TAXATION LAW AND MANAGEMENT l ASSIGNMENT

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

1TAXATION LAW
Executive summary:
The current note is aimed at giving summary of tax related information to the taxpayer for the
applicable income year of 2019. The letter of recommendation will be covering the
substances of small business entity concession that are obtainable to the taxpayer. The letter
of advice will consist of facts whether the taxpayer will be instantaneously capable of writing
off each asset acquired by him recently. The letter of advice will also lay down the advice
relating to depreciation and will converse the most suitable technique that is appropriate for
the taxpayer.

2TAXATION LAW
Private and Confidential
Roma Tax Advice & CO
18 Pollock Street
Smithville VIC 3207
Mr Herbie
65 Smith Street
Smithville VIC 3207
Dear Herbie,
To proceed further with our most current discussion, we would request you to please
find below our letter of advice that contains valuable advice relating to the matters as
requested by you.
Scope:
The scope of this letter is to advice you on the matters relating to “Small Business
Entity” and its concession.
Note: Please note that the current letter simply excludes the tax consequences that will follow
if the asset is surplus in the organization either on the basis of loan, distribution or payment.
Facts:
The current advice is based on the relevant taxation laws, cases and guidelines that are
issued by the ATO as we understand its application in your situation.
Summary of Advice:

3TAXATION LAW
The necessary facts and assumptions on the basis of which our advice was based
along with the summary of your brief has been outlined in the Appendix A. In case you
notice that any of our facts or assumptions do not meet your understanding then please
contact us immediately because this will carry an effect on the advice that is given. In
summary our advice are as follows:
Issues:
1. Is Herbie is regarded as small business entity within the purpose of “ITAA 1997”?
2. Is Herbie eligible for claiming any available concession that are allowed to small
business entity?
3. Is Herbie allowed to claim an immediate deduction or write off of assets that is
purchased by her recently?
4. Is Herbie eligible for obtaining deduction in respect of the decline in value of asset or
any available method of claiming depreciation?
Rule:
Small Business Entity
As explained by the ATO a business may be classified as small business entity if it is a
partnership, company, individual or trust that is;
a. Doing or carrying any business
b. Has the total or aggregate turnover of lower than $10 million.
The aggregate turnover represents the yearly turnover along with the yearly turnover
of any other businesses a taxpayer is having connection with or have influence over it1. The
1 "Simplified Depreciation - Rules And Calculations", Ato.Gov.Au (Webpage, 2020)
<https://www.ato.gov.au/Business/Depreciation-and-capital-expenses-and-allowances/In-
detail/Depreciating-assets/Simplified-depreciation---rules-and-calculations/>

4TAXATION LAW
rule of aggregation ascertain when a person is required to include the yearly turnover of
another business when they are computing their aggregate turnover. An individual will be
classified as small business if they are not related with any other business and their business
turnover is lower than $10 million.
The small business Eligibility Test:
The small business eligibility test requires a business to meet one of the below stated
criteria;
a. It is a small business entity as explained in
“Div 328 ITAA 1997”, widely that is
executing its business activities and has the aggregate turnover of lower than $10
million during the income year; or
b. It is a partner in the partnership that is considered as the small business entity; or
c. The overall net “value of assets” of a taxpayer and its related entities do not surpass
$6 million2.
Active asset Test:
The asset that is disposed by the small business is used by the taxpayer in conducting
or doing business activities.
Concessional stakeholder test:
This test is only applied if the asset which is sold by the taxpayer in the company or
an interest in a trust.
Small Business CGT Concessions:
2 Barkoczy, Stephen, Foundations Of Taxation Law 2018

5TAXATION LAW
On satisfying the above stated small business eligibility test the small business are
given four CGT concessions when they sell their business assets3.
15-Year Exemption: Under “sec 152-105 ITAA 1997” a small business is given with 15-
year exemption from CGT is given upon retirement4. This requires the taxpayer to completely
ignore the capital gains if the taxpayer has used the asset for a minimum of 15 years in the
business.
50% Reduction in CGT: Under the “sec 152-205 ITAA 1997” another 50% reduction in
capital gains is given on top of the usual CGT discount.
Retirement Exemption: Under the “sec 152-305 ITAA 1997” a retirement concession is
allowed to the taxpayer to disregard the capital gains for a maximum of $500,000.
Replacement asset roll-over: Under “sec 152-405 ITAA 1997” a capital gain is deferred
until an event occurs to the “replacement asset”5.
Immediate writing off asset:
Within the instant asset write-off eligible business is allowed to claim;
a. Under the instant write-off the cost of every asset which has the cost of lower than the
threshold limit.
3 Deutsch, Robert Et Al, Australian Tax Handbook 2018 (Thomson Reuters Australia, 2018)
4 "Simplified Depreciation - Rules And Calculations", Ato.Gov.Au (Webpage, 2020)
<https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/in-
detail/depreciating-assets/simplified-depreciation---rules-and-calculations/?page=4>
5 Kenny, Paul, Michael Blissenden and Sylvia Villios, Australian Tax 2018

6TAXATION LAW
b. Obtain a tax deduction for business part of the purchase cost during the year in which
the asset is first used or installed as ready for use.
The instant asset write-off can be used for the new and second hand assets. The
$30,000 instant asset write-off provides the small business with the asset write-off. The asset
should have the cost of lower than instant asset write-off threshold and should be purchased
as well as used in the year when the write-off is claimed. In order to be eligible for claiming
an instant asset write-off a business should be recognized as small business by the ATO.
Depreciation:
Under the
“Div 40 ITAA 1997” uniform capital allowance is given to the taxpayer.
Under the
“sec 40-25 (1)” an entity is given the permission of claiming a deduction for the
decline in value for the income year relating to a depreciating asset that is held by the
taxpayer all through the year6. To compute the depreciation for majority of asset an individual
is permitted to implement the general depreciation rules unless a taxpayer is considered
eligible for using the install asset write off or the simplified depreciation for the small
business. The general rules of depreciation set down that the amount which can be claimed on
the basis of effective life of the asset.
To compute the depreciation, a taxpayer is allowed to claim depreciation either by
using the prime cost method or the diminishing value method. In majority of the cases, a
taxpayer is permitted to choose either of the two alternative methods for computing the
depreciation. This involves the
“prime cost method” and the
“diminishing value method”.
Under the prime cost method depreciation for decline in value of asset is computed by
6 Nethercott, Les, Australian Taxation Study Manual 2018 (Oxford University Press, 2018)

7TAXATION LAW
uniformly decreasing the asset over its effective life7. While the diminishing value method
presumes that the value of
“depreciating asset” decreases more during the yearly years of its
effective life.
Application:
Herbie in the current case be classified as small business entity since it is an
individual sole trader because he is carrying on the business and has the overall turnover of
less than $10 million. The business of Herbie is a small business entity under
“Div 328
ITAA 1997”, because it is executing its business activities and has the aggregate turnover of
lower than $10 million during the income year8. Furthermore it is assumed that the overall net
“value of assets” do not surpass $6 million.
As Herbie has met the eligibility test, he can obtain four CGT concessions when he
sell their business assets. Herbie can obtain a 15-year exemption under “sec 152-105 ITAA
1997” from the CGT when he retires from the business given that the assets are used by him
for a minimum of 15-years. Besides this Herbie is also eligible for a 50% reduction in CGT
within “sec 152-205 ITAA 1997” apart from the 50% reduction in capital gains is given on
7 "Prime Cost (Straight Line) And Diminishing Value Methods", Ato.Gov.Au (Webpage,
2020) <https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/
general-depreciation-rules---capital-allowances/prime-cost-(straight-line)-and-diminishing-
value-methods/>
8 Sadiq, Kerrie, Australian Taxation Law Cases 2018 (Thomson Reuters, 2018)

8TAXATION LAW
top of the usual CGT discount9. Furthermore a retirement exemption and a replacement asset
rollover is also available to Herbie.
Herbie during the year has purchased three new VW Beetle. Under division 40 capital
allowance can be claimed by Herbie. To compute the depreciation for majority of asset
Herbie is permitted to implement the general depreciation rules10. With respect to the
“sec
40-25 (1) ITAA 1997” Herbie can claim decline in value of the red VW Beetle is more than
$33,000 because the value of asset is more than the instant asset write-off limit. The instant
asset write-off can be used for the new VW Beetles. As Herbie is a small business it is
qualified for an instant asset it can immediately write off the VW Beetle and yellow VW
Beetle because the value of its asset is lower than $30,000 threshold limit. While the VW red
Beetle asset is depreciated on the basis of prime cost method. The prime cost method is
considered as the most appropriate method of depreciating the asset as this will allow Herbie
to claim deduction on the constant basis11. The asset is purchased as well as used in the year
when the write-off is claimed by Herbie. It is assumed that the asset has the effective life of
five years.
Taxable Income and Tax Liability
The case study further provides that Herbie has reported a total taxable income of
$420,334 following the deduction of all the expenses incurred by the business. The total
9 Taylor, C. J et al, Understanding Taxation Law 2018
10 "Deductions For Prepaid Expenses 2019", Ato.Gov.Au (Webpage, 2020)
<https://www.ato.gov.au/Forms/Deductions-for-prepaid-expenses-2019/?page=5>
11 Woellner, R. H, Australian Taxation Law 2018

9TAXATION LAW
assessable income for the business stands $11,660,150. On the other hand the total allowable
expenses for Herbie for the year ended 30th June 2020 is $11,239,818. The total amount of
Medicare levy is imposed on the taxable income for Herbie is $8,406.6812. The information
furnished also provides that a PAYG has been withheld that amounted to $5,000. The PAYG
that has been withheld has been considered as a permissible tax offset and same is deducted
from the overall tax liability that is payable by Herbie. On the basis of the information that
has been furnished it can be stated that the overall tax liability for the Herbie stands
$165,653.68.
Conclusion:
Preceding from the above given explanation the advice can be concluded by stating
that Herbie business activities will be categorised as small business entity because the
business being carried on as a sole trader. The business is eligible for small business entity
concession under
“Div 328 ITAA 1997”. This is because the aggregate turnover for the
business during the year do not exceeds the threshold limit of $10 million during the income
year and overall net “value of assets” of the taxpayer and its related entities do not surpass $6
million threshold limit. Herbie will be allowed to claim instant asset write off for blue VW
Beetle and yellow VW Beetle that is purchased by him on 15th February and 6th June
respectively. While for the red VW Beetle depreciation for the decline in value can be
claimed as the cost of asset is beyond the threshold limit of $30,000.
As it has been stated earlier once you have accordingly reviewed our advice given and
you find it appropriate then please let us know as this will have an impact on your tax return.
If you are looking forward to discuss with us for any of the above given matters in more
12 Woellner, R. H, Stephen Barkoczy and Shirley Murphy, Australian Taxation Law 2019

10TAXATION LAW
detail then we will request you to please not hesitate and you can contact or reach our
registered office at any point of time during our office hours.
Yours Sincerely
Associate Taxation
Roma Tax Advice & CO

11TAXATION LAW
References:
"Deductions For Prepaid Expenses 2019", Ato.Gov.Au (Webpage, 2020)
<https://www.ato.gov.au/Forms/Deductions-for-prepaid-expenses-2019/?page=5>
"Prime Cost (Straight Line) And Diminishing Value Methods", Ato.Gov.Au (Webpage,
2020) <https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/
general-depreciation-rules---capital-allowances/prime-cost-(straight-line)-and-diminishing-
value-methods/>
"Simplified Depreciation - Rules And Calculations", Ato.Gov.Au (Webpage, 2020)
<https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/in-
detail/depreciating-assets/simplified-depreciation---rules-and-calculations/?page=4>
"Simplified Depreciation - Rules And Calculations", Ato.Gov.Au (Webpage, 2020)
<https://www.ato.gov.au/Business/Depreciation-and-capital-expenses-and-allowances/In-
detail/Depreciating-assets/Simplified-depreciation---rules-and-calculations/>
Barkoczy, Stephen, Foundations Of Taxation Law 2018
Deutsch, Robert Et Al, Australian Tax Handbook 2018 (Thomson Reuters Australia, 2018)
Kenny, Paul, Michael Blissenden and Sylvia Villios, Australian Tax 2018
Nethercott, Les, Australian Taxation Study Manual 2018 (Oxford University Press, 2018)
Sadiq, Kerrie, Australian Taxation Law Cases 2018 (Thomson Reuters, 2018)
Taylor, C. J et al, Understanding Taxation Law 2018
Woellner, R. H, Stephen Barkoczy and Shirley Murphy, Australian Taxation Law 2019
Woellner, R. H, Australian Taxation Law 2018

12TAXATION LAW

13TAXATION LAW

14TAXATION LAW
Appendix:
Computation of Taxable Income
For the year ended 30th June 2019
In the books of Herbie
Particulars Amount ($) Amount ($)
Assessable Income
Beetle Hire 11660152
Total Assessable Income 11660152
Allowable Deductions
Contractors 5940065
Fuel 223486
Marketing 4087765
Rent 530000
Repairs and Maintenance 365700
Instant Write off
VW Beetle (15th February 2019) 28000
VW Beetle (6th June 2019) 29000
Depreciation (VW Beetle 1st October 2018) 6600
Sundry Expenses 29202
Total Expenditure 11239818
Total Taxable Income 420334
Tax on Taxable Income 162247
Add: Medicare Levy 8406.68
Less: PAYG Withholding 5000
Total Tax Payable 165653.68