Taxation Law: Capital Gains Tax, Legal Expenses, and Earnings from Individual Effort

This article discusses the concepts of capital gains tax, legal expenses, and earnings from individual effort in taxation law. It provides answers to common questions and explains the relevant sections of the ITAA 1997. The article also cites relevant cases and provides examples to help readers understand the concepts better.

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

1TAXATION LAW
Table of Contents
Answer to question 1:.................................................................................................................2
Answer to question 2:.................................................................................................................4
Answer to question 3:.................................................................................................................6
References:.................................................................................................................................8

2TAXATION LAW
Answer to question 1:
As stated in the “section 108-5 of the ITAA 1997” capital assets is usually referred as
the form of property or any kind of the legal equitable rights which is not treated as the
property. As stated under the “section 108-5 of the ITAA 1997” the land and building are not
considered for the capital gains tax purpose (Barkoczy 2014). As stated in “section 104-10
(1) of the ITAA 1997” CGT event A1 happens when the CGT asset is sold. For a taxpayer it
becomes vital to determine the time when the CGT event took place particularly when the
taxpayer entered into the transactions for selling the asset.
As explained by the Australian taxation office a taxpayer’s house is generally not
included for the capital gains tax purpose. Nevertheless, the taxpayer can claim for the full
amount of main residence exemption. However if the taxpayer makes any portion of the
house for the purpose of generating taxable income then the taxpayer in such situation can
claim for the partial main residence (Brokelind 2015). For an individual taxpayer in order to
ascertain the value of the capital gains it becomes vital to understand the market value of the
residence when the house was employed for producing taxable income.
A taxpayer is generally held eligible for the main residence exemption when the
dwelling satisfies the criteria for main residence. On noting that the taxpayer holder one or
more than one dwelling then in such situation it is necessary for the taxpayer to determine
which one dwelling qualifies as the main residence and eligible for exemption (Grange,
Jover-Ledesma and Maydew 2014). Whether the main residence is regarded as main dwelling
for the taxpayer is reliant on the question of fact.
As stated by the Australian taxation office in order to ascertain the amount of capital
gains or loss it is reasonable for the taxpayer to determine the amount up to which the money
has been borrowed to acquire the property (James 2013). On noticing that the taxpayer has

3TAXATION LAW
used the main residence for producing the assessable income, in such a situation the taxpayer
is believed to have held the asset up to the extent when the home was initially employed for
generating the taxable income.
According to the Australian taxation office capital gains or loss that are assessable
constitutes the amount which is practically have association to the degree where the taxpayer
is allowed to claim the deduction for the sum of interest occurred in borrowing for purchasing
the asset (Jover-Ledesma 2014). In most of the situation the proportion of floor area or the
portion of the home is set aside for producing the assessable income and the time up to which
the taxpayer has utilised the home for generating the assessable income.
In the current case it is noticed that Wilson used 10 square metres of his 200 square
metre house for running his personal consultancy. Hence, the portion of dwelling that is
employed by Brent for producing the assessable income stands 5% of the total area. The
capital gains tax for Brent for the year ended 2019 has been computed below;

4TAXATION LAW
Answer to question 2:
As stated under the “section 8-1, ITA Act 1997” legal expenses are treated to have
been allowed for deductions given the legal expenditure have originated from the result of
taxpayers revenue generating activities (Kenny, Blissenden and Villios 2018). However, legal
expenditure are not treated as deductions when the expenses that is incurred by the taxpayer
is capital, domestic or private in nature or occurred in the derivation of the exempted income.
Noting the instances in “Snowden & Wilson Pty Ltd (1958) v FC of T CLR 431” the
commissioner of taxation allowed the company with the deduction for the costs that is
occurred in the defending the before the royal commission investigation of its business
practices (Kenny 2014). Similarly, in “Hallstorms Pty Ltd v FC of T (1946)” legal expenses
are usually viewed as the outlays on the revenue account or as the outlays of capital nature
dependent upon the purpose for which the incidentals were occurred.
Correspondingly the law court in “Magna Alloys & Research Pty Ltd v FC of T
(1980)” allowed the company with an allowable deductions for the legal expenditure that was
occurred in defending the claims of secret commissions (Sadiq et al. 2018). The taxation
commissioner stated that the necessarily incurred does not mean unavoidable or essentially
essential. However the important matter of the fact is that the expenditure must have to be
appropriate and incurred for the business carried on with the objective of deriving taxable
income.
Evidently in the current situation it is noticed that Brent reported an occurrence of
$25,000 that was paid as the legal fees for defending himself against the claims of negligence
medical. Citing the case of “Snowden & Wilson Pty Ltd (1958) v FC of T CLR 431” it can
be specified that the legal spending that is incurred by Brent when he carried on the business
for obtaining the taxable income (Taylor et al. 2018). Furthermore, the most important

5TAXATION LAW
subject is that the legal expenses that is incurred by Brent was for the purpose of deriving the
assessable income.
Quoting the instances of “Hallstorms Pty Ltd v FC of T (1946)” the legal expenses
that is incurred by Brent should be characterised as the outcome based on the revenue
account (Woellner et al. 2018). Correspondingly the decision of federal court in “Magna
Alloys & Research Pty Ltd v FC of T (1980)” the legal expenses that is incurred by Brent
will be classified as the revenue account and hence will be permitted for deductions under the
positive limbs of “section 8-1, ITAA 1997” since it is occurred in the derivation of assessable
income.

6TAXATION LAW
Answer to question 3:
“Section 6-1, ITAA 1997” defines earnings from the individual effort. The earnings
from the individual effort refers to the proceeds that is obtained from the salary, wages, and
proceeds from business, gratuity, pensions and payment received for any services rendered.
“Section 6-5, ITA Act 1997” defines the ordinary income (Woellner et al. 2018). As per the
“section 6-5, ITAA 1997” ordinary income refers to the income that are received by the
taxpayer in the ordinary business course. The court in “Scott v CT (1935)” held that the
income is not the word of art and involves appropriate examination of the facts in deciding
the receipts as the ordinary income (Kenny 2014). The court held that receipts should be

7TAXATION LAW
treated as the ordinary income in agreement with the ordinary concept and the usage of
mankind.
Similarly citing the case of “Scott v CT (1935)” it can be stated that the receipts of
gross salary and proceeds from the consultancy business by Brent is an income under the
ordinary meaning (Sadiq et al. 2018). The earnings would be treated as the taxable earnings
under the ordinary impressions of “section 6-5, ITAA 1997” since it is derived by the
taxpayer in the ordinary course of business.
In the positive limbs of “section 8-1, ITA Act 1997” an individual taxpayer is
permitted to entitlement for the deductions from their chargeable earnings relating to any
losses or expenditures up to the degree that is occurred in the generation of assessable income
or it has been necessarily occurred in performance of business activities with the purpose of
attaining chargeable earnings. Similarly Brent reports expenses incurred for subscriptions and
cleaning purpose. The expenses were occurred in the generation of assessable income and
hence will be permitted for deductions under “section 8-1, ITA Act 1997”.

8TAXATION LAW
References:
Barkoczy, S. 2014. Foundations of taxation law 2014.
Brokelind, C. 2015. Principles of law.
Grange, J., Jover-Ledesma, G. and Maydew, G. 2014 principles of business taxation.
James, S. 2013. The economics of taxation.
Jover-Ledesma, G. 2014. Principles of business taxation. [Place of publication not identified]:
Cch Incorporated.
Kenny, P. 2014. Australian tax 2014.
Kenny, P., Blissenden, M. and Villios, S. 2018. Australian Tax 2018.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., Teoh, J. and Ting,
A. 2018. Principles of taxation law.
Taylor, C., Walpole, M., Burton, M., Ciro, T. and Murray, I. 2018. Understanding taxation
law 2018.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2018. Australian taxation
law.