Taxation Law

This report provides guidance on tax treatment of transactions, capital gains, and legal fees in taxation law. It discusses the taxability of income earned and deduction of expenses incurred by the taxpayer, as well as the tax treatment of capital gains obtained from selling the main residence and deductibility of legal fees. The report includes relevant case law and legislative provisions.

Running head: TAXATION LAW
Taxation Law
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Table of Contents
Introduction:...............................................................................................................................2
Tax Implications involving the sale of house:...........................................................................2
Tax consequences of legal fees:.................................................................................................3
Computation of taxable income:................................................................................................4
Conclusion:................................................................................................................................6
References:.................................................................................................................................7

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Introduction:
The present report is based on ascertaining tax treatment of transactions reported by
Chris Matthews derived from several sources. The report would consider the taxability of
income earned and deduction of expenses incurred by the taxpayer from the rendering
personal services and consultancy business. The report would also consider the tax treatment
of capital gains obtained from selling the main residence and deductibility of legal fees that is
occurred by taxpayer in defending the lawsuit of negligence.
Tax Implications involving the sale of house:
For main residence to be implemented on the dwelling, the house should qualify as
the main residence for the taxpayer. Whether the dwelling forms the main residence of the
taxpayer it will be the question of fact (Barkoczy 2014). The commissioner has stated that to
get the main residence, it is necessary that the property has the dwelling on it and the
taxpayer has lived in it. The taxpayers are only allowed to get full main residence when the
house is not used by them for producing taxable income such as renting it out. To ascertain
the net value of capital gains, the taxpayer should determine the market value of the main
residence particularly the time when the taxpayer used the main dwelling for obtaining the
taxable income.
The property was purchased by Chris on 1st March which he used for producing
revenue. The property was eventually sold by Chris on 3rd July 2014 for $1,000,000. During
his ownership Chris used the house in the form of main residence while for certain time
period the house a certain part of house was used for running his personal consultancy
business (Grange, Jover-Ledesma and Maydew 2014). Chris modified the rooms so that it
become appropriate to conduct business activity while the remaining portion of house was
used for personal purpose. The business purpose use of the house comprised of 5% of total

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floor space. While on selling the house, a capital gain of $572,000 was made by Chris. Since
the main residence of Chris was used for business purpose and producing income, a partial
main residence exemption will be obtained by Chris from the CGT. In addition, the main
residence of Chris satisfies the twelve-month ownership rule (Kenny 2013). Chris is eligible
to apply the CGT discount method to compute the net amount of capital gains. The taxable
value of capital gains from the sale property is computed below;
Notes:
Tax consequences of legal fees:
As explained under the “section 8-1, ITAA 1997” a taxpayer is allowed to claim
deduction for the expenses that are incurred in gaining the taxable earnings except in the
situation where the outgoings are held as domestic, capital or private in nature and related

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with the derivation of exempted earnings (Jover-Ledesma 2014). The decision made in
“Herald & Weekly Times Ltd v FC of T (1932)” held that the legal outgoings is allowed for
deduction if the outgoings are as a result of generating assessable income of the taxpayer and
legal outgoings are not capital, domestic or private in nature (Morgan, Mortimer and
Pinto,2013).
In the present situation a legal expenses were occurred by Chris that amounted to
$25,000. The legal expenses were occurred in defending the claims associated to negligence
is an allowable deduction under legislative provision of “section 8-1, ITAA 1997”. Citing the
“Herald & Weekly Times Ltd v FC of T (1932)” the legal expenses can be considered as
permissible deduction because the expenses were incurred in generating the assessable
income (Krever 2013). The legal outgoings occurred by Chris is having the strong association
with his medical practices and the expenses is considered germane to his medical practices of
generating assessable income. Chris here did not derive any type of durable benefit from the
outgoing and it is appropriate to consider the legal outgoings on the revenue account.
Therefore, Chris is permissible to claim deduction from the assessable income within the
“section 8-1, ITAA 1997” for legal expenses which is occurred in defending the negligence
claims.
Computation of taxable income:
As defined in the “section 6, ITAA 1936” income derived from the private efforts by
the taxpayer as wages, commissions, bonus, salaries etc. in discharge of employment duties
by working as the employee (Kenny 2013). Whereas, “section 6-5, ITAA 1997” provides an
explanation that major portion of the income which is earned by the taxpayer is held as
ordinary income. The taxation commissioner in “CT v Scott (1935)” has interpreted the word
income by stating that it does not constitute a simple word of art rather it requires treating the

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receipts with appropriate principles and in accordance with the ordinary income (Sadiq
2014).
The taxpayer here Chris derived employment income as salaries and cash allowances
that were paid to him in capacity of employee. With reference to “section 6, ITAA 1936” the
salary and cash allowances is a personal exertion income. Citing the decision of
commissioner in “CT v Scott (1935)” the employment remuneration and cash allowances is
an assessable income within the ordinary meaning of “section 6-5, ITAA 1997”. Where
taxpayers derives business gains then such receipts are treated in accordance with ordinary
concept (Woellner et al., 2014). During the year Chris, from his consultancy practice earned a
fees of $12,000 in the present income year which is included for assessment while the rest
$3,600 is yet to be recovered for the year 2017/18.
As defined under the “section 8-1, ITAA 1997” a taxpayer is permitted to claim
deduction for the expenses that are occurred in the course of business for gaining or
producing the taxable earnings. The ATO explains that a taxpayer is permitted to obtain
deduction for expenses related to subscribing to trade, business or professional associations.
During the year subscription to c-clinic was made by Chris. The expenses is permitted for
deduction under “section 8-1, ITAA 1997” because it is occurred in the course of business
for gaining or producing the taxable earnings.

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Conclusion:
On a conclusive note, Chris will be able to claim a tax refund of $123.17 for the year
ended 2017/18. He will be entitled to partial main residence exemption and permitted to
claim deduction for legal expenses.

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References:
Barkoczy, S. 2014. Foundations of taxation law.
Grange, J., Jover-Ledesma, G. and Maydew, G. 2014. Principles of business taxation.
Jover-Ledesma, G. 2014. Principles of business taxation: Cch Incorporated.
Kenny, P. 2013. Australian tax. Chatswood, N.S.W.: LexisNexis Butterworths.
Krever, R. 2013. Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.
Morgan, A., Mortimer, C. and Pinto, D. 2013. A practical introduction to Australian taxation
law. North Ryde [N.S.W.]: CCH Australia.
Sadiq, K. 2014. Principles of taxation law 2014.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2014. Australian taxation
law 2014.