Taxation Law

This document provides answers to questions related to taxation law. It discusses topics such as capital gains tax on family home, sale of car, sale of business, sale of furniture, and sale of paintings. It also covers the rules and provisions for depreciation deduction for a depreciating asset held for producing income.

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

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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to Question 2:................................................................................................................6
References:.................................................................................................................................9

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Answer to question 1:
A: The capital gain in relation to family home:
Capital gains tax can be defined as the set of rules that are mainly designed to
compute the capital gains that would be levied for tax under the income tax regime for the
sale of capital asset. Capital gains tax is not viewed as the separate tax (Jones 2015). The
legislation of CGT was introduced during 20th September 1985 with the objective of
imposing tax on gains that are made from the sale of assets purchased on or following the
date. Assets which are purchased before the 20/9/1985 are termed as the Pre-CGT asset and
gains that are originated from the sale of those assets are termed as non-taxable.
Accordingly, under the “sec 118-110, ITAA 1997” the main residence of the taxpayer
comprises of the dwelling that is exempted from capital gains tax (Grudnoff 2016). A
taxpayer is allowed to obtain the partial main residence if they subdivide and sell any part of
the property or they use the house for generating assessable income.
The case study states that Jasmine purchases a home in 1981 for $40,000 which
currently worth’s $650,000 at the time of sale. The house has been the main home of
residence for Jasmine from day when the interest of ownership was formed till the last day of
disposal. The main residence of Jasmine can be classified as the pre-CGT asset because the
house was bought in 1981 which is before the CGT legislation date of 20/9/1985. As a result,
the house will be regarded as the pre-CGT asset and gains made from the sale of home will
be is exempted from CGT,
B: Capital gain from the sale of car:
Under the “subdivision 108-C” personal use assets mainly includes the use of assets
that are completely for private purpose (Yuan 2016). The capital gains that are made from the

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sale of personal use assets is ignored if the assets has been acquired for lower than $10,000.
While under subdivision 108-C a loss derived from the personal use asset is completely
ignored. When a sale of assets takes place then there is a “CGT event A1” under “sec 104-10
(1), ITAA 1997”. Under “CGT event A1” a capital gain or loss is made.
A car was purchased by paying a purchase price of $31,000 in 2011 by Jasmine. The
car was eventually sold for $10,000. Under “subdivision 108-C” the car has been classified
as the personal use asset because Jasmine used the asset for her personal purpose.
Furthermore, the sale of car has led to “CGT event A1” under “sec 104-10 (1), ITAA 1997”
(Evans, Minas and Lim 2015). As noted, upon selling the car Jasmine suffers a loss. Under
the “subdivision 108-C”, the loss from sale of personal use car should be disregarded by
Jasmine.
C: Capital gains in relation to sale of business:
In order to qualify for the small business CGT concession, an entity must meet the
basic conditions for all the concessions (Ingles and Stewart 2015). This includes satisfying
any one of the following;
a. The entity was a small business entity with turnover of less than $2 million
b. An individual may not conduct its business but the CGT assets is used in business by
small business entity
c. An individual is the partner in the partnership entity which is a small business and the
CGT asset forms the interest in the partnership or the asset owned is used in
partnership business (Pope 2013).
To assist the small business on meeting the basic conditions, capital gains can be
lowered by applying numerous concessions listed under the “subdivision 152-A, ITAA
1997”. There are four available small business concessions;

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a. 15-Year exemption under “Subdivision 152-B”
b. Reduction in capital gains by 50% under “Subdivision 152-C”
c. Retirement concessions under “Subdivision 152-D”
d. Rollover relief under “Subdivision 152-E”
The case study provides that Jasmine decides to retire from her small cleaning
business and she is returning back to UK. The business was sold for $125,000 which included
$65,000 for business equipment and $60,000 for goodwill. With regard to basic conditions
listed under “subdivision 152” her aggregate turnover of Jasmine’s business has been below
$2 million with net asset values not exceeding more than $6 million. The assets were active
asset at the time of disposal because they were used in carrying on the business. She will be
allowed to obtain small business concessions (Reinhardt and Steel 2016). Jasmine can obtain
a 15-year CGT exemption under “subdivision 152-C”. The assets were used by Jasmine for
more than 15-years and has also satisfied the basic conditions.
In regard to the business goodwill, a “CGT event C1” occurs when a business is
ceased on the permanent basis. When the business ends up on a permanent basis there is a
loss of business goodwill (Evans and Krever 2015). Similarly, in case of Jasmine, a “CGT
event C1” happened upon the sale of her business goodwill. Jasmine can obtain a 50%
reduction from her CGT under “subdivision 152-C”.
D: Capital gains in relation to sale of furniture:
According to the special rules of “sec 118-10 (3)” capital gains and capital loss
should be ignored when it is noticed that under the first element of the cost base of assets is
lower than $10k (Lignier and Evans 2014). Jasmine sold her furniture for $5,000 which she
purchased for $2,000. As evident the first element cost base of furniture is less than 10k.

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Hence, under the “sec 118-10 (3)” Jasmine must disregard the capital gains from the
furniture in this context.
E: Capital gains on selling the paintings:
As per the “sec 108-10 (2), ITAA 1997” collectables include;
a. Artwork, jewellery, coin or antiques
b. A rare folio, books or manuscripts
c. Postage stamps
These assets are usually kept for the personal usage of the taxpayer. As per “sec 108-10
(1), ITAA 1997” capital gains and loss should be ignored when the first element of
collectibles cost base is lower than $500. Jasmine sold several paintings for $35,000 which
she has bought for $500. Paintings held by Jasmine is treated as collectibles under “sec 108-
10 (2), ITAA 1997”. “CGT event A1” happened when the paintings were sold by Jasmine. As
the cost paintings is $500 it fails to meet the first element of collectibles cost base
collectibles. The capital gains made from selling her painting is ignored in this context.
While one of Jasmine paintings cost $1,000 which was purchased directly from the
artist and was eventually sold for $5,000. The sale of painting has yielded capital gains for
Jasmine and the first element of cost base of collectible is also satisfied in this case. The
capital gains made will be considered for tax however Jasmine can avail 50% CGT discount
as it is presumed that the paintings were under the ownership for more than 12 months.

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Answer to Question 2:
Issues:
Is the taxpayer may be allowed to obtain depreciation deduction for the decline in the
value of the depreciating asset that is held under “s 40-25, ITA Act 1997”?
Rule:
A taxpayer might be allowed under the provision of “s 40-25, ITA Act 1997” to get a
depreciation deduction for the “depreciating asset” equal to the decline in value which is
held for producing income. While “s 40-30 (1), ITA Act 1997” defines the “depreciating
asset” as something that has restricted effective life and they can be reasonably anticipated to
fall in terms of value based on the usage of asset (Marsden, Sadiq and Wilkins 2013). For a
taxpayer to get the deduction in “s 40-25, ITA Act 1997” for the “depreciating asset” it
becomes obligatory to know when the taxpayer has held the depreciating asset and
ascertaining the deduction is equivalent to the “decline in value” while considering the
income tax purpose. The law court in “Yarmouth v France (1887) 19 QBD 647” defined the
meaning of plant by stating that whatever the type of apparatus that a business uses for
conducting its activities (Woellner et al., 2016).
A tax payer under the “s 40-25 (2), ITA Act 1997” is allowed to get the deduction for
the “depreciating asset” that is completely used for assessable purpose (Sørensen and
Johnson 2015). Usually, an assessable purpose is only existent where the asset is used by
taxpayer for generating chargeable business earnings under “s40-25 (7), ITA Act 1997”.
An asset that are depreciating in nature held under the ownership of taxpayer begins
to fall in terms of value when it start time begins under “s 40-60 (1), ITA Act 1997”. For a

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depreciating asset the start time happens when the asset is first utilized by taxpayer. It also
includes under “s 40-60 (2), ITAA 1997” whether the assets has been ready for utilization.
As per “Subdivision 40-C” in order to depreciate the depreciating asset it is necessary
to find out the cost of the asset (Ingles and Stewart 2018). As a general sense, the price paid
for purchase would form the part of cost base but other incidental cost such as installation and
delivery would be also included under the cost base. In “Broken Hill Co Pty v FCT (1970)”
minor cost incurred for re-arranging, removing or accommodating the new plant is counted
under the cost base of the “depreciating asset”.
“Sec 40-175, ITAA 1997” classifies cost of depreciating asset under two elements.
“Sec 40-180, ITAA 1997” states that the “first element” would generally include the price
paid for purchasing the asset (Kenny, Blissenden and Villios 2018). While “sec 40-190,
ITAA 1997” is associated with the “second element”, which comprises of deliver cost,
installation cost and capital improvement cost of the asset.
Application:
John is carrying on the business of motor vehicle parts and accessories manufacturing
company. He purchases a CNC machine from Germany on 1st November 2014 by paying a
purchase price of $300,000. The CNC machine will be classified under “s 40-30 (1), ITA Act
1997” as “depreciating asset” which is reasonably anticipated to fall in terms of value based
on the usage of asset. Citing “Yarmouth v France (1887) 19 QBD 647” the machine has
been bought by John exclusively for the taxable purpose or for carrying on his business
activities (Ingles and Stewart 2018). Under “s 40-25 (2), ITA Act 1997” John is allowed to
get the deduction for the “decline in value” of the CNC machine that is completely used for
assessable purpose.

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Under the “s 40-60 (1), ITA Act 1997” the start time of CNC machine for the
“decline in value” is from 15th January onwards. Citing “s 40-60 (2), ITAA 1997” the assets
has been installed as ready for utilization by John from 15th January onwards.
Later it is noticed that John occurred several cost both prior to installation and
following the installation of the CNC machine. Referring to “Subdivision 40-C” to
depreciate the CNC machine or to claim the “decline in value” it is necessary to find out the
cost of the asset. Citing the example of “Broken Hill Co Pty v FCT (1970)” the cost base of
CNC machine would also include the minor incidental costs under the cost base element to
ascertain the total cost base of the asset (Kenny, Blissenden and Villios 2018).
Referring to “Sec 40-180, ITAA 1997” the “first element” would generally include
the price paid for purchasing the CNC machine. While citing “sec 40-190, ITAA 1997” under
the “second element” of the CNC machine the cost base would include the installation cost
of machine, capital improvement cost of machine such as adding the guiding rod for making
it more effective. These costs will be included in computing the capital allowances of the
CNC machine.
The cost base of the machine is calculated below with reference to “sec 110-25, ITAA
1997”.
Conclusion:

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The analysis performed above can be concluded by stating that a decline in value of
the CNC machine is allowable to be claimed as depreciation by John under “s 40-25, ITA
Act 1997”. The machine was exclusively bought by John for taxable purpose for use in
derivation of business income.

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References:
Evans, C. and Krever, R., 2015. Tax reviews in Australia: a short primer. Tax Reviews in
Australia: A Short Primer (July 12, 2015). Australian Business Tax Reform in Retrospect and
Prospect, pp.4-11.
Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: An
alternative way forward. Austl. Tax F., 30, p.735.
Grudnoff, M., 2016. CGT main residence exemption. Why removing the tax concession for
homes over $2 million is good for the budget, the economy and fairness. Policy Brief.
Australia Institute, Canberra.
Ingles, D. and Stewart, M., 2015. Superannuation tax concessions and the age pension: a
principled approach to savings taxation. Tax and Transfer Policy Institute-Working Paper, 7.
Ingles, D. and Stewart, M., 2018, October. Australia's company tax: Options for fiscally
sustainable reform. In Australian Tax Forum (Vol. 33, No. 1).
Jones, S., 2015. Your primary residence and CGT: capital gains tax. Tax Breaks
Newsletter, 2015(351), pp.5-6.
Kenny, P., Blissenden, M. and Villios, S., 2018. Australian Tax 2018.
Lignier, P. and Evans, C., 2014, August. The rise and rise of tax compliance costs for the
small business sector in Australia. In Australian Tax Forum (Vol. 27, No. 3, pp. 615-672).
Marsden, S., Sadiq, K. and Wilkins, T., 2013. Small business entity tax concessions: Through
the eyes of the practitioner. Revenue Law Journal, 22(1), p.6731.
Pope, J., 2013. The compliance costs of taxation in Australia and tax simplification: The
issues. Australian Journal of Management, 18(1), pp.69-89.

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Reinhardt, S. and Steel, L., 2016. A brief history of Australia's tax system. Economic Round-
up, (Winter 2006), p.1.
Sørensen, P.B. and Johnson, S.M., 2015. Taxing capital income: options for reform in
Australia. In Melbourne Institute, Australia’s Future Tax and Transfer Policy
Conference (pp. 179-235).
Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian taxation
law. CCH Australia.
Yuan, H., 2016. Mid market focus: The sharing economy and taxation. Taxation in
Australia, 51(6), p.293.