Income tax law essay

Ordinary income can also be generated out of businesses operating on contrary basis. Ordinary income and capital gains attracts different tax rates. Ordinary income is the income gained out of the sale of an inventory (services or goods); such income includes rent, salary, wages, interests and other similar incomes in that stream. Ordinary income is taxed depending on the amount of the income using the tax rates brackets provided. These rates are 10%, 15%, 25%, 28%, 36% and 39. 6% of the gain realized 39. 6% * $5m= $1. 98m Kristie will pay a tax of $1. 98m A capital gain is attained after a sale of an asset/property at profit. A time an asset can be sold at a loss and the loss cannot be subjected into any tax. The gain realized out of the sale of business to DoorsRUs is: $400, 000 - $100, 000 = $300, 000 Capital gain tax on goodwill =15% * $300, 000 =$45, 000 Tax deductions apply on the provided exceptions on particular assets allowed by income tax law.

Concessions in most cases apply to active assets (Abel, 2017). A superannuation account is always taxed under three circumstances, which are; immediately when super gets into the tax payers account, when the taxpayer’s money is withdrawn from the investor’s account and lastly when the money is being withdrawn from the superannuation account (Williams, Belanger, & Arthur, 2011). Although in Dave’s case the superannuation is with balance and it will only be used on contributions that are to be carried of unused concessions. The insurance policy amount received on premiums is tax deductible because Dave is employed at the moment. A company gains many advantages by use of small business capital gain tax concessions; some of these concessions include retirement exemptions for small business, a rollover for small business and a reduction of 50% of active asset.

In some other cases, when the company gets exempted of the two concessions all or part of its income may be exempted of tax. The company applying for concessions must be eligible for any of the four concessions. A sale of Dave’s business enables the company to incur a capital gain tax which then gives a rise to the whole capital gain. Any asset that is active will then attract a 50% reduction on the capital gain tax. Negative gearing is a form of tax reduction in Australia since the loss brought by the difference between the interest due and income earned is deducted from the current income tax. Later on, it becomes beneficial during the sale of the property and one gets capital gains from the intermittent losses.

This requires a lot of speculation from the investors and for them to be financially stable so as to fund the losses from their own pocket until the property disposal time where profit is reached. This, therefore, raises a lot of argument among investors when making a crucial decision whether to go for positive or negative gearing. Investors are advised that before making property investment decision to first consult the property tax accountant for advice In Australia, there is a great competition among investors and most of them source for external funding. The low-income earners we cannot really measure how if they do benefit at all. Australian independent ‘think tank' the Grattan Institute states that the removal of negative gearing will decrease the housing prices by up to 3% which in return will cause an increase in the government revenues.

It further goes on to explain that reducing the capital gain tax discount by 25% contrary to the myth is that rent will slightly or not at all change hence no housing market collapse. In opposition to negative gearing, there are alternative models being proposed which include only new housing can be negatively geared. Landlords providing housing to the disadvantaged group tenants can also be allowed to be negatively geared; providing tax credits for investment in social housing. He suggests that less government interference and less tax solves the housing affordability. It’s the wish of every investor to pay less tax as there is no exemption on paying tax. The effectiveness of negative gearing is that it converts wage income to taxed capital gains even though most of the benefits go to the wealthy.

The effectiveness of the negatively geared property will be realized in the retirement age. There is a lot of politics going around in relation to housing tax reform. A decrease in rental prices causes a loss to homeowners and to the investors. Competition for properties also will be affected if negative gearing is removed. Negative gearing allows investors to acquire cheap properties which they sell later when the prices rise Negative gearing allows people to invest in unproductive assets and Australia is better off as the limited funds are genuinely invested in industries like manufacturing industries that are more productive industries. In short-term government policy affects the fixed stock of real estate which is distributed between the owner-occupiers and investors. In the long term, the housing supply increases even though the construction of new housing will be higher as the government will be having a tax concession.