Please provide a brief explanation of the concept of the splitting of income (not more than 100 words) as an effective strategy for the couple.
Answer 1
In the present case, Sue and Paul are married and both earn remuneration from their present job. Sue works as part time teacher and earns $ 26000 while Paul earns $ 145000. Besides, their employer also pays minimum superannuation contribution. The superannuation contribution by the employer is not considered as taxable.
Besides, income show house rental income, managed funds distributions, shares dividends and interest on term deposit.
The computation of individual taxable income is as under:
Sue: 26000+12000-9000-4500=24500 (Negative Gearing)
Assuming no child deduction taken
Tax= (24500-18200)*0.19=1197+ Medicare levy (24500*2%)= 490= 1687
LITO: 700
LMITO: 675
Tax payable = 1687- 1375= 312
For
Paul: 145000+ 6500+ 5000+ 6000= 162500
LITO: Not Available
LMITO: Not Available
Tax = 29467+(42500)*.37=$ 45192
Medicare levy = 162500*2%= $ 3250
Total Tax= 45192+ 3250=$ 48442- 1500= $46942- 29600= 17342
Total tax = 17342+312= 17654
Splitting of income refers to a strategy where in high tax paying individual transfers his personal income to low tax paying individual in order to reduce the burden of taxation. In the present case, Paul can transfer managed fund distribution, share dividend and interest to Sue.
Impact on sue Tax=
Sue Revised income = 24500+ 17500= 42000
LITO=700-4500*.05= 475
LMITO= 675- 4500*.075= $338
Tax= (42000-18200)*.19= 4522+ medicare levy 840= 5362-1500= 3862
Paul: 145000
LITO: Not Available
LMITO: Not Available
Tax = 29467+(25000)*.37=$ 38717
Medicare levy = 145000*2%= $ 2900
Total Tax= 38717+ 2900=$ 41617- 29600= 12017
Total tax for family = 3862+ 12017= 15879
Net difference= 17654- 15879= 1775
Please provide the couple with an explanation of gearing and negative gearing using their current context. Support your explanation with calculations. How does owning a negatively geared property save tax for this couple? Whose name should the investment property and mortgage be held to avail the maximum benefit of negative gearing?
Answer 2
The term gearing means taking of debt in the books and involves purchasing asset using debt. The said asset is generally investment asset and interest on such asset is tax deductible.
Negative gearing strategy refers to a strategy which provide immediate tax benefit while also offering the promise of long term gains in the form of capital housing growth. Thus, there are dual aspect involved where in tax benefit is available immediately and long term benefit is available in the form of appreciation of property
In the present case, the rental income from the property is 12000 and the expense which can be taken under Section 8 positive limb is 9000 and 4500 . The net loss under such transaction is $ 1500 and the couples can offset the said loss against the income which results in tax benefit to the couples.
Name in the property shall be of Paul as he is in higher tax slab and shall have the maximum tax benefit under the said category.
Answer 3
The expected return on Sue’s superannuation portfolio shall be (50%*4%+ 15%*1.4%+ 30%*10.8%+ 5%*3.1%)= 5.61%
There is a fluctuation in Sue superannuation portfolio as the investment is majorly inclined towards equity which makes the portfolio volatile. The proportion of shares is roughly 80% which makes the portfolio highly volatile and also 30% is international share which has very high volatility compared to domestic share. Thus, on an overall basis the portfolio has very high risk and very high volatility.
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