Accounting Taxation Law

This article discusses the deductibility of expenditures incurred by Ruby Engineering Pty Ltd in calculating the taxable income for the income year of the company. It also provides insights on the capital gains tax in Australia and how it applies to assets like paintings, shares, and personal assets like violins. The article cites relevant provisions of Income Tax Assessment Act, 1997 and guidelines provided by the Australian Taxation Office (ATO).

Running head: ACCOUNTING TAXATION LAW
Accounting Taxation Law
Name of the Student:
Name of the University:
Authors Note:

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ACCOUNTING TAXATION LAW
Contents
Answer to question 1:......................................................................................................................2
Answer to question 2:......................................................................................................................4
References:....................................................................................................................................10

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Answer to question 1:
Issue:
Number of expenditures have been incurred by Ruby Engineering Pty Ltd during the
year. The issue is to determine the deductibility of these expenditures incurred by the company in
calculating the taxable income for the income year of the company. Each specific outgoing shall
be discussed in accordance with the applicable provisions of Income Tax Assessment Act, 1997
and guidelines provided by the Australian Taxation Office (ATO).
Rules:
Section 8.1 of Income Tax Assessment Act, 1997 (ITA 1997) contains provisions in
relation to general deductions. Section 8.1 provides that the tax payer, whether individual or an
entity carrying on business, can deduct from the assessable income any expenditures and
outgoings to the extent the outgoing is for earning income from business or it is necessary to run
the day to day affairs of the business (Smith, Smillie, Fitzsimons, Lindsay, Wells, Marles &
Atkinson, 2016).
Division 35 of the ITAA 1997 restricts businesses from deducting expenditures and losses from
non-commercial business activities. Thus, the businesses are not allowed to deduct expenditures
that are not for carrying business activities (James, Sawyer & Wallschutzky, 2015).
ATO in its website has specifically mentioned that a business will be allowed to deduct
outgoings and losses of any kind to the extent these are essential for carrying on the business
activities and or has been incurred to earn assessable income from business. Thus, in determining
the deductibility of outgoings and losses for a business the most important consideration is that

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whether the same are essential to carry on the business activities and contribute in producing
assessable income of such business (Gribnau, 2015).
Application:
Application to each specific situation shall be made here with respect to the deductibility
of the expenditures and outgoings of Ruby Engineering Pty Ltd.
(a)
The cost of $8,500 incurred in replacing old kitchen fittings due damage from water and normal
wear and tear is not related to the business operations of the company. The rental income from
residential property is assessable income to the company as it is now in real estate business.
Thus, the cost of $8,500 shall be allowed as deduction from assessable income from business of
the company as it is for normal wear and tear (Saad, 2014).
(b)
Legal expenditures to defend a lawsuit against the business is an allowable deduction to the
business provided it is not for a breach of law. Thus, in the ordinary course of business a
business is allowed to deduct legal expenses from assessable income to compute taxable income
from business (McIntosh, Trubka & Newman, 2015).
(c)
The agreement between Ruby and Diamond provided that the former shall be liable for any
claims that arise prior to the selling of the business to the later. In 2016 the engineering business
of Ruby was sold to Diamond. Thus, any liability contracted prior to that, Ruby will be liable. In
this case the damages of $750,000 to be paid by Ruby shall be allowed as deduction as the

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revenue incurred in 2015 from sale of batch of parts were included in assessable income
(Huizinga, Voget & Wagner, 2018).
Conclusion:
Taking into consideration the provision of section 8.1 of ITAA 1997 and division 35 of
the act, the following conclusions have been drawn for the specific scenarios:
Cost incurred in kitchen of the rental property is in the ordinary course of business thus, is
deductible expenditure. Similarly the legal expenditures and damages paid by the company both
are expenditures and outgoing eligible for deductions during the year to compute taxable income
of the company.
Answer to question 2:
(a) Paining:
In Australia, capital gain tax (CGT) was introduced on 20th September 1985. Thus, only assets
acquired o or after that date is under the obligation of capital gain event. Thus, any asset acquired
before 20th September, 1985 is not subjected to the provisions of CGT of ITAA 1997 (Dixon &
Nassios, 2016).
Betty acquired the painting before 20th September, 1985 thus, no capital gain or capital loss from
sale of the painting is to be considered for capital gain purpose. Thus, the sale proceeds of
$125,000 from sale of the painting which was acquired for merely $2,000 will not attract any
capital gain to Betty (Jacob, 2018).
(b) Shares:
The capital gain or capital loss from the sale of shares are calculated below:

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Details $ $ $

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Proceeds from sale 11,000
.00
Less: Cost base
Index cost of acquisition and development 12,972
.65
Capital gain / (capital Loss) (1,972
.65)
Particulars $ $ $
Sale proceeds from sale of Common Bank Shares
(1000 x 20)
20,000
.00
Less: Brokerage on sale 55
0.00
Net proceeds 19,450
.00
Less: Cost and incidental expenses
Cost of acquisition (1000 x15) 15,000
.00
Stamp duty 75

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0.00
15,750
.00
3,700
.00
Sale proceeds from sale of PHB (2500 x25) 62,500
.00
Less: Brokerage on sale 1,000
.00
Net proceeds 61,500
.00
Less: Cost and incidental expenses
Cost of acquisition (2500 x12)) 30,000
.00
Stamp duty 1,500
.00
31,500
.00

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30,000
.00
Sale proceeds from sale of PHB (1200 x 0.50) 60
0.00
Less: Brokerage on sale 10
0.00
Net proceeds 50
0.00
Less: Cost and incidental expenses
Cost of acquisition (2500 x12)) 6,000
.00
Stamp duty 50
0.00
6,500
.00
(6,000
.00)
27,700

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.00
Less: CGT discount (27700 x 50%) 13,850
.00
Capital gain (Long term gain) 13,850
.00
Shares are held for more than 12 months are long term assets and thus, gain or loss resulting
from such shares shall be classified as long term capital gain or loss as the case may be. Capital
gain discount of 50% is allowed to the residents on assets held for a period of more than 12
months before the date of sale. Hence, 50% discount method has been used to calculate taxable
capital gain of Betty. Betty’s capital gain from sale of shares is $13,850 for the year (Chardon,
Freudenberg & Brimble, 2016).
(c) Violin:
Capital gain tax is not applicable on depreciated assets and assets used for personal purpose
provided it costs less than $10,000. ATO guideline shows that no capital gain tax shall be
payable on depreciated and personal assets. For personal assets costing over $10,000, this
exemption does not apply (Kouparitsas, Prihardini & Beames, 2016).
The violin is a musical instrument which Betty plays on a regular basis. It is a personal asset of
Betty. The asset at the time of acquisition costs only $5,500, i.e. lower than the prescribed limit
of $10,000. Hence, the sale of violin will not be subjected to capital gain tax as it satisfies all the
conditions to be exempted from capital gain tax (Richardson, Taylor & Lanis, 2015).

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Net capital gain of Betty for the year ended on June 30, 2018 is calculated below:
Net capital gain
Particulars $ $
Capital gain from painting NA
Capital gain from sale of
shares
13,850
.00
Capital gain from violin NA
Net capital gain 13,850
.00
Net capital gain of Betty for the year ended on June 3, 2018 is $13,850.

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References:
Chardon, T., Freudenberg, B., & Brimble, M. (2016). Tax literacy in Australia: not knowing
your deduction from your offset. Austl. Tax F., 31, 321.
Dixon, J. M., & Nassios, J. (2016). Modelling the impacts of a cut to company tax in Australia.
Centre for Policy Studies, Victoria University.
Gribnau, H. (2015). Corporate social responsibility and tax planning: Not by rules alone. Social
& Legal Studies, 24(2), 225-250.
Huizinga, H., Voget, J., & Wagner, W. (2018). Capital gains taxation and the cost of capital:
Evidence from unanticipated cross-border transfers of tax base. Journal of Financial
Economics.
Jacob, M. (2018). Tax regimes and capital gains realizations. European Accounting
Review, 27(1), 1-21.
James, S., Sawyer, A., & Wallschutzky, I. (2015). Tax simplification: A review of initiatives in
Australia, New Zealand and the United Kingdom. eJournal of Tax Research, 13(1).
Kouparitsas, M., Prihardini, D., & Beames, A. (2016). Analysis of the long term effects of a
company tax cut (No. 2016-02). The Treasury, Australian Government.
McIntosh, J., Trubka, R., & Newman, P. (2015). Tax Increment Financing framework for
integrated transit and urban renewal projects in car-dependent cities. Urban Policy and
Research, 33(1), 37-60.

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Richardson, G., Taylor, G., & Lanis, R. (2015). The impact of financial distress on corporate tax
avoidance spanning the global financial crisis: Evidence from Australia. Economic
Modelling, 44, 44-53.
Saad, N. (2014). Tax knowledge, tax complexity and tax compliance: Taxpayers’
view. Procedia-Social and Behavioral Sciences, 109, 1069-1075.
Smith, F., Smillie, K., Fitzsimons, J., Lindsay, B., Wells, G., Marles, V., & Atkinson, I. (2016).
Reforms required to the Australian tax system to improve biodiversity conservation on
private land. Environmental and Planning Law Journal, 33, 443-450.