Taxation Law Assignment: CGT, Capital Allowances, and Business Assets

This document provides a comprehensive analysis of taxation law in Australia, addressing key concepts such as Capital Gains Tax (CGT) and capital allowances. The assignment explores various scenarios, including the CGT implications for a main residence, personal vehicles, business assets, furniture, and paintings. It delves into the specific exemptions and concessions available under Australian taxation law, such as those for small businesses and personal assets. Furthermore, the assignment examines capital allowances related to the purchase and installation of a CNC machine, including the treatment of subsequent improvements like the installation of a guiding rod. The analysis covers depreciation rules, the definition of depreciable assets, and the timing of capital allowance claims. The assignment concludes with a summary of the findings, emphasizing the importance of understanding these taxation principles for effective financial management and compliance with Australian tax regulations.

TAXATION LAW

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................1
a....................................................................................................................................................1
b....................................................................................................................................................1
c....................................................................................................................................................2
d....................................................................................................................................................2
e....................................................................................................................................................3
QUESTION 2...................................................................................................................................3
Issue.............................................................................................................................................3
Rules............................................................................................................................................3
Application...................................................................................................................................4
Conclusions..................................................................................................................................5
REFERENCES................................................................................................................................6

QUESTION 1
a.
According to Australian taxation, generally main residence is exempted from the CGT
but for availing the exemption, it is necessary that an individual must be having a dwelling on its
property and it must be used for the purpose of living because for vacant land exemptions are not
entitled (Martin and Connor, 2017). In order to claim the exemption on the main residence, an
individual must be an Australian resident and not the foreign resident because at the time when
the event regarding capital gain tax happens to an individual's residential property within
Australia then he or she might not be entitled with any rights relating to claiming the exemption
for his or her main residence.
In accordance with the Australian taxation law, the exemption on the family home are
based on more than one factor and the weight that is been assigned to each factor varies based on
the individual circumstances (Blakelock, and King, 2017). An assessee is eligible for availing
full amount of the exemption on its main residence in case dwelling must be a home of owner,
partner and the other dependants for an entire period for which he had owned it. Secondly, it
must not be used for producing an assessable income and lastly, it must cover land equated to
two hectares and less.
Thus, as per the provisions, Jasmine could enjoy full exemption on sale of her main residence
because she is the owner and an Australian resident.
b.
As per the guidelines provided by Australian taxation office car purchased by an
individual is exempt from capital gain tax on its sale. The car in the laws is defined which is
having load of less than 1 tonne and does not carry more than nine passengers. As per the rules
provided in law if an individual sells a car for price that is less than the price at which it
purchased it than the difference is considered as capital loss. All personal vehicles are considered
as capital assets by Internal Revenue Service. Where the individual is selling car at price more
than its original cost than it will be entitled to capital gain tax (Steyn and et.al., 2018). Selling a
car at profits is considered as capital gain by the IRS. Therefore it is required to be reported in
the tax returns of the individual.
Capital gain tax is calculated after considering the cost of improvements that were made
to car to the original price of purchase. So Jasmine would not be required to pay the tax on the
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car she purchased for $ 30000 and which is now valued at $ 10000 if she sells the car at less
than $ 10000. If the car is sold by her at price more than $30000 than the she will be liable to pa
y the capital gain tax on sale of car.
c.
As per the the norms provided by ATO there are concession available on sale of business.
As per 15 year exemption if the individual is above age of 55 years or is permanently
incapacitated and the business asset is sold for after keeping it for 15years, than the CGT would
not be payable on disposal of assets. If an active business asset is sold than tax will be paid
only on 50% of capital gain. CGT exemption is there on business asset is up to the limit of $
500000. CGT is used to arise on assets which were acquired after September 19, 1985 and after
deducting capital losses (Capital Gain Tax, 2019). Taxation provisions have concession for small
businesses for reducing their CGT amount.
As per the guidelines given by Australian taxation officer on the sale of small business
individuals capital gain tax would be applicable but there are concessions available on sale of
business. She would be required to pay tax on goodwill that arise on sale of business. But on the
part of assets jasmine has suffered a capital loss of $ 10000 therefore it would not be required to
pay capital gain tax on sale of business assets(Barros, Teo and Hinchliffe, 2016). Goodwill is
taxed as per the provisions of taxation laws
d.
Sale of furniture is also covered under provisions of capital gain. Capital tax applies on all the
asset that are acquired by business after September 20, 1985. CGT applies on the assets that are
purchased by individual for personal or business purposes. Restrictions are also there for the
assets that are attracting capital gains. Furnitures are purchased by Jasmine may be used for the
business purpose or for personal use. If the furniture were for personal use the capital gain will
be taxable if it sold at prices higher than it original purchase price. And if it was used for
business depreciation would have been charged on the furnitures which says that deductions
have been already provided for the furnitures (Bentley, 2019). But as per the guidelines it is
covered under the list of exempted capital gains
Australian Taxation has provided guidelines for charging capital gains on different assets
of the individuals. In the present case jasmine has sold asset costing $2000 for $5000. This
shows that furniture is sold for more than its purchase price . Jasmine has capital gain of $ 3000
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on sale but the tax is not required to be paid as it is exempted. The personal asset is costing less
than $10000 therefore exempted.
e.
The paintings acquired by Jasmine are all sold for collectively $ 35000. as per the taxation office
of Australia the paintings are covered under collectables. The paintings were acquired for its
personal use or décor. There are exemptions given by the law for various capital gains. Paintings
are covered under the exemption list as they were purchased by Jasmine for less than $500. Al so
they are sold at prices that do not acquired any gain for the individual. In the case of painting
which was purchased for $ 1000 is not covered under exemption list (Evans, Minas and Lim,
2015). Also it is sold by Jasmine for $5000 which is price much higher than its original cost
therefore Jasmine is required to pay capital gain tax on sale of the painting worth of $1000.
QUESTION 2
Issue
In the present case John is an owner of company that manufactures vehicle parts & accessories
and it produces certified part for BMW. John imported computer numeric control (CNC)
machine for industrial purpose from Germany on November 1, 2014 costing $ 3000000. John
made a visit to CNC factory for inspection of CNC machines and for placing the order. The visit
to Germany was only for purchasing CNC machine which costed around $12000 to John.
Installation of CNC machine required specialists and for bolting it to factory floor. Installation
cost of CNC machine amounted to $ 25000 and was completed on 15th January. After the
installation CNC machine was put to use. Additional guiding rod is installed in CNC machine
for increasing its efficiency on February 1. Cost of installing rod was $ 5000. Issue in the present
case is related to the purchase price of the capital asset for claiming the capital allowance. The
issue is company has purchased the asset and was put to use on 15 Jan where guiding rod for
increasing efficiency was installed on 1 Feb. Now whether the cost of rod is to be included in
price of the CNC machine or not for claiming allowance.
Rules
General depreciation rules provide for the capital allowances that could be claimed on the basis
of effective life of asset. There are two methods which are generally used by company for
depreciation are prime cost or method of diminishing value. Cost price of assets include all the
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cost that have been incurred for making the asset available for use (Powell and Hope, 2018). It
includes cost of purchase, installation, and other cost that are associated with capital asset.
Decline in value of asset starts when the company first put the asset for use or installed it and is
ready for use, this is known as start time of depreciating asset. Decline in value of asset is
treated from its start time.
Taxation Ruling: TR 2017/D1
Depreciating asset for working out capital allowances.
As per Division 40 of Income Tax Assessment Act, 1997 deduction for decline in value of
depreciable asset is based on its effective life. Asset having limited effective useful life and is to
decline over time in value is a depreciating asset.
Ruling was on the commissioner's views that relates to determining composite item is a
depreciable asset or its components are separately depreciable asset. For component to be
considered as depreciable asset it is essential that component to be separately recognised or
identified having economic or commercial value.
Depreciating asset can be considered as separate item notwithstanding it is performing
commercially complete or more wider function in conjunction or combination with items that
are identified as separate depreciable asset (Decline in Value, 2019).
Based on fact where item is not capable of operating on it own & also not having any
commercial utility unless connected or linked to other items will be forming part of composite
item instead of recognising as separate depreciable asset.
Where the element is installed or purchased at different time and is having separately identifiable
function that element
Application
Capital allowances are given for capital expenditure in form of income tax relief or corporation
tax. Value of capital assets will be reduced or written down over years in accounts using
depreciation. Depreciation in accounts does not get tax deduction. In tax return of business
depreciation will be replaced by capital allowances which are used for reducing taxable profits.
Tax reliefs are not provided in full at time of time of expenditure but is amortised over years.
Allowances are available at different rates for different expenditures (Burns, Le Leuch and
Sunley, 2016). When capital allowance are not granted tax reliefs are provided ate the time of
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computing capital gains on sale. Capital allowances are to be claimed by company specifically.
Rules define nature of expenditure whether it is capital or revenue.
 Whether expenditure is related to repair or improvement.
 Whether enduring benefits will arise to trade.
 When asset is replaced, replacement is to the whole or just part of asset.
In the given case guiding rod has been installed and that will increase the efficiency of
the machine and as a result it will drag economic benefits to business of company. The CNC
machine was brought by company for improvising the processing of company (Freudenberg and
et.al., 2017). In the present case machine was put to use on 15th January' 2019 so, as per the
general rules and guidelines given by Australian Taxation Office value of decline starts from the
date it is first put to use. Therefore the asset will be depreciable from the 15th of January. For
guiding rod it will not be included in the price of asset as it was installed in machine on 1st Feb
at that time machine was already under use by company. Therefore, the company cannot include
the cost of guiding rod in its purchase price. But it will be included in machine as its part and
depreciation will be claimed on the machine including the guiding rod.
Conclusions
Carrying out the above study about the case conclusions can be drawn that CNC machine
purchased by company is put to use on 15th January after including the cost of installation in its
purchase price. Company for increasing the efficiency of machine installed the guiding rod on 1st
Feb. as per the rules provided cost of rod is available for capital allowances but its price will not
be included in the cost of purchase as it is installed after the machine was put to use.
Depreciation will be charged by company for the machine from 1st January and the rod will be
made part of its cost from 1st Feb and depreciation will be charged on machine including the cost
of rod installed in the machine (Morse and Deutsch, 2015). Capital allowance will be available to
the company for machine and also the guiding rod as it is installed for increasing the efficiency
of machine.
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REFERENCES
Books and Journals
Martin, F. and Connor, M., 2017. Using Blended Learning to Aid Law and Business Students'
Understanding of Taxation Law Problems. J. Australasian Tax Tchrs. Ass'n. 12. p.53.
Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching. Proctor,
The. 37(6). p.18.
Steyn, T. and et.al., 2018. Capital gains tax research: an initial synthesis of the literature. EJTR.
16. p.278.
Barros, C., Teo, E. J. and Hinchliffe, S., 2016. Clash of the deeming provisions: Pre-CGT
concessions, tax consolidation and policy in the federal court. Austl. Tax F.. 31. p.509.
Bentley, D., 2019. Does A Capital Gains Tax Work? The Australian Experience Eleven Years
On. Journal of Malaysian and Comparative Law. 23. pp.13-36.
Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: An alternative
way forward. Austl. Tax F.. 30. p.735.
Powell, K. and Hope, M., 2018. Shifting digital currency definitions: current considerations in
Australian and US tax law. EJTR. 16. p.594.
Burns, L., Le Leuch, H. and Sunley, E. M., 2016. Taxing gains on transfer of interest. In
International Taxation and the Extractive Industries (pp. 176-205). Routledge.
Freudenberg, B. and et.al., 2017. Tax literacy of Australian small businesses. J. Austl. Tax'n. 19.
p.21.
Morse, S. C. and Deutsch, R., 2015. Tax Anti-Avoidance Law in Australia and the United States.
The International Lawyer. 49(2). pp.111-148.
Online
Capital Gain Tax. 2019.[Online]. Available through : <https://www.ato.gov.au/general/capital-
gains-tax/cgt-assets-and-exemptions/>.
Decline in Value. 2019[Online]. Available through :
<https://www.ato.gov.au/Business/Depreciation-and-capital-expenses-and-allowances/In-
detail/Depreciating-assets/Uniform-capital-allowance-system--calculating-the-decline-in-value-
of-a-depreciating-asset/?page=2>.
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