Tax Consequences of Capital Gains Transactions

This document provides information on the tax consequences of capital gains transactions, specifically focusing on the case of Sophia. It discusses the relevant issues and material facts related to her transactions, such as the sale of a block of land, shares, stamp collection, and a guitar. The document explains the applicable laws and regulations for calculating the cost base of assets and determining capital gains or losses. It also covers the applicability of capital gains tax on different assets and provides advice on allowable deductions for various expenses incurred in generating income. The second part of the document addresses the deductibility of expenses incurred by Ava, including relocation expenses, work uniform, childcare expenses, phone call expenses, food expenditure, fines, and travel expenses. It explains the relevant laws and case laws governing the deductibility of these expenses and provides a conclusion on the deductibility of each expense.

Running head: TAX
Tax
Name of the Student
Name of the University
Author Note

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Table of Contents
Question 1..........................................................................................................................2
Issue...............................................................................................................................2
Law.................................................................................................................................2
Application......................................................................................................................4
Conclusion......................................................................................................................4
Question 2......................................................................................................................5
Issue...............................................................................................................................5
Law.................................................................................................................................5
Application......................................................................................................................6
Conclusion......................................................................................................................7
References.....................................................................................................................8

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Question 1
Issue
Sophia needs to prepare her income tax return for the year 2018. But, she needs
advice on the capital gains tax consequences of the transactions under taken by her.
The relevant issues and material facts relating to her transactions are as follows:
Block of land in Ninety Mile Beach: The selling price of this block of land was $8,
00,000. Cost of $1, 30,000 was incurred to purchase the land in 1991. Stamp duty was
$800 and legal fees was $1,200. To purchase the land Sophia had to take a bank loan
and pay interest of $27,000. While owning the land she paid counsel rates, water rates
and insurance of $18,500. A dispute occurred with a neighbour and $8,000 was
incurred in resolving the same. To improve the saleability of the land $15,000 was spent
to remove dangerous pine trees on the land. Additional expenses like legal fees,
advertising and agents fees were $25,000.
Sale of shares: These shares were purchased for $1.5 in 1983 and a brokerage of 1%
was paid on their sale.
A sale of stamp collection: The stamp collection was purchased in January 2018 for
$33,000. The selling price of the same was $23,000 and auction fees of $3,000 was
also paid.
Sale of Bob Marley guitar: This guitar was purchased in 2003 for $70,000 and sold in
the current year for $45,000.

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Law
As per s108-5(1) ITAA 1997, a CGT asset is a property or legal or equitable right
which cannot be considered as a property. It includes both tangible and intangible
properties. Capital gains or losses arising from the sale of CGT assets are assessable
as a part of the statutory income of an individual defined under s6-5 ITAA 1997
(Ato.gov.au 2020). In case of the land the relevant law is related to calculating the cost
base of the asset. According to subdivision 110-A ITAA 1997, there are five elements
included in the cost of an asset. These are to be deducted from the capital proceeds
received from the sale of the asset. The amount paid to procure an asset under s110-
25(2) is allowed as a deduction from the sale price of the asset (Ato,gov,au 2020).
Similarly, incidental costs like legal duty and stamp duty are allowed as a part of the
cost base under s110-35. For properties acquired on or after 20 August 1191, the
interest paid on the loan taken to acquire an asset is allowed as a deduction under
s110-25(4). As per s110-25(5) any cost which preserves the value of an asset or
improves its saleability is deductible from the amount received from selling the asset.
The expenditure incurred in defending the title or establishing the same is allowed as a
deduction under s110-25(6) (Legislation.gov.au 2020). All these expenses are added to
calculate the cost base of the asset and deducted from the sale proceeds to calculate
the capital gains or losses from the sale of the asset. Collectables and personal use
assets are a part of the CGT assets. Collectables, as defined by s108-10(2) are a piece
of artwork or medallion which are collected by a taxpayer just for their enjoyment and
personal purposes. Capital gains and losses incurred on the sale of these collectables
are to be disregarded if the cost of acquiring these assets are allowed as a deduction

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under s119-10(1). Similarly, personal use assets are the assets other than collectables
which are kept by a taxpayer for their personal purpose under s108-20(2) ITAA 1997.
Some of the examples of personal use assets include television, bicycle and a yacht.
The capital gains arising from the sale of the personal use assets are to be disregarded
if they are acquired by paying lower than $10000 under s118-10(3). The capital gains
tax in Australia is applicable on assets procured on or after 20 September 1985. Any
assets purchased before this date are not considered as CGT assets and no capital
gains or losses are charged on them. These are the relevant regulations in the case of
the CGT assets sold by Sophia.
Application
In this case, CGT is applicable on the block of land sold by Sophia. The $130000
paid by her to acquire the asset is allowed as a deduction. Stamp duty of $800 and legal
fees of $1200 are to be included in the cost base as they are defined under the item
incidental costs. If the property is acquired after 20 August 1991, the interest paid on the
bank loan taken by her is also allowed as a deduction. Local rates, water and insurance
are not allowed as a deduction because they are not essential to defend or establish the
right of the asset procured by her. However, as $8000 is incurred by her to defend her
title from the dispute with her neighbour, it is allowed as a deduction from the sale
amount received by her. $1500 and $25000 are spent to complete the sale of the asset
successfully. Hence, they are also allowed as a deduction. As the shares are purchased
before 20th September 1985, no tax is charged on them. The stamp collection is a part
of the collectables owned by her as the cost of acquisition exceeds $500, there is no
exception from capital gains in this case. However, the auction fees is deductable as it

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is a cost incurred to complete the sale. The Bob Marley guitar can be included under the
list of collectables owned by her. The capital gains or losses are taxable as the cost of
acquisition exceeds $500. Based on the above application the capital losses incurred on
the sale of stamp collection and the guitar can be reduced from the capital gains earned
on the sale of the block of land in Ninety mile beach.
Conclusion
Taking all the above discussion into consideration, it can be suggested that
capital gains tax is applicable on the sale of land, a stamp collection and the guitar. This
is because they made the criteria of CGT assets under ITAA 1997. Hence, the capital
gains earned from the sale of land are reduced due to the capital losses incurred on the
sale of stamp collection and guitar. Hence, for income tax year 2018, Sophia has to pay
taxes on the statutory income earned by her.
Question 2
Issue
Ava wants to know whether the expenses incurred by her are allowable
deductions or not. This is because most of the expenses incurred by her are personal or
domestic in nature. They will be allowed as deductions only if they are incurred as a part
of generating or producing the income by her. As she is employed in the Sunshine
hospital and had to relocate for the same, the expenses incurred by her are of a wide
variety. They range from expenses incurred to attend the job interview, relocating
expenses, expenses incurred as a part of the compulsory work wear worn by her,
childcare expenses, phone call expenses, food expenditure, speeding fines paid and
the expenses incurred to travel from work to home.

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Law
As per s8-1(3) ITAA 1997, any loss or outgoing which can be deducted under s8-
1 is known as a general deduction. S8-1(1) ITAA 1997 states that a taxpayer can
deduct an expenditure from his assessable income to the extent that it is incurred in
generating or gaining assessable income of the individual (Ato.gov.au 2020). It must
also be necessarily incurred in carrying on the business of an individual. However, an
expense is not deductible to the extent that it is capital, private or domestic, incurred in
producing non-assessable income or income exempt from tax and prevented from
deduction by a specific provision of the Income Tax legislation. The essential character
test of the expenses incurred is done on the basis of Lunney v FCT and Hayley v FCT.
It should be essential to prove that the expenditure is necessary to generate the
income. As per the guidelines of FCT v Maddalena, expenses incurred as a part of
getting gainful employment are not allowed as a deduction (Ato.gov.au 2020).
Relocation expenses, as suggested by Fullerton v FCT, are not allowed as a deduction
in the hands of a taxpayer. Childcare expenses also tend to put the taxpayer in the
position of generating additional income but do not directly contribute towards
generating the income by the individual. Hence, they are not allowed as a deduction as
stated by Fullerton v FCT. Similarly, work uniform which is made compulsory by the
guidelines of s 34-10(1) is also allowed as a deduction in the hands of the taxpayer
(Ato.gov.au 2020). Food expenditure does not directly contribute to the income
generated by an individual. S32-10(1) of ITAA 1997 states that the expenditure incurred
by way of food or drink or recreation is not allowed as a deduction. Speeding fines and
other types of fines are not allowed as a deduction as per the ATO regulations.

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Expenses incurred as a part of travelling from work to home are not allowed as a
deduction based on Ruling IT 112. This was also suggested by Lunney v FCT and
Hayley v FCT.
Application
When applying the above provisions to the situation of Ava, the following results
are obtained:
 Travel expenses to Sunshine Hospital from Victoria cannot be allowed as a
deduction;
 Relocation expenses are also not allowed as a deduction as they private or
domestic in nature;
 As the uniform is compulsory in the process of the job, it is allowed as a
deduction;
 Childcare expenditure is not deductible as it is private or domestic in nature;
 As the phone calls are necessary in generating income from the business, it is
allowed as a deduction;
 Speeding fines and fines of other nature are not allowed as a deduction;
 Expenses incurred in travelling from work to business during the normal course
of work are allowed as a deduction.
Conclusion
From the available legislations and case laws, it is thoroughly evident that the
expenses incurred by an individual are deductible only if they are relevant to the income
producing activities of Ava. Otherwise, they are not allowed as a deduction. Hence, it
becomes necessary to prove that the expenses contribute to the income earned by an

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individual. In Ava’s case, only the phone expenses and the uniform related expenditure
are allowed as a deduction because they satisfy the criteria of generating or producing
income. Hence, $400 worth deductions are deductible in Ava’s hands.

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References
Ato.gov.au. (2020). CGT assets and exemptions. [online] Available at:
https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-exemptions/ [Accessed
28 Jan. 2020].
Ato.gov.au. (2020). Legal Database. [online] Available at:
https://www.ato.gov.au/law/view/document?Docid=ITR/IT2670/NAT/ATO/00001
[Accessed 28 Jan. 2020].
Ato.gov.au. (2020). Legal Database. [online] Available at:
https://www.ato.gov.au/law/view/document?DocID=TXD/TD200035/NAT/ATO/
00001&PiT=99991231235958 [Accessed 28 Jan. 2020].
Ato.gov.au. (2020). Legal Database. [online] Available at:
https://www.ato.gov.au/law/view/document?DocID=TXR/TR989/NAT/ATO/00001
[Accessed 28 Jan. 2020].
Ato.gov.au. (2020). Legal Database. [online] Available at:
https://www.ato.gov.au/law/view/document?docid=ITR/IT2217/NAT/ATO/00001
[Accessed 28 Jan. 2020].
Ato.gov.au. (2020). Legal Database. [online] Available at:
https://www.ato.gov.au/law/view/document?DocID=TXR/TR200316/NAT/ATO/00001
[Accessed 28 Jan. 2020].
Ato.gov.au. (2020). Legal Database. [online] Available at:
https://www.ato.gov.au/law/view/document?DocID=TXR/TR9534/NAT/ATO/00001
[Accessed 28 Jan. 2020].

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Legislation.gov.au. (2020). Income Tax Assessment Act 1997 . [online] Available at:
https://www.legislation.gov.au/Details/C2017C00336/Controls/ [Accessed 28 Jan.
2020].