Taxation Law - Taxation of Holiday Home Sale and Related Expenses

This taxation law assignment analyzes a case study involving Sarah, who purchased a holiday home. The assignment addresses the deductibility of expenses incurred during the purchase, including legal fees and stamp duty, which are added to the cost base under section 110-25 of the ITAA 1997 and are not deductible. It also examines the non-deductibility of initial repair expenses under section 25-10 of the ITAA 1997. The case further explores the tax implications of selling the holiday home, focusing on whether the profit is taxable under section 25(1) or 26(a) of the ITAA 1936, concluding that the sale proceeds will be considered for capital gains tax. The assignment references relevant sections of the ITAA and case law to support its conclusions.

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

1TAXATION LAW
Table of Contents
Answer to question 1:.............................................................................................................2
Headings:................................................................................................................................2
Issues:.....................................................................................................................................2
Rule:.......................................................................................................................................2
Application:............................................................................................................................3
Conclusion:............................................................................................................................3
References:.................................................................................................................................4

2TAXATION LAW
Answer to question 1:
Headings:
The case study involves determining the deductibility of expenses that are occurred
while disposing the property bought by the taxpayer.
Issues:
The issue here is the taxpayer allowed to claim deduction for initial repairs under
“section 25-10, ITAA 1997”. Whether the taxpayer will be taxable for the profits made from
the sale of land is taxable under the “section 25 (1) or 26 (a) of the ITAA 1936”.
Rule:
Expenses incurred while acquiring the CGT asset such as the legal fees or stamp duty
forms the part of cost base under “sec 110-25, ITAA 1997”. These expenses are not allowed
as deduction rather they are added to purchase price of asset to calculate the net capital
gains1. Furthermore, “section 25-10, ITAA 1997” explains that no deduction for initial
repairs is allowed when purchasing the property.
There may be circumstances where some taxpayer may choose to develop the land in
an enterprising manner and the profit derived thereon may be taxable under “section 25 (1)
or section 26 (a) of the ITAA 1936”. In “Statham & Anor v FC of T (1989)” profit from
sale of land was not held as income. when the extraordinary and isolated transaction are not
held as ordinary income then the proceeds derived will be treated as capital gains tax.
Application:
On purchasing the holiday home, the stamp duty and legal fees was incurred which
will be included into the cost base of the house. Referring to “section 110-25, ITAA 1997”
1 Barkoczy, Stephen, Foundations Of Taxation Law 2014

3TAXATION LAW
the stamp duty and legal fees is not permissible deduction2. Additionally, expenses on the
property in the form of repairing the roof and gutters is an initial repair which is non-
deductible under “section 25-10, ITAA 1997”. The expenses are considered as capital in
nature.
Later a garage was constructed on the property and Sarah entered in a contract of
selling the holiday home for $1.2 million. Referring to “Statham & Anor v FC of T (1989)”
the holiday home proceeds should not be viewed as extraordinary or isolated transactions.
Rather the sales proceeds will be considered for capital gains tax.
Conclusion:
On a conclusive note, the initial repair will not be allowed for deduction under
“section 25-10, ITAA 1997”. Whereas the sale of holiday home will be taxable as capital
gains.
2 Sadiq, Kerrie and Cynthia Coleman, Principles Of Taxation Law 2013 (Lawbook
Co./Thomson Reuters, 2013)

4TAXATION LAW
References:
Barkoczy, Stephen, Foundations Of Taxation Law 2014
Sadiq, Kerrie and Cynthia Coleman, Principles Of Taxation Law 2013 (Lawbook
Co./Thomson Reuters, 2013)