Taxation Law: Assessable Income and Tax Liability Calculation for Jack

TAXATION LAW
STUDENT ID:
[Pick the date]

Question 1
Issue
The objective is to ascertain the assessable income for Jack along with underlying tax liability
for years ending on June 30, 2017 and June 30, 2018.
Relevant Rule
It is imperative to note that assessable income could arise primarily on account of either
ordinary income or statutory income.
 Ordinary Income – This is the income that is derived in accordance with ordinary
concepts as highlighted in s. 6(5) ITAA 19971. Based on the relevant case laws, it is
apparent under s.6(5) income derived from employment, business, personal exertion
along with investment income (interest, rent , dividend) is included2.
 Statutory Income – This is the income which is defined in s. 6(10) ITAA 1997. As the
name suggests, for this income source, a particular statute would exist to deal with the
appropriate taxation treatment. One of the important sources of statutory income is in
the form of capital gains tax which can arise due to CGT events defined under s.
108(5) ITAA 19973.
With regards to computation of capital gains, a key consideration is computing the cost base
which is done in accordance with s. 110 (25) ITAA 1997. The key elements included in the
cost base are highlighted below4.
1) The first element is the purchase price paid along with the market value of any other item
given in exchange of the capital asset acquired (s. 110-25(2)).
2) The second element comprises of the incidental costs that are related to buying or selling
of the capital asset (s. 110-25(3)).
3) The third element comprises of owing costs such as interest costs related to financial
assistance obtained for acquiring the asset, costs of insurance, maintenance and repair of
the asset along with land tax. However, these would be added only if the asset under
consideration has been acquired post August 20, 1991 (s. 110-25(4)).
1 Income Tax Assessment Act, 1997 (Cth)
2 Barkoczy, Stephen, Foundation of Taxation Law 2015, (North Ryde, CCH, 2015)
3 Deutsch, Robert, et. al., Australian tax handbook. (Pymont, Thomson Reuters, 2015)
4 Austlii (n.d.) < http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s110.25.html>

4) The fourth element refers to any capital expenditure that the taxpayer has incurred with the
intention of increasing the value of the asset (s. 110-25(5).
5) The fifth element refers to any capital expenditure that the taxpayer has incurred in
relation to title preservation in regards to any dispute arising (s. 110-25(6).
Also, in accordance with Division 115 ITAA 1997, for long term capital gains, individual
taxpayers can avail a discount a 50% and therefore only the remaining amount of capital
gains would be subject to CGT (Capital Gains Tax)5.
Application
The given situation needs to be analysed in the light of the above applicable regulations.
Year ending on June 30, 2017
Shares of ABC
The disposal of share would be considered as a CGT event under s. 112-45 ITAA 1997.
Further, it is apparent that since the shares were bought for investment purpose, hence the
profit/(loss) cannot be considered ordinary income. The taxable component in this case would
be any capital gains that are derived. Also, it is noteworthy that since the asset has been
purchased after September 20, 1985, hence it is not CGT exemp6t.
Total investment in ABC shares = 1000*1.4 = $ 1,400
Sale proceeds of ABC shares (August 15, 2016) = 1000*0.7 = $ 700
Capital losses = 1400 – 700 = $ 700
This capital loss cannot be used to lower the taxable income but can be adjusted against the
capital gains made7.
Sale of Investment Property
5 Division 115 (n.d.) < http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s115.1.html>
6 Ibid. 2
7 Ibid. 3