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

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

(a) Paul asks you to prepare a table to show how theincome from the apartment would be taxed and how it would affecthis after-tax cash flow. Use the information provided to completethe pro-forma table below for the first year after the propertypurchase.

                       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)