Taxation Law Computation and Explanations

TAXATION LAW
STUDENT ID:
[Pick the date]

Computations & Relevant Explanations
I.As per the information provided, it is apparent that the underlying property comprises of
two assets considering that the titles for the two floors are separate. This is pivotal to consider
since it implies that any exemption that may be extended to one floor cannot be made
available to the other owing to these being two different assets. A key provision which is
relevant with regards to determining if the CGT liability would arise or not in the context of
property sale is subdivision 118-B ITAA 1997. It states that 100% exemption of any capital
gains realised from the aegis of Capital Gains Tax (CGT) provided the same is realised on
main residence sale1. In accordance with s. 118-110 ITAA 1997, it is essential that property
under consideration should be used as main residence for the total ownership period and
additionally no assessable income must be produced. Besides, a taxpayer at a given time
could have only a particular main residence even though there is ownership of multiple
properties2.
As per the information provided, the use of the lower floor is for residence of Jeremy along
with wife Maxine. Besides, this arrangement had begun when the duplex was bought and
continued till the property was sold. Besides, at no time was any income generated from the
lower floor which implies that it would be appropriate for all the capital gains derived from
the sale of this floor to be exempt from CGT. But in regards, to the upper floor of the duplex,
it is a CGT asset purchased after September 19, 1985 without any main residence exemption,
hence CGT would be applicable for any capital gains that are realised by the taxpayers on the
sale of the upper floor of the duplex3.
1 Barkoczy Stephen, Core Tax Legislation and Study Guide 2017 (Oxford University Press Australia, 2017)
2 Reuters, Thomson, Australian Tax Legislation (THOMSON REUTERS, 2017)
3 Ibid. 2

II. General deductions are permitted as per s. 8-1 ITAA 1997 with the central condition that
the outgoings or expense must be incurred for the generation of assessable income.
Additionally, in accordance with ss. 8-1(1) ITAA 1997, a necessary condition is that the
underlying expense has to be revenue and not capital for deduction to be available. With
regards to capital expenditure also, deduction under s. 40-880 ITAA 1997 may be permitted
provided the expense is business4.
The expense prior to purchase of property would be included in the cost base as per ss. 110-
25(3) ITAA 1997 and thereby the nature of expenditure is capital. Further, considering the
fact that the given expenditure is not for any business, hence it would not be considered as
deductible.5.
There are additional costs which the taxpayer has incurred in relation to the property which
would fall within the ambit of the cost base as defined under s. 110-25. These would include
stamp duty while purchasing (incidental cost while purchasing s. 110-25(3)), purchase related
legal expenses (incidental cost while purchasing s. 110-25(3)), incidental costs related to
selling such as solicitor fee and agent fee, ownership costs such as taxes and interest on
principal assumed6. All these costs are capital in nature and not for business purpose owing to
which all these would not be deductible from the income of the taxpayer7.
In related to repair cost before moving in, there are termed as initial repairs and in accordance
with tax ruling TR 97/23, these would be considered as capital costs. Since this capital cost is
not for business purpose owing to which all these would not be deductible from the income of
4 ATO Business Related costs – Section 40-880 deduction < https://www.ato.gov.au/Forms/Guide-to-
depreciating-assets-2007-08/?page=81>
5 Krever Richard, Australian Taxation Law Cases 2017 (THOMSON LAWBOOK Company, 2017)
6 Austlii, Section 110-25 Cost base http://www8.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/
itaa1997240/s110.25.html
7 Ibid. 4