Taxation Laws: Deductions, Concessions, and Capital Gains Analysis

This report is a comprehensive analysis of Australian taxation laws, specifically focusing on deductions, capital gains tax (CGT), and small business concessions. The report examines various scenarios and provides detailed answers to questions regarding allowable deductions for expenses such as repairs, depreciation of assets, and car expenses, referencing relevant sections of the ITAA 1997. It also addresses non-allowable deductions, including those related to capital expenses and fines. Furthermore, the report delves into CGT, covering the treatment of collectibles, personal use assets, and CGT assets like shares. The second part of the report provides an overview of small business concessions, including their types, eligibility criteria, objectives, and historical context, concluding with a discussion on the effectiveness of these methods and recommendations. The report uses case studies to illustrate the application of tax laws and provides a clear understanding of complex tax principles.

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

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Table of Contents
Answer to question 1:.................................................................................................................3
Answer to A:..........................................................................................................................3
Answer to B:..........................................................................................................................3
Answer to C:..........................................................................................................................4
Answer to D:..........................................................................................................................4
Answer to E:...........................................................................................................................5
Answer to question 2:.................................................................................................................5
Answer to A:..........................................................................................................................5
Answer to B:..........................................................................................................................5
Answer to C:..........................................................................................................................6
Answer to D:..........................................................................................................................6
Answer to E:...........................................................................................................................6
Answer to question 3:.................................................................................................................7
Answer to A:..........................................................................................................................7
Answer to B:..........................................................................................................................7
Answer to C:..........................................................................................................................8
Answer to D:..........................................................................................................................8
Answer to E:...........................................................................................................................9
Part B: Small Business Concessions:.......................................................................................10
Introduction:.............................................................................................................................10

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Types of small Business Concessions:.....................................................................................10
Criteria for meeting the eligibility of concessions:..................................................................10
Objectives of the small business Concessions:........................................................................11
History of measuring tax for small business:...........................................................................11
Current amendments that are made to the small business concessions:..................................11
Effectiveness of the methods:..................................................................................................13
Recommendations:...................................................................................................................13
Conclusion:..............................................................................................................................13
Reference List:.........................................................................................................................14

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Answer to question 1:
Answer to A:
As defined under “section 25-10 of the ITAA 1997” a person is entitled to claim an
allowable deduction for expense relating to repairs performed on the premises and any
deprecating asset which is solely held for the deriving assessable income. Nevertheless, the
provision of this section prohibits a person from any deductions relating to expenses that are
solely capital in nature (Woellner et al., 2016). Bhavraj reports an expense on repainting the
building of the restaurant to reflect Indian theme. Denoting the judgement in “W Thomas and
Co Pty Ltd v FCT (1965)” cost of repairing and painting the initially acquired is not allowed
for deductions since it is a capital expense. The cost of repainting the restaurant building
reflects an initial repair which is non-allowable capital expenditure.
Answer to B:
Referring to “division 40-25(1)” an individual entity is entitled to claim a sum that is
equal to the decline in the value of the asset during the year in which it is held (Anderson et
al., 2016). Bhavraj reported expense on purchase of new oven that costs $10,000 with
additional expenses of $1,000 each for transportation and installation. Based on rules of
simpler depreciation for small entity a person can immediately write off or subtract the entire
cost of asset in the year of purchase given the asset costs is less than $20,000. The
transportation costs and installation costs forms the cost of assets. Bhavraj can write-off the
cost of assets as it is less than $20,000.

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= (14000)*365/335 = 15253.7
= 15,253.7 x 200 / 5 = 6101.49
Under the diminishing method can claim $6,101.49 as the highest amount of depreciation.
Answer to C:
As per the Australian taxation office assets that is written off in the previous period
under instant write off method or under the low value pool and the sales revenue obtained by
selling the assets must include such amount in their assessable income till the extent the asset
is used and depreciated for taxable purpose. Referring to “section 40-25 (1) of the ITAA
1997” Bhavraj is entitled to allowable deductions equal to the decline in value of the
refrigerator all through the year of income in which it is held.
Answer to D:
“Section 8-1 (2) of the ITAA 1997” prohibits an individual taxpayer from claiming
any allowable deductions for expenses that are not in the course of gaining or producing
taxable income (Barkoczy, 2016). As evident in the situation of Bharaj, he reported an
expense of $5,000 resealing the customer car park. Therefore, under the negative limbs of

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section 8-1 (2) of the ITAA 1997 the expenses are neither relevant nor incidental in
derivation of Bhavraj assessable income hence no deductions will be allowed for cost of
resealing the customer car park.
Answer to E:
As defined by the Australian Taxation Office car refers to the motor vehicle which is
created to carry weight of lower than one tonne (Tan et al., 2016). While working the
depreciation a person can use the cents per kilo metre method or the log book method for
claiming the deductions. Similarly Bhavraj can claim deductions for the cost of running the
car as the car was solely used for business purpose.
Answer to question 2:
Answer to A:
As defined under the “ATO ID 2004/489” expenses that are incurred for long service
leave contribution made to the worker by the employee would be allowed for deductions
under “section 8-1 of the ITAA 1997” (Long et al., 2016). As evident in the situation of Raj
the payment that is made by him into his employee long service leave shall be considered as
the allowable deductions under “section 8-1 of the ITAA 1997”. The reason for being held
deductible is because it is incurred in the course of gaining taxable income.
Answer to B:
As defined under “Section 26-5 of the ITAA 1997” a person is prohibited from
claiming any deductions in respect of fines or penalties which is imposed in the form of
breach of Australian law (Cao et al., 2015). This consists of the fines relating to parking that
is occurred while travelling in the course of work. Evidently in the situation of Raj the
parking fines that was incurred by his employee would not be allowed as deductions since it

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is a breach of Australian law. With respect to Section 26-5 of the ITAA 1997”, the parking
fines of $5,000 is a non-allowable deductions.
Answer to C:
An expenditure is allowed as deductions given the outgoings are held relevant and
incidental in the derivation of the assessable income of the taxpayer. Citing the reference of
“W Neville & Co v FCT” the court of law permitted the taxpayer from claiming allowable
deductions relating to the payment that was made for agreeing the managing director to
resignation (Saad, 2014). This is because the payment made was to increase the business
efficiency. Similarly, in the case of Raj the payment that is made the restaurant manager for
obtaining the resignation is an allowable deductions under “section 8-1 of the ITAA 1997”.
Answer to D:
As stated by the Australian Taxation Office an individual taxpayer can be entitled to
claim a permissible deduction for the expenses that is incurred in relation to the
superannuation payment of the employees. Raj would be allowed to claim an allowable
deductions for an amount of $45,000 relating to the contributions that is by him in the
employee superannuation fund.
Answer to E:
Losses or outgoings that are incurred during the preliminary stage of business or prior
to the commencement of income producing activities is not allowed as deductions under
“section 8-1 of the ITAA 1997”. Citing the case of “Softwood Pulp & Paper v Federal
Commissioner of Taxation (1976)” the taxpayer reported an expenses that was related to the
feasibility study with other cost to commence the production of the paper mill (Robin &
Barkoczy, 2018). The court of law held that the expenditure was in nature of preliminary and
non-deductible. As evident in the current case of Raj, the cost that was incurred for the

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feasibility study of would not be allowed as deductions since it is preliminary business costs
and non-deductible under “section 8-1 of the ITAA 1997”.
Answer to question 3:
Answer to A:
As defined under the “section 108-10 (2) of the ITAA 1997” collectibles represent any
form of artwork, antique or jewellery which is usually kept for an individual taxpayers
personal use and enjoyment (Murphy, & Higgins, 2016). As stated under “section 118-
10(1)” capital gains or loss from the collectibles should be disregarded in the first element
given the cost base of the collectibles is less than $500. Similarly, the present situation it is
noticed that the antique desk was purchased for $4,000 but was sold at a loss of 500 (i.e.
$3500).
As defined under the “subsection 108-10 (1) of the ITAA 1997” while determining the
net amount of capital gains during the income year capital loss that are made from the
collectables can be used only to offset the capital gains made from collectibles (Blakelock &
King, 2017). A taxpayer is under obligation of disregarding the capital loss incurred from the
collectibles. The loss sustained from the sale of the antique desk is not permitted for offset as
there was no such instances of capital gains from the sale of collectibles. Raj under
“subsection 108-10 of the ITAA 1997” is required to disregard the loss sustained from the
disposal of antique desk.
Answer to B:
Personal use asset can be defined under “subdivision 108-C” as those assets that are
mainly kept or used for personal enjoyment and use but does not include land and buildings
(McDaniel, 2017). This usually comprises of the electrical goods, households items, Yacht
and furniture. Referring to “section 118-10 (3)” capital gains that are made from the sale of

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the personal use assets should be disregarded if the cost base of the asset is $10,000 or less.
With respect to section “section 118-10 (3)” Raj is reports a capital gains on selling the
Yacht. However, Raj under the provision of “section 118-10 (3)” is required to disregard
such capital gains as the Yacht was acquired for $6,000 which is less than the prescribed cost
base of $6,000.
Answer to C:
As defined under the “Section 108-5 of the ITAA 1997” CGT assets usually
comprises of the shares in the company, land and buildings, options, goodwill etc. (Schenk,
2017). Shares held in company or in unit trust is regarded CGT asset and it is treated in the
identical way as other assets for capital gains tax purpose. Likewise the sale of shares and
gains derived on selling the shares would be subjected to CGT.
Answer to D:
As defined under the “section 108-5 (1) of the ITAA 1997” personal use assets
constitute those assets that has a cost base of greater than $10,000. As evident in the current
situation the sale of Mercedes car by Raj is regarded as the personal use assets since the cost
of the car was greater than $10,000. Therefore, the capital gains made by Raj upon the sale of
Mercedes car would be subjected to Capital gains tax.

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Answer to E:
As stated by the Australian Taxation Office a person’s main residence or their home is
exempted from CGT. However, to gain exemption the dwelling should be the main residence
of the person and the taxpayer must have lived in that house. As evident in the present
situation of Raj presumably the sale of main residence is exempted from capital gains tax.
The capital gains reported by Raj would be liable for exemption.

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Part B: Small Business Concessions:
Introduction:
Small business forms the sizeable share of Australia. Small business contributes
greater $1.4 trillion in the form of revenue for the Australian government. Even after making
large amount of contributions they fail to get the large scale benefits then the large business
(Woellner et al., 2016). Owing to the increasing importance of small business a small
business tax system was bought into the action with the objective of providing the small
business an options of measuring the tax and simplifying the measures of tax by
simultaneously lowering the cost of compliance. The CGT concessions for small business
enables the taxpayers with the objective of lowering or removing the capital gains made on
definite assets.
Types of small Business Concessions:
Small business concessions are of four types namely;
a. 50% reduction in the active assets
b. Exemptions associated to retirement
c. 15 year exemptions
d. Exemptions of rollover
Criteria for meeting the eligibility of concessions:
For a small business taxpayer there are certain kinds of criteria that is required to be met
and these are as follows;
a. Fulfilling the test of Net Asset Value
b. Fulfilling the criteria of active asset
c. Where the assets are as shares in company or unit in the trust

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Objectives of the small business Concessions:
The purpose of the small business concessions was to give the taxpayers with a new
platform of dealing with tax. The purpose of applying the simplified rules of business is to
lower down the cost of tax compliance cost for around 95% of the business (Anderson et al.,
2016). The actual small business concessions provide the business with the options of
collectively undertaking four sets of tax treatment. This comprises of the simplified
depreciations rules, accounting in cash for the purpose of income tax, simplified business
rules trading stock and the claiming tax deductions immediately for prepaid expenses. These
four types of concessions that are determined by the business was to give the small business
with the ability of increasing the simplicity of the business.
History of measuring tax for small business:
By gauging into the history of the business it reflects that there are additional
concessions for the business that comprised of CGT relief and GST relief for the purpose of
accounting based on the cash basis (Barkoczy, 2016). The small business concessions were
implemented on business that had the annual turnover was lower than $1 million every year,
even though the test of eligibility differed in respect of the additional related provision. Under
the traditional system it ignored the debtors and the credits with the taxation of work-in-
progress when it realised.
Current amendments that are made to the small business concessions:
The current amendments have been introduced by the small business which is
intended to achieve the simplifications and greater amount of fairness for the small business.
The recent amendments include the options of accounting for GST on the cash basis. Other
prominent changes are stated below;

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Simplified rules for trading stock: A small business is no more required to value each and
every item of trading stock in hand upon the conclusion of the accounting year (Tan et al.,
2016). Value of trading stock can be carried forward for until further notice unless the value
of the trading stock is going beyond the value of the opening stock amount by more than
$5,000.
Simplified rules for depreciation: A new amendment that was made provides the small
business with the advantage of adopting the simplified depreciation rules under the “section
328-170 to 325-257 of the ITAA 1997” (Long et al., 2016). Another change that was
introduced under the simplified depreciation is that when the asset is bought during the year
of income the asset can be depreciated at half of the pool rate for the income year. Under the
new rules the use of pro-rated deprecation is removed.
Claiming immediate deductions for the prepayments: Under the new rules the small
business is provided with the facilities of claiming deductions associated to the prepaid tax
expenditure if the qualification period is lower than 12 months. The new rules provide the
small business with the objective of claiming the tax deductions if the eligibility service
period finishes before the end of the income year following the expenditure year.
GST base accounting on cash basis: An organization that satisfies the principles of
“section 328-110 of the ITAA 1997” would be able account for GST based on the cash basis
(Cao et al., 2015). Companies under the new rules are obligatory required to account for the
GST on the basis of non-cash or based on accrual basis.
Income tax based on the cash basis accounting: Under the new method small business are
able to continue by using the accounting for cash basis relating to income tax purpose (Saad,
2014). The new rules enable the business with large sum of debtor’s balance to deferred the
tax payment until the next year of income in which the amount was collected.

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Effectiveness of the methods:
With the introduction of new policies in small business concessions it has assisted the
small business in reducing the compliance costs of tax that the business faced (Murphy &
Higgins, 2016). This provided the business with the options of undertaking the simplified tax
rules and led to reduction of burden of tax compliance cost.
Recommendations:
The taxpayer’s ability of meeting the $6 million maximum test is difficult criteria.
Recommendations can be made to replace the $6 million test with the substitute eligibility
test. A revised aggregate turnover would help in reducing the concession beyond the
threshold limit.
Conclusion:
Findings suggest that small business concessions are increasingly adopted. One of the
most popular is the CGT relief for small business and adoption of accounting for cash basis
relating to GST purpose. The simplified rules for depreciation and prepaid expense
deductions is regarded as helpful measures in reducing the cost of tax compliance for
business.

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Reference List:
Anderson, C., Dickfos, J., & Brown, C. (2016). The Australian Taxation Office-what role
does it play in anti-phoenix activity?. Insolvency Law Journal, 24(2), 127-140.
Barkoczy, S. (2016). Foundations of taxation law 2016. OUP Catalogue.
Blakelock, S., & King, P. (2017). Taxation law: The advance of ATO data
matching. Proctor, The, 37(6), 18.
Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., ... & Wende, S.
(2015). Understanding the economy-wide efficiency and incidence of major
Australian taxes. Canberra: Treasury working paper, 2001.
Long, B., Campbell, J., & Kelshaw, C. (2016). The justice lens on taxation policy in
Australia. St Mark's Review, (235), 94.
McDaniel, P. (2017). Federal Income Taxation. Foundation Press.
Murphy, K. E., & Higgins, M. (2016). Concepts in Federal Taxation 2017. Cengage
Learning.
Robin & Barkoczy woellner (stephen & murphy, shirley et al.). (2018). Australian taxation
law 2018. Oxford University Press.
Saad, N. (2014). Tax knowledge, tax complexity and tax compliance: Taxpayers’
view. Procedia-Social and Behavioral Sciences, 109, 1069-1075.
Schenk, D. H. (2017). Federal Taxation of S Corporations. Law Journal Press.
Tan, L. M., Braithwaite, V., & Reinhart, M. (2016). Why do small business taxpayers stay
with their practitioners? Trust, competence and aggressive advice. International
Small Business Journal, 34(3), 329-344.

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Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation
Law 2016. OUP Catalogue.