| Country : | Australia |
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Assignment Task :
Case Study – Accessability of Income and deductibility of Expenses
Harry Fernandez is employed as an Architect and is married to Elizabeth with 2 school aged children. He is employed by a leading construction company in Sydney.
He is also the secretary of the local swimming club for the past 10 years. This is an honorary role and he does not get paid any wages for this.
Harry has converted his garage into a study area at his home exclusively allocated as a home office with no other use.
During the Christmas season Harry’s office did have a compulsory closure from 20 December 2019 to 5 January 2020. As there was nothing else to do during this period Harry took his family on a holiday to Cairns for 2 weeks.
Following are his Receipts and Payments which Harry believes could be relevant for his tax return for FY2019/20 (All amounts are in AUD).
Receipts:
Net Wages (from employment) 107,000
PAYG on wages withheld by the employer 43,000
Bank Interest (joint account with Elizabeth) 2,200
Franked Dividends from Woolworths Ltd (Co Tax rate 30%) 3,500 Dividends from AMP
- Unfranked 400
- Franked 1,225
Harry Received a one-off consulting payment from an overseas client 4,500 Advising a friend in Darwin relating to a construction matter 500 (Paid by the friend as cash in hand during one of their meetings)
Investment Property
During the year Harry purchased an investment property (freestanding House) in Schofields by himself (not joint with his spouse). The contract for the investment property was signed on 3 September 2019 and the settlement occurred on 15 October 2019.
Harry incurred the following expenses in buying. Stamp duty of $29,250, Solicitors fee of $1,500 and loan processing fee of $750. These amounts were all paid with cash monies Harry had previously saved in his bank account.
Harry obtained an interest only loan of $800,000 to purchase the Schofields property. Harry secured this loan by mortgaging the residence which he owns joint with his spouse. The loan was for a period of 20 years and the interest rate was fixed at 4.0% for the next 3 years. Harry borrowed this amount as he was bidding for the property at an auction and was able to secure the property for $752,000. As a result, he decided to do some renovations to his residence using the rest of the borrowed funds. Harry wants to claim the entire interest on the loan as a tax deduction as the primary purpose of borrowing was for the rental property and the property could fetch around $800,000 in a booming property market.
Whilst preparing the property to place it with a real estate agent, it was discovered that air-conditioner in the lounge was not working and Harry replaced it with a new 9.5kw split system for $ 2,800 and added a new 2.5 kw split system to the master bed room, at a cost of $ 800 so that he could command a better rent from prospective tenant.
Further Harry replaced carpets throughout the house for $ 9,000 added a new (Polyethylene) rainwater tank for $2,400 and had some repairs done for $ 2,000. All repairs and additions were completed and the property was ready to be occupied on 1/11/2019 and was listed with the local real estate agent on the same day. Due to the quiet real estate market, a tenant for the property was not obtained immediately, in fact the tenant did not move in until 1 December 2019.
Harry engaged a quantity surveyor who provided a depreciation report with the following costs. Building construction cost of $300,000 and date of completion of the building was 30 June 2012. The property also includes previously owned and used asset, hot water system valued at $ 875.
Rental Income from the property was $700 per week and it was rented for 30 weeks during this financial year. His real estate agent charged a commission of 7% (including GST) for the services provided.
Other expenses Harry incurred relating to the rental property are:
Council Rates 1,487 Water Rates 698 Repairs due to tenant damage (Jan 2020) 1,695
Last year Harry’s Grandmother passed away in Spain and according to her will Harry received an inheritance in October 2019 of Cash 100,000 Euros. This money is invested in a term deposit Maturing in October 2020. Harry is pretty confident that he does not need to declare either the inheritance or the interest earned in his any of his tax returns as the money is held overseas.
Harry Fernandez seeks your advice as to what income needs to be declared in his Tax return and deductions (if any) he might be able to claim as per the information provided below for the year ended 30 June 2020.
2. Effective life of assets should be as per TR 2019/5
a) Provide a complete calculation of Harry’s Taxable Income, Tax liability (including Medicare Levy and Surcharge – if any) for the year and the net Refundable or Payable for FY 2020. Please add the relevant section of the law for the figures you have included in your calculation.
b) Advise Harry how he could have improved his tax situation if he has done anything differently in relation to the borrowed funds
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