Taxation Law - Question and Answer

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Author Note

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Table of Contents
Question 1......................................................................................................................2
Issue...............................................................................................................................2
Relevant Laws................................................................................................................2
Application......................................................................................................................3
Conclusion......................................................................................................................4
Question 2......................................................................................................................4
Issue...............................................................................................................................4
Relevant Law..................................................................................................................5
Application......................................................................................................................5
Conclusion......................................................................................................................6
References.....................................................................................................................7

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Question 1
Issue
The given situation is related to the tax liability of Sophie, who has entered into a
variety of transactions on which CGT can be charged for the relevant taxation year.
These are as follows:
The primary issue is related to the sale of land in Ninety Mile Beach for $800000.
However, prior to this sale, there were some expenditure incurred in relation to the sale
of the land. The most important cost in this regard was the cost of acquiring the land
which amounted to $130000 in 1991. At that time, she also paid $800 in stamp duty and
$1200 in legal fees. In order to facilitate the purchase, Sophia also happened to take a
bank loan for which the total interest paid by her was $27000. However, these were not
the only costs incurred by her. Others included $8000 paid as legal fees in order to
settle the dispute with the neighbour about the land. Similarly, the council rates, water
rates and insurance paid by her amounted to $18500. In order to facilitate the smooth
sale of the property, she had to make it fit for sale. Hence, she incurred an additional
expenditure of $1500 to remove a large number of pine trees that were growing on the
land. Additional expenditure included the advertising, legal and agent’s fees which were
totalled at $25000. In this case, advice is to be provided to her on the amount of
deduction that would be allowed to her on the sale and regarding the items which can
be added to the cost base of the asset.
The second CGT transaction is the sale of shares in ABC for $32.20 per share. The
purchase date of these shares was in 1983 and a brokerage of 1% was paid on the sale
of the asset.
The third CGT asset sold by Sophia was a stamp collection purchased in January 2018
for $33000 which was purchased for a fees of $23000. The auction fees in relation to
this fees totalled at $3000.
The final CGT asset sold by her was a Bob Marley guitar purchased in 2003 for $70000.
The sale of this guitar fetched $45000 in 2018.
Relevant Laws
In Australia, the CGT began from 20 September 1985. Any assets which were acquired
prior to this date are not covered under CGT on the sale of assets (Ato.gov.au. 2020).
Under s104-10(1) of ITAA 1997, a CGT event happens when the taxpayer disposes off
a CGT asset. As per s104-10(2) of ITAA 1997, a capital loss occurs if the sale proceeds
from an asset are lower than the revised cost base of the asset. Similarly, if the
proceeds from the asset are more than the cost base of the asset, then there is an
occurrence of capital gains. The sale of land can either be taxed under the Income from
Business and Property or under the head Capital Gains. However, as held by the court
in FCT v St Hubert’s Island Pty Ltd, if the primary activity of the taxpayer is to develop
and sell land, then the sale proceeds would be taxable as a part of the business
income. Under s108-5(1) of ITAA 1997, an asset is a CGT asset if it is a legal or
equitable right but not a property. Some of the assets covered under this section include
land and buildings, units, shares and other contractual obligations. As per s108-10(2) of
ITAA 1997, a collectable is a CGT. Some of the items covered under the definition of a

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collectable include an artwork, jewellery, coin or a medallion. However, under s119-
10(1), the capital gains and losses occurring from a CGT asset would be lower if the
cost of acquiring the asset was lower than $500 (Legislation.gov.au 2020). Similarly, a
personal use asset covered under s108-20 of ITAA 1997 is also liable to be taxable
under CGT. Some of them include a television, mobile phone, yacht and a bicycle
amongst others. As per s118-10(3) of ITAA 1997, the capital gains earned from the sale
of a personal use asset are to be disregarded when the cost of acquiring the asset was
lower than $10000 (Legislation.gov.au 2020). The cost base of the asset is the total
costs incurred in relation to the CGT asset covered under subdivision 110-A of ITAA
1997. There are five elements covered under this subdivision. They include the money
paid for acquiring the asset under s110-25(2), incidental costs under s110-35, costs
involved in owning the asset under s110-25(4), expenditure incurred to preserve or
increase the value of the asset under s110-25(6). Indexation is available only for assets
covered under s110-25(7) & (8) of ITAA 1997 and acquired before 11.45 am of
September 21 1999.
Application
In Sophia’s case, all the assets sold are covered under the definition of a CGT
asset under s108-5(1) of ITAA 1997. Hence, the capital gains earned from the sale of
the asset are taxable under CGT. However, in order to calculate the capital gains, the
cost base of the asset needs to be calculated in an accurate manner. Hence, the CGT
on this transaction are as follows:
Particulars Amoun
t
Amount Description
Sale proceeds from the block of
land
800000
Less: Cost base of the asset
Purchase price of the asset 130000 s110-25(2) ITAA 1997
Stamp duty 800 s110-35 ITAA 1997
Legal Fees 1200 s110-35 ITAA 1997
Interest on Bank loan 27000 s110-25(4) ITAA 1997
Council rates, Water rates and
insurance
- Subdivision 110-A ITAA
1997
Legal Fees to defend title 8000 s110-25(6) ITAA 1997
Costs involved in improving the
asset
1500 s110-25(5) ITAA 1997
Advertising, Legal and agent's
fees
25000 s110-25(5) ITAA 1997
Total Cost base of the asset 193500
Total Capital Gains from the sale 606500
The capital gains from the sale of land are calculated on the basis of the sale
proceeds received from the land and the cost base of the asset. In calculating the cost
base, some of the costs like council rates, water rates and insurance are not included

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due to the non-inclusion in the provisions of sub-division 110-A of ITAA 1997. Hence,
the total capital gains are calculated to be $606500.
The shares purchased by Sophia are before 20 September 1985. Hence, the
capital gains or losses arising from the transaction should be ignored from taxation
under CGT.
Particulars Amount Amount Description
Sale proceeds from collection of
stamps
23000
Less: Cost of acquisition 33000
Auction fees 3000 s110-25(5) ITAA 1997
Total Cost 36000
Capital Gains/(Losses) (13000)
Particulars Amount Amount Description
Sale proceeds from guitar 45000
Less: Cost of buying the guitar 70000 s119-10(1)
Capital Losses from the guitar (25000)
The guitar comes under the definition of a collectable under s108-10 ITAA 1997.
Hence, CGT is calculated on this asset. The capital losses are to be deducted from the
overall capital losses earned by her.
Conclusion
On the basis of the above discussion, it can be suggested to Sophia that her total
capital gains for the taxation year after ignoring the indexation are worth $568500. The
capital losses incurred from the sale of the guitar and collection of stamps are to be
utilised in further reducing the capital gains earned by her. After which, she can
calculate the capital gains on the land block using the CGT discount method and reduce
them by 50%.
Question 2
Issue
The issue in this situation is related to the allowable travel expenses of Ava, who
has taken up employment in Sunshine Hospital recently. The main issue is to
differentiate whether they are expenses that are a part of an allowable deduction or
expenses which are domestic in nature. Some of the expenditure incurred by Ava that
are relevant to this case are as follows:
$320 travel expenses for the job interview to travel to the hospital;
Relocating from her home in Darwin to Sunshine in Victoria cost her $1800;
Compulsory work wear cost her $200;
Childcare expenses worth $18200 were paid for her daughter;
Phone calls made from home to the hospital to keep a check on the patients cost her
$200;

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Food worth $570 was purchased from the hospital café bar by her;
A speeding fine of $207 was paid by her when she was running late for a hospital visit
due to an emergency case; and
$330 were incurred to and from work by her
Relevant Law
According to s8-1of ITAA 1997, a general deduction provision is applicable to
any expenditure incurred by the taxpayer. As per s8-1(3) of ITAA 1997, any loss or
deduction which can be deducted under s8-1 is called as a ‘general deduction’. S8-1(1)
of ITAA 1997 states that an expenditure would be allowed as a deduction to the extent
to which it is incurred in gaining or obtaining assessable income. Similarly, the
expenditure which is necessary in carrying on a business for the purpose of producing
assessable income is also allowed as a deduction under this s8-1(1). However, s-82(2)
of ITAA 1997 states that an expenses which satisfies the conditions of s8-1(1) may not
be deductible to the extent that it is private or domestic in nature or used in producing
non-exempt income. As held in the case of Charles Moore & Co (WA) Pty Ltd v FCT,
deductions will not only be provided on expenditure incurred but also on losses
sustained. As suggested by the TR 98/9, food and drink consumption by an individual
are not a part of the income generating activities of an individual and hence, they are
not allowed as a deduction. Expenditure incurred by the taxpayer in gaining
employment are not deductible as suggested by FCT v Maddalena because they are
too early in the process of generating assessable income. Similarly, relocation
expenditure is not deductible under s8-1 of ITAA 1997 because they are putting the
taxpayer in the position of producing income and not directly contributing towards
producing the income itself (Ato.gov.au. 2020). As held in Lodge v FCT, these expenses
are also not allowed as a deduction because they are merely putting the taxpayer in a
position of generating income. In case of travel expenditure, the expenditure incurred in
travelling from home to workplace are not deductible on the basis of Ruling IT 112 and
as held in the case of Lunney v FCT. As suggested by s34-15 of ITAA 1997, a uniform
which has to be compulsorily worn as a part of the job of an individual is deductible as
an expenditure (Ato.gov.au. 2020). As per the rules of ATO, the telephone expenses
incurred by an individual can be allowed as a deduction if they are paid by the taxpayer
themselves. However, there should be proper records available to claim the deduction.
The ATO guidelines suggest that the expenses incurred as a part of paying fines for
speeding are not allowed as a deduction (Ato.gov.au. 2020).
Application
After applying the relevant laws in the case of Ava, the amount of deductions
allowable to him and the reasons for the same are as mentioned below:
Particulars Amount of
Deduction
Description
Travel expenses for Job
Interview
0 FCT v Maddalena
Relocation Expenses 0 s8-1 of ITAA 1997
Payment for compulsory work
wear
200 s34-15 of ITAA 1997

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Childcare Expenses for 2
year old daughter
0 Lodge v FCT
Phone calls from home to
hospital
200 ATO guidelines. However, proper
records should be maintained
Food expenditure 0 FCT v Cooper
Speeding fine 0 ATO guidelines
Expenses to travel to and
from work
0 Ruling IT 112
Total allowable deductions 400
Conclusion
On the basis of the above discussion, the total value of deductions allowed to
Ava are worth $400 because they can be constituted as expenses incurred as a part of
generating the assessable income of the individual. Due to this reason, the travel
expenses and relocation expenses are not allowed as a deduction. Similarly, the
childcare expenses and food expenditure are not allowed as a deduction. As the work
wear is mandatory in the workplace, it is allowed as a deduction from the annual
expenditure incurred by him. In order to claim the deduction on telephone expenditure,
proper records should be maintained.

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References
Ato.gov.au. (2020). Police - income and work-related deductions. [Online] Available at:
https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Occupation-and-
industry-specific-guides/Police---income-and-work-related-deductions/?page=2
[Accessed 28 Jan. 2020].
Ato.gov.au. (2020). Claiming mobile phone, internet and home phone expenses.
[Online] Available at:
https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/
Other-work-related-deductions/Claiming-mobile-phone,-internet-and-home-phone-
expenses/ [Accessed 28 Jan. 2020].
Ato.gov.au. (2020). Capital gains tax. [Online] Available at:
https://www.ato.gov.au/General/Capital-gains-tax/ [Accessed 28 Jan. 2020].
Legislation.gov.au. (2020). Income Tax Assessment Act 1997. [Online] Available at:
https://www.legislation.gov.au/Details/C2017C00336/Controls/ [Accessed 28 Jan.
2020].
Legislation.gov.au. (2020). Income Tax Assessment Act 1936. [Online] Available at:
https://www.legislation.gov.au/Details/C2017C00242 [Accessed 28 Jan. 2020].
Ato.gov.au. (2020). Legal Database. [Online] Available at:
https://www.ato.gov.au/law/view/document?DocID=TXR/TR989/NAT/ATO/00001
[Accessed 28 Jan. 2020].