Taxation Assessment: Analyzing Peter Smith's Tax Situation

This assignment solution provides a comprehensive analysis of Peter Smith's tax situation, addressing two assessments. Assessment 1 focuses on calculating net capital gains from property sales, determining taxable income, and computing tax payable, including Medicare levy and PAYG. It covers relevant expenses, deductions, and the application of CGT rules, including partial main residence exemption and the 50% CGT discount. Assessment 2 builds upon the initial scenario by incorporating the purchase of an air conditioner and its depreciation, exploring capital allowances and their impact on the capital gains calculation and overall tax position. The solution also discusses capital allowance regimes, tax planning, and avoidance strategies, and provides detailed calculations and explanations based on the provided facts and Australian taxation law. The analysis considers the implications of job loss and rental income, offering tax advice and outlining the differences between tax planning and avoidance.

Running head: TAXATION
Taxation
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Assessment 1:.............................................................................................................................2
Answer to question 1:.............................................................................................................2
Calculation of net capital gains on property:.........................................................................2
Answer to question 2:.............................................................................................................3
Answer to question 3:.............................................................................................................4
Answer to question 4:.............................................................................................................4
Answer to question 5:.............................................................................................................4
Answer to question 6:.............................................................................................................5
Answer to question 7:.............................................................................................................5
Answer to assessment 2:............................................................................................................6
Answer to question 1:.............................................................................................................6
Answer to question 2:.............................................................................................................6
Answer to question 3:.............................................................................................................6
Answer to question 4:.............................................................................................................7
Answer to question 5:.............................................................................................................7
Answer to question 6:.............................................................................................................7
Answer to question 7:.............................................................................................................8
Answer to question 8:.............................................................................................................8
References:.................................................................................................................................9

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Assessment 1:
Answer to question 1:
Calculation of net capital gains on property:
Computation of Net Capital Gains
In the books of Peter Smith
For the year ended 2017
Particulars Amount ($) Amount ($)
Capital gain on sale of Lot 1
Gross Sales Proceeds (CGT Event A1, S-104 (10) 1,85,000.00
Less: Agent Commission 3,095.00
LTO Fees 157.00
Search Cost 110.00
Conveyancer Fees 550.00
Other settlement cost 462.50
Adjusted Rates 379.76
Net Sales proceeds 1,80,245.74
Cost base Item (S-110-25(1)-(6))
Cost of Acquisition
Cost of land (45.52% of 250,000) 1,13,800.00
Add: Stamp duty on Purchase 4,076.32
Registration of Transfer 757.91
Government Fees 90.13
Conveyancer Fees 250.36
Interest Paid 13,262.83
Council rates 1,300.26
Water Rates 1,559.66
ELS 206.74
Subdivision Cost 13,579.57
Total Cost Base 1,48,883.78
Total Capital gain on sale of Lot 1 31,361.96
Capital gain on Sale of Lot 2
Gross Sales Proceeds (CGT Event A1, S-104 (10) 2,12,000.00
Less: Agent Commission 2,750.00
LTO Fees 157.00
Conveyancer Fees 550.00
Other settlement cost 423.00
Adjusted Rates 430.56 2,07,689.44
Cost base Item (S-110-25(1)-(6))

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Cost of Acquisition 136200
Add: Interest Paid 15,873.45
Council rates 1,556.19
Water Rates 1,866.65
ELS 247.44
Stamp duty on Purchase 4,900.48
Registration of Transfer 907.09
Government Fees 107.87
Subdivision Cost 16,252.53
Total Acquisition Cost 1,77,911.70
Total Capital gain on sale of Lot 2 29,777.74
Total Capital gain from the CGT Event 61,139.71
Partial Main Residence Exemption 26,001.94
50% CGT Discount 13,000.97
Net Capital gains on disposal of property 13,000.97
Answer to question 2:
If an individual taxpayer is only allowed to claim partial main residence exemption
under the rules of main residence if the property that is owned by the taxpayer is rented out
for producing taxable income (Woellner et al. 2016). Additionally, if an individual derives
profit from the sale of subdivided land might be treated as capital gain or ordinary income,
depending upon the circumstances. If an individual subdivides the block of land in which
they live and sell the newly constructed block of land, then any kind of profit that is derived
is usually considered as the capital gains that are subjected to the capital gains tax.
As evident in the situation of Peter used the home as his main residence from 8th May
2013 till the end of December 2013. While from 1st January 2014 onwards to November 2014
the property was rented out. As a result, a full main residence exemption is not applicable in
case of Peter. However, a partial main residence rules for capital gains tax purpose is
applicable in case Peter. The taxpayer here Peter can claim a 50% CGT discount on capital
gains that are made from the sale of subdivided lots. This is because the land was under the
ownership of Peter for more than 12 months.

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Answer to question 3:
A CGT event A1 happens under “section 104-10 (1)” when the sale of asset takes
place (Barkoczy 2016). The CGT event generally happens when the taxpayer enters in the
agreement or contract to sale the asset. In the current situation of Peter, it is noticed that the
sale of subdivided land has led to “CGT event A1” under “section 104-10 (1) of the ITAA
1997”.
Answer to question 4:
The taxable income of Peter is computed below;
Computation of Taxable Income
In the books of Peter Smith
For the year ended 2017
Particulars Amount ($) Amount ($)
Assessable Income
Gross Salary 71,259.00
Australian sourced bank interest 176.00
Capital Gains 26,001.94
50% CGT Discount 13,000.97 13,000.97
Total Assessable Income 84,435.97
Allowable Deductions
Compulsory Work-related Uniform 60.00
Licence renewal 125.00
Donation 1,000.00
Tax-agent fees 121.00
Tax consultation fees 120.00
Phone expenses 16.00
Total Allowable deductions 1,442.00
Total Taxable Income 82,993.97
Answer to question 5:
Computation of Taxable Income
In the books of Peter Smith
For the year ended 2017
Particulars Amount ($) Amount ($)
Assessable Income

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Gross Salary 71,259.00
Australian sourced bank interest 176.00
Capital Gains 26,001.94
50% CGT Discount 13,000.97 13,000.97
Total Assessable Income 84,435.97
Allowable Deductions
Compulsory Work-related Uniform 60.00
Licence renewal 125.00
Donation 1,000.00
Tax-agent fees 121.00
Tax consultation fees 120.00
Phone expenses 16.00
Total Allowable deductions 1,442.00
Total Taxable Income 82,993.97
Tax on Taxable Income 18,520.05
Add: Medicare Levy 1,659.88
Less: PayG Withholding 15,459.00
Total Tax Payable 4,720.93
The amount of tax that is payable by Peter for the year 2017 stands $18,520.05.
Answer to question 6:
The total amount of Medicare Levy Surcharge that is payable stands $1,659.88.
Answer to question 7:
The net amount of tax payable by Peter for the year 2017 stands $4,720.93.

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Answer to assessment 2:
Answer to question 1:
Under the “section 40-25 (1), ITAA 1997” an individual taxpayer is allowed to claim
deduction for the equivalent amount of decline in value during the income of a depreciating
asset which is held by the taxpayer throughout the year (Murray et al. 2018). The general
rules of depreciation explain that the set amounts which can be claimed is based on the
effective life of the asset. As understood in the current situation of Peter he bought an air
conditioner on 5th June 2014 for $10,000. Therefore, an amount equivalent to the decline in
value of the air conditioner can be claimed by Peter.
Answer to question 2:
When an individual purchases a property and rents it out then the taxpayer in such
case is ordinarily treated for taxation purpose as having bought numerous separate items of
depreciating asset such as air conditioners and other items. The air conditioners have the
effective life of ten years and it can be depreciated by Peter until the effective life of ten
years.
Answer to question 3:
Calculation of capital allowances
For the year ended 2017
Particulars Amount ($)
Cost Base 10,000
Effective Life 10 years
Days held 365 days
Claimable Allowances 2,000
The claimable capital allowances have been claimed on the basis of diminishing value
method with claimable allowances stands $2,000.

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Answer to question 4:
Yes, the fact regarding the air conditioner that was missed in the assignment 1 entirely
changes the capital gains calculation as well as Peter taxable position. This is because the on
charging depreciation relating to the capital allowances the net amount of capital gains would
have been less. The depreciable value could have been claimed as uniform capital allowances
under the division 40. In addition to this, there would have been an increase in the overall
allowable deduction and simultaneously the taxable income of Peter would also have
declined as well. Consequently, the total tax payable would have been much lower as well.
Answer to question 5:
There are two main capital allowances regimes. These are uniform capital allowances
and capital works allowances. According to the “division 40 of the ITAA 1997” an
individual taxpayer or an entity is allowed to claim deduction for an amount that are equal to
the decline in value of the income year for a depreciating asset which is held throughout the
year (Morgan, Mortimer and Pinto 2018). Additionally, under the “section 40-25 (2) of the
ITAA 1997” a deduction is reduced where the decline in value of the asset that is attributable
to its use is mainly for the purpose apart from the taxable purpose.
For example: Mark is holding the depreciating asset that is used by him for the private
purpose for around 30% of the total use during the income year. If the asset declines by
$1,000 all throughout the year, then Mark would have to reduce his deduction by $300 (30%
of his $1,000).
Answer to question 6:
If Peter Smith would have to approached for tax advice prior to signing the contract of
selling the land and if he knew that he would be losing his job during July 2017 then Peter
would have been advice against selling the property. In other words, an advice would have

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been given to Peter to rent out the property because this would have helped him in
maintaining a continuous source of income producing activities for taxable purpose.
Answer to question 7:
On assuming that Peter decides selling against the house property and rents out the
same, then the rental income that would be received by him would constitute the entire
amount of rent and the associated payment that he would receive or be entitled to when he
rents out the property. Considering the tax advice, the taxpayer here Peter must assume the
share of entire amount of rent that would be earned by him in his tax return.
Answer to question 8:
Tax planning can be defined as the arrangement of the financial activities in a manner
that the assesse can avail the highest amount of benefit by making the best use of all the
available lawful benefits such as deductions or exemptions (Morgan, Mortimer and Pinto
2018). While tax avoidance is regarded as the method of refraining from tax payment with
the help of just and fair means. It mainly intends to defeat the fundamental motive behind the
legislation. The difference between tax avoidance and planning is that it is mainly reliant on
the defences in benefits which is availed to reduce the tax burden.

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References:
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
Morgan, A., Mortimer, C. and Pinto, D., 2018. A practical introduction to Australian
taxation law 2018. Oxford University Press.
Murray, I., Taylor, J., Walpole, M., Burton, M. and Ciro, T., 2018. Understanding Taxation
Law 2019.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation
Law 2016. OUP Catalogue.