Taxation Law : ITAA-1997 Answers

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

TAXATION LAW1
Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................6
References:...............................................................................................................................10

TAXATION LAW2
Answer to question 1:
Answer A: Sale of block of land:
The cost of the asset normally includes five elements. The first element of cost base
under “sec 110-25 (2)” includes the overall money paid or property given to obtain an asset.
While the second element of cost base represents the incidental costs under “sec 110-35”.
These cost includes stamp duty, legal fees etc. paid to acquire an asset. “Sec 110-36”
involves the cost of ownership as the third element of cost base (Nightingale 2014). The
ownership costs involves the interest, ownership cost of maintenance, insurance and land
taxes. The fourth element of the cost base involves the capital improvement and preservation
cost under “sec 110-38 ITAA 1997”. The examples of this type of cost includes
improvement, moving and installation expenditure.
The fifth element of the cost base includes capital expenditure that is occurred in
maintaining the title rights to assets. The examples of this cost under the “section 110-45
ITAA 1997” involves cost occurred in opposing the compulsory acquisition of land by
government.
Sophia in the current case has reported the sale of block of land for $800,000. The
land was actually purchased by Sophia for $130,000 in 1991. In order to ascertain the CGT of
the land it is important to understand the acquisition cost of asset (Mankiw, Weinzierl and
Yagan 2019). Under the “sec 110-25 (2)” the acquisition cost of asset would include the
purchase price paid by Sophia to acquire the asset. Sophia further reports the payment of
stamp duty of $800 and legal fees of $1200. With regard to “section 110-35” these costs will
be classified as incidental costs and hence Sophia is required to include the same in the cost
base of her asset.

TAXATION LAW3
In order to purchase the investment property Sophia had secured a bank loan and paid
an interest amount of $27,000 against the loan. When the property was under the ownership
of Sophia she paid a council rates, water rates and insurance which totalled $18,500.
Referring to “section 110-36” these expenses must be classified as property ownership cost
and Sophia is required to add into the cost base in order to determine the net capital gains
(Burman et al. 2016). Later in the year a dispute happened with neighbour regarding the use
of property and Sophia incurred a legal fees which amounted to $8,000. Under “sec 110-25
(6)”, these costs will be regarded under the fifth element cost base for establishing the title
cost of property. Finally, before the property was put on sale, Sophia reported the expense on
removing the pine trees that hazardously present on the property (Higgins 2014). Under the
“sec 110-25 (5)” it is a capital expenditure which the taxpayer has occurred in increasing the
asset value and as a result, Sophia should include it in her cost base.