Calculation of Assessable Income and Tax Liability

The assignment calculates the assessable income of Earnest Construction Pty Ltd, which is $250000. The taxable income includes salaries, interest, etc. and foreign earnings generated. The tax liability is calculated based on the ITAA 1936, which considers various aspects such as capital gains, business expenses, and deductions.

Australian Taxation
Law

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY ..................................................................................................................................3
1. Advising to Cassandra Pty Limited of the CGT consequences...............................................3
2. Stating the extent to which expenditures incurred by Oscar Pty Ltd are deductible from the
perspective of Australian income tax ..........................................................................................5
3. Calculating assessable income of Ernest Constructions Pty ltd .............................................7
CONCLUSION ...............................................................................................................................8

INTRODUCTION
Particular sum of money which is taken by government from earning people or corporate
on the amount generated at the end of year is known as taxation amount Higher the income when
earned by an individual or company, then respective party has to pay more tax amount to
government as per the legal laws and acts. The present project shows about basically three
aspects which are like capital gains, assessable income as well as the deductions. Further, the
study is based on property assess where long term capital gains are computed after considering
various kinds of the sections of Income Tax Assessment Act 1997. Apart from this, with the help
of relevant sections of ITTA 1997, deductions as well as assessable earnings are computed for
companies.
MAIN BODY
1. Advising to Cassandra Pty Limited of the CGT consequences
An amount which is generated as an income or profit from selling any kind of property or
investment is known as capital. In short, when a person or company put some capital on any
asset then generates return which is identified as the capital gains. In the market, companies and
people make investment in order to enhance their total level of gains. Higher the capital gains
boost up total income and economic condition of the firm or person. Further, it is difference
between purchasing and selling amount of property or asset after including associated expenses.
Apart from this, sum of money which is paid by a person in the form of tax on capital generated
is considered as the capital gain tax. When total capital gains are higher, then the candidate has
to pay more taxation amount as per the income tax assessment act 1997. In order to perform
calculation of capital gains and tax, various sections of the Income Tax Assessment Act 1997 are
undertaken. In the present case scenario, Cassandra Pty Limited purchased a building on 1st
January 2016 and sold on 1st July 2016. In between this period, it generated a capital gain which
is stated as below:
Particulars Amount (in $)
Sales consideration on 1st July 2016 3000000
Revenue from theatre 200000

Total gains $3200000
Purchase price on 1st January 2014 500000
Cost of demolishing asset 100000
Cost of construction 1000000
Cost of stamp duty 10000
Legal fees 2000
Cost of enlarging theatre 150000
Interest paid to Big Bank Limited 150000
Total expenses $1912000
Capital gains $1288000
Capital gains taxes $257600
On the basis of the above statement, it has been visualised that Cassandra Partnership
Limited purchases a building worth of $500,000. According to ITAA 1997 section 110-25, those
costs which are made on the property in order to improve it as well as modify are included under
the expenses. The Cassandra Company spends amount worth of $100,000 in order to demolish
purchased building after data of purchasing. On the basis of this particular section, sum of money
spent by the cited firm in order to demolish the property is included in the total expenses while
performing calculation of capital gains. Apart from this, the purchased party enters into a
construction contract in order to build a theatre. Further, the amount which is spent on the bought
property for modifying it is involved in the expenses. As per the section 110-251 of income tax
assessment act 1997, the amount of constructing theatre in Melbourne is supposed to be involved
in the total expenses of Cassandra Pty Limited. Amount of interest tax paid to the Big Bank
Limited is computed on the basis of capital raised and interest rate which are $1,200,000 and 5%
1 s110-25 of income tax assessment act 1997, General rules about cost base

per annum. Further, loan borrowed on 15th January 2014 and paid after selling property i.e. on 1st
July 2016. As per this, number of years of the loan period are 2.5 where interest amount in each
year is worth of $60000 (1200000×5%). Therefore, total interest paid is worth of $150000
(60000×2.5 years).
As per the Income Tax Assessment Act 1997, those expenses made on property in legal
manner like transfer of ownership etc, involved under the total expenses. Expenditures made in
order to accomplish all legal formalities are supposed to be involved in the expenses. In addition
to this, section 104-10A2 reflects that stamp duty when made among both the parties i.e. buyer
or seller is involved in the books of capital expenses. Further, as per the section 103-15 of ITAA
19973, when any kind of loan is taken from the bank or another party for property purchasing or
modifying, money is paid in instalments. In the present case scenario, Cassandra Pty Limited
firm paying construction amount worth of $1,000,000 paying in the instalment. The reason due
to which laws of instalments are used is that reducing financial burden on payee at one time. On
the basis of ITAA 1997 section 116.204, until and unless procedure of purchasing or selling
property from seller or buyer is not completed in a legal manner, amount cannot be involved. In
the present study, both the processes like buying and selling are completed in Cassandra Pty ltd.
On the basis of all above computation, it has been assessed that amount of total gains in
Cassandra limited at the end of year is worth of $3,200,000. In this, sales consideration and
revenue earned from theatre is involved. On the other hand, total expenses are worth of
$1762000. Therefore, capital gains of the cited partnership firm is worth of $1438000 which are
calculated after deducting total expenses from total gains at the end of selling assets. As per the
ITAA 1997, when capital gain is higher than 4, 00,001 then, tax rate imposed on the earned
capital is 20%. Further, capital gains tax for Cassandra is worth of $287600 which has to be paid
to government at the end of income tax year.
2 s104-10A, Disposal of a CGT asset: CGT event A1
3 s103-15 of ITAA 1997, Requirement to pay money or give property
4 ITAA 1997 section 116.20, General rules about capital proceeds

2. Stating the extent to which expenditures incurred by Oscar Pty Ltd are deductible from the
perspective of Australian income tax
On the basis of cited case situation, Oscar Pty ltd is a resident company from tax
perspective. Cited case situation presents that on 1st July 2016, Oscar ltd invested $3000000 for
purchasing land and theater building from Cassandra Pty ltd. In this, after some time, Oscar
found that building which was purchased suffered from mild earth tremor. Hence, Oscar has
taken advice from engineer who suggested that strengthening work is required which in turn
helps in increasing the life of building. On the basis of such aspect, following issues, laws and its
application has been assessed:
Issues: By analyzing the case situation, it has been identified that Oscar Pty ltd agreed to
pay total payable of $500000 in the form of four equal installments during the period of 16
months. In accordance with such aspect, first installment was paid on 1st July 2016 and the last
one will be on 1st November 2017. Along with this, in the month of December 2016, Oscar Pty
Ltd employs various personnel for the smooth functioning of business activities such as
carpenter, stage, lighting technician, finance and marketing manager. Hence, per week salary of
such personnel accounts for $1500 respectively. In addition to this, material amounted to $50000
also purchased and used by Oscar Pty Ltd for the construction work of theater. Further, firm
contracted with actors in relation to pay $500 and $1000 respectively for each rehearsal as well
as performance. In this, main issue is to assess the type of expenses and extent to which they are
free from tax liability.
Laws: In order to present suitable solution of the concerned issue salary, wage and super
section of Income Tax Assessment Act 1936 has been considered. On the basis of such aspect,
business unit or employer can claim for the deductions regarding making payment of salaries and
wages to the workers. Further, section of repairs, maintenance and improvement expenses entail
that one can demand for the deductions in relation to material used. ITAA 1936 clearly exhibits
that expenditures which are incurred by tax payer for repairs come under the category of
deduction. However, as per laws and legislation when specific material is used for the
construction purpose then concerned one will be excluded from deductions5.
Application: Laws assessed above are highly applicable on the situation of Oscar Pty Ltd.
Moreover, laws and sections considered for tax purpose and deductions are highly associated
5 Repairs, maintenance and replacement expenses

with the aspects of salary, repairs, maintenance and construction. As per ITAA (1936) repairs
and maintenance cost are generally tax deductible and offer relief to the concerned entity.
However, in the case of Oscar Pty Ltd construction of theatre or strengthening work will increase
the value of property as well as its life to a great extent. Thus, material worth of $50000 used by
company is not tax deductible from income tax perspective. The main reason behind this, activity
related to repairs will improve both condition as well as life of an asset.
In the concerned case, it is mentioned that strengthening work will incline the life of asset
to a great extent and so, it would not be tax deductible. Along with this, case of Odeon
Associated Theatres v. Jones (Inspector of Taxes) (1972) presents that an initial repair
expenditure come under the category of capital expenses6. Hence, expenses that help in
producing assessable income or carrying out business are not tax deductible as per ITAA 1936.
On the other side, it is clearly mentioned in ITAA (1936) that salaries and wages paid by the firm
are deductible from the perspective of tax. Thus, Oscar ltd is entitled to get tax benefits in
relation to the salaries paid by it to different workers and managers.
Conclusion: It has been concluded from the case evaluation that Oscar Pty Ltd cannot
claim for deduction regarding material expenses as per ITAA, 1936. Besides this, it has been
found from the evaluation that business unit can demand for the salaries paid by it to workers.
3. Calculating assessable income of Ernest Constructions Pty ltd
Issue: On the basis of given case, Oscar ltd refused Earnest Constructions Pty Ltd for
making payment of installments related to the due date of 1st July and 1st November 2017. Hence,
in against to such aspect, Ernest construction Pty Ltd sued on the aspects of contractual breach.
Laws: ITAA (1936) considered to assess the taxable income and associated liability of
Earnest Construction Pty Ltd.
Application: In accordance with ITAA, assessable income includes several aspects such
as salaries, interest, etc. Income generated by an individual or entity which can be taxed at the
end of a financial year is considered as the assessable income7. Along with this, it provides the
6 ? Income tax: deductions for repairs
7 ? What is income?

individual in order to generate enough for exceeding tax-free threshold. This kind of income has
high degree of similarity with the taxable income of an individual. There are different types of
incomes earned by the firm which go under assessable earnings. Further, such kind of profits are
like salary or wages, gratuities, different allowances, interest earned from bank accounts,
dividend or other returns on investment, bonuses, pensions, rental income, commissions, etc.
Apart from this, foreign earnings generated are also involved under the assessable income.
However, there are some amounts excluded while performing calculation of the assessable
earnings for an individual. Further, such excluded terms are like earnings from hobby,
inheritance, awards, gifts, incomes generated through gambling and money borrowed from
externals.
On the basis of such aspect, assessable income of company is $250000. Moreover, out of
4 installments, 2 were paid by Oscar ltd to Earnest Construction Pty ltd.
Calculation of assessable income:
Particulars Figures (in $)
Revenue earned by Earnest Constructions Pty
Ltd
(2 installments)
250000
Conclusion: It can be presented from evaluation that assessable income of Earnest
construction is $250000.
CONCLUSION
From the above report, it has been articulated that capital gain attained by Cassandra Pty
Ltd during financial year accounts for $1438000. In accordance with such aspect, business is
entitled to pay tax @ 20% which implies for $287600. Besides this, it can be inferred that ITAA
1936 is highly related to the repairs and maintenance of property. It can be seen in the report that
Oscar Pty Ltd cannot claim for the deduction related to material used for strengthening work.
Further, it can be summarized from the evaluation that expenses related to salaries and wages are
tax deductible. Overall, it can be stated that for the determination of tax liability, calculation of
assessable income is highly required.