Your client Damien comes to see you in December 2016 asking to prepare his income tax return for the year ended 30 June 2016. He is also seeking your taxation advice in relation to some other issues. He provides the following information;

Damien inherited a single-storey house valued at $360,000 on 1 December 1984 and lived in it as his main residence. On 1 September 1989, Damien added a second storey of equal size to the house at a cost of $190,000. He moved upstairs, since it had better views, and started to rent out the downstairs area to help pay off his mortgage.

Damien wants to sell the house and travel the world. He could sell it now for $650,000, but he believes he could sell the house for $720,000, provided he undertakes the following work to the house;

Replacing all the old floor coverings with tiles $4,800 Repainting the entire inside of the house $6,500 Building a carport as there is no car accommodation at present $10,400

Damien also received an insurance payout of $12,000 after a motorcycle accident coming home from work one day. He incurred $3,200 in medical costs and $3,000 in legal fees in relation to his injuries.

In addition to the above transactions, Damien had the following income and expenses for the year ended 30 June 2016;

Income

Salary (occupation sales representative) $79,000

Entertainment allowance $2,000

Rental income from the house mentioned above $15,400

Franked dividends from Commonwealth Bank shares $2,106

Free flight received from Qantas Frequent Flyer Program $1,300

Expenditure

Meals incurred when entertaining clients in his job as a sales representative for his employer $1,700

Purchase of work clothing and shoes $450

Costs of studying a management degree in order to obtain a promotion within The business he is employed $2,950

Train tickets for travelling to and from work $150

Rates and insurance on the house (this is the full amount) $2,400 Life insurance $180 Tax Agent fees $750 Damiens PAYG Payment Summary shows PAYG withholdings for the year $18,800

REQUIRED: Prepare a Letter of Advice to Damien that outlines/discusses/explains the following:

The tax implications of the expenditure on the house that he wants to undertake to improve the sale value.

The tax implications of the sale of the house,including any exemptions available.Calculate the assessable gain, if any, assuming he does undertake the work to improve the sale value.

The tax implications of the insurance payout and medical costs incurred.Calculatethe assessable gain, if any.

The assessability and deductibility of all the other items listed in the information as you calculate Damiens taxable income for the year ended 30 June 2016.

The taxpayable/(refundable) for Damien for the year ended 30 June 2016, including all additional levies and tax offsets.

Important Note:

Damien is an astute taxpayer and questions every piece of tax advice given to him. To ensure Damien is satisfied and your advice will not be questioned in the future, you will need to provide adequate (but concise) explanations about the income tax treatment of all these items above.

As such, you will need to support all your discussion and interpretation with reference to legislation, cases or rulings. Referencing the Master Tax Guide will not be appropriate as this is not the authority, but rather assists your understanding of the legislation, cases and rulings. Also, copying entire sections of legislation, cases or rulings will not be appropriate as Damien wants your advice provided in a way he can understand.

It may be necessary to make assumptions in the absence of specific information that will be provided by Damien later, so you may need to make a decision that moves in a particular direction, but provide a brief explanation if another course of action is appropriate.

Your advice should be provided formally in a professional letter addressed directly to Damien (not an essay about him), addressing each issue as necessary. Remember, quantity does not always equate to quality, so be concise in your response.