Housing

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Housing

Housing affordability is a goal of governments and opposition parties in Australia.  A topic of discussion in the media is whether negative gearing combined with the capital gains tax discount (‘tax concessions’) increases speculative activity in the housing market – to the disadvantage of the first home buyer.  
Task Identify and evaluate key arguments both for and against retaining these tax concessions if housing affordability is to be achieved.      In your response you must explain what is meant by negative gearing and how capital gains arising from property investment are treated. You should refer to sections of legislation, tax rulings and cases where relevant.   
Part B  
Jai is 50 years old, currently employed and planning to retire when he is 70. As part of his plans for retirement Jai recently sold the large home he has lived in for many years – planning to purchase a smaller home to live in and also an investment property.  
After paying expenses associated with the sale and repaying his home loan Jai was left with $200,000 cash.  Jai has placed an offer of $200,000 with a real estate agent to purchase a home which will be Jai’s  principal place of residence. Jai has also placed an offer of $150,000 to purchase an investment property to be used for rental income.  
Jai does not have enough funds to complete the sales on both properties, but his bank manager has approved a loan for the shortfall of $150,000 at an interest rate of 5% per annum.   
In order to prepare loan documentation, the bank manager needs to know whether Jai will: a) use the $200,000 cash to pay for his new home and use the borrowed funds of $150,000 to purchase the  investment property;  b) use $150,000 of the cash to pay for the investment property and then pay for his new home with the remaining $50,000 cash and the borrowed funds of $150,000; or 
c) pay for his new home by using $100,000 of the cash and $100,000 of the borrowed funds; and pay for the investment property by using the remaining $100,000 cash and the balance of the borrowed funds ($50,000).  
Task   
Assume Jai’s goal is to take advantage of negative gearing opportunities and receive the most favourable tax treatment. Advise  Jai which of the three options – a), b) or c) -   would best achieve this goal. Give reasons for your answer.  



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