Holmes Institute Taxation Law: Individual Assignment T2 2019

This individual assignment delves into various aspects of Australian taxation law. The first part addresses capital gains tax (CGT) implications for Jasmine, an Australian resident selling assets. It examines the sale of her home, car, cleaning business, furniture, and paintings, applying ATO guidelines to determine tax liabilities and exemptions. The second part focuses on a case study involving John's vehicle parts manufacturing company and the depreciation of an imported CNC machine. The assignment analyzes the cost of the asset for capital allowance purposes, including inspection costs and installation expenses, and determines the date from which depreciation can be claimed. The analysis references relevant sections of the ITAA 1997 and ATO guidelines to support the conclusions on CGT exemptions and depreciation calculations.

Running head: INDIVIDUAL ASSIGNMENT
Individual Assignment
Name of the Student
Name of the University
Author Note

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Table of Contents
Question 1..........................................................................................................................3
A. Sale of Home........................................................................................................3
B. Sale of Car............................................................................................................3
C. Sale of cleaning business.....................................................................................3
D. Sale of Furniture...................................................................................................4
E. Sale of paintings...................................................................................................4
Question 2..........................................................................................................................4
Issue...............................................................................................................................4
Law and Application.......................................................................................................5
Law and Application.......................................................................................................5
Law and Application.......................................................................................................5
Conclusion......................................................................................................................6
References.....................................................................................................................7

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Question 1
A. Sale of Home
Jasmine is an Australian resident and selling off her Australian assets to move back
to the UK, where she was born. According to the ATO guidelines on buying and
selling one’s home, the amount received from the sale is not charged to tax under
the capital gains tax (Ato.gov.au 2019). The section 118.100 of ITAA 1997 states the
amount of gains earned from the sale of a property are to be ignored if the property
in question is the main residence of a person. It also should not be used for any
other income earning or business purposes. Jasmine’s house was purchased in
1981 for $400000 and its value has now become $650000. Taking indexation into
consideration, it is possible that Jasmine would have earned capital gains on the
property. However, these need to be ignored as the property has been the main
residence of Jasmine since she first bought it.
B. Sale of Car
A car, as defined by the ATO, is something that cannot carry more than 9 persons
and 1 tonne at once. Section 118.5 in ITAA 1997 states that the sale proceeds
received from the sale of a car are completely exempt from capital gains. This
means that the gains earned from their sale and the losses suffered are not to be
included in assessing the capital gains of other people (Ato.gov.au 2019). As
Jasmine had purchased the car by paying $31000 and ended up selling it for
$10000, it is evident that she had incurred losses on the sale of the asset. Hence,
the capital losses incurred through the sale of the car by Jasmine are not to be
included as a part of the other capital gains earned by her.
C. Sale of cleaning business
It is mentioned that the cleaning business of Jasmine is a small business. The
Australian government has made four types of exemptions available to the small
businesses on the sale of their business assets. They are the 15-year exemption,
50% active asset reduction, small business retirement exemption and the rollover by
small business. The first exemption states that if the asset was owned for a period of
more than 15 years and its owner is more than 55 years, then the assets should be
ignored from the capital gains tax. Another option available is to reduce the total
capital gains earned from an asset by 50% (Business.gov.au 2019). The third
exemption states that if the business assets are sold by a person who is above 55
years and retiring after the sale, then an amount of $500000 is allowed as a lifetime
deduction on the sale of the assets. The rollover option suggests that the amount of
capital gains that have not been accrued completely can be deferred for a year after
they are received. However, if the same capital gains are used in the purchase of a
replacement asset, then the amount of capital gains earned can be deferred for a
period of two years. Jasmine has sold off her business assets including the goodwill

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and business equipment for $125000 and is retiring after the sale. As she is 65
years of age and will be retiring after the sale of the business assets, she can claim
a lifetime deduction of $500000 from the sale of the assets. However, as the
consideration received by her is only $125000, the amount is exempt from capital
gains tax in her hands.
D. Sale of Furniture
A furniture comes under the scope of a personal use asset as defined by section
108.20 of ITAA 1997. This is because it is mainly kept for the use or personal
purposes of an individual or his colleagues (Ato.gov.au 2019). The section also
states that if a person sells a personal use asset, then the amount of capital gains
received from its sale are exempt from CGT if the cost of acquiring the asset was
less than $10000. Jasmine’s set of furniture includes furniture that were not acquired
for more than $2000. Therefore, the amount received by her on selling them should
be exempted from the capital gains tax.
E. Sale of paintings
Collectables are items that are kept by a person for their pleasure. These include a
variety of items like stamps, paintings and jewellery. The guidelines of section
108.10 of ITAA 1997 suggest that amount earned from the sale of a collectable
should not be charged to capital gains tax if the asset was purchased for $500 or
less. However, if the cost of acquisition exceeds the same, then the amount earned
from its sale should be charged under CGT. Jasmine has sold all of her paintings for
$35000. All of her paintings except the one which was purchased for $1000 directly
from an artist are exempt from CGT. The $5000 which was earned from the sale of
the $1000 painting should not be charged to CGT in the given financial year.
Question 2
Issue
John is the owner of a vehicle parts and accessories manufacturing company
that produces certified BMW parts. He purchased an industrial computer numerical
control (CNC) machine on 1 November 2014 by getting it imported from Germany.
Before importing the same, he inspected the machine by travelling to Germany and
inspecting the machinery by himself. The cost of the machinery was $300000 while
$12000 was spent on the inspection of the machine. As the machinery was needed to
be bolted to the factory floor to be used, $25000 was paid to experts to complete the
same. After it was deemed to have been installed in a satisfactory manner, the
machinery began to be used in the production process by John from 15 January 2015.
However, after being used in the production process for some time, John realised that
installing a guiding rod was necessary to improve the productivity of the machinery. This
installation was finished by paying $5000 on 1 February 2015. The cost of the asset for

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the purpose of capital allowance needs to be calculated. The date from when the asset
begins to fall in value also needs to be determined.
Law and Application
As per the rules of the ATO, a person can charge capital allowance and obtain
the entire amount of the cost of the asset at once if he is involved in the business as a
small service provider or has eligibility to claim tax on the entire amount spent under
special provisions. For assets that are purchased on or after 30 June 2005, the cost of
an asset whose value is declining has two aspects to it. They include the money spent
on buying the asset and the costs incurred in relation to its inspection. These costs are
to be obtained as a part of the capital allowance from the value of an asset that is
declining in value in a particular financial year. The costs should remain exclusive to
that of the new asset and should not be interchanged with the costs incurred in relation
to some other asset. Other expenditure that are incurred by the business like the
installation charges and the additional expenses necessary to bring the machinery into
the usage of the business. They are not necessary in holding the machine, i.e. to keep
the machinery with the business. Hence, these costs should not be included in
calculating the cost of the machinery itself.
Law and Application
There are two sets of rules guiding the time from when the asset can be started
to be accounted for its decline in value. These are the UCA rules and the transitional
rules. If the assets were purchased before 1 July 2001, then transitional rules are to be
applied in calculating the decline in the value of the assets. From 1 July 2001, the
assets are to be accounted for the decline in their value using the UCA rules. The rules
are the same for most of the assets except for the assets that are used in the fields of
water storage, fodder and horticultural assets (Guide to depreciating assets 2019).
These rules state the decrease in the value of an asset happens when it is started to put
to use in the process of production. The production can even be undertaken for the
private purposes of the owner and not used directly in the business itself. However, the
reduction in the value of the asset is only allowed to the extent for which the asset is
used as a part of the business and not for the part for which it was used as a part of the
private usage of the owner.
Law and Application
By using the applicable regulations in an appropriate manner, a few aspects can
be calculated with regards to the CNC machine procured by John. The first element of
the cost of the asset is the amount on which capital allowances on the asset are to be
allowed. As the asset has been procured after 30 June 2005, the UCA rules become
applicable in calculating the cost of the asset. As these rules state that the costs on
which the capital allowances can be calculated on the cost of the machinery and the
travelling charges incurred to improve it, the same is applied in this situation. The cost
of the asset for calculating the value of the allowances on the machinery is $312000,

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consisting of the $300000 value of the machinery and the $12000 value of the trip to
Germany. As the travel to Germany was solely for the inspection of the machinery and
not for any other purposes, deduction can be claimed on the entire $12000. If any of the
costs included the personal purposes of John, then the cost incurred on the same would
have been disallowed. The second element of the cost of the asset is the date from
when the decline in the value of the asset could begin to be calculated for the CNC
machine. As the machine was put to use in the business from 15 January 2015,
decrease in the value of the asset can be started to be calculated from that day itself.
The additional guiding rod that was installed on 1 February 2015 is a part of the
expenditure incurred in improving the efficiency of the machinery. It was not the first
time when the machinery was put to use in the business itself. Hence, the decline in the
value of the asset can be started to be calculated from that particular day itself.
Conclusion
From the above discussions on the two elements of the cost of the asset, there
are a few aspects which become clear. These are that the cost of the machine for
calculating the amount of capital allowances allowed on it is the cost of holding the
asset. In case of John’s CNC machine, it is the $312000. These are the costs
necessary for buying the machinery itself and bringing it to the factory in Australia. As
the machinery began to be used in the production of the goods from 15 January 2015
itself, the amount of decline in the value of the asset can be claimed from that date itself
and not 1 February when the additional guiding rod was attached to the machinery to
improve its efficiency.

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References
Ato.gov.au. (2019). Capital gains tax property exemption tool. [Online] Available at:
https://www.ato.gov.au/Calculators-and-tools/Capital-gains-tax-property-exemption-tool/
[Accessed 26 Aug. 2019].
Ato.gov.au. (2019). CGT assets and exemptions. [Online] Available at:
https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-exemptions/ [Accessed
26 Aug. 2019].
Ato.gov.au. (2019). Guide to depreciating assets 2019. [Online] Available at:
https://www.ato.gov.au/Forms/Guide-to-depreciating-assets-2019/?page=10 [Accessed
26 Aug. 2019].
Guide to depreciating assets 2019. [EBook] Australia: Australian Taxation Office.
Available at: https://www.ato.gov.au/uploadedFiles/Content/IND/downloads/Guide-to-
depreciating-assets-2019.pdf [Accessed 26 Aug. 2019].
Legislation.gov.au. (2019). Income Tax Assessment Act 1997. [Online] Available at:
https://www.legislation.gov.au/Details/C2017C00336/Controls/ [Accessed 28 Sep.
2019].
Business.gov.au. (2019). Capital Gains Tax (CGT). [Online] Available at:
https://www.business.gov.au/finance/taxation/capital-gains-tax [Accessed 28 Sep.
2019].