Taxation Law Assignment: CGT, Depreciation, and Tax Concessions

This assignment provides a comprehensive analysis of taxation law, focusing on capital gains tax (CGT) and depreciation. The first part of the assignment analyzes different scenarios involving Jasmine, examining the tax implications of selling her main residence (pre-CGT asset), a car (personal us...Read More

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

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Table of Contents
Answer to question 1:.................................................................................................................2
Answer A: Sale of main residence.........................................................................................2
Answer B: Sale of car:...........................................................................................................2
Answer C: Sale of her cleaning business...............................................................................3
Answer D: Sale of Furniture:.................................................................................................4
Answer E: Sale of paintings:..................................................................................................5
Answer to question 2:.................................................................................................................6
Issues:.....................................................................................................................................6
Laws:......................................................................................................................................6
Application:............................................................................................................................7
Conclusion:............................................................................................................................9
References:...............................................................................................................................10

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Answer to question 1:
Answer A: Sale of main residence
The capital gains tax regime was started in the year 1985-86 in order to overcome the
deficiencies that is present in the current income tax system. Under the regime of CGT when
it is noticed that the net capital gains has been accrued to an individual taxpayer during the
specific income year, then such gains is included inside the taxpayer’s assessable income for
that year (Walrut 2017). As the CGT was introduced in 20/9/1985, taxes are only imposed on
the assets that is acquired following the events. For that reason, the word pre-CGT and post-
CGT is very commonly used by the taxpayer for referring the assets or events that happens
prior to that date.
The instances that has been obtained from the case details of Jasmine suggest that she
is the owner of family home which she has purchased in 1981 by paying a sum of $40,000.
Conversely, she has decided to sell it in in the present tax year for $650,000. As it is
understood that Jasmine is leaving Australia for a permanent basis to move UK, the sale of
property has yielded her capital gains (Gordon 2017). However, it must be noted that Jasmine
has purchased the property in 1981 which should be inferred as the pre-CGT asset. The
property was bought before the start of CGT regime. So in this situation the capital gains that
is made from selling her family is disregarded since it is exempted from the regime of CGT.
Answer B: Sale of car:
Within the “sub-div 108-C ITA Act 1997” guidance regarding the capital gains tax
treatment has been made for personal use assets (Sommer 2017). Mentioning “sec 108-20
(2)”, assets that is kept by taxpayer basically for making personal use and usage, it is termed
as personal use asset. Examples are boats, vehicles, furniture etc. are referred as personal use

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asset. When a taxpayer makes any loss from the personal use asset then they are usually
disregarded under “sec 108-20 (1), ITA Act 1997” notwithstanding of its price.
Instances which has been obtained from the case facts of Jasmine, she had bought a
car in 2011 for $31,000. In addition, when the car was sold by Jasmine it eventually fetched
her $10,000 only. The car here under “sec 108-20 (2)”, is a personal use asset. It must be
noted that the car was used by Jasmine mainly for the private purpose (Emma 2018). Under
“sec 104-10 (1), ITA Act 1997”, when Jasmine disposed the car a “CGT event A1”
happened. The disposal of vehicle has yielded capital loss. So Jasmine by referring to “sec
108-20 (1)”, must ignore the capital loss made from the personal use car irrespective of its
acquisition price.
Answer C: Sale of her cleaning business.
Small business concessions relating to the CGT event that takes place following
21/9/1999 is dealt under “Div 152”. For a CGT asset that is meeting the “active asset test”
under “sec 152-35” there can be four concessions which will be allowed to the taxpayer
(Villios 2014). Any business taxpayer that has the net value of the CGT assets owned by
them and any related companies is not greater than $6 million under “sec 152-10” is allowed
for availing CGT concessions.
The four small business concession are as follows;

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a. Under “subdiv 152-B” a fifteen year exemption from capital gains is provided to the
small business.
b. As per “subdiv 152-C” a small business is permitted capital gain reduction by 50%.
c. With respect to “subdiv 152-D” a retirement capital gains exemption is permitted.
d. While under “subdiv 152-E” roll-over relief is provided to the taxpayer from capital
gains upon making asset replacement.
Jasmine is found to be selling her small cleaning business. At the time of sale,
Jasmine has yielded capital gains of $125,000 out of which $65,000 relates to business
equipment sale and $60,000 for goodwill. It can be stated that Jasmine is eligible for small
business CGT under “Div 152”. Additionally, under “sec 152-10, ITA Act 1997” the net
value of the CGT assets owned by Jasmine is within $6 million threshold limit (Sadiq and
Marsden 2014). The CGT asset under “sec 152-35, ITAA 1997” also meets the active asset
test. Therefore, Jasmine is eligible for claiming 15-year exemption from the disposal of her
CGT asset. Jasmine has owned the asset for a minimum of 15 years and she also ages more
than 55 years.
Answer D: Sale of Furniture:
It is essentially vital for the taxpayers to understand that under “sec 118-10, ITA Act
1997” capital gains that is realised from selling the personal use asset is simply disregarded
when the asset is purchased for lower $10,000 or low (Lam and Whitney 2016). The
evidences that is obtained here suggest that a furniture that cost $2000 was sold by Jasmine
for $5,000. On applying the special rules of “sec 118-10, ITA Act 1997” the capital gains
from furniture being a private use asset is disregarded in this situation.

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Answer E: Sale of paintings:
As noted in “subdivision 108-B” it mainly deals with CGT assets known as
collectables. Accordingly, “sec 108-20 (2)” defines collectables as the type of assets that is
mainly held by taxpayer for private enjoyment purpose. Examples are paintings, sculptures,
jewellery, antiques and stamps (Minas, Lim and Evans 2018). Especially under “sec 118-10
(1)”, capital gains or loss happening from selling the collectables that has the acquisition
price of $500 or low is ignored. While capital gains from collectables is included for tax that
is bought for greater than $500.
Jasmine has collection of numerous paintings. The paintings were purchased by
Jasmine for $500. However, all the paintings are sold for $35,000. Under “sec 108-20 (2)”
the paintings are recognized as collectables. Sale of paintings has led to “CGT Event A1”. As
none of the paintings cost no more than $500, within “sec 118-10 (1)”, the capital gains from
disposal of paintings are ignored (Joseph 2017). Despite the fact, there was also one
exception where a painting was purchased for $1,000. This painting was sold by Jasmine for
$5,000. Hence, a capital gains made in this regard. Therefore, the capital gains will be taxed
under the CGT regime.

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Answer to question 2:
Issues:
The issue considered in this factual situation of John is that whether he will be able to
get the access of “sec 40-25, ITA Act 1997” for claiming decline in value of the machine
bought during the year.
Laws:
A part of uniform capital allowances permits a taxpayer for deduction in respect of the
decline in value of depreciating asset in “Div 40, ITA Act 1997”. As a general note of
“Division 40, ITA Act 1997” the provision of capital allowance is commonly applicable on
the depreciating asset under “sec 40-30, ITA Act 97” which is not held as capital works. The
common provision of capital allowance under “Division 40” is not eligible for claim for all
the taxpayers (Phan 2016). The operative provision of “sec.40-25 (1), ITA Act 97”
pronounces that an individual taxpayer is permitted for claiming deduction equal to
depreciation amount for the income of a depreciating asset which the taxpayer has held it
during any part of the year.
As noted in “sec 40-30 (1)”, a depreciating asset is generally referred as the asset
which has the limited effective life and it is reasonably anticipated to fall in value with regard
to its usage. However, it must be noted that neither land nor trading stock has been
considered in this definition. Usually, assets are not defined and it should be assigned its
ordinary meaning based on the specific requirement of capital allowances (Pointon 2017).
The ordinary meaning of plant was considered by the federal court in the Australian case of
“FC of T v Wangaratta Woollen Mills Ltd [1969]”. The federal court stated that a structure
of dye-house was viewed as having the meaning of plant in contrast to the ordinary structure

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of a building. This is because the dye-house represented a tool in trade and plays a vital role
in the manufacturing procedure of the taxpayer.
“Division 40, ITA Act 1997” explains that a deduction for asset is allowed under the
capital allowance regime only when the asset is held for taxable purpose. For that reason,
under “sec 40-25 (7)”, the term taxable purpose represents the purpose of generating taxable
earnings (Armstrong 2016). The capital allowance regime of “Div 40, ITAA 1997” says that
a deduction the decline in value of the depreciating asset during the year of income is
permitted for claim by those that hold the asset all through the income year.
In calculating depreciation there are some relevant dates that should be considered
under the general capital allowance regime. With respect to “sec 40-60”, a depreciating asset
beings to depreciate when an individual taxpayer makes the first use of the asset or they have
installed the asset ready for assessable use purpose (Walrut 2013). While “sec 40-175” says
that depreciation is calculated based on the assets cost base. The cost base of the assets
usually contains two elements which are discussed below;
 1st Element of Cost: The first element cost base includes the consideration that is
provided by the taxpayer for holding the asset. This commonly includes the
purchase price that is paid to purchase the asset.
 2nd Element of Cost: The second element of cost base usually includes the
consideration that a taxpayer has provided to bring the asset in its present conditions
and location. This mostly takes account of cost involved in transportation, capital
improvements and installation expenses occurred to the asset.
Application:
The case study opens up with the scenario where it is noticed that John is the owner of
the manufacturing company which is largely involved in the production of BMW parts. In the

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meantime, the facts obtained from the case further contributes that John has bought a CNC
machine which he intends to use for his business. In regard to the operative provision of “sec
40-30 (1), ITA Act 97” the CNC machine is a depreciating asset (Mark and James 2016). By
referring to the factual situation of “FC of T v Wangaratta Woollen Mills Ltd [1969]”, the
depreciating asset has some degree of operational life and the CNC machine can reasonably
be anticipated to decrease in worth based on the time of its usage.
In the meantime, “sec 40-25 (7)”, contributes to the fact that the CNC machine was
bought by John wholly for taxable purpose. In other words, the CNC machine was bought for
producing taxable income. Under “Div 40, ITAA 1997” of the capital allowance regime, it is
necessary to determine the cost base of CNC machine (Mishra and Anwar 2017). As
understood the machine was purchased by John by paying $300,000. With regard to “sec 40-
185”, the consideration paid by John to hold the CNC machine is included under the 1st
element of cost.
John further reports a cost of $25,000 incurred for installing the machine. He also
occurred an additional cost of $5,000 for adding a guiding rod in the CNC machine as this
will improve its performance. Denoting “sec 40-190, ITA Act 1997” the installation cost and
cost of adding a guiding rod will be included in the 2nd element cost of CNC machine.
To compute the decline of value of asset under “sec 40-25 (1), ITA Act 1997” the
start date of taxable use of CNC machine should be considered (Walrut 2013). As per the
case facts obtained, John completely installed the CNC machine on 15th January. Therefore,
under sec 40-60, the start date for decline in value of CNC machine is 15th January, for the
reason that John first used the machine from that day onwards for generating chargeable
business earnings.

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Conclusion:
The central operative provision of “sec 40-25 (1), ITA Act 1997” is applicable for
John where he can claim the deduction for depreciation of CNC machine which he has held it
all through the year.

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References:
Armstrong, M., 2016. CGT withholding on real estate transactions in Australia. Mondaq
Business Briefing, pp.Mondaq Business Briefing, March 11, 2016.
Emma L, 2018. CGT: changes to threshold and rate for foreign resident capital gains
withholding payments. Mondaq Business Briefing, pp.Mondaq Business Briefing, May 2,
2018.
Gordon, R., 2017. Proposed changes to CGT main residence exemption for foreign residents.
Mondaq Business Briefing, pp.Mondaq Business Briefing, August 22, 2017.
Joseph, M., 2017. Dissolving strata title and the potential for capital gains tax (CGT) liability.
Mondaq Business Briefing, pp.Mondaq Business Briefing, April 26, 2017.
Lam, D. and Whitney, A., 2016. Practical aspects of the new foreign resident CGT
withholding tax. LSJ: Law Society of NSW Journal, (21), p.84.
Mark, K and James, M, 2016. PM weighs higher capital gains tax. The Age (Melbourne,
Australia), p.4.
Minas, J, Lim, Y and Evans, C, 2018. The impact of tax rate changes on capital gains
realisations: Evidence from Australia. Australian Tax Forum, 33(4), pp.635–666.
Mishra, A.V. and Anwar, S., 2017. Foreign portfolio equity holdings and capital gains
taxation. International Review of Financial Analysis, 51, pp.54–68.
Phan, L., 2016. Australia's Foreign Resident Capital Gains Tax Withholding Regime.
Mondaq Business Briefing, pp.Mondaq Business Briefing, Sept 29, 2016.
Pointon, A., 2017. Separating business and personal property, and the application of the CGT
roll-overs. Mondaq Business Briefing, pp.Mondaq Business Briefing, June 25, 2017.

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Sadiq, K. and Marsden, S., 2014. The small business CGT concessions: evidence from the
perspective of the tax practitioner. Revenue Law Journal, 24, pp.1–21.
Sommer, A., 2017. 1 July 2017 start for significant changes to the Foreign Resident CGT
Withholding Tax regime - are you ready? Mondaq Business Briefing, pp.Mondaq Business
Briefing, June 28, 2017.
Villios, S et al., 2014. The capital gains tax implications of buy-sell agreements.(Australia).
Australian Tax Review, 41(2), pp.100–112.
Walrut, B, 2013. Tax files: Absolute entitlement and capital gains tax. Bulletin (Law Society
of South Australia), pp.36–37.
Walrut, B, 2017. Tax files: Capital gains tax - death, disagreement and devolution. Bulletin
(Law Society of South Australia), 39(2), pp.43–44.