Assignment on Tax - Capital Gains Tax

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

1TAX
Table of Contents
Question 1: Capital Gains Tax.......................................................................................2
Issue...............................................................................................................................2
Law.................................................................................................................................2
Application......................................................................................................................4
Conclusion......................................................................................................................4
Question 2......................................................................................................................5
Issue...............................................................................................................................5
Law.................................................................................................................................5
Application......................................................................................................................6
Conclusion......................................................................................................................7
References.....................................................................................................................8

2TAX
Question 1: Capital Gains Tax
Issue
Sophia wants to file her tax return for income tax 2018 and needs advice about
the capital gains consequences of the transactions undertaken by her. However, there
are various items involved in the calculation of the capital gains on which an individual
needs to pay taxes. The main issue that is faced in this situation is to classify the
available assets CGT assets or assets exempted from CGT. After identifying the same,
the next issue is to determine whether the nature of the CGT assets is such that tax
needs to be paid on them. After which, the next issue is related to the cost base of the
asset. This is an important aspect because the capital gains or losses earned from the
sale of an asset are to be calculated on the basis of the sales amount and the cost base
of the asset. If the capital proceeds from an asset exceed the cost base of the asset,
then the capital gains are earned from the asset. Similarly, s104-10(4) of ITAA 1997
states that capital losses occur when the capital proceeds from asset are lower than the
cost base of the asset. As various costs like legal fees, stamp duties and other related
fees have been incurred by Sophia, the next relevant issue is to determine whether the
costs incurred by her can be allowed in calculating the cost base of the asset or not.
Hence, advice needs to be provided to Sophia in relation to these issues.
Law
Capital gains tax are levied on assets classified as CGT assets. A property or a
legal equitable right which is not a property can both be classified as CGT assets under
s108-5(1) of ITAA 1997. Some of the examples included as CGT assets are Land and

3TAX
Buildings, shares, units, options and rights to enforce an obligation in a contract. Other
classifications of CGT assets takes place on the basis of the nature of the assets. One
such asset is a collectable defined under s108-10(2) ITAA 1997 (Legislation.gov.au
2020). Some assets which can be classified as collectables include paintings, artworks,
manuscripts and rare folios. There are few exemptions available on the sale of the
collectables by a taxpayer. Capital gains and losses occurring from a collectable are to
be disregarded if their cost base is lower than $500 under s119-10(1) (Ato.gov.au
2020). Another aspect of collectables that is notable is the quarantining rule under s108-
10(1). This means that the capital losses occurring from the sale of collectables can
only be used to reduce the capital gains arising from the sale of a collectable. They
cannot be used to club the capital gains arising from the sales of other assets. Similarly,
the costs incurred on the sale of a collectable are allowed as a deduction only if they are
necessary in completing the sale of the product. The cost base of the asset is calculated
using the five elements of cost mentioned in the Subdivision 110-A of ITAA 1997
(Legislation.gov.au). They are a combination of the different costs involved in the
procurement and maintenance of the asset. The first element of the asset’s cost base is
the money paid, or required to be paid or the market value of the asset under s110-
25(2). Incidental costs such as the legal fees or the applicable stamp duty are also
added to the cost base of the asset as per s110-35. Other costs like cost of owning the
asset are also a part of the cost base of the asset under s110-25(4). For assets
acquired after 20 August 1991, interest on loan is added to the cost base of the asset.
Expenses which are incurred to preserve an asset or install or move the same are
allowed as a deduction under s110-25(5). Similarly, expenses involved in establishing,

4TAX
preserving or defending the title of an asset are all allowed as a deduction from the
capital proceeds of the asset.
Application
Land is covered under the definition of a CGT asset. Hence, capital gains need
to be calculated on the sale of the asset. The cost of purchasing the asset, i.e. $130000
is allowed in the cost base of the asset. $800 stamp duty and $1200 legal fees are both
allowed as a deduction as they are covered under the definition of incidental costs. If
the asset was acquired after 20 August 1991, the interest paid on the bank loan is
allowed as a deduction from the capital proceeds. Hence, the deduction of interest on
loan depends on the date of acquiring the asset. Similarly, it cannot be used to compute
the capital loss on an asset. Advertising, legal and agent’s fees incurred in the sale of
the asset are all allowed as a deduction as they are necessary in selling the asset.
$8000 incurred in preserving the value of an asset and $1500 used in preserving the
value of the asset are both allowed as a deduction.
As the shares are purchased by Sophia before 20 September 1985, the capital
gains and losses arising from their sales are disregarded from capital gains tax.
Similarly, the stamp duty collection is liable to CGT as the cost of acquisition exceeds
$500. Auction fees are allowed as a deduction as they are necessary in completing the
sale of the asset. The Bob Marley guitar can also be included in the definition of a
collectable. As its cost of acquisition is more than $500, the capital losses of $25000 are
incurred on the sale of the guitar. These capital losses on the guitar and the stamp
collections cannot be used to reduce the overall capital gains earned by Sophia from
the sale of the land.

5TAX
Conclusion
All of Sophia’s are liable to CGT as they are included as a part of the assets
defined under the CGT asset under ITAA 1997. Hence, tax needs to be paid on the
same. The Capital gains are earned from the sale of the block of land. CGT needs to be
ignored on the sale of shares. Capital losses are incurred on the sale of the stamp
collection and the Bob Marley Guitar. However, these capital losses cannot be used to
reduce the overall capital gains earned by her from the sale of land and other assets.
Question 2
Issue
Ava is concerned about the deductibility of the expenses incurred by her as a
part of undertaking employment in Sunshine hospital in Victoria and continuing it
successfully. The main issue in her situation is to determine whether the expenses
undertaken by her are a part of the employment generation procedures. It is also
necessary to understand if they can be considered as a part of her private or domestic
expenditure. On the basis of this knowledge, it becomes possible to determine whether
the expenses incurred by her are deductible from her annual assessable income or not.
The expenses incurred by Ava include travel expenses, relocation expenses, fees for
uniform, childcare expenses and expenses of similar nature. Other expenses include
the food expenditure, speeding fines and expenses incurred to travel from home to her
place of work. Based on the findings, advice can be provided to Ava about the total
expenditure which is exempted in Ava’s hands.

6TAX
Law
The main reason for not allowing expenses that are private and domestic in
nature as a deduction is that they tend to put the taxpayer in a position of producing
income rather than directly producing the income itself. Hence, expenses which are
necessary in generating the income are allowed as a deduction. Otherwise, they are
not. Consuming food and drink by the taxpayer is not an income producing activity by
the taxpayer. Hence, they are not allowed as a deduction under Ruling TR 98/9
(Ato.gov.au 2020). Similarly, expenses incurred in the process of obtaining employment
are not allowed as a deduction. The same was stated in FCT v Maddalena. These
expenses are considered to be too early in the process of income generation and hence
are not allowed as a deduction. Relocation expenses, as suggested by Fullerton v FCT
are not allowed as a deduction under s8-1 ITAA because they do only put the taxpayer
in a position of generating income and do not generate the income itself. Similarly,
childcare expenses are not deductible under the guidelines of the case law Martin v
FCT. Lunney v FCT and Ruling IT 112 state that travelling expenses incurred between
travelling from home to work during the normal working hours are not allowed as a
deduction (Ato.gov.au 2020). However, FCT v Collings states that the travel expenses
incurred outside the normal working hours are allowed as a deduction. S34-15 states
that if the whole uniform must be compulsorily worn, then the expenditure incurred in
relation to the same should be entirely deductible (Ato.gov.au 2020). Similarly, other
expenses like telephone expenses, if incurred as a part of conducting the job
successfully are allowed as a deduction in the hands of the taxpayer.

7TAX
Application
The travel expenses incurred by Ava to attend the job interview in Sunshine are
not allowed as a deduction. They are only putting her in a position of generating the
income rather than generating the income itself. Hence, $320 is not deductible.
Relocation expenses of $1800 are also not deductible for the same reason. As the work
uniform needs to be compulsorily worn by her, the expenses of $200 is allowed as a
deduction. Childcare expenses do not have a direct contribution towards the income
generated by her. Hence, they are not allowed as a deduction. The phone calls are
made as a part of the income generating process and hence are allowed as a deduction
in her hands. Hence, $200 is exempted from taxation purposes. Food expenditure of
$570 is not allowed as a deduction. Speeding fines and other fines are not allowed as a
deduction on the basis of the guidelines of ATO. Expenses incurred as a part of
traveling from home to work during the normal course of her job are not allowed as a
deduction.
Conclusion
Expenses which are said to have been incurred in generating the income or
producing the relevant profits during the course of the business are only allowed as a
deduction. Due to these reasons, Ava is able to deduct only $400 of the expenditure
incurred by her. This is because the phone calls and fees paid for the compulsory
uniform are necessary in producing the income and are directly related to the same.
However, other expenditure incurred by her are putting her position of generating
income rather than directly generating the income itself. Hence, the other expenses
incurred by her are not allowed as a deduction.

8TAX

9TAX
References
Ato.gov.au. (2020). Capital gains tax. [Online] Available at:
https://www.ato.gov.au/General/Capital-gains-tax/ [Accessed 28 Jan. 2020].
Ato.gov.au. (2020). Claiming mobile phone, internet and home phone expenses.
[Online] Available at:
https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/
Other-work-related-deductions/Claiming-mobile-phone,-internet-and-home-phone-
expenses/ [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). Police - income and work-related deductions. [Online] Available at:
https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Occupation-and-
industry-specific-guides/Police---income-and-work-related-deductions/?page=2
[Accessed 28 Jan. 2020].
Legislation.gov.au. (2020). Income Tax Assessment Act 1936. [Online] Available at:
https://www.legislation.gov.au/Details/C2017C00242 [Accessed 28 Jan. 2020].
Legislation.gov.au. (2020). Income Tax Assessment Act 1997. [Online] Available at:
https://www.legislation.gov.au/Details/C2017C00336/Controls/ [Accessed 28 Jan.
2020].

10TAX