Answer - 1 Capital gains tax a. in respect of family home

Capital gain in respect of family home The residents of Australia can claim tax exemption on capital gain earned from the sale of the family home if only they have the ownership of that property (Yardney, 2019). Jasmine acquired and has been residing in this residential property since 1981, and as per the law, any property that is bought before 1985 will not fall under the ambit of CGT. Hence, all these details suggest that Jasmine is eligible to claim full CGT exemption on the capital gain earned from

TAXATION LAW

Taxation
Answer – 1 Capital gains tax
a. Capital gain in respect of family home
The residents of Australia can claim tax exemption on capital gain earned from
the sale of the family home if only they have the ownership of that property
(Camp, 2019). In the given case, it can be seen that Jasmine is the owner of the
property and she has solely used the same for residential purposes only. Jasmine
has citizenship of United Kingdom and she moved to Australia long back. The
property was registered in her name and all her emails were received at this
particular address. Therefore, Jasmine qualifies all the requirements for availing
tax exemption on capital gain earned from the sale of her family home. The
residential property was purchased by Jasmine for $40,000 and the same was
sold at $650,000. This means that the residential property was sold at a capital
gain of $610,000 ($650,000-$40,000). The earnings from this residential property
cannot be taxed as Jasmine does not fall under the purview of CGT (capital gains
tax). Jasmine acquired and has been residing in this residential property since
1981, and as per the law, any property that is bought before 1985 will not fall
under the ambit of CGT.
CGT is levied in multiple countries. Even in Australia, the citizens have to pay
CGT on the capital gains earned by them from the disposal of an asset. Any asset
that has a worth of ten thousand dollars will fall under the ambit of CGT (Orem,
2019). Jasmine who is a resident of Australia is the owner of her property that
was purchased in 1981 has used this property solely for residential purposes.
Hence, all these details suggest that Jasmine is eligible to claim full CGT
exemption on the capital gain earned from the sale of her property used for
dwelling purposes (Manto, 2019).
b. The capital gain or loss made by the sale of the car
Assets like four-wheelers, motorbikes, residential property, machinery, etc that
are bought on or before September 20, 1985, is exempted from CGT. Jasmine
earned a capital loss amounting to $21,000 from the sale of her car. Jasmine will
not be liable to pay capital gains tax as there have not been any capital gains
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earned from the sale of the car. Jasmine might have been liable to pay CGT if
there would have been any capital gains earned from the disposal of the car. It is
a known fact that capital loss can be absorbed by capital gains (Patnia, 2011).
This means that capital gains can only be used to set-off capital loss. Capital loss
earned from the disposal of long term capital assets can be set-off using long-
term capital gains. Capital loss earned from the disposal of short-term capital
assets can be set-off using both long-term capital gains and short-term capital
gains. This provision applies to all types of capital assets excluding shares.
c. The capital gain on the sale of the business
Capital gain earned from the sale of the business is partially exempted from
capital gains tax. A discount of 50 percent can be availed on the capital gain
earned from the sale of a business. Only organizations can claim this discount
and not individuals. Any individual who wishes to claim this discount shall be
over and above 55 years of age. Jasmine can claim this discount since she is 65
years old which is way higher than the required ceiling to qualify for the 50
percent exemption on capital gains that are earned from the sale of the business
(Brown, Ferguson & Sherry, 2010). As per all the calculation, it can be understood
that her business was started at least fifteen years ago as the same was
established soon after she shifted to Australia and when she shifted she was
almost nearing her retirement. The overall value of intangible and tangible assets
owned by Jasmine stands at $ 125,000. The capital gain earned by her amounts to
$50,000 and as she can claim 50% exemption on the same, therefore, her CGT is
$25,000.
d. The capital gain on selling the furniture
Assets used for personal purposes are called personal assets. Personal assets
that are worth $1,000 or anything lesser shall not be charged for CGT (Yardney,
2019). This means that the furniture owned by Jasmine shall be exempted from
the purview of capital gains tax. She can claim an exemption only on the value at
which the furniture is acquired. The furniture was purchased for $2,000 and the
same was sold at $5,000. This means that the furniture shall not fall under the
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purview of CGT. Hence, CGT not applicable in the case of capital gain earned
from the sale of the furniture.
e. The capital gain about selling the paintings
Capital gain earned from the sale of paintings can be claimed if in any case, the
cost at which the painting was purchased is within or $500 (Sadiq et. al, 2014).
Also, these paintings must not be taken into use for revenue generation
purposes. Jasmine had two paintings that were purchased for $500 and $1000
respectively. The second painting shall be charged for CGT. CGT on paintings
must be based on the capital gain earned from the resale of the same (Black,
2019). Jasmine earned a profit of $4000 from the sale of the second painting.
Jasmine is liable to pay 50% tax on capital gain earned from the resale of
painting, therefore, her tax liability amounts to $2,000.
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Taxation
Answer 2.
In the given case study, John, a manufacturer develops certified automobile parts and
other accessories for BMW. John installed a CNC machine very recently and incurred
various direct and indirect expenditures to make the machine perform its manufacturing
purpose. He installed an additional part, installed the machine, and visited Germany too
so that the CNC machine performs maximum output. The CNC machine was bought on
November 1st, 2014 and it was purchased for $300,000. The CNC machine was
installed in January 2015. The cost of installation of the machine amounted to $25,000.
John even visited Germany and this entire trip was done at an expenditure of $12,000.
He purchased an additional rod to increase the efficiency of the CNC machine. This
additional rod was purchased for $5,000. Since the CNC machine is a depreciable
asset, the same must be accounted for depreciation. Below are the required details that
must be considered while computing the depreciation of the CNC machine.
Date of purchase: November 1st, 2014
Date of installation: January, 2015
Cost of purchase: $300,000, Cost of installation: $25,000
Cost of trip: $12,000, Cost of rod: $5,000
Installation date - February, 2015
All the direct costs that are incurred to bring the machine to its present state must be
considered while calculating the total amount of asset acquisition. Direct costs may
include costs like the purchase of spare parts, transportation cost, cost of installation,
etc. Since the machine is a depreciable asset it must be considered for depreciation
(Black, 2019). The machine must be accounted for depreciation since the date the
same has been purchased. The date at which the machine is installed has nothing to do
with depreciation (ATO, 2019). The date at which the purchase of machine is recorded
in the books shall always be considered as its date of purchase for depreciation
purposes. The machine is a depreciable asset and therefore, its efficiency starts to drop
no matter if the same is installed or not. This is why depreciation of an asset must
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always be accounted from the date the same has been acquired and not from its date of
installation.
The purchase of an additional spare part for the CNC machine must be regarded as a
direct cost. This is because an additional rod is purchased with an intent to increase the
output of the CNC machine. This item can be treated either as a separate line item or
cost (Hans, 2012). The additional rod is separately purchased to enhance the
productivity of the machine. Since the expenditure incurred in the purchase of an
additional rod is recognized as a direct cost, therefore, the same will be considered
while computing the total cost of the asset.
The Germany trip is completely disregarded from qualifying as a direct cost since the
same has nothing to do with enhancing the performance of the CNC machine. The
expenditure incurred on this trip is not related to increasing the productivity of the CNC
machine and therefore, it is an indirect expenditure (Yardney, 2019). The trip to
Germany was for inspecting the installation of the CNC machine only. This cost must be
entirely ignored while computing the overall cost of asset acquisition.
The cost of machine installation must be considered while computing the total cost of
the machine. Installation cost is a necessary expenditure and therefore, it will be
regarded as a direct cost. On November 1st, 2014 the CNC machine was purchased
and the same was installed in January 2015. The machine was installed for $25,000.
The CNC machine will be charged for depreciation from the date at which the same is
purchased or recorded in the books irrespective of when the same is taken into use.
Installing an additional rod is surely a direct expenditure since it aided in enhancing the
efficiency and productivity of the CNC machine. The rod installed will also be accounted
for depreciation. The trip to Germany is an indirect expenditure since it had nothing to
do with enhancing the productivity and functioning of the CNC machine. The installation
cost incurred is a necessary expenditure because if the machine is not installed then
how the same can fulfill the purpose for which it is bought (Yardney, 2019). The total
cost of asset acquisition can be calculated by adding the purchase cost of the machine,
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its installation cost and the cost of additional rod. Hence, the overall cost of machine
amounts to $330,000 ($300,000+$25,000+$5,000). The machine will be charged for the
depreciation that amounts to $12,000. The amount of depreciation shall be reported to
the Profit/Loss Account.
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References
ATO 2019, Capital gains Tax 2019, viewed on 20 September 2019 <
https://www.ato.gov.au/General/Capital-gains-tax/
Black, E 2019, What is Capital Gains Tax and how do I calculate it?, viewed on 24
September 2019, https://www.realestate.com.au/advice/what-is-capital-gains-tax/
Brown, P., Ferguson, A., & Sherry, S 2010, Investor behaviour in response to
Australia's capital gains tax, Accounting and Finance, vol. 50, no. 4, pp. 783, viewed 20
September 2019 <https://search.proquest.com/docview/762714715?accountid=30552
Camp, A 2019, How to avoid capital gains tax when selling property, viewed 23
September 2019, https://www.finder.com/avoid-capital-gains-tax-when-selling-property
Hans, P.P 2012, Ensuring a Softer Grip, viewed 24 September 2019
https://www.businesstoday.in/moneytoday/tax/property-selling-profit-lowering-
tax-liability/story/189407.html
Manto, A 2019, How you can avoid paying Capital Gain Tax on your investment
property, viewed 24 September 2019
https://www.nowtolove.com.au/lifestyle/money/how-to-avoid paying-capital-gains-
tax-investment-property-33505
Orem, T 2019, Selling a House? Avoid Taxes on Capital Gains on Real Estate in 2018
and 2019, viewed 24 September 2019
https://www.nerdwallet.com/blog/taxes/selling-home-capital-gains-tax/
Patnia, A 2011, No Capital gain tax or income tax on profit on sale of a car or other
personal effect, viewed 20 September 2019, https://taxmantra.com/capital-gain-tax-
income-tax-profit-sale-car-personal-effect/
Sadiq,K., Coleman, C., Hanegbi, R., Jogarajan,S., Krever, R.,Obst, W., & Ting, A 2014,
Principles of Taxation Law, Sydney.
Yardney, M 2019, A Complete Guide to Capital Gains Tax, viewed on 24 September
2019, https://propertyupdate.com.au/a-complete-guide-to-capital-gains-tax/>
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