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Ted is an investor and has purchased an IIP for the original price of $863.52807120123....

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Finance

Ted is an investor and has purchased an IIP for the original price of $863.52807120123.

For your convenience, the original information regarding IIP's has been repeated below.

  • Customers pay $863.52807120123 to buy an IIP.
  • The IIP will pay out $48 at the end of each year for 12 years
  • The IIP will pay out a further single payment of $1,000 after 12 years
  • There are no further payments after this single payment at time 12.

(a) Suppose Ted holds on to the IIP for the full 12 years. Ignoring time value of money, what is the profit he receives on an IIP? (This can be regarded as profit for tax purposes).

(b) Ted's tax rate is 30%. The full amounts of the level annual payments from the IIP are taxable. What is the total tax Ted pays on the level annual payments?

(c) The final single payment, for tax purposes, is what's called a "capital gain" if it exceeds the original price paid (and a capital loss otherwise). For this investment, only 50% of the capital gain is taxable. Calculate the tax that Ted pays as a result of the single payment.

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