Taxation Law Report: Australian Taxation of Capital Gains & Allowances

This report provides a comprehensive analysis of Taxation Law, specifically focusing on Capital Gains Tax (CGT) and Capital Allowance within the Australian context. The report begins with an introduction to taxation laws, emphasizing their importance and scope. It then delves into two key areas: CGT, examining its implications in scenarios involving family homes, cars, business sales, and the sale of paintings. Each scenario is analyzed based on ATO guidelines and relevant sections of the ITAA 1997. The report then transitions to Capital Allowance, identifying issues related to the cost and depreciation start time of an industrial CNC machine. It calculates the total cost of the machine, including acquisition, travel, and installation expenses, and determines the appropriate date for depreciation. The analysis incorporates relevant case laws and legislative provisions, providing a detailed understanding of the tax implications for each scenario. The report concludes by summarizing the key findings and emphasizing the importance of accurate cost determination and depreciation start dates for tax purposes.

TAXATION
LAW

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1: CAPITAL GAINS TAX.........................................................................................1
A. Capital Gain in relation to family home income.....................................................................1
B. Capital Gain or loss made from car.........................................................................................1
C. Capital Gain in relation to sale of business.............................................................................2
D. Capital Gain in relation to selling paintings............................................................................2
QUESTION 2: CAPITAL ALLOWANCE.....................................................................................3
Identified Issue:............................................................................................................................3
Law and Application....................................................................................................................3
Law and Application....................................................................................................................4
Concluding discussions................................................................................................................4
Conclusion...................................................................................................................................4
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Taxation laws are one of the most important legislations irrespective of what nation or
economy they belong to. Essentially, a taxation law can be defined as that area of legal study
which deals with the provisioning of client assistance so as to enable them to file their
obligations towards the government, including both state and federal, in an effective manner
(Cassidy and Alley, 2012). This report aims to provide a comprehensive account on two chief tax
areas viz. Capital Gains Tax (CGT) and Capital Allowance. In order to achieve this, two case
studies have been taken into account based on which CGT Consequences have been discussed in
the Question 1 whereas in the latter part, an issue is identified and conclusions have been drawn
through the corroboration of its authenticity by way of case laws and other related legislations of
Australian Tax Law.
QUESTION 1: CAPITAL GAINS TAX
A. Capital Gain in relation to family home income
A Capital Gains Tax is imposed on the event of selling or disposing of non-inventory
assets for a profit realisation on it which is then added to the assessable income of the tax payer
(James, 2012). As per ATO Guidelines in regards to CGT, a dwelling is considered a main
residence if one has lived in it and the area has not been left as a vacant block with no sign of any
property on it. Generally, as per the tax guidelines main residence is exempted from the Capital
Gains Tax. In the context of given case scenario, Jasmine purchased her house in 1981 for
AUD$40,000. Its current worth today is AUD$650,000. Since her principal place of residence
has been bought before September 20, 1985, CGT does not apply to her house as prescribed by
Subsection 104-10(5) of the ITAA 1997 and such a property is treated as a valuable pre-asset
(CGT on Main Residence, 2019).
B. Capital Gain or loss made from car
As per the ATO Guidelines, any capital gain or loss made from the sale of a car is
exempted from CGT. However, it is important to note that it is not classified as a personal use
asset (Kenny, Blissenden and Villios, 2018). As per the taxation guidelines, if there is a disposal
of car, the tax payer is supposed to account for GST equivalent to one-eleventh of the sale price
if such a sale is of taxable nature. This applies to any vehicle bought prior to July 1, 2000 or sold
to an individual under a Private Sale Arrangement (Disposal of Car and CGT, 2019). In the
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context of given case scenario, Jasmine bought her motor vehicle in 2011 for AUD$31,000
which is currently worth AUD$10,000. Even though there is GST provision applicability, any
gain on the sale of a car is not taken under the account for CGT purposes. Section 118-5 of the
ITAA 1997 states that any capital gain or loss made on the sale of a car, motor cycle or similar
vehicle is disregarded (Cars and CGT Provisions, 2015).
C. Capital Gain in relation to sale of business
Capital Gain or loss realised on the sale of business is prone to be covered under CGT
concession up to 50%, as prescribed by ATO Guidelines, based on certain criterion such as:
 Purchase Consideration for such sale is less than five million dollars;
 Business is still active at the time of occurrence of such an event and traded for at-least
7.5 years, in case the periodicity of ownership is less than 15 years; or
If the ownership of business exceeds 15 years and is not active at the time of its sale, it should
have been in trading for at-least 7.5 years;
 Business is owned by an individual or in case of a business or in case it is owned by a
company with at least one shareholder owning and controlling at least 50% of the issued
shares. The company may also have the business for benefit of a trust (Lignier and Evans,
2012).
In the context of given case scenario, Jasmine had a small cleaning business which was
sold to a buyer for AUD$125,000. This included two components viz. Business Equipments and
Goodwill which was worth AUD$60,000 and AUD$65,000 respectively. As per the above listed
conditions, Jasmine's business is assumed to be active at the time of sale as well as in trading for
more than 15 years. With this information, it can be said that Jasmine is eligible for a CGT
Concession of 50% on the sale of business. Apart from this, since she is making this sale with an
intention of retiring and is aged more than 55 years, a 15 year exemption is also applicable which
exempts the entire transaction from CGT and no liability will exist (Sale of Business and CGT,
2019).
D. Capital Gain in relation to selling paintings
Australian Taxation Office, under section 108-10 of the ITAA 1997, classifies paintings
under purview of collectables which have been defined as those items which are kept or used for
personal purposes or mere enjoyment (Sadiq and et.al., 2012). In the context of given case
scenario, Jasmine has an assortment of paintings which were mainly bought from second-hand
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shops at a cost price less than $500. Exceptional to this condition, one of the paintings was
directly bought by her from its artist and costed AUD$1,000. The total selling price of such
collectables is $35,000 out of which the one bought by artist is being sold for $5,000. As per the
ATO guidelines, any disposition of such items is disregarded if such an asset is purchased before
December 16, 1995 for $500 or less (Collectables and CGT, 2019). Since no information
regarding this is available in the case study, it is assumed that the collectables were acquired by
Jasmine after 20 September, 1985 and are therefore,any gain or loss realised through its sale is
taxable.
QUESTION 2: CAPITAL ALLOWANCE
Identified Issue
In the context of given case scenario, a motor vehicle parts and accessories
manufacturing business owner, named John, decides to purchase an industrial computer
numerical control (CNC) machine which is to be imported from Germany. For this purpose, John
travels to Germany in order to place the order after thoroughly inspecting it. After coming back,
he realised that the installation of CNC machine would be done through specialists. Apart from
this, an additional expenditure must be incurred by him on the installation of Guiding rods so as
to make the new CNC Machine more effective. All this would require extra outlay on John's
part. Hence, it can be said that there are two elements to the issue which have been identified
from the given case study and are enlisted as under:
a. What is the Cost of CNC Machine for the purpose of calculating Capital Allowance? and
b. What is the right starting time for calculating the decline in value of the CNC Machine?
Law and Application
Capital allowance can be defined as the practice of providing tax relief on capital
expenditure of tangible nature. This is basically carried out by ATO under a uniform capital
allowance system or UCA wherein an immediate deduction is allowed on a specified class(s) of
assets (Cost of Depreciating Asset, 2019). The first element of the problem identified earlier
relates to the determination of CNC Machine cost so as to compute capital allowance.
For this purpose, firstly, cost of machinery has been calculated as under:
Particulars $ (in AUD)
Acquisition Cost of Machinery 300000
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Travelling Cost to Germany incurred by John 12000
Installation and Bolting costs 25000
Installing an additional guiding rod to increase
the effectiveness of machinery
5000
Total Cost of Machinery 312000
As per the UCA, the first element of cost of depreciating asset needs to be calculated
which is usually the purchase price. It also includes the expenditure incurred for holding the
asset. However, it is to be kept in mind that such an amount is directly related to the machine
itself. In the given case scenario, it comes to $325000 (=$300000+$12000) which includes both
acquisition cost or the purchase price as well as travelling costs while rest of the expenditure is
of indirect nature. In addition to this, capital allowances related legislation also states that an
immediate deduction is available as long as the asset is not used to produce business income and
costs less than AUD$300 (Capital Allowances, 2019). Based on this, it can be said that no
deduction will be applicable for the CNC Machine bought by John as it is purchased with an
intention to generate business income and costs more than AUD$300.
Law and Application
As per ATO guidelines prescribed by the ITAA 1997, a depreciating asset is one which
has a limited effective life and is, thus, subjected to a decline in value (Tiley and Loutzenhiser,
2012). In order to work out the decline in value of depreciating asset, it is important to ascertain
the start time as well as the method most suitable for accounting for such a value reduction in
asset. Here, the second element of cost is mainly related to the time taken in bringing the asset in
question to its present condition as well as location. Thus, it would include the rest of the
amounts which are presented as under:
Particulars $ (in AUD)
Installation and Bolting costs 25000
Installing an additional guiding rod to increase
the effectiveness of machinery
5000
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Total Costs 30000
This is due to the fact that such costs are incurred by John after he started to hold the
vehicle. Note that, additional expenditure incurred on buying additional guiding rod is directly
related to the intent of making the CNC Machine more effective. Thus, it is also contributing in
bringing the machine to its present condition. It is also crucial to note that in this scenario any
impact of GST stands ignored. After the second cost element of John's CNC Machine has been
established, it is safe to say that the exact date to start depreciation for the machine would be
from the time it was installed (Guide to depreciating assets, 2019).
Concluding discussions
As per the ATO Guidelines, the exact start time for decline in value of assets is the day
they are put to use or are installed for the purpose of being utilised. In the given case scenario,
the exact time turns out to be 15 January, 2015 for CNC Machine whereas the total cost of the
machine is AUD$342,000 which includes both direct costs as well those which bring the
machinery to its present usage condition (Cost of Depreciating Asset, 2019).
Conclusion
Based on the discussions, it can be established that there are two issues which have been
identified viz. Cost of depreciable asset and what is the exact start time to be considered for
accounting in the decline of its value (Woellner and et.al., 2016). Based on the findings and
supported legislations, it is inferred that the Cost can be divided into elements viz. first and
second. The first is mainly related to the direct costs while the latter talks about how the
machinery is brought to its present workable condition as well as location. The total cost turns
out to be $342000. Whereas the exact time comes out to be the date of installation which is
January 15, 2015. Also, while the CNC machine includes additional guiding rod bought by John
in February, when calculating depreciation in the first year, this would be depreciated for 11
months whereas the machine would be depreciated for 12 months since they were installed on
separate dates.
CONCLUSION
From the inferences drawn and discussions made in the above report, it can be asserted
that Capital Gains Tax facilitates the successful classification of CGT events in a manner which
is essential for the payment of any profit or loss realised on the tax payer's part. If this is not
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done, their would be an exclusion of timing and may gravely impact the tax liability of an
individual gravely. On the other hand, Capital Allowances also provide relief to the tax-payer in
the form of a deduction from the total tax-liability.
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