Analyzing Janet Brown's Taxable Income and Deductible Expenses

This assignment presents a comprehensive analysis of Janet Brown's tax return for the period of July 1, 2017, to June 30, 2018. It meticulously details various income sources, including salary from BMA Investments Ltd, rental income from a Newport VIC townhouse, and capital gains from the sale of Telstra and Babushka dolls shares. The assignment further examines deductible expenses such as interest payments on loans used for investment properties and renovations, repair costs for the rental property, and expenses related to a lawsuit. It calculates net capital gains, and taxable income, culminating in the determination of Janet's gross tax payable and net tax payable after accounting for PAYG payments. The analysis includes a letter to Janet Brown explaining the deductibility of lawsuit expenses, and concludes with a statement of income summarizing all financial aspects for the tax year.

TAXATION
JANET BROWN: PART – A: INCOMES
ISSUE – 01: Salary from BMA Investments Ltd.
Janet Brown received a Gross Salary amount of $99,9201 from BMA Investments Ltd
for the period 1 July 2017 to 30 June 2018. She also received an amount of $3,0002
towards allowances during the same period of her employment. Amount withheld by
BMA Investments Ltd from her salary on account of PAYG for this period was
$26,734.
ISSUE – 02: Rental Income from Newport (VIC) Townhouse
Janet entered into a contract for purchase of her Newport VIC townhouse on 10 August
2017 for $300,000. It was rented with effect from 1 September 2017 at $2,500 per
month. Janet earned a total of $25,0003 as Rental Income from this investment property
during the year ending 30 June 2018.
ISSUE – 03: Capital Gain / (Loss) on Telstra / Orica Shares
1,000 Telstra shares were purchased in 2014 for $5,000 and sold for $10,000 on 15
March 2018, giving a Gross Capital Gain of $5,000. Since the shares were held for more
than 12 months, the capital gain is eligible for 50% Discount4. Thus the Net Capital gain
shall be $2,5005.
The Orica shares were purchased in December 2017 for $10,000 and sold in March
2018 for $6,000, thus creating a Gross Capital Loss of $4,000.
As both the above transactions were carried out in the year 2017-18 and both belong to
CGT Assets, the NET effect reflected in the Income Statement of Janet for the year
ended 30 June 2018 shall be Capital Loss of $1,500.
1 Ordinary Income – s.6-5(1)
2 Ordinary Income – s.6-5(1)
3 Statutory Income – s.6-10(1)
4 Under Discount Method – s.115-5
5 Statutory Income – s.6-10(1)

ISSUE – 04: Capital Gain / (Loss) on Babushka Dolls
The Babushka dolls are item of personal collection described as “Collectables”6. If the
purchase price of a collectible is less than $500, all capital gains / losses from its sale
are ignored for taxation purposes. Since Janet had purchased a set of 5 dolls for $1,000
and owned them for more than 2 years, the Gross Capita Gain will be subjected to 50%
Discount.
Purchase Cost of 3 Dolls @$200 each $600
Sale Proceeds received for 3 dolls $5,900
Gross Capital Gain $5,300
50% Discount $2,650
NET CAPITAL GAIN $2,6507
JANET BROWN: PART – A: EXPENSES
ISSUE – 01: Interest Payment on Loan used for Investment property
Janet took a loan of $400,000 from BMA Investments Ltd at annual interest rate of 3%.
Of this amount, she invested $300,000 towards purchase of an investment property in
Newport VIC and used $100,000 for renovating her residential house at Sesame Street,
Elmo VIC. Hence, for investment property use, Janet will be deducting the following
amount as expense from the rental income derived –
Amount – $300,000
Interest Rate – 3% pa
Period of usage – From 1 July 2017 to 30 June 2018 (12 months)
Interest Payable – $300,000 x 3% = $9,0008
ISSUE – 02: Interest Payment on Loan used for Residential Home
Janet used $100,000 for renovating her residential house at Sesame Street, Elmo VIC.
Hence, for investment property use, Janet will be deducting the following amount as
expense from her salary income –
Amount – $100,000; Interest Rate – 3% pa; Period of usage – From 1 July 2017 to 30
June 2018 (12 months); Interest Payable – $100,000 x 3% = $3,0009
6 s.108-10(2)
7 Statutory Income – s.6-10(1)
8 Deductible Expense – s.8-1
9 Deductible Expense – s.8-1

ISSUE – 03: Petrol Expenses on Company Car
As Janet is given taxi fare for travelling to meet company clients and she is not using
the company car for any official purpose, the amount of $500, which she states to have
spent on petrol during the period 1 July 2017 to 30 June 2018, shall be treated as a
personal expense. Janet is not entitled to any car allowance from her employer, hence
she cannot claim this amount either as a deductible expense or as a reimbursement from
employer.
ISSUE – 04: Deductible Expenses incurred on Rental Property
Janet purchased the Newport investment property on 10 August 2017 and rented it out
with effect from 1 September 2017, hence the amount of $22,00010, which she spent on
the repair of the leaking roof, shall be considered as a deductible expense from her
rental income derived from the investment property.
ISSUE – 05: Capital Expenses incurred on Rental Property
On 10 December 2017 Janet incurred an expense of $4,000 on installing a new air-
conditioning system on the top floor of the investment property. This will be treated as
Capital Expenditure and added to the Capital Value of the Investment Property and shall
reflect in the Balance Sheet of Janet Brown for the year ended 30 June 2018.
ISSUE – 06: Expenses incurred on Law Suite
Since the amount of $25,000 spent by Janet during the income year pertain to fees paid
to court and her attorney for defending her legal rights (it does not matter whether she
lost or won the legal suite), Janet is entitled to claim the amount of $25,00011, paid for
fees and $10,00012, paid for damages, from her rental income for the income year ended
30 June 2018.
10 Deductible Expense – s.8-1
11 Deductible Expense – s.8-1
12 Deductible Expense – s.8-1

LETTER TO JANET BROWN
TAX ACCOUNTANTS
42 CLOVE ROAD, ELMO VIC 4030
Dated: 9 July 2018
Dear Janet,
RE: Expenses on Law Suite
Section 8-1 of ITAA, 1997 states that a taxpayer is entitled to claim deduction of
expenses which are incurred in defending a claim for damages13.
Section 8-1 is eligible for claiming all deduction on account of losses or outgoings,
which are incurred by a taxpayer in gaining or producing an assessable income. Since
this lawsuit was defended by you in protecting your rights of earning an assessable
income from the investment property, and since the expenditure was not of capital
nature, you can claim the same in your tax return for the year ended 30 June 201814.
Accordingly, these expenses have been included in the deductible expenses of your
Income Statement for the year ended 30 June 201815.
I am sure this will settle the ambiguity in this matter.
Sincerely,
(Accountant)
Encl.: Statement of Income – 2017-18.
13 ATO ID 2003/484
14 Herald & Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113
15 Federal Commissioner of Taxation v. Snowden & Willson Pty Ltd (1958) 99 CLR 431

JANET BROWN
STATEMENT OF INCOME
FOR THE YEAR ENDED 30 JUNE 2018
S. No. Particulars Income Expenses
01. Gross Wages 99,920.00
02. Allowances 3,000
03. Rental Income – Investment Property 25,000.00
04. Net Capital Gain from Sale of Babushka
Dolls 2,650.00
05. Net Capital Gain on Sale of Telstra
Shares 2,500.00
06. Interest paid for Loan used for
Investment Property purchase 9,000.00
07. Interest paid for Loan used for
renovation of Home 3,000.00
08. Repair of Roof of the Investment
Property 22,000.00
08. Attorney and Court Fee for defending
the lawsuit 25,000.00
09. Damages Paid as per Court Orders 10,000.00
TOTALS 133,070.00 69,000.00
LESS:
Loss on Sale of Orica Shares 4,000.00
Gross Taxable Income 129,070.00
NET Taxable Income 129,070.00
Gross Tax Payable 35,388.00*
PAYG Payment 26,934.00
NET TAX PAYABLE 8,454.00
*Since Janet Brown is adequately covered for Health Insurance, she is not eligible for
the Medicare Levy Surcharge.