Question

QUESTION 1 – Principles and Concepts

Renovations Pty Ltd (“RPL”) has been in the business of home renovation for over 30 years. Following a downturn in the renovations market however, RPL sought out new sources of income. In 2012, RPL decided to purchase old run-down houses in the inner-city, renovate them and lease them out for very high rents.

After some time, the directors of RPL decided that the company should again concentrate on its core business activity. Consequently, in the current tax year (2017/2018) RPL sold the houses it had renovated for rental and made large profits.

With reference to legislation and case law, advise RPL on the tax implications regarding the profits it made during the 2017/2018 tax year.

You are not required to undertake any capital gains calculations, the focus of this question is income principles and concepts only.

Answer 1

Ans

The following information is given

• Renovations Pty ltd is s pvt ltd company in business of purchasing houses refurbishing and selling it not holding the property for long time

The income or profit generated in this of transaction will attract income tax applicable to pvt ltd companies but will be not taxed for capital gains tax or other allowances

• In 2012 the company changed the business model it started purchasing old run-down houses in the inner-city, renovate them and lease them out for very high rents. . the income generated is rent and the tax implications will be as under

Lease or rent will be treated as income applicable allowances like property tax and repairs and maintenance is allowed the net income tax will taxed at income tax rates applicable to the Pvt ltd companies

• In 2017/18 the companies has sold the houses that it has leased from 2012 the tax implications on the profits will be taxed as under

As the property is held than more than 5 years the capital gains tax will be applicable. it will be calculated by sale price less (cost price of property plus refurbished cost plus capital indexation benefit) no income tax will be applicable for the year 2017/18