tax(CGT) in similar ways as rental property”, deductions on income tax on costs for owning the property since they don't raise rental income cannot generally be claimed, and one should be able to include costs of ownership of the property within the "property's cost base" thus reducing "capital gains tax" liability when selling it (Sanderson, 2017).

There are number of situations where deductions on liability tax on the rental property are or not carried out. These situations occur depending on the expenses incurred by the rental owner. Expenses where you cannot do or claim necessary deductions include; Those that are not incurred by the rental owner rather by tenants, disposal and acquisition costs of the property, conveying costs and  purchase costs for the property. Other expenses that cannot lead to claim of deductions also include; travel expenses when inspecting the property before buying it, using the rental property for carrying out business or an "excluded entity"(Biggs, 2013). Expenses and interests that make it possible for the property owner to claim include; those on advertisement, bank charges expenses, body corporate charges and fees, council rates, cleaning, insurance, interests on loans, lease documents expenses (preparation, registration, and stamp duty), legal expenses excluding borrowing and acquisition costs, and many other expenses(Local Government Association of South, 2018). Therefore, the owner of the rentals needed a thorough understanding of law on tax levied on rental properties (Gittins, 2009).

Referring to the "Income Tax Assessment Act 1997(Cth)(ITAA 97)" and as far as deductions are considered or concerned, positive limb, character test, and extent concept are explained  by the "language of 8-1 Income Tax Assessment Act 1997(Cth)(ITAA 97)".The language of 8-1 is referred to as "General Deductions". The positive limb explains the following phrases and words; incurred, loss, to the extent that, assessable income, necessarily incurred and carrying out business (2nd limb), sufficient connection, purpose of, producing or ingaining.The Taxable Income of the client would be calculated from, "Taxable Income = Assessable Income - deductions".The "general deductions provision s 8-1 ITAA 1997" illustrates positive Limbs as; One can deduct any outgoing or loss that:

1. is incurred when producing or gaining assessable income.
2. is incurred when carrying out a business for the purposes of producing or gaining assessable income.

Considering the above conditions in the positive limb, necessary deductions on client’s taxable income ought to be made because of interests and expenses he incurred together with the losses. "The extent concept (apportionment)" can also be used in explaining the client that the necessary deductions should possibly be conducted on the client’s income. It explains that outgoing or loss deductions can be conducted but not exceeding this extent:

(a) "It is a loss or outgoing of capital, or of a capital nature;" or

(b) "It is a loss or outgoing of a private or domestic nature;" or

(c) "it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income";

At a point of character testing, the client never gained any profits from his business. He spent the income on expenses rather than personal lifestyle where he could possibly pay income tax at personal rates. The client retained profits and reinvested them back in the business hence acquiring trust. Therefore there is need for tax organization to carryout necessary deductions on the income tax.

Depending on the above explanations on the taxes levied on the rental property by the Australian Tax Office, it is necessary for the firm to fully explain to therental owner about the different terminologies as applied by the ATO. The property owner did not understand the need for claim for deductions on tax because of expenses and interests thus refusing to sign up the document because he knew these reductions where unnecessary.  Since the rental owner did not effectively understand the type of expenses that he incurred, these expenses might be those where deductions by the Australian Tax office on tax could be made (Blazey and Gillies, 2008). These might be the expenses as to why the rental owner (client) failed to generate income in the first five months. Some of these expenses as explained where deductions could be possibly made include; insurance, council rates, body corporate charges and fees, cleaning expenses, lawn and gardening mowing, bank charges, advertising the rentals(Australian Taxation Office, 2018), gas and electricity expenses, video and audio service charges (charges on visualization), lease document expenses, interests on loans, and so many other expense (Abelson & Joyeux, 2007). The necessary income tax deductions can be claimed on the property. Therefore, it advisable to explain to the rental owner to fully understand this principle so that he can do the signing of the tax return. The different expenses he incurred during the first four months must be understood by himself and should support the deductions on income tax (Australian Taxation Office, 2018).

Conclusion

One of the reasons for an invalid Tax Return is pending signatures, the client needs to understand why the necessary deductions as claimed by the firm should be included. These are the main reason why he never made any profits in the first four months, therefore tax on his income should be deducted because of need for compensation for the expenses he incurred. The Taxation body within Australia (Australian Tax Office) formulated a number of conditions and terms that governs taxation on the revenue or income from rental properties within Australia. These conditions explain when and why should a rental property be made available so as to compensate for expenses incurred or not. These conditions were also meant to protect property owners from unexpected taxes on their incomes. The organization went ahead and described the different expenses on rentals where necessary deductions are made and not made. These expenses are described in the body of the essay above. Therefore, following the description of the different expenses as well as explanation of income tax conditions on rentals, it is discovered that the rental owner or client was misled thus there is a need for him to sign the Tax return form so as to make it Valid.

References.

Abelson, P. and Joyeux, R. (2007). ‘Price and Efficiency Effects of Taxes and Subsidies for Australian Housing’, Economic Papers, 26(2), 147-69.

Australia, Local Government Association of South.(2018).  "Council Rates". Retrieved 2018-01-08.  https://www.lga.sa.gov.au/councilrates

Australian Taxation Office. (2013)."When to lodge your tax return". https://web.archive.org/web/20130628071407/https://www.ato.gov.au/Individuals/Lodging-your-tax-return/When-to-lodge-your-tax-return/

Australian Taxation Office.2018. Australian Government: Rental Properties,  https://www.ato.gov.au/uploadedFiles/Content/IND/downloads/Rental-properties-2018.pdf,

Blazey, P. and Gillies, P. (2008). Sustainable Housing in Australia – Fiscal Incentives and Regulatory Regimes – Current Developments – Policies for the Future, Working Paper No 29, Macquarie School of Law.

Gittins, R. (2009). ‘Tax Inquiry Reveals Economists at their Most Clueless’, Sydney Morning Herald, 29 June, Available:  https://business.smh.com.au/business/tax-inquiry-revealseconomists-at-their-most-clueless-20090628-d184.html?page=1

Biggs, A. (2013). "A short history of increases to the Medicare levy". Parliament of Australia, https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2013/May/A_short_history_of_increases_to_the_Medicare_levy

Edmonds, L. (2010). "The 1910s: Laying the Foundations". A brief history of the Australian Taxation Office (PDF). Australian Taxation Office. pp. 5–22. Retrieved 20 April 2013,https://www.ato.gov.au/content/downloads/cr00260313_chapter1.pdf.

Sanderson. (2017).Rental properties 2017, Taxation Guide, https://www.rjsanderson.com.au/wp-content/uploads/2016/08/Rental-Property-Guide-2017.pdf.

Slack, E., & Bird, R. M. (2014). The Political Economy of Property Tax Reform, OECD Working Papers on Fiscal Federalism 18, OECD Publishing, https://www.oecd-ilibrary.org/taxation/the-political-economy-of-property-tax-reform_5jz5pzvzv6r7-en?crawler=true&mimetype=application/pdf

Thorpe, Clarissa (2012). "Tax Pack dumped, online returns encouraged". ABC New, https://www.abc.net.au/news/2012-07-09/tax-pack-dumped-online-returns-encouraged/4117784.