HA3042: Taxation Law Assignment - Capital Gains and Allowances

This assignment solution addresses key aspects of Australian taxation law, focusing on capital gains tax and capital allowances. The first part analyzes Jasmine's capital gains from the sale of her family home, a car, a business, furniture, and paintings, considering relevant exemptions and concessions. It meticulously applies tax principles to each scenario, calculating taxable amounts and potential tax liabilities. The second part delves into capital allowances, using a case study involving John's company and a CNC machine. It examines the costs associated with the machine's purchase, installation, and the addition of an extra rod, determining the appropriate capital allowance and the date when depreciation commences. The solution demonstrates a clear understanding of tax regulations, providing detailed calculations and justifications for each conclusion, supported by relevant references.

TAXATION LAW

Taxation
Answer – 1 Capital gains tax
A. Capital gain about the family house
It was observed that the property owned by Jasmine was termed to be as a residence while
making the sale. This made possible for Jasmine to get exemption for sale of main residence. It
was observed that she was having no other house in the country and was residing in that house
by herself which clearly stated that the property was not used by her to earn or generate income.
She has also stated the location of the property as her mailing address. Hence, all the necessary
factors were met by her to claim the exemption. The selling price of the property was stated to be
$650000 and price of purchase was $40,000. If for any reason, she wouldn't have met the criteria
for examination, then she would have been charged 50% of capital gains tax over the profit
earned after selling the property.
It was analyzed that the property was acquired in the year 1981 which states that it will be free
from any kind of capital gains tax. Any property acquired before 1985 is exempted from capital
gains tax. Capital generally termed as the difference between the sale price and purchase price
after the deduction of relevant charges and related expenses (ATO, 2019). Generally, capital
gains tax is applied on any assets that have been used to generate income. Properties, leases,
shares, and any other personal use assert that exceeds an amount of $10,000 are liable for capital
gains tax. It is still very important for organizations to notice that the purchases that have been
made before 20th September 1985 are free from any kind of above-mentioned taxes according to
the laws of tax and provisions.
B. The capital gain or loss made from the sale of car
There are different types of assets like car, motorcycle, depreciable assets, property, main
residence, and other assets that have been acquired before 20th September 1985 that is exempted
from the capital gains tax (Black, 2019). Hence it was observed that transaction of car was free
from any kind of capital gains tax. For this particular scenario, it was observed that a capital loss
of $21000 was incurred. However, it is a clear fact that if capital gains are exempted, then capital
loss can also be not booked because it will further tend to reduce the tax liability. This
transaction was also observed to be stagnant for Jasmine while calculation of capital gains.
There are provisions which state that capital loss can only be treated if that particular asset is also
charged with a capital gain. The losses of individuals can also be adjusted with the transaction
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Taxation
amount. Any kind of profit or loss accrued with the help of an asset that has been held by the
organization for more than 36 months can be adjusted with the help of the long term capital gains
(Brown, Ferguson & Sherry, 2010). Any kind of losses accrued from the short term capital asset
can also be adjusted with the help of long and short term capital gains (Terrano, 2017).
Following the provisions, the loss and the gains can be accrued from any capital assets except for
shares.
C. The capital gain concerning the sale of the business
A small reduction of the value of assets sold by the individuals is being treated as carrying
amount as capital gains on the sale of business. A discount of 50% is available for individuals
except for the corporate organizations. For this particular scenario, it was observed that the
individual Jasmine was 65 years old and was eligible to gain concessions over the small business
capital gains. Her age was more than 55 years with Maida eligible for this concession. it was
observed that the time frame of business activities was not properly mentioned because of which
it was assumed that she have held the business for more than 15 years as she has settled in this
country a long time ago and started the business. The total concession received by then amounted
to $125000 out of which $60,000 was considered as concession for goodwill and the other
$65000 was for the assets. A total of $75,000 will also be reduced while considering the value of
assets because of which the taxable amount will fall to $50,000. After applying the discount on
capital gain, this value will amount to $25,000.
D. The capital gain about selling the future
If the furniture is used as personal assets by an individual, then they will be free from any kind of
capital gains tax if required for thousand dollars or less. For this particular scenario, it was
observed that the furniture was purchased for an amount which was not crossing $2,000. As it
was observed that the furniture was used for personal purposes only and the amount was not
observed to exceed level of $2,000, it was exempted from the capital gains tax. Sale of personal
assets does not cause any changes in the capital gains tax because of the exemption available on
their acquisition values. Personal assets are those assets which were used by the employees or
associates for self-enjoyment (Solomon, 2019). Hence, for this particular case coma the
acquisition value was not exceeding $2000 per asset and also the total sale value was $5,000
which was easily exempted from capital gains tax.
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Taxation
E. The capital gain with the selling of paintings
Paintings are considered to be as collectibles under the capital gains tax and are exempted under
some conditions (Paretts, 2018). The cost of the assets acquired should be less than $500 and
should be used for the personal enjoyment of employees or associates only. In this particular
scenario, it was observed that the paintings were purchased for less than $500 but was sold for
more than $35000 except one painting which was purchased at thousand dollars and was sold at
$5000. Therefore capital gains tax will be charged on the painting which was purchased at
thousand dollars. For this case, the acquisition cost of the painting was observed to be $500 and
the provision committed or stated by it was not subjected to tax. the painting was acquitted for
thousand dollars and was sold for 5000 dollars because of which the difference in the amount
will be treated for charging capital gains tax (Deloitte, 2018).
Hence, in all the above transactions the capital liability of jasmine will amount to $4,000 and
after the discount, she will be liable to pay a capital gains tax of $2,000 for that particular
accounting period.
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Taxation
2. Capital allowance
Problem discussion
In the case provided to us, John is the owner of a company that is engaged in manufacturing
motor vehicles parts as well as accessories. Its principal activity is manufacturing parts of the
BMW. On 1st November 2014, John bought a CNC machine for $300000. John wanted to
inspect this machine before buying it and so he had to visit Germany. The cost of traveling to
Germany amounted to $12000. The installation cost involved amounted to $25000 which is
directly attributable to the product. This CNC machine would help in smooth functioning of the
operations carried out in the company but it would have greater effectiveness if an additional rod
was added which cost $5000. Some important information about this case for the computation of
assets reduction is provided below:
Purchase was made on 1st November 2014
Installation took place on 15 January
Cost of machine was $300000
The road was installed on 1st February
Cost off-road was $5000.
This would help us to calculate the cost of capital allowance and the time at which the asset start
depreciating.
Law and application
If there is an existence of any spare part which will increase the effectiveness of the asset then it
must be included in the cost of the asset or can also be shown as a separate line item. This acid
should be depreciated at the same rate of interest. If spare part is added only for maintenance
purpose then cost of it must not be considered while calculating capital gain. In the case provided
to us, an additional rod was purchased because it has the machine to provide the best results.
This road helps in ensuring better productivity and so should be considered while computing
capital gain (Kluwer, 2015).
John incurred trip cost to inspect the machine and check its functioning which is not directly
associated with the asset. This cost has already incurred irrespective of the fact whether he will
buy the machine or not. So, the cost of the trip shall not be included in the cost of the asset.
Later, it was found that worthiness of the machine would not be enhanced and so it will be
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Taxation
considered just visit Germany by John. All the other incidental costs that are related to the asset
should be included in the asset's value. The total cost will be equal to the purchase cost and
installation cost incurred which amounts to $325000. So, we can conclude that any cost that
directly affects the sale or purchase of an asset must be included in the total cost. Here, there was
no existence of direct relationship between the trip cost and the asset and so it should not be
taken into consideration (Nethercott, Richardson & Devos, 2013).
The date at which the asset was purchased will be regarded as the date of recording the asset in
the books which is November. Installation cost incurred in January and the same month the asset
was put to use. An amount of $25000 must be added because of installation. The depreciation
shall start from November in which the asset was purchased. It was observed that the rod was
purchased for improvising the quality of the machines. Hence the cost of the rod will be added to
the overall cost of the machine. The usage of rods has helped the organization a lot to improvise
the efficiency of the organization by improving the quality of the work and increasing the time
efficiency (Patnia, 2011). Thus at year-end, the real value of the asset will amount to $330000
(300000+25000+5000).
$12000 will charge to statement of profit and loss account and the qualifying amount for the
capital allowance is $330000.
Conclusion
It is a clear fact that the organizations add any type of expenses incurred for running the
machines to the cost of the machinery itself. The total amount of the depreciation charged is
calculated on the date of purchase notwithstanding the put to use as even if the asset is purchased
and also the value of the machine keeps depreciating because of rusting and the continuous use
for fulfilling the operational strategies of the company. Hence, the machine is observed to start
depreciating from the date of purchase rather than the date when it has been put to work. It is
thereby imperative that the treatment should completely consider this aspect otherwise the entire
treatment will become problematic.
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Taxation
References
ATO 2019, Capital gains tax property exemption tool, viewed 22 September 2019
https://www.ato.gov.au/Calculators-and-tools/Capital-gains-tax-property-exemption-tool/
Black, E 2019, What is Capital Gains Tax and how do I calculate it?, viewed 22 September 2019
https://www.realestate.com.au/advice/what-is-capital-gains-tax/
Brown, P., Ferguson, A., & Sherry, S 2010, Investor behaviour in response to Australia's capital
gains tax, Accounting and Finance, vol. 50, no. 4, pp. 783, viewed 22 September 2019
<https://search.proquest.com/docview/762714715?accountid=30552
Deloitte 2018, Fine Art Direct and indirect taxation aspects, viewed 22 September 2019
https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/
artandfinance/lu-en-artfinance-taxmatrix-16092013.pdf
Kluwer, W 2015, Income tax: capital gains: is a capital gain or capital loss made from an
antique car, a veteran car or a vintage car disregarded? viewed 22 September 2019,
https://iknow.cch.com.au/document/atagUio568535sl17295631/td-2000-35-cgt-capital-gain-
or-capital-loss-made-from-an-antique-car-a-veteran-car-or-a-vintage-car
KMPG 2019, Australia – Proposed CGT Main Residence Exemption Changes Could Be
Dropped, viewed 22 September 2019 https://home.kpmg/xx/en/home/insights/2019/03/flash-
alert-2019-049.html
Nethercott, L., Richardson, G.,& Devos,K 2013, Australian Taxation Study Manual, Oxford
university Press
Paretts, S 2018, How to Tax the Sale of Art as an Investment or a Collectible, viewed 22
September 2019 https://yourbusiness.azcentral.com/tax-sale-art-investment-collectible-
27134.html
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Taxation
Patnia, A 2011, No Capital gain tax or income tax on profit on sale of a car or other personal
effect, viewed 20 September 2019, https://taxmantra.com/capital-gain-tax-income-tax-profit-
sale-car-personal-effect/
Solomon, J 2019, Understanding Australian GST: A Guide for SaaS Companies, viewed on 22
September 2019 https://www.chargebee.com/blog/gst-australian-saas-founders-heres/
Terrano, M 2017, Can you avoid fees and charges when transferring property within the family?,
viewed 22 September 2019 https://www.finder.com.au/avoid-fees-transferring-property-to-
other-family-members
Yardney, M 2019, A Complete Guide to Capital Gains Tax, viewed on 22 September 2019
https://propertyupdate.com.au/a-complete-guide-to-capital-gains-tax/
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