Understanding Australian Taxation Law: Capital Gains and Deductions

This document provides an overview of the Australian taxation system for income and capital gains. It explains the reporting requirements for various types of income and the deductions and exemptions available to individuals. The document also includes scenarios involving the sale of land, shares, stamp collection, and personal assets, as well as the allowable deductions for work-related expenses and the limitations on deductions for domestic or private expenses.

TAXATION LAW

TABLE OF CONTENTS
INTRODUCTION...............................................................................................................1
QUESTION 1.....................................................................................................................1
a) Sale of land ...............................................................................................................1
b) Sale of Shares............................................................................................................3
c) Sale of stamp collection ............................................................................................3
d) Sale of Bob Marley Guitar..........................................................................................4
QUESTION 2.....................................................................................................................4
a) Travel Expenses. ......................................................................................................5
b) Moving expenses to relocate in Darwin. ...................................................................5
c) Payment of white uniform...........................................................................................6
d) Childcare expenses...................................................................................................6
e) Phone calls for attending patients. ............................................................................6
f) Food purchase for evening shifts ...............................................................................6
g) Speeding fine in emergency.....................................................................................7
h) Travelling expense.....................................................................................................7
CONCLUSION ..................................................................................................................7
REFERENCES..................................................................................................................8

INTRODUCTION
Most of the major business taxes of business like the income tax is collected by
Australian Government via Australian Taxation Office. Over some scenarios state taxes
are also applicable, generally for the payroll tax. There are number of tax treaties held
by Australia. It is holding number of tax treaties with many nations for preventing the
double taxation. An Australian resident individual are liable for income tax on worldwide
basis. Tax is collected every financial year from the working individuals (Woellner and
et.al., 2016). Australian income tax is based on progressive basis higher the income
higher is the tax liability. Present Report will provide understanding about the Australian
taxation system for income and the capital gains. It will provide about the incomes to be
reported and deductions and exemptions available to the individual in his tax return.
QUESTION 1
Capital gain refers to difference between acquisition price and the price received
on its sale. Tax over capital gains are levied when the gain is made on sale of asset.
Capital gain tax is applicable to shares, property, goodwill, foreign currency, licences,
contractual rights & the assets of personal use that are purchased above $ 10000.
main residence, cars, depreciating assets that are used for the taxable purpose. Assets
purchases before September 20, 1985 are tax exempt.
Capital gain tax is not separate tax it is the part of personal income tax. When the
property is owned for more than 12 months, on its sale capital gain tax becomes slight
complicated process. Capital gain is taxable as per the Income Tax Assessment Act,
1936 (Fry, 2017). The law provides for the provision and relevant rules regarding the
taxation of capital gains in the income tax return of individual. Section 104 of ITAA,
1997 provides the provisions of Capital gain event on disposal. Short term capital gain
arise if asset is hold for less than 12 months with tax rate upto 37%. When the assets
are hold for more than 12 months capital gains are taxed at lower rates of around 20%.
a) Sale of land
When the land is sold residents are atttract the CGT event and are liable to
capital gain tax on the profitable sale.
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Sale Proceeds 800000
Cost Base
Cost of Purchase 130000
Stamp Duty 800
Legal Fees 1200
Removal of Pine trees 1500
Agent's fees & solicitor's Fees 25000
Cost Base Un-indexed 158500
Capital Gain on Sale
Proceeds on Sale 800000
Less : Un-indexed Cost base 158500
Capital Gain 641500
Tax on capital using discounting
method
Capital Gain 641500
Discount 50%
Net taxable capital gain 320750
Sophia sold the land acquired in 1991 for $ 800000 that was purchased for
$130000 in 1991. She incurred the expenditures on stamp duty and legal fees of $ 800
& $1200 respectively. Before the property was put for sale expenditure was incurred for
removal of pine trees for bringing the property to saleable condition. She also incurred
expenses on legal fees, advertising and fees of the agent on sale of land amounting
$25000 (Capital Gains Tax, 2019). Australian taxation guidelines provides that council
rates, insurance tax, and interest on borrowing for purchase of the property. These will
be forming part of cost base if property is acquired after August 20, 1991. In the present
case it is assumed that property is purchased before 20 August, therefore the above
expenditures are not included in the cost base (Brown, 2018). The deductions are not
available as it was not used for producing assessable income. She had capital gain of
$320750 using the discounting method.
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b) Sale of Shares
Investment by shares in any company have the same capital gain tax
consequences like any other asset that are used for capital gain tax purpose. It attracts
CGT when the share are sold. As per the guidelines issues by the taxation office it could
be analysed that the shares that are acquired before September 20, 1985 are exempt
from the the capital gain tax consequences. Sophia would be required to pay capital
gain if she had purchased the shares after September, 1985. Since she acquired the
shares in company in 1983 the capital gain on their sale is exempt (Exemptions and
deductions, 2019). The brokerage fees paid on disposal of shares are allowed as
deduction from the sale proceeds.
Sale of 2000 shares
Sale Proceeds 64400
Cost of Acquisition 3000
Brokerage fees 644
Capital Gain 60756
c) Sale of stamp collection
Sale of stamp collection by Sophia will be liable to capital gain tax. Purchase of
stamps are generally considered as the collectables which are acquired by the
individual as personal interests. Sophia purchased the shares for $ 33000 in January
2018 that means she hold the collection for less than 12 months. The stamps are
purchased by private collector. She is not a dealer of stamps and has purchased them
for personal use. If they are considered as collectables than also capital gain tax will be
applicable as they are not worth below $500. Therefore the capital gain tax are to be
calculated like any other assets (McBarnet, 2019). Auction fees incurred for sale of
asset will be included in the cost base of stamps purchased. She had made a capital
loss on the sale of collectables. This loss can be claimed by Sophia again the capital
gain over the sale of any other collectables. The capital loss of $13000 cannot be
claimed against any other capital gain by her (Murphy, 2019). Sale of stamps within 12
months will have the short term capital loss.
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Sale of Stamps
Proceeds on Sale 23000
Cost Base
Purchase price 33000
Auction fees 3000 36000
Capital loss -13000
d) Sale of Bob Marley Guitar
The tax office of Australia provides for exemptions over the assets purchased for
personal use. Purchase of Bob Marley guitar is for personal use of Sophia. The guitar is
considered as personal asset as it is used mainly for personal enjoyment or use. It has
been stated in Section 108.20 of ITAA, 1997 that losses arising from the personal use
assets are to be disregarded. Though Sophia has incurred the capital loss over the sale
of guitar this will not be allowed against the capital gain from sale of land. Whole of the
capital loss of $ 25000 will be disregarded while computing the capital gain tax for the
year of Sophie.
Sale of Guitar
Proceeds on Sale 45000
Less; Purchase price 70000
Capital loss -25000
For the income tax return of year 2018 the capital gains will be include in the tax return.
The taxable capital gain is incurred only on sale of land. Gain over sale of shares is
exempt as purchased before 1985. The capital loss on stamp sale and guitar sale
cannot be adjusted against the capital gain from land. Capital gain will be taxed at the
tax rate of 20%.
QUESTION 2
Issue : Identifying outgoings of Ava as allowable deduction or expense of domestic or
private nature.
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Deductions
Deductions can be referred as an item or expenditure which is subtracted from
the total gross income for reducing the income subject to the income tax. Income tax
are paid on money that is paid over the money that is received like salary, wages, rental
income, dividends and interests and profits on sale of shares. Individual can reduce tax
liability for the tax year by claiming the deductions which are related directly to the
income earned. Deductions can be claimed for work related expenses. For work related
deductions money which have been spent and not been reimbursed.
Deductions could be claimed for the outgoings or losses incurred for producing or
gaining assessable income. Tax deductions have not been provided for the expenses of
domestic or private nature. Example : personal medical expenses, private insurance
premiums, child care costs, clothes for family, etc. There is relationship between the
assessable income and outgoing income as they are incurred for producing the
assessable income (Allowable deductions, 2019). Domestic or private expenses are
the expenses which are incurred for personal care and not for producing any
assessable income. If the expenditure is incurred partly for work related and partly for
personal use. Deductions would not be available for private use but only for work
related expense. Receipts are required to be produced for claiming the deductions in
the income tax return.
a) Travel Expenses.
The travel expenses incurred by Ava for the job interview expenses could be
claims as deductions if she has selected in the hospital. ITAA 36 and taxation office
provides that expenses that are related to the work related and not been reimbursed
can be claimed as deduction. Travel expenses are related to work which has not been
reimbursed by the hospital to her.
b) Moving expenses to relocate in Darwin.
The moving expenses have been incurred by the Ava for relocating her stay in
Victoria. The expenses incurred are not for work related and for personal purpose.
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They cannot be regarded as work related as the expenditure is not incurred for
producing assessable income. Though the shifting has been made for employment it
cannot be regarded as work related as per Australian tax department.
c) Payment of white uniform.
Ava is allowed for deduction of amount paid for the purchase of uniform. She is
not allowed to work without uniform in the hospital. The expenses incurred for the
uniform is not reimbursed by the hospital therefore she can claim deduction of $ 200 for
uniform. Any other purchase which is not related to the employment cannot be claimed
as deduction by the individual in her return.
d) Childcare expenses.
The childcare expenses of $ 18200 for her daughter are incurred during the year.
The Taxation office provides that the expense of private or domestic nature are not
allowed for deduction in the personal tax return of individual. Childcare expenses are
specifically mentioned in the non allowable deductions by the taxation department.
Childcare expenses are not related to the production of assessable income (Personal
deductions, 2019).
e) Phone calls for attending patients.
Ava is working as doctor in the sunshine hospital where she is required to talk to
paitients. The phone calls made by Ava are tax deductible as they are incurred for
checking the patinets. The calls were not made for private or domestic purpose but for
work related. Tax law provides that the expenses that are incurred for work related are
allowed as deductions in the return (Berg and Davidson, 2016). If the phone call costs
include both private and work calls she can claim deductions only for hospital calls.
f) Food purchase for evening shifts
Purchase of food for evening shifts cannot be claimed as deduction. The
expenditure is not incurred for earning assessable income but for living. Though the
food is purchased for working in evening shifts but is not related to work or earning
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assessable income. Tax law provides deductions for food allowance paid by employer.
Expense is for private and domestic purpose.
g) Speeding fine in emergency
Speeding fine paid by Ava cannot be claimed as deductions as the tax office
specifically provides that fines and penalties are non allowable deductions (Allowable
deductions, 2019). The fine payment is not allowed as deduction under tax law.
h) Travelling expense
Travelling expense incurred by Ava are for earning the assessable income .
Travel expense to any place other than office are not allowed as deductions. If the
travelling expenses are been reimbursed by hospital than it will not be allowed as
deduction in the tax return of Ava for the year (Taylor and et.al., 2017).
CONCLUSION
The above study shows that all the incomes and expenses are guide by the ITAA
36 and the further guidelines provided by Australian Taxation Office. The project has
given understanding about the capital gain events and the exemptions allowed. An
individual can claim deduction for his work related expenses. They have to keep the
receipts of expenditure incurred for earning assessable income. They are not allowed
for deductions related with private or domestic purpose. The tax liability of an individual
is calculated after claiming all the deductions and exemptions where applicable.
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REFERENCES
Books and Journals
Woellner, R., and et.al., 2016. Australian Taxation Law 2016. OUP Catalogue.
Fry, M., 2017. Australian taxation of offshore hubs: an examination of the law on the
ability of Australia to tax economic activity in offshore hubs and the position of the
Australian Taxation Office. The APPEA Journal. 57(1). pp.49-63.
Brown, C., 2018. Submission to the Inspector-General of Taxation, Review into the
Australian Taxation Office’s use of Garnishee Notices.
McBarnet, D., 2019. When compliance is not the solution but the problem: From
changes in law to changes in attitude. Centre for Tax System Integrity (CTSI),
Research School of Social Sciences, The Australian National University.
Murphy, K., 2019. Moving towards a more effective model of regulatory enforcement in
the Australian Taxation Office. Centre for Tax System Integrity (CTSI), Research
School of Social Sciences, The Australian National University.
Berg, C. and Davidson, S., 2016. Submission to the House of Representatives Standing
Committee on Tax and Revenue Inquiry into the External Scrutiny of the
Australian Taxation Office.
Taylor, J., and et.al., 2017. Understanding Taxation Law 2018. LexisNexis Butterworths.
Online
Capital Gains Tax. 2019. [Online]. Available through :
<https://www.ato.gov.au/General/Capital-gains-tax/Your-home-and-other-real-
estate/Calculating-the-cost-base-for-real-estate/>.
Exemptions and deductions. 2019. [Online]. Available through :
<https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-exemptions/>.
Allowable deductions. 2019. [Online]. Available through :
<https://www.ato.gov.au/Business/Income-and-deductions-for-business/
Deductions/>.
Personal deductions. 2019. [Online]. Available through :
<http://taxsummaries.pwc.com/ID/Australia-Individual-Deductions>.
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