Background facts: Dr Zhu immigrated to Australia with her parents in 1985 and has since been a...

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Background facts: Dr Zhu immigrated to Australia with her parents in 1985 and has since been a resident for taxation purposes. While she had the privilege of a good education, her parents had a low level of education and worked in factories until they recently retired with a low superannuation balance and their family home in St Albans. Dr Zhu has taxable income of $300,000 in the 2019 income year, and it will remain $300,000 for the next 11 years. She has been using negatively geared rental properties to reduce her taxable income for many years. In order to assist her parents, Dr Zhu has purchased an apartment near her home in Hawthorn for her parents to retire in. This enabled her parents to sell their home, then travel and live comfortably for the remaining decade on its proceeds and their low superannuation balance. Instead of paying for the apartment with her own money that she has saved, Dr Zhu took out a mortgage and decided to charge her parents 50% of the market rate of rent for the next decade. After a decade she plans to stop charging them rent and allow them to live in the apartment until they pass away. Dr Zhu believes that having a mortgage and low rent would ensure that she can negatively gear the property and reduce her taxable income. Dr Zhu supplied the following income and expenses that she believes she would incur on an annual basis: Year 1: Rental income: $10,200 (50% of market rate) Interest expense: $17,500 Other rental expenses: $8,200 Net rental loss: $15,500  Year 10: Rental income: $15,200 (50% of market rate) Interest expense: $17,500 Other rental expenses: $12,200 Net rental loss: $14,500 Year 11: Rental income: $0 (will not charge rent) Interest expense: $17,500 Other rental expenses: $12,500 Net rental loss: $30,000 Task: Dr Zhu has asked you to prepare a letter of advice explaining the tax treatment of her rental property in years 1, 10 and 11. In that letter of advice, she would like you to: - Explain whether she is entitled to use the rental property loss to reduce her taxable income in each of the income years. - Using 2019 tax rates, explain to her what her tax payable will be in each of the income years. Assume that she is a resident, without withholding tax, and has no other deductions or offsets. - Tell her if she could do anything else to improve her tax situation, such as applying for aPrivate Binding Ruling from the ATO.

Kushal · Accepted Answer

Context –
Dr. Zhu purchases an apartment for his parents live in and retire in and instead of using her own money, she charges 50% of the rent and uses the mortgage for the flat. The idea here is to save the taxes and decrease the taxable income for the same. The property is negatively geared.
We need to help her understand how she can use the mortgages to save taxes on the same, if it is tax deductible. Are there any other ways she can save more taxes as well as decrease the tax deductible income in the Australian Taxation System context?
Also, what could be the innovative tax management schemes we can come up with, keeping ourselves under the gambit of the laws, we can significantly save the taxes. These are the key questions we will be answerable towards Dr. Zhu who approached us for the tax savings purpose.
Rental Property loss - When the net loss due to property transactions are there, at that time the owner can reduce the taxable income and hence, the income is tax deductible. However, this will be tax deductible until the property is rented and after that it won’t be. 1
	 
	Year-1
	Year-10
	Year-11
	Taxable Income
	300,000
	300,000
	300000
	Rental Income
	10,200
	15,200
	0
	Other rental expense
	8200
	12,200
	12500
	Interest Expense
	17500
	17500
	17500
	Net Rental Loss
	-15500
	-14500
	-30000
The owner can claim the rental expenses and the interest expense against the total taxable income. Only the expenses occurring from the income producing units can be used to offset the taxable income and the units or the properties used for the personal purpose cannot be used for any offset purpose. These are the ATO obligations and client Mr. Zhu needs to follow all the obligations. Here, the interest expenses on the loans taken for the property developments can be used against any offset for the taxable income and also the rental expenses can be used for the tax deductions.
This could be detrimental to the economy as well because the tax savings will give the taxpayers an incentive to invest more and more in the real estate properties, driving the price high and hence, this will eventually create an asset bubble. Furthermore, the mortgage interest deduction is very popular across countries, driving the interest rates up as well and hence, this leads to crowding out effect to some extent.3
Income Tax Rates- 
Dr. Zhu earns $ 300,000 income and hence, she needs to pay $ 54,096 and additional $ 54,000 for income above $ 180,000. Total Taxes, assuming there are not any additional deductions, she will have to pay $104,096 taxes. Please find the tax rates below as mentioned.
	Income Level Thresholds
	tax Rates
	Cumulative Taxes
	0 to 18200
	0%
	0
	18,201 to 37000
	19%
	3572
	37001 to 90000
	32.50%
	20,797
	90001 to180000
	37%
	54,096
	>180000
	45%
	54,096 + 45 % of additional income
Source - https://www.ato.gov.au/Rates/Individual-income-tax-rates/
Addressing the key tasks- 
1. Whether the net property losses tax deductible in the Australia taxation? - - -  - - - - -  - - - - -1
a. Based on the social security law and the policy of treatment of the income components and net property losses, we understand that the taxable income will decrease by the amount of losses incurred.
b. Recently , if we see, the interest expenses incurred from  getting debt and all sort of liabilities are growing in popularity and hence, we need to ensure that the investors do invest in such investments driving the prices up for the same. This can have a detrimental effect on the taxation systems,

Background facts: Dr Zhu immigrated to Australia with her parents in 1985 and has since been a resident for taxation purposes. While she had the privilege of a good education, her parents had a low...

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