Taxation Law Answer 2022

TAXATION LAW

Taxation
Answer – 1 Capital gains tax
a. Capital gain in respect of family home
It has been observed that Australian residents can claim exemption of tax on residents
if and only if the property is owned by them. Therefore it can be stated that Jasmine
can claim exemption of tax for residence. It has been verified that Jasmine is a citizen
of the United Kingdom and have never used the property for any kind of commercial
purpose which can help her to earn a profit using it. The property owned by her was
registered in her name and was used as a residence and also it was observed that all
her emails posted at this address. Therefore all the requirements for exemption of the
tax have been met by her (Australian government, 2019). The cost price of the property
owned by her was $40,000 which is now being sold for $650000. The capital gain
earned on this transaction will be calculated on the total profit made on the sale which
amounts to $610,000. As she is eligible for the exemption of capital gains tax, the profit
earned by her will not be reduced by 50%. It was observed that the property was
bought in the year 1981 and according to the property law, any land all property which
have been purchased before the year 1985 will have an exemption from the capital
gains tax (Cordato, 2017).
Heavy taxes are applied by countries like Australia on capital gains and are termed as
capital gains tax. Assets that are having a net value of $10,000 are needed to be taxed
for capital gains. Hence, as it was observed that Jasmine was an Australian resident
with the property being used as a residential home for her, she will be exempted from
paying the capital gains tax on the sale of her residential property (Black, 2019).
b. The capital gain or loss made by the sale of the car
All the assets like motorcycles, car, main residence, depreciable assets, etc which
have been purchased before the date 20th September 1985 are observed to be
exempted from the capital gains tax. It was observed that the total capital loss of
$21000 was to be paid. It has been observed that the total tax liability will not be
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registered as the capital gain was also not being recorded (KMPG, 2019). Hence, there
will be no changes made in the value of the capital gains. Generally, it is observed that
capital loss is adjusted with capital gains. The long term capital gains are used to
adjust the capital loss that has been incurred by the individuals on the sale of assets.
The capital loss earning from the sale of the assets can also be adjusted with the help
of short term capital gains provided all the provisions should include any type of
capital assets except shares.
c. The capital gain on the sale of the business
Total discount of 50% can be claimed as capital gains that have been earned by selling
the business. This discount can only be claimed by the organizations and not by
individuals. The age of an individual should be 55 years if he wants to claim these
exemptions. Hence, Jasmine is eligible for this exemption because her age was 65
years at the time of sale of the business (Mursgruv, 2019). All that can be clearly stated
that the business was established a lot before 15 years ago because she was on the
verge of retirement and have started the business just after entering Australia and
settling there. The total value of tangible and intangible assets amounted to $125000.
The total value of the capital gains tax can be reduced from the final consideration of
the value of assets. A total of $50000 was evaluated as capital gains tax. A 50%
discount can be availed by air as an exemption which will turn the amount to $25,000.
d. The capital gain on selling the furniture
All the assets that are used by an individual for personal purposes are termed as
personal assets. Also, it has been stated that any personal asset which is having a cost
value of less than $1000 will be exempted from capital gains tax. Therefore the
furniture purchased by Jasmine will be exempted because all results under the
exemption limit and also the assets were used for personal use only. Hence an
exemption can be claimed on the acquisition value of the sale of the furniture
(Nethercott, Richardson & Devos, 2013). The purchase value of the furniture was $2,000
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and the sale value was $5000 because of which it can be clearly stated that they will be
exempted from capital gains tax.
e. The capital gain about selling the paintings
Capital gains tax and dividend on the capital gains on the sale of paintings.
Exemptions can only be availed if the purchase amount is less than or equal to 500
dollars. Also, it should be noted that the paintings are not used for commercial
purpose or any other revenue-generating business activity (Patnia, 2011). Jasmine was
observed to buy two paintings of $500 and $1000 out of which the second painting will
be charged for capital gains tax. The owner of the paintings will be liable to pay capital
gains tax on the total profit earned from the resale of the painting that was bought for
$1000. The total profit made by her on the sale was $4000 which will be further reduced
by 50% in order to calculate the capital gains tax which will amount to $2000.
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Taxation
Answer – 2 Capital Allowance
Discussion of the problem
John manufactures BMW’s parts and accessories. On 1st November 2014, he purchased
a CNC machine for $ 300,000. An expenditure of $ 25,000 was incurred in the installation
of a computerized numerical control machine. John incurred additional expenditure in the
purchase of a spare part for the computerized numerical control machine. The spare part
was purchased at $ 5,000 on the first day of February. The additional spare part was
purchased to increase the efficiency of the CNC machine. A visit to Germany was also
made by John for inspecting the CNC machine. A total expenditure of $ 12,000 was
incurred during this trip to Germany. The computerized numerical control must be
accounted for depreciation from the date at which the same was acquired. The date at
which the computerized numerical control machine was installed or put into use is
irrelevant for calculating depreciation (Black, 2019).
The date at which the CNC machine was acquired, the installation date, cost of additional
spare part, overall cost incurred in the Germany trip, installation cost, and amount at which
machine is purchased will be needed to calculate the overall cost of asset acquisition.
Law and Application
The expenditure incurred in the Germany trip is not a direct cost as it has nothing to do
with increasing the efficiency of the machinery. This expenditure was not a necessary one
and hence, the same shall be completely ignored in the calculation of the asset’s actual
cost of acquisition. John’s purpose behind visiting Germany was only to learn how to
install a computerized numerical control machine. The trip to Germany was not intended to
increase the productivity of the machine. The overall expenditure incurred in the trip will be
deemed as an indirect cost as it is neither a necessary expenditure nor it will increase the
efficiency of the machine. The expenditure borne on this trip to Germany shall be excluded
from the calculation of the total cost of asset acquisition as it has nothing to do with
enhancing the efficiency or output of the computerized numerical control machine. As this
trip will not aid in increasing the performance and the efficiency of the CNC machine,
therefore, the same shall be ignored during the calculation of the actual cost of asset
acquisition (Yardney, 2019).
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Taxation
An additional rod was purchased by John to enhance the efficiency of the CNC machine.
This expenditure is a direct cost as it has a direct relation with enhancing the worthiness of
the asset. This expenditure can also be treated separately that is it can be regarded as a
separate item and charged for depreciation. As the additional rod is purchased specially to
enhance the productivity of the computerized numerical control machine therefore, it
qualifies for capital gains tax. John incurred expenditure towards the purchase of an
additional rod to make sure that the computerized numerical control machine delivers
better output. The rod was purchased for $ 5,000 for increasing the productivity of the
computerized numerical control machine. This expense can be regarded as a necessary
expenditure and it can be treated as a cost or a separate line item. The expenditure is
incurred to increase the output of the computerized numerical control machine and
therefore, it is eligible for CGT.
The expenditure incurred in the installation of the computerized numerical control machine
is a direct cost and therefore, the same must be taken into consideration while calculating
the total cost of asset acquisition. The CNC machine was bought at $ 300,000 and the
cost of its installation amounted to $ 25,000. The total cost of CNC machine amounts to $
325,000 (300,000+25,000).
The books of accounts are to be updated with the purchase entries of computerized
numerical control machine. The date on which the purchase of machinery is recorded in
the books shall be considered as the date of its acquisition. The installation of the CNC
machine was done in January and the cost of installation of the same amounted to
$25,000. The computation of the actual cost of asset acquisition must also include
installation cost. Installation cost is a necessary expenditure and hence the same must be
regarded as a direct cost. If the machine is not installed, then the same cannot be taken
into use. Hence, the installation cost is a direct cost and must not be ignored in the
calculation of the actual cost of asset acquisition (ATO, 2019).
The CNC machine was bought in November and was kept idle until January. This doesn’t
mean that the machine will be charged for depreciation January onwards. The machine
must be accounted for depreciation as soon as it bought or recorded in the books
irrespective of the fact when the same is installed. The expenditure incurred towards the
machine installation and purchase of an additional spare part is a direct cost and these
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must be considered while determining the actual cost of asset acquisition. Hence the
overall cost of asset acquisition amounts to $330,000 (300,000+25,000+5,000). The total
depreciation on CNC machine amounts to $12,000.
Conclusion
The CNC machine can deliver its function only because of various additional costs that
were incurred towards its installation and purchase of the additional spare part. If these
direct costs would not have been incurred then the machine would not have been able to
deliver the expected output. The depreciation on an asset must be accounted from the
date the same is purchased irrespective of the date from which the same was installed or
taken into use. It is highly due to the machine’s efficiency that keeps falling with each
passing day whether the same is taken into use or not. Any expenditure that does not
have a direct link with enhancing the efficiency of the machine must be ignored while
calculating the actual cost of asset acquisition.
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References
ATO 2019, Your main residence, viewed 23 September 2019
https://www.ato.gov.au/General/Capital-gains-tax/Your-home-and-other-real-estate/Your-
main-residence/
Australian government 2019, Residential Premises, viewed on 22 September 2019 <
https://www.ato.gov.au/Business/GST/When-to-charge-GST-(and-when-not-to)/Input-taxed-
sales/Residential-premises/>
Black, E 2019, What is Capital Gains Tax and how do I calculate it?, viewed on 22 September
2019 < https://www.realestate.com.au/advice/what-is-capital-gains-tax/>
Black, E 2019, What is Capital Gains Tax and how do I calculate it?, viewed on 22 September
2019 < https://www.realestate.com.au/advice/what-is-capital-gains-tax/>
Cordato, A 2017, A Guide to Tax and the Family Home, viewed 23 September 2019
https://www.lexology.com/library/detail.aspx?g=976078a8-d5aa-4ce5-90a5-
34c4702ae89c
https://www.realestate.com.au/advice/capital-gain-vs-cash-flow/?pid=article-page|
source:advice:article-page-bottom
KMPG 2019, New GST rules for property developers, viewed on 22 September 2019 <
https://home.kpmg/au/en/home/insights/2018/05/gst-rules-for-property-developers-
from-july-2018.html>
Mursgruv, A 2019, Digital Taxes Down Under: Australia’s GST, viewed on 23 September 2019
<https://quaderno.io/blog/digital-taxes-australias-gst/>
Nethercott, L., Richardson, G.,& Devos,K.. (2013) Australian Taxation Study Manual. Oxford
university Press
Patnia, A 2011, No Capital gain tax or income tax on profit on sale of a car or other personal
effect, viewed 22 September 2019, https://taxmantra.com/capital-gain-tax-income-tax-
profit-sale-car-personal-effect/
Yardney, M 2019, A Complete Guide to Capital Gains Tax, viewed on 13 September 2019 <
https://propertyupdate.com.au/a-complete-guide-to-capital-gains-tax/>
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