Taxation: Analysis of Tax Deductible Expenses and Net Capital Gains/Losses

Taxation
STUDENT NAME/ID
[Pick the date]

Question 1
The various aspects of the transactions would be analysed in regards to determine the tax
deductible expenses for the taxpayer Ruby Engineering Pty Ltd.
(a) The expenditure paid by taxpayer in regards to replace the kitchen fittings would be
classified as repairs under TR 97/23. This is because the taxpayer does not have any motive
to change the character of the kitchen fittings which is evident from the fact that same type of
material as well as layout has been taken into account. The taxpayer can claim for the tax
deduction on the account of spending incurred on repairing under two provisions which are s.
8(1) ITAA 1997 and s. 25(10) ITAA 1997 (Barkoczy, 2017).
It is essential to note that 100% tax deduction would be available for the taxpayer as per s. 8-1
ITAA 1997 if the taxpayer is able to prove the relation between the incurred expenses and the
assessable income production (Krever, 2017). Further, in this regards it is imperative that the
expenses must not be categorised as capital expense. In accordance with s. 25(10) ITAA 1997
the deduction would be available for the taxpayer on the account of expenses incurred on repairs
of income producing properties though it is essential that expenses must be revenue type
(Reuters, 2017).
Based on the given information, it can be said that expenses incurred in the kitchen fitting are
capital in nature. This is because kitchen fittings such as fixing stove, sink, cupboard and
pluming are termed as part of the property only owing to them being permanent in nature.
Therefore, the expenses would be considered as capital expenditure and would contribute to the
cost base of the asset as per s. 110-25(5) ITAA 1997. Taxpayer would not be able to claim any
tax deduction on this capital expense (Sadiq et. al., 2015).
(b) The legal expense incurred with respect to rental property would be tax deductible only when
the property would result in assessable income for the taxpayer. Further, the essential aspect
is to check the nature of the expenses (capital or revenue). The nature of the outgoing would
be determined based on the characteristics of the benefits generated from the outgoing as
defined in the judgement of British Insulated and Helsby Cables Ltd v. Atherton [1926] AC
205 case. The benefits derived from capital expenses must be long lasting, significant and are
not restricted to a limited period (Deutsch, Freizer, Fullerton, Hanley & Snape,2015).
1

It can be seen that taxpayer is involved in a real estate business where the negligence related
claim are quite frequent. Further, the legal expenses incurred in this do not provide any long term
benefit to the taxpayer and rather it restricts the negligence liability (Coleman, 2016). Hence, the
expenses are revenue expenses and taxpayer can claim for the tax deduction under s. 8(1) ITAA
1997.
(c) Company has shifted their business from manufacturing company to real estate business.
There is some litigation as customer has been provided with defective engines/associated
parts. Further, due to this litigation the reputation of the company and the financial cash
outflows are also affected and thus, the business of the company is affected negatively. In
accordance with s. 8(1) ITAA 1997 the deduction would not be available for taxpayer
because the expense is capital expense (Sadiq et. al., 2015). Further, if it has been considered
that the claim amount would be an outflow in relation to business operation and therefore,
100% tax deduction would be available for taxpayer under s. 40-880, ITAA 1997 as five
equal annual payments (Barkoczy, 2017).
Question 2
The aim is to determine the net capital gains or losses for the given transaction incurred by Betty
for the sale of her capital assets.
Asset: Painting
Assets that are purchased by the taxpayer earlier than September 20, 1985 are considered as pre-
CGT assets in accordance with s. 149(10), ITAA 1997. Capital Gain Tax (CGT) implications
would not be imposed on the capital gains or losses derived from the sale of pre-CGT asset.
Hence, it is essential to determine whether the asset belongs to pre-CGT asset or not (Deutsch,
Freizer, Fullerton, Hanley & Snape,2015). Betty has purchased the painting before September
20, 1985 which implies that painting is a pre-CGT asset of Betty and hence, CGT implication
would not be levied on her. Further, the capital proceeds from asset sale are also tax free as
highlighted in s. 116-5 ITAA 1997 (Krever, 2017).
Asset: Shares
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