Taxation: Potential Tax Deduction and Capital Gains on Disposal of Assets

Taxation
STUDENT NAME/ID
[Pick the date]

Question 1
The potential tax deduction for taxpayer (Ruby Pty Limited) is as discussed below.
(a) In the given case, the taxpayer has incurred expense with regards to replacement of kitchen
fittings. This replacement has been done after incurring damage and through replacement the
original character has been restored and no change in layout has been done. Considering the
given aspects, it would be fair to consider the given expense as repairs as per TR 97/23 (Krever,
2017).
With regards to expenses related to repairs, 100% tax deduction in the year of incurring the
expense in available under the aegis of two sections.
1) Section 8-1 ITAA 1997
2) Section 25-10 ITAA 1997
One of the common requirements for both these sections is that the underlying expenditure must
not be capital. (CCH, 2013). A unique feature of kitchen fittings is that a large amount of
components are in the form of permanent fixtures which are essentially part of the property and
cannot be detached. Potential examples include sink, plumbing, cupboard and possibly stove if
fixed. Owing to the above aspect, any expenditure even on repair of kitchen fittings would be
termed as capital in nature as per TR 97/23 and the amount would be reflected in the property
cost base. Therefore, it may be concluded that Ruby Pty Ltd would receive no deduction on tax
in the given case (Sadiq et. al., 2016).
(b) General deduction of expenses is permissible under s. 8-1 ITAA 1997 provided these are
incurred in the process of deriving assessable income. An additional requirement is that the
nature of this expense must be necessarily revenue and not capital (Gilders, Taylor, Walpole,
Burton & Ciro, 2016).
Various case laws are relevant to allow differentiating between the two type of expenses. One
such case is British Insulated and Helsby Cables Ltd v. Atherton [1926] AC 205. The crucial
aspect highlighted in this case is that the type of expenditure would be driven by the advantage
that arises from the outflow. The advantage in case of capital expenditure would be expected to
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be enduring unlike revenue expenditure which would lead to an advantage limited to the current
period (Deutsch, Freizer, Fullerton, Hanley & Snape, 2016).
It is apparent that the given expense is a normal business expense considering the nature of
business where these claims do arise. Also, the advantage that the case settlement would provide
does not impact the future of the business and is not ensuring since the impact would be limited
to the given year when the result is announced. Thus, the nature of expenditure is revenue and
hence general deduction can be availed since it is in relation to a income producing property
(Woellner, 2014).
(c) The past business of the company was manufacturing parts related to engine. In such a
business, litigation can arise on account of faulty goods being provided. In normal course of
business, the future business of Ruby would have been impacted, however, since the company
has already sold the business, hence the reputation damage in the automobile sphere is not more
of significance for the company (Gilders, Taylor, Walpole, Burton & Ciro, 2016).. Hence, the
nature of advantage cannot be termed as enduring and thereby the revenue nature of expenditure
is apparent. This allows for s. 8-1 ITAA 1997 general deduction in the current year (Barkoczy,
2015).
Question 2
Taxpayer: Betty (Investor and collector)
In the present case Betty has performed three transactions for the disposal of capital assets
(shares, painting and violin). The aim is to analyse the transactions and compute the net capital
gains or losses on account of these disposals..
Painting
In accordance with s. 149 (10) ITAA 1997, all the respective assets of the taxpayer which are
bought before September 20, 1985 would be termed as pre-CGT asset and Capital Gains Tax
(CGT) liability would not be raised on the derived capital gains/losses. In other words, capital
gains that are produced from the disposal of the assets which are bought by taxpayer before
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