Question

At the start of the current financial year Paul decided to purchase a newly constructed apartment in the city for $400,000 which he hopes will increase his long-term wealth and create some tax deductions given that he is on a 46.5% marginal tax rate. He used $80,000 of his own money as a deposit and borrowed the remaining $320,000 from Fast Finance on an interest-only loan for 5 years at a fixed interest rate of 7% p.a.. Some additional details regarding the property purchase are listed below:

Purchase price of $400,000 consisting of $375,000 for the building costs and $25,000 for depreciable plant and equipment. A building allowance of 2.5% p.a. and plant and equipment depreciation of 20% p.a. is available for the purchase on a straight-line basis. Property rental of 6% p.a. gross (of the total purchase cost) with annual cash-based operating expenses (excluding financing) of $10,000.

(a) Paul asks you to prepare a table to show how the income from the apartment would be taxed and how it would affect his after-tax cash flow. Use the information provided to complete the pro-forma table below for the first year after the property purchase.

                        Cash flow Details $

                        Gross rent

                        Less property expenses paid in cash

                        Less interest payments

                        Net cash outflow before tax (A)

                        Less depreciation of building

                        Less depreciation of furniture, fittings, etc.

                        Taxable income

                        Tax loss (i.e. tax savings) (B)

                        After-tax cash flow (B-A)

Answer 1