Capital Gains Tax and Deductions Analysis - TAX 2, University

This report provides a detailed analysis of capital gains tax (CGT) implications for two different scenarios. The first section assesses the CGT consequences of various property and share sales, including the calculation of cost bases, capital gains, and the application of relevant tax laws in Australia. Th...Read More

Running head: TAX
Tax
Name of the Student
Name of the University
Author Note

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Table of Contents
Issue...............................................................................................................................2
Law.................................................................................................................................2
Application......................................................................................................................4
Conclusion......................................................................................................................7
Question 2......................................................................................................................7
Issue...............................................................................................................................7
Law.................................................................................................................................8
Application......................................................................................................................9
Conclusion....................................................................................................................10
References...................................................................................................................11

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Issue
Sophia has entered into various transactions on which CGT is applicable. Advice
is to be provided to her on the capital gains tax consequences of these transactions.
The income tax return is to be prepared on the basis of the tax applicable on these
transactions. The relevant facts related to the sales made by her as follows:
 The sale of land in Ninety mile beach occurred for $8, 00,000. This property was
purchases in 1991 by paying $1, 30,000. Stamp duty of $800 and legal fees of
$1,200 were also paid by her. A bank loan was secured and interest of $27,000
was paid on the loan. During her ownership she paid various local taxes worth
$18,500. In January 2008, $8,000 was paid to resolve a dispute with a
neighbour. In order to make the property saleable $1,500 was incurred on
improving it. Other relevant fees of $25,000 were paid to sell her land.
 Shares in ABC Company were sold for $32.20 per share. 1% brokerage was paid
on the sale. These shares were purchased in 1983 for $1.5 per share.
 A stamp collection was sold January 2018 for $23,000. The purchase value of
this collection was $33,000. $3,000 was paid as action fees.
 A bob Marley guitar purchased for $70,000 in 2003 was sold for $45,000.
Law
In Australia, CGT is levied on the net capital gains earned by an individual on the
sale of a CGT asset. As per s102-5 ITAA 1997, the income earned from the capital
gains is included as a part of the assessable income of an individual under statutory
income (Legislation.gov.au 2020). This income, along with the ordinary income under
s6-5 ITAA 1997 form a part of the assessable income of an individual. For a specific
taxation year. In order to levy CGT on an asset, it must meet the criteria of a CGT asset
defined under ITAA 1997. Along with it, they must have been procured on or after 20
September 1985 (Ato.gov.au 2020). Assets which were procured prior to this date are
not taxable under CGT on the basis of the guidelines prevalent in Australia. Capital
gains occur when the sale proceeds from an asset exceed the costs incurred in
obtaining the asset. The difference between both the amounts is charged to tax under

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CGT. Similarly, capital losses earned by an individual are used in reducing the overall
capital gains earned by the individual. The relevant laws in the case of the assets sold
by Sophia are as follows:
 The sale of the land is chargeable under the head business income and is a part
of the ordinary income of an entity if the business of the seller is related to
dealing in lands. The same was suggested in FCT v Hubert’s Island Pty Ltd
(Ato.gov.au 2020). If the sale is not in the ordinary course of the business by an
individual, the same would be constituted as a CGT asset and the tax would be
charged under CGT. In this case, there are also laws related to the cost base of
the asset. This cost base is to be deducted from the sale amount to calculate the
capital gains on the sale of the asset. Subdivision 110-A of ITAA 1997 suggests
that there the cost base of an element contains five major elements under
different heads (Ato.gov.au 2020). The first element includes the amount paid to
procure the actual asset. The second element consists of incidental costs like
stamp duty and legal fees paid to procure the asset under s110-35 ITAA 1997.
The third element consists of the costs of owning the asset. In this case, the
interest on a loan taken to purchase an asset is deductible only if the asset is
procured after 20 August 1991. The fourth element consists of the expenditure
incurred to increase or preserve the value of an asset under s110-25(5). The fifth
element consists of the costs incurred to establish, preserve or defend the title of
an asset under s 110-25(6) ITAA 1997. All of these costs are added up and then
deducted from the selling price of the asset. S108-10(2) ITAA 1997 defines a
collectable (Ato.gov.au 2020). According to it, a collectable is an artwork,

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medallion or antique item which is collected by an individual for their personal
enjoyment. If the cost of acquiring this collectable is lower than $500, then the
capital gains earned and capital losses incurred from the sale of the assets are to
be disregarded. They are not included as a part of the assessable income at all.
Similarly, an asset that is not a collectable but is kept for the usage of an
individual is defined as a personal use asset under s108-20 ITAA 1997. The
capital gains from these assets need to be disregarded if their procurement costs
are lower than $10000 under s118-10(3).
Application
As Sophia is not involved in the business of dealing in lands, the profits earned
by her are charged as a part of her statutory income and not as her ordinary income.
However, not all of the expenditure incurred by Sophia is considered as a part of the
cost base of the land. The total cost base of the land is as follows:
 The $130000 paid to procure the asset is allowed as a deduction under s110-
25(2) ITAA 1997;
 The stamp duty and legal fees paid for procuring the asset are allowed as a
deduction as a part of the incidental costs under s110-35;
 In case the asset is procured after 20 August 1991, the interest paid on the loan
taken from the bank is allowed as a deduction under s110-25(4);
 The insurance, council rates and water rates are expenses during the period of
the ownership. They are not necessary in enhancing the value of the asset.
Hence, they are excluded as a part of the cost of the asset;

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 The $1500 is allowed as a deduction as it is incurred to preserve the value of the
asset under s110-25(5);
 Similarly the $8000 and $25000 spent on the asset are deductible as they are
necessary in making the sale of the asset possible.
Hence, the total capital gains earned from the sale of the land are totalled at
$606500.
Similarly, the stamp collection is a part of the collectables. The auction fees incurred on
the sale of the asset is deductible under s110-25(5) ITAA 1997. The total capital losses
incurred from the sale of the losses are $13000. The guitar is also a part of the
collectables. As the cost of acquiring the same is more than $500, capital gains are to
be charged under the assessable capital gains of an individual. Hence, the total capital
losses earned from the sale of the guitar are $25000. These are allowed as a deduction
from the total capital gains earned by Sophia.

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Conclusion
Applying all the relevant laws, it can be stated that the annual capital gains of
Sophia are worth $568500. The annual tax payable by Sophia will be charged on this
particular amount.
Question 2
Issue
Ava has recently started a job in the Sunshine hospital in Victoria. However, as
her hometown is in Darwin, she had to relocate from there. Apart from these, the costs
incurred by her are related to various items related to and as a part of the job

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undertaken by her. They include the travel expenses from Darwin to Victoria for the job
interview. The relocation expenses cost her $1800. As a part of the job, her white
uniform cost her $200. This was compulsory as a part of her job. She also paid $18200
childcare expenses for her two-year-old daughter. She happened to make phone calls
from her home to the hospital to keep a check on her patients. This process cost her
$200. During the times when she worked night shifts, she procured food from the
hospital café bar for $570. She also paid a speeding fine of $207 when she was rushing
to the hospital for an emergency visit. She also incurred $330 travel expenses to travel
from her home to her place to work.
Law
Domestic or private expenses are allowed as a deduction from the assessable
income of an individual if they are incurred as a part of obtaining or producing the
income generated by them for a particular tax year. In this regard, there are a wide
variety of case laws guiding the tax liability of an individual. The travel expenses
incurred for going to the job interview are not allowed as a deduction under the
judgement in FCT v Maddalena (Ato.gov. au 2020). Similarly, relocation expenses are
also not allowed as a deduction under s8-1 ITAA 1997. This is because both of them
are incurred as a part of being in a position to generate or produce income. They do not
directly form a part of the income generated by the individual as a part of their
profession. However, as work wear is compulsory for an individual to generate income
from their profession without any hindrance, it is allowed as a deduction under the
guidelines of s34-10(1). However, childcare expenses are not allowed as a deduction as
held in Martin v FCT (Ato.gov. au 2020). The phone calls undertaken as a part of the job

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are allowed as a deduction if they are paid by the individual. The ATO however states
that the taxpayer should maintain appropriate supporting records for the same. Food
and drinks related expenditure of an individual are not allowed as a deduction as
suggested by FCT v Cooper. Fines paid by individuals are not allowed as a deduction
as suggested by the guidelines of ATO. This is because they do not play any role in
generating or producing the income from the profession of an individual. Expenditure
incurred to and from work are not allowed as a deduction from the hands of the
taxpayer as suggested by Ruling IT 112 (Ato.gov.au 2020).
Application
The guidelines of the various case laws, when applied in the case of Ava
produce the following results:
 The travel expenses to Sunshine hospital for the job interview are not allowed as
a deduction;
 The relocation expenses of $1800 incurred to move to Victoria are not allowed as
a deduction;
 The expenditure incurred in relation to the uniform is allowed as a deduction as it
is compulsory to wear the same as a part of the job;
 Childcare expenses of $18200 are not allowed as a deduction in the hands of
Ava;
 The phone calls made by Ava are a part of the income producing activities
undertaken by her. Hence, these costs of $200 are allowed as a deduction from
the assessable income generated by Ava;
 The food expenditure of $570 incurred by Ava is not allowed as a deduction;

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 The speeding fines of $207 are not to be deducted under the guidelines of ATO;
and
 The expenditure of $330 incurred in travelling from home to work during the
normal course of business are not allowed as a deduction in the hands of Ava.
Conclusion
After applying the relevant laws to the case of Ava, it can be found that the total
expenditure incurred by Ava is not fully deductible as a part of the personal and
domestic expenditure incurred by her. This is because not all of the expenses play a
role in directly contributing towards the income generated by her for a given taxation
year. Hence, the total expenditure which qualifies for the general deductions in her
hands is $400.

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References
Ato.gov.au. (2020). CGT assets and exemptions. [online] Available at:
https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-exemptions/ [Accessed
28 Jan. 2020].
Ato.gov.au. (2020). Legal Database. [online] Available at:
https://www.ato.gov.au/law/view/document?Docid=ITR/IT2670/NAT/ATO/00001
[Accessed 28 Jan. 2020].
Ato.gov.au. (2020). Legal Database. [online] Available at:
https://www.ato.gov.au/law/view/document?DocID=TXD/TD200035/NAT/ATO/
00001&PiT=99991231235958 [Accessed 28 Jan. 2020].
Ato.gov.au. (2020). Legal Database. [online] Available at:
https://www.ato.gov.au/law/view/document?DocID=TXR/TR989/NAT/ATO/00001
[Accessed 28 Jan. 2020].
Ato.gov.au. (2020). Legal Database. [online] Available at:
https://www.ato.gov.au/law/view/document?docid=ITR/IT2217/NAT/ATO/00001
[Accessed 28 Jan. 2020].
Ato.gov.au. (2020). Legal Database. [online] Available at:
https://www.ato.gov.au/law/view/document?DocID=TXR/TR200316/NAT/ATO/00001
[Accessed 28 Jan. 2020].
Ato.gov.au. (2020). Legal Database. [online] Available at:
https://www.ato.gov.au/law/view/document?DocID=TXR/TR9534/NAT/ATO/00001
[Accessed 28 Jan. 2020].

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Legislation.gov.au. (2020). Income Tax Assessment Act 1997 . [online] Available at:
https://www.legislation.gov.au/Details/C2017C00336/Controls/ [Accessed 28 Jan.
2020].