Taxation Liabilities: Capital Gains Tax and Capital Allowance

This document discusses the taxation liabilities related to capital gains tax (CGT) and capital allowance. It provides professional advice on CGT consequences of selling assets before leaving Australia and explains the capital allowance for a CNC machine acquired by John. The document also covers the concept of capital allowance and the computation of the cost of the asset for tax purposes.

Running head: - Taxation liabilities
1
AUSTRALIAN TAXATION LAW
CAPITAL GAINS TAX AND CAPITAL ALLOWANCE
Student’s Name:
ID:
Module:
Instructor:
Date of Submission:
Word Count:

Taxation liabilities
2
Table of Contents
Introduction.................................................................................................................................................3
Answer to question no- 1............................................................................................................................3
Professional Advise to Jasmine, an Australian Resident, on CGT Consequences of Her Sale of Assets
before Leaving Australia for the UK.........................................................................................................3
Answer to question no- 2............................................................................................................................9
Capital Allowance for CNC Machine Acquired by John............................................................................9
Conclusion.................................................................................................................................................11
References.................................................................................................................................................11

Taxation liabilities
3
Introduction
With the changes in time, taxation rules and regulations have been changing. However, in
order to compute the proper taxation liabilities of the tax payer, there is need to implement the
proper tax planning as per the applicable taxation rules and regulations. It is considered that
capital gains tax (CGT) was introduced to the Australian taxation system in 1985. As such CGT
applies to any asset acquired after 20th September, 1985, subject to certain exemptions.
Australian Tax Office defines capital gain as the positive difference between the price that
assesse receives on disposal of the asset and the cost of the asset to the assesse. This report
reflects the key aspects of the taxation liabilities in the different situations.
Answer to question no- 1
Professional Advise to Jasmine, an Australian Resident, on CGT Consequences of Her
Sale of Assets before Leaving Australia for the UK
The assessee is required to report the capital gain or loss in the income tax return for the
purpose of paying CGT as part of income tax. As capital gain is added with the income, it might
significantly increase the income tax liability of the assessee. Since there is no provision in
Australian tax system for withholding CGT, the taxable capital gain needs to be worked out
earlier in order to make funds available to meet the tax obligation.
Australian taxation system has the provision of offsetting capital losses against capital
gains, and carrying forward the net capital loss for an indefinite period, but capital loss cannot be
offset against normal income of the assessee.
Capital Gains Tax (CGT) Event
According to Australian Tax Office (ATO) following are considered as CGT event
whether gain or loss (Australian Government, 2019):
i) An asset is sold or given away to someone else,

Taxation liabilities
4
ii) An asset is lost or destroyed,
iii) Owned shares are cancelled, redeemed or surrendered,
iv) The taxpayer ceases to be an Australian resident,
v) As a shareholder the person receives payment, other than dividend, from the company.
Capital Gains Tax (CGT) Assets
All assets acquired by the taxpayer since the inception of CGT are subject to CGT, if not
exempted specifically (Australian Taxation Office, 2019). Following is a succinct list of CGT
assets:
 Real estate: Most of the real estate assets are subject to CGT. This includes houses, vacant land,
rental properties, hobby farms, and holiday homes.
 Shares and other investments: Company shares and units in a unit trust are subject to CGT,
unless those were acquired before 20 September, 1985. However gain on shares sold as part of
business activities is not subject to CGT, rather it is treated as ordinary income.
 Crypto-currency: This is a digital asset, and gain on its sale is subject to CGT.
 Leases, licenses, goodwill, contractual rights: Intangible assets are subject to CGT if they were
active assets.
 Personal use assets: Personal use assets for CGT purpose includes furniture, electronic goods,
household items, and boats etc. which are kept for personal enjoyment.
 Collectables: Collectables are items of personal enjoyment or enjoyment of associates of the
assessee. Section 108 of the Capital Gains Tax 1985 list certain items as collectables and subject
to CGT (Australian Taxation Office, 2019). These include. Sculptures, drawings, paintings,
engravings or photographs, reproductions of these items. or similar property, antiques, jewellery,
postage stamps or first day covers, rare manuscripts, books, folios.
Assets Exempted from CGT

Taxation liabilities
5
It is analyzed that some assets are exempt from CGT. Gain from such assets are not included in
the income, neither any loss from these assets are allowed to be used to offset against capital gain
to reduce taxable income.
 Main home of the taxpayer: Main home of the assessee is exempt from CGT, if the taxpayer and
her family lived in the house, the address of the house is used as mailing address, the personal
belongings of the taxpayer are in that house, the address of the house is in electoral role, and the
house has gas and electricity connections. If the taxpayer was not a resident of Australia for CGT
purpose while living in the house, then this exemption cannot be availed.
 Personal use assets: Any personal use asset acquired for less than $10,000 is exempt from CGT.
 Collectibles: According to subsection 108 – 10(2) collectibles acquired for $500 or less are
disregarded for the purpose of CGT, nor any loss from sale of such items can be used to offset
against capital gain.
 Depreciating assets: Any depreciating asset used by the assessee solely for taxable purpose is not
subject to CGT. Business equipment, items in rental property are examples of depreciating asset.
Assets not in the depreciation pool however are subject to CGT, and any gain or loss from sale of
these assets is added with assessable income or deduction can be claimed as the case may be.
However, assets not treated for taxable purpose and used for private purpose are subject to CGT.
 Pre-CGT assets: Assets acquired prior to 20 September, 1985 are exempted for computation of
CGT. As per Taxation Ruling TR 2004/18, exceptions to such exemption are pre-CGT shares in
private companies and interests in private trusts where CGT event arises due to combination of
more than one factors (Australian Taxation office, 2019). These assets are subject to CGT
(Woellner, et al. 2010).
 Car and motor cycle: According to Section 118 – 5 of the Income Tax Assessment Act 1997, any
gain or loss arising from sale of cat, motor cycle or any other similar vehicle is to be disregarded
for the purpose of CGT. Subsection 995 – 1(1) of the Income Tax Assessment Act 1997 defines
car as a motor vehicle capable of carrying a load of less than 1 tonne and less than 9 passengers.
According to Section 108 – 10(2) a car is a CGT asset if it is antique. Taxation Determination
1999/40 defines an antique car which is at least 100 years old.

Taxation liabilities
6
Resident for Tax Purpose
Residential status of an assessee is important for deciding upon how one would be taxed in
Australia. Australian Tax Office has set different standards to the Department of Immigration
and Border Protection for determining residential status for the purpose of tax. This ensures that
an Australian taxpayer pays tax in accordance with the set standards irrespective of the place of
residence of the taxpayer (Braithwaite, and Reinhart, 2019)
A taxpayer is considered a resident for tax purposes if any of the following conditions are met;
i) The person has always lived in Australia,
ii) The person has moved into Australia from overseas but intends to live in Australia for a
foreseeable future,
iii) The person stayed in Australia for half of the income year, provided s/he has no home abroad
and wants to live in Australia,
iv) The person is an overseas student enrolled in a study course in Australia which has more than
6 months duration (McBarnet, 2019).
On the basis of above findings the consequences of sale of assets are presented in the following
table (Symes, 2016).
Table showing CGT consequences of sale of assets by Jasmine
CGT Event Residential
Status
Gain/Loss CGT
Consequence
Reason/Explanation
Sale of home
for $650,000,
Resident while
living in the
Gain Excluded i) The asset was

Taxation liabilities
7
acquired for
$40,000
home purchased before 1985
ii) The home was
assessee’s main home
iii) The assessee was a
resident of Australia
during the period she
lived in it
Sale of car for
$1000,
acquired for
$31,000
Loss Exempt and
cannot be off set
against capital
gain
Disregarded as the car
was not an antique item
as it was purchased in
1981
Sale of
business
equipment for
$65,000,
acquired for
$75,000
Loss Exempted and
cannot be off set
against capital
gain
The equipment is a
depreciating asset
Sale of
goodwill for
$65,000
Unknown
as the book
value is not
Taxable It was an active asset

Taxation liabilities
8
given
Sale of
furniture as
set for $5,000,
acquired each
item for less
than $2,000
Exempt Every single item
acquired at less than
$10,000
Sale of second
hand paintings
for and35,000,
each acquired
for less than
$500
Exempt No single painting
costs more than $500
Sale of
painting for
$5,000,
acquired
direct from
artist for
$1,000
Taxable amount
$4,000
The painting was
acquired for more than
$500

Taxation liabilities
9
Answer to question no- 2
Capital Allowance for CNC Machine Acquired by John
Capital Allowance
Capital allowance, also called tax depreciation, is a deduction available for decline in the value
of an asset (Capital Claims, 2019). It is a tax relief for certain capital expenditures. The entire
cost of an asset cannot be deducted in one single year as per taxation and accounting rules.
Capital allowances are available to assets for which annual investment allowance (AIA) is not
applicable (Australian Taxation Office, 2019). Capital allowance can be claimed for an asset up
to 40 years (Barkoczy, 2016).
Australian Taxation Office has adopted Uniform Capital Allowance Rules on 1 July 2001 for all
kinds of depreciating assets (Australian Taxation Office, 2019). The UCA incorporates a range
of capital allowance provisions that existed earlier in relation to plant and equipment. A set of
general rules is provided by UCA for calculation of deduction for decline in value of
depreciating assets. Some concessions are provided in the rule for primary production
depreciating assets (Australian Taxation Office, 2019). The UCA rule also provides for
deductions for certain capital expenditures which was not available before implementation of the
rule (Braithwaite, and Reinhart, 2019).
Cost of the CNC Machine for the Purpose of Capital Allowance
In order to determine the capital allowance pertaining to a depreciating asset, it is imperative to
determine the cost of the asset. For the purpose of UCA there are two elements for calculating
the cost (McBarnet, 2019). The first element of cost includes the price directly associated with
holding of the asset. Examples of such expenses are purchase price of the asset, travelling cost,
and other costs that are directly related to holding the asset. The second element of cost includes
any cost incurred after the first element for bringing the asset into present condition, location,

Taxation liabilities
10
and making improvements in the asset. It also includes any cost incurred after 30 June 2005 for
balancing adjustments (Australian Taxation Office, 2019).
Computation of cost of the CNC machine purchased by John in 1 November, 2014
$ $
First element
Purchase price 300,000
Travelling expenses 12,000 312,000
Second element
Installation cost 25,000
Improvement cost 5,000 30,000
TOTAL COST 342,000
Start Time of Decline in the Value of the Asset
According to UCA the decline in the value of a depreciating asset starts when the same is started
to be used for any purpose, including private purpose. Thus if an asset is used for private purpose
for some time and after that it has been used for business purpose, then the decline in the value

Taxation liabilities
11
would start when the asset was first installed for private purpose (Australian Taxation Office,
2019).
John purchased the machine on 1 November 2014, and the machine was installed on 1 January
2015. Installation was complete only after a guiding rod was installed on 15 February 2015.
Hence the decline in the value of the CNC machine would start from 15 February 2015.
Conclusion
After assessing the income tax of assess, it is found that If the cost of acquisition of the
assets exceeds the price at which it is disposed of, the result is capital loss. Capital gain tax is not
separately payable in Australia but it is added with the income of the assessee in the same year
when the capital gain for the assessee takes place. However, if capital gain arises out of sale of
an asset which was held by the assessee for at least 1 year, then the capital gain is discounted by
50% for individual taxpayers, and by 33.3% for superannuation funds.

Taxation liabilities
12
References
Australian Government (2019). Capital Gains Tax (CGT). [online] accessed on 21st September
2019 available at https://www.business.gov.au/finance/taxation/capital-gains-tax
Australian Taxation Office (2019). CGT assets and exemptions. [online] accessed on 21st
September, available at https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-
exemptions/#Exemptions1
Australian Taxation Office (2019). Other capital assets and expense deductions. [online]
retrieved from https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-
allowances/other-capital-asset-and-expense-deductions/ on 21 September 2019
Australian Taxation Office (2019). Uniform capital allowance system: calculating the decline in
value of depreciating assets. . [online] accessed on 21st September, available at
https://www.ato.gov.au/Business/Depreciation-and-capital-expenses-and-allowances/In-detail/
Depreciating-assets/Uniform-capital-allowance-system--calculating-the-decline-in-value-of-a-
depreciating-asset/
Barkoczy, S. (2016). Foundations of taxation law 2016. OUP Catalogue.
Braithwaite, V., and Reinhart, M. (2019). The Taxpayers' Charter: Does the Australian Tax
Office comply and who benefits?. Centre for Tax System Integrity (CTSI), Research School of
Social Sciences, The Australian National University.
Braithwaite, V., and Reinhart, M. (2019). The Taxpayers' Charter: Does the Australian Tax
Office comply and who benefits?. Centre for Tax System Integrity (CTSI), Research School of
Social Sciences, The Australian National University.

Taxation liabilities
13
McBarnet, D. (2019). When compliance is not the solution but the problem: From changes in
law to changes in attitude. Centre for Tax System Integrity (CTSI), Research School of Social
Sciences, The Australian National University.
McBarnet, D. (2019). When compliance is not the solution but the problem: From changes in
law to changes in attitude. Centre for Tax System Integrity (CTSI), Research School of Social
Sciences, The Australian National University.
Symes, C. F. (2016). Statutory priorities in corporate insolvency law: an analysis of preferred
creditor status. Routledge.
Woellner, R. H., Barkoczy, S., Murphy, S., Evans, C., and Pinto, D. (2010). Australian taxation
law. CCH Australia.

Taxation liabilities
14