Australian Taxation Law Assignment: Income, CGT and Deductions

This assignment analyzes the assessable income and tax liabilities of Charlotte under Australian taxation law. It begins by calculating her net assessable income from lecturing, considering deductions for work-related expenses such as home office, running expenses, and depreciation. The assign...Read More

AUSTRALIAN TAXATION LAW
STUDENT ID:
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TAXATION
The various transactions have been discussed as follows with a view of determining their
impact on the assessable income for the taxpayer (Charlotte).
Assessable income & Deductions
The aim is to highlight the assessable income that Charlotte derives under the ambit of s.
6(5), ITAA 1997 that tends to deal with income based on ordinary concepts1.
Annual assessable income from working as a lecturer = $ 90,000
Further, based on the verdict of the Thomas v FC of T2case, it is appropriate that house would
not be considered as a place of business but rather would be limited to only the private study3,
The various expenses that can be considered as deductions under s. 8(1) are as follows4.
 Rent expenses to the extent of the area used for this purpose
 Running expenses which relate with electricity along with heating and cooling costs.
 Any decline in value of the depreciating assets can also be claimed.
 Under s.25(10), home repairs to the part occupied for work or assessable income
production would also be deductible5.
In line with the above discussion, the following deduction may be claimed.
Occupancy related expenses (according to floor area) = (10/100)*31200 = $ 3,120
Running expenses (electricity as per floor area) = (10/100)*2000 = $ 200
Depreciation for FY2016 = 3100*0.4 = $ 1,240
Depreciation for FY2017 = (3100-1240)*0.4 = $ 744
Decline in value available for deduction6 = 0.7*744 = $ 520.8
Deduction for repairs (internet wireless card)7 = 0.7*180 = $ 126
1 Barkoczy, Stephen, Foundation of Taxation Law 2015, (North Ryde, CCH, 2015)
2 Thomas v FC of T (1972) 3 ATR 165
3 Income Tax: Deduction for Home Office Expenses: Tax Ruling TR93/3
4 Deutsch, Robert, et. al., Australian tax handbook. (Pymont, Thomson Reuters, 2015)
5 Gilders, Frank, et. al., Understanding taxation law 2015. (LexisNexis, Butterworths 2015)
6 Ibid.1
7 Ibid. 4

TAXATION
Deduction for public transport8 (s. 8(1) ITAA 1997) = $ 850
Deduction for seminar would not be available as it would not be used to generate assessable
income9. It is known that Charlotte attended the seminar so as to cater to her personal agenda.
Deduction is not available for premium of income protection insurance which protects the
income is case of physical injury10. Hence, the premium paid for the same would not be
considered deductible.
Thus, net assessable income = 90000 – (3120 + 200 + 520.8 + 126 + 850) = $ 85,183.2
Sale of share portfolio
The intent is to determine any assessable income that would potentially arise on the basis of
share sale.
As per s. 6(5), ITAA 1997, dividend income is one of the components of ordinary income
and would contribute to assessable income. However, whenever there is a disposal of a CGT
asset, the capital gains or loss do arise and the same need to be accounted for. For the
computation of the same, the cost base of the asset in accordance with s. 110-25 needs to be
computed11. The cost base of an asset contains elements over and above the acquisition cost
particularly related to financing of the asset, maintaining title and incidental costs related to
selling and buying of asset. Also, as per s. 115-25, the discount method can be deployed for
computation of capital gains only when these are long term in nature12.
Purchasing price of the share (April 1, 2006) = $ 16,000
Total interest cost incurred with borrowing for the shares = $ 3,000
Incidental costs related to share sale = $ 500
8 Ibid. 5
9 ATO, Seminars, conferences and education workshops, ATO< https://www.ato.gov.au/Individuals/Income-and-
deductions/Deductions-you-can-claim/Other-deductions/Seminars,-conferences-and-education-workshops/>
10 ATO, income Protection Insurance, ATO< https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-
can-claim/Other-deductions/Income-protection-insurance/>
11 Ibid. 4
12 Sadiq, Kerrie, et. al., Principles of Taxation Law 2015, (Pymont,Thomson Reuters, 2015)

TAXATION
Total cost base of shares = 16000 + 3000 + 500 = $ 19,500
Selling price of the share (April 1, 2017) = $ 20,000
Hence, capital gains on sale of share = 20,000 – 19,500 = $ 500
Outstanding capital losses from share sale (FY2016) = $3,000
Therefore, net capital gains on the share sale would be zero with a pending capital loss of
$2,500.
Hence, contribution to assessable income would be only in the form of dividend income in
FY2017 which amounts to $ 800 (ignoring the impact of franking credits)13.
Thus, it may be concluded that the share sale has resulted in contribution of $ 800 to the
assessable income.
Sale of Painting
The objective is to determine if any capital gains/(losses) are made on the sale of the painting.
Painting in accordance with s.108-10(2) is defined under the broad category of collectibles.
Capital gains that arise from the sale of any collectible would be realisable only if the buying
price is greater than $ 50014. Also, capital loss that arise from sale or disposal of collectible
would be adjusted only against corresponding capital gains arising from collectible sale only
as per s. 108(1)15.
Buying price of the painting (FY2017) = $ 3,000
Selling price of the painting (FY2017) = $ 2,000
Also, there would be adjustment in the cost base since no additional cost incurred in buying
or selling, hence the cost base would essentially constitute of the purchase price only.
Hence, capital gains/(losses) = 2000 – 3000 = -$1,000
13 Ibid.1
14 Ibid. 12
15 Ibid. 5

TAXATION
Thus, it may be concluded that a capital loss of $1,000 would be carry forwarded to the
next year i.e. FY2018 so that it can be offset against gains from sale of collectible items.
Hence, the sale of painting has no contribution to assessable income.
Sale of inherited mother’s property
The capital gains implication of the sale of inherited house needs to be determined.
A critical aspect to note is that death of the owner is not considered a CGT event and hence
on account of the death, no capital gains or losses need to be computed. Further, when a
house is passed on which had served as the main residence for the deceased from the time of
construction, then the CGT treatment at the hand of beneficiary would essentially depend on
the date of inheritance and property purchase and certain other conditions. Considering the
given information, a particular situation is being applied.
For any dwelling that is purchased after September 20,1985 and passed on after August 20,
1996, then no CGT implications would arise if both the following conditions are satisfied16.
 Either the dwelling is disposed off within a period of two years from the date of
inheritance or it serves as the main residence during the period of residence
 Just before the death of the person deceased, the house was serving as the main
residence and was not being used for deriving any income.
It is apparent based on the given facts that the house has been inherited by Charlotte from her
mother who died on August 1, 2016. The property was purchased by her mother on August 1,
2005 and from that day onwards, the house continued to serve as the main residence. This
dwelling was passed on to Charlotte officially on October 1, 2016. Further exactly after two
months i.e. December 1, 2016, the house was sold. Hence, it is apparent that all the
conditions are fulfilled as mentioned below.
 The house has been purchased after September 20, 1985
 The house has been transferred to Charlotte after August 20, 1996.
 It served as main residence of the deceased from the time of purchase to the time of
her mother’s death.
16 ATO, CGT exemptions for inherited dwellings, ATO< https://www.ato.gov.au/General/Capital-gains-tax/Deceased-
estates-and-inheritances/Inherited-dwellings/CGT-exemptions-for-inherited-dwellings/>

TAXATION
 Also, it was disposed within 2 years of taking possession by Charlotte.
Thus, no capital gains or losses would be booked on the sale of the house by Charlotte.
Sale of block of land
The objective is to determine if any capital gains have been derived on the sale of the land to
her son.
Cost price of the land (July 1, 2016) = $100,000
Interest paid on the amount borrowed to make the purchase = $6,000
Hence, cost base of the land (s. 110-25) = 100000 + 6000 = $ 106,000
Selling price of land = $ 100
Section 116-30, ITAA 1997 is relevant here as it outlines that the selling price which is
considered for computation of capital gains would be always the value which is higher
between the selling price and the market value17.
Hence, for computation of capital gains, the market value of land on the date of sale i.e. $
120,000 would be considered.
Thus, capital gains = 120,000 – 106,000 = $ 14,000
Net capital gains (after offsetting pending capital losses) = 14000 – 2500 = $ 11,500
The above capital gains would be considered in FY2017 only since the agreement for sale
was signed on June 30, 2017. Also, the discount method cannot be applied to lower capital
gains liability on account of the holding period not being greater than 1 year.
Thus, taxable capital gains for Charlotte on account of the land sale to her son amounts
to $11,500.
Lottery Earnings
17 Ibid. 12

TAXATION
The winnings from lottery are not subject to personal income tax since there is no skill
involved in the same and it is essentially driven by chance18. This is in line with the
commentary forwarded in IT 2584 and also Coleman v Commissioner of Taxation19 [1999]
AAT 249. Thus, the winnings at the Aussie Big Lotto would not contribute to the assessable
income.
Taxable Income Computation
Net taxable income arising from lecturing = $ 85,183.2
Dividend (without considering franking credits) =$ 800
Total capital gains = $ 11,500
Hence, total taxable income for Charlotte for the year FY2017 = 85,183.2+800+11500 = $
97,483.2
Bibliography
18 ATO, Taxation Ruling IT 2584, ATO < http://law.ato.gov.au/atolaw/view.htm?
rank=find&criteria=AND~lotto~basic~exact&target=EA&style=java&sdocid=ITR/IT2584/NAT/ATO/
00001&recStart=1&recnum=11&tot=12&pn=ALL:::ALL%22
19 Coleman v Commissioner of Taxation [1999] AAT 249

TAXATION
ATO, CGT exemptions for inherited dwellings, ATO<
https://www.ato.gov.au/General/Capital-gains-tax/Deceased-estates-and-inheritances/
Inherited-dwellings/CGT-exemptions-for-inherited-dwellings/>
ATO, income Protection Insurance, ATO< https://www.ato.gov.au/Individuals/Income-and-
deductions/Deductions-you-can-claim/Other-deductions/Income-protection-insurance/>
ATO, Seminars, conferences and education workshops, ATO<
https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/
Other-deductions/Seminars,-conferences-and-education-workshops/>
ATO, Taxation Ruling IT 2584, ATO < http://law.ato.gov.au/atolaw/view.htm?
rank=find&criteria=AND~lotto~basic~exact&target=EA&style=java&sdocid=ITR/IT2584/
NAT/ATO/00001&recStart=1&recnum=11&tot=12&pn=ALL:::ALL%22
Barkoczy, Stephen, Foundation of Taxation Law 2015, (North Ryde, CCH, 2015)
Deutsch, Robert, et. al., Australian tax handbook. (Pymont, Thomson Reuters, 2015)
Gilders, Frank, et. al., Understanding taxation law 2015. (LexisNexis, Butterworths 2015)
Sadiq, Kerrie, et. al., Principles of Taxation Law 2015, (Pymont,Thomson Reuters, 2015)