Holmes Institute HA3042 Taxation Law Assignment: Individual Tax

This assignment solution addresses key aspects of Australian taxation law, focusing on individual tax scenarios. The first part of the assignment analyzes Jasmine's tax liabilities, examining capital gains tax (CGT) implications from the sale of her family home (pre-CGT asset), a car (personal use ass...Read More

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
Answer to question 2:.................................................................................................................6
References:...............................................................................................................................10

2TAXATION LAW
Answer to question 1:
Sale of family home:
A gain is generally branded capital since it is not the subject of income inside the
ordinary earnings concepts. The regime of capital gains has begun on 20/9/1985 and it brings
the capital earnings in the tax base (Lam & Whitney, 2016). The income tax liability of the
taxpayer also includes the net capital gains. Any gains that is made before this date is termed
as “pre-CGT” and it does not attracts any capital gains tax.
There are some basic exemption which is available to the taxpayer from the capital
gains or capital loss transpiring from CGT event. Main residence exemption is available only
under “sec 118-110 (1) ITA Act 1997” when the taxpayer is treated as individual and the
house was the main place of dwelling during the ownership period (Phan, 2016).
Jasmine here lived in the dwelling that she has purchased for $40,000. As she is
relocating to UK permanently, the dwelling was eventually sold for $650,000. It must be
noted that dwelling is a pre-CGT asset because Jasmine has purchased it before 20th
September 1985. As a result the capital gains that she has made from the main dwelling will
exempted from CGT.
Sale of car:
“Section 108.5 ITA Act 1997” says that CGT asset usually encompasses any property
or lawful or equitable right (Armstrong, 2016). A CGT event is identified as occurrence for
particular assets that determines the net capital gains or loss from such event. A “CGT event
A1” under “sec 104-10 (1) ITA Act 1997” commonly applies to majority of the assets that
are disposed.

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An important explanation regarding personal use asset given in “sec 108-20 ITA Act
1997” denotes that these assets are mainly kept by taxpayer for their own enjoyment (Mahar,
2016). The examples of this assets namely include the TV, vehicles, yacht, furniture etc. The
capital loss that happens from the sale of the personal use asset is on a frequent basis ignored
under “sec 108.20 (1) ITA Act 1997”.
In the present year Jasmine sold a car and received around $10,000. It must be noted
that Jasmine bought the car for $31,000 in 2011. The car here is a personal use asset within
“sec 108.20 ITA Act 1997”. Additionally, a “CGT Event A1” triggered when the car was
disposed by Jasmine. Eventually, she realised a capital loss when the car was sold.
Henceforth, under “sec 108.20 (1) ITA Act 1997” Jasmine should disregard the capital loss
from her personal use car.
Capital gains for Sale of business:
“Div 152” provides concessions to the small business so that they obtain relief from
capital gains tax (Friend, 2014). However to access the concessions, some basic conditions
needs to be satisfied:
a. The entity must meet the condition of small business entity where its net value of
asset must not go beyond $6 million or its gross turnover must not exceed $2 million
in a relevant year.
b. The small business asset must be an active asset
When the small business satisfies the conditions that is given above, they are provided
with the access of four small business concessions;
a. 15-year exemption: The total sum of capital gains is exempted from CGT when the
asset is owned for 15 years and the age of taxpayer is 55 years or more.

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b. 50% CGT Reduction: The taxpayer that are meeting the qualification criteria are
allowed to reduce the capital gain by further 50% following the application of general
50% discount percentage.
c. Retirement concession: Capital gains is disregarded for CGT asset related with small
business given that the amount is used by taxpayer for retirement purpose (Ingram,
2016).
d. Roll-over relief: This is given to taxpayer when the proceeds of capital gain is used
for purchasing another replacement asset.
The case facts that is found advises that Jasmine has retired from her small business
and has sold all her assets for $65,000 while her business goodwill for $65,000 to fetch an
overall amount of $125,000. Jasmine here qualifies for the small business concession because
the value of her asset is not greater than $6 million and all her CGT asset is an active asset.
Jasmine will be permitted to avail a 15-year exemption since the asset was owned by her for
15-year and she also ages more than 55 years.
Capital gain on Sale of furniture:
Most importantly, there are some vital rules that is applicable on disposal of personal
use asset. Accordingly, in “sec 118.10 (3) ITA Act 1997” the taxpayer must ignore the capital
gains when the asset fail to meet the first element cost base of $10,000 (Hay-Bartlem, 2017).
In the present situation, Jasmine sells her furniture for $5,000 which she eventually purchases
for $2,000. As understood the capital gains made here will be ignored by Jasmine because the
first element cost base is not satisfied since the painting was bought for less than $10,000.
Sale of paintings:
“Sec 108.10 ITA Act 1997” defines collectable as asset which is held by taxpayer for
own enjoyment (Mannix, 2017). Examples include antiques, paintings, rare stamps, coins etc.

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Capital gains are overlooked under “sec 118-10 (1) ITA Act 1997” when collectables are
purchased for less than $500.
Jasmine sold large number of paintings for $35,000 that she had purchased directly
from a second hand seller. The cost of every painting was $500. Hence, painting is
categorized as collectable under “sec 108.10 ITA Act 1997” because she has kept for her own
enjoyment. A “CGT event A1” happened when the paintings was sold (Kenny et al., 2016).
However, Jasmine must ignore the capital gains from paintings under “sec 118.10 (1) ITA
Act 1997” because it was purchased for less than $500. While one of the painting purchased
for $1000 was sold for $5,000. Jasmine made capital gains in this respect. Hence it will
attract CGT and the net gains will be included in her assessable income under “sec 102-5,
ITA Act 1997”.

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Answer to question 2:
Issues:
The central issue to the subject is associated with the deduction for the amount that is
equivalent to the decline in value for the income year of the depreciating asset that was held
by the taxpayer under “sec 40-25 (1), ITA Act 97”.
Laws:
“Div 40 ITA Act 1997” provides explanation to the taxpayer regarding the capital
allowance regimes. Within “sec 40.30 ITA Act 1997” the provision of capital allowance is
applicable to majority of the depreciating assets that does not amounts to any capital works.
Within the “Div 40 ITA Act 1997” the general provisions relating to the capital allowance is
permissible as claim for all the taxpayers (Sadiq & Marsden, 2014). In addition to this, under
“subdiv 40-E” all the taxpayers apart from the SBE taxpayers, is allowed to use the specific
lower value asset provision to make the claim for higher depreciation.
The central provision of the “sec 40-25 (1) ITA Act 1997” all the taxpayers are
provided with the permission of deducting a sum that is equal to the “fall in value” or
depreciation during the income year relating to the depreciating asset that is held by them for
any time period throughout the year. While “sec 40-30 (1)”, says that a depreciating asset
amounts those asset that has very limited effective life (Brown et al., 2014). This type of asset
are projected to fall in respect of their values over the time period till it is used.
While “sec 40-25 (7) ITA Act 1997” articulates that the assessable purpose represents
the purpose of generating assessable income and also comprises of the purpose of exploring
and prospecting of the depreciating asset that is held throughout the year (Novek, 2016).
Capital allowance regime given in “division 40 ITA Act 1997” lists down that a deduction

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relating to the decline in value of the depreciating asset for the income year is only allowed
for claim by person that has held the asset throughout the income year. Under “sec 45-40
ITA Act 1997” a depreciating asset usually takes into the account the concept of plant. The
law court in “Yarmouth v France (1887)” explained the ordinary meaning of plant which
includes device of any kind used by a business man for conducting the business activities
(Walrut, 2015).
In the meantime “sec 40-60 ITA Act 1997” provides relevant dates under the capital
allowance regime. The start time for decline in value of the depreciating asset commences
when it is first used by the taxpayer or the asset has been installed by the taxpayer as ready
for taxable business usage (Meadmore, 2016). The taxpayers are required to denote that they
are only allowed to claim depreciation based on the assets cost base. Meanwhile, the rules of
computing the cost of asset is contained within “Subdiv 40-C”. As a common rule, the cost
would not comprise of the purchase price but would take note of the incidental costs as well
as any delivery cost that is occurred while installing the depreciating asset. The taxpayer
should notably denote that any kind of added expenses that is occurred towards rearranging
or removing the other plant for accommodating the new plant might also be included in the
cost base of the asset.
The present legislation of “sec 40.175 ITA Act 1997” classifies the depreciating asset
cost under two elements. The exact rule concerned with working out the first element is given
in “sec 40.180 ITA Act 1997”. While “subsection 40.180 ITA Act 1997” provides direction
that this element must be worked out when the taxpayer begins holding the asset (Kennedy,
2016). “Sec 40.180 ITA Act 1997” says that the first element normally involves the purchase
price that is paid while purchasing the asset. Meanwhile, “sec 40.190 ITA Act 1997” is
primarily associated with the second element that generally involves the delivery costs,
installation and capital improvements that is made to the asset.

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Application:
The scenario evidences of the case suggest that John produces certified BMW parts.
He is the owner of motor vehicle parts and accessories manufacturing company. On one
occasion he visited Germany to inspect the CNC machine. Additionally, following the
successful inspection he purchased the asset for $300,000. The machine was finally installed
on 15th January and John incurred an installation cost of $25,000. Under “sec 40.30 (1) ITA
Act 1997” the CNC machine is a depreciating asset because the machine has the limited
effective life. Quoting the case of “Yarmouth v France (1887)” the machine is also
estimated to fall in value based on its usage (Meadmore, 2016). Furthermore, the CNC
machine also satisfies the condition given in “section 40.25 (7) ITA Act 1997” because the
machine was exclusively purchased by John for producing the assessable business earnings.
To determine the cost base of machinery reference to the rule contained within
“Subdiv 40-C” has been referred. Under the first element, the purchase price paid by John for
purchasing the machine will be included for determining the “decline in value” of the asset.
The sum of $300,000 paid by John for the acquisition of CNC machine will be included
under first element of “sec 40.180 ITA Act 1997”.
John also incurred an installation cost of $25,000 to install the machine. He also
incurred a sum of $5,000 for installing a guiding rod for making the CNC machine more
effective. Referring to the “sec 40.190 ITA Act 1997” the second element cost base of CNC
machine would include the installation cost and cost occurred for adding a guiding rod.

9TAXATION LAW
To claim the deduction for the decline in value of CNC machine under “sec 40.25 (1)
ITA Act 1997”, it is necessary to determine the start time of the depreciating asset. As
evident the machine was installed by John on 15th January (Mannix, 2017). This can be
considered as ready business use or ready for producing taxable income of John in the course
of his business activity. Therefore, under “sec 40.60 ITA Act 1997” the start date for
calculating decline in value of the machine is 15th January. The machine was first used by
John for taxable purpose from that date onwards.
Conclusion:
John will be permitted under “sec 40-25 (1), ITA Act 97” to deduct the amount equal
to the “decline in value” or depreciation during the relevant income year that is held by him
for taxable business purpose.

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References:
Armstrong, M. (2016). CGT withholding on real estate transactions in Australia. Mondaq
Business Briefing, p. Mondaq Business Briefing, March 11, 2016.
Brown, P., Ferguson, A., & Sherry, S. (2014). Investor behaviour in response to Australia’s
capital gains tax. Accounting & Finance, 50(4), 783-808.
Friend, R. (2014). The CGT small business concessions: Issues, anomalies and opportunities.
(capital gains tax) (Australia). Australian Tax Review, 40(2), 108-137.
Hay-Bartlem, S. (2017). CGT relief, 2016 Budget changes and SMSFs - Do I need to
commute back to accumulation phase to access relief? Mondaq Business Briefing, p.
Mondaq Business Briefing, May 17, 2017.
Ingram, P. (2016). Tax files: More than meets the eye - the new 'foreign resident capital gains
tax withholding regime'. Bulletin (Law Society of South Australia), 38(5), 36-37.
Kennedy, A. (2016). New regime for withholding CGT when purchasing Australian land.
Mondaq Business Briefing, p. Mondaq Business Briefing, Feb 8, 2016.
Kenny, P., Blissenden, M., & Villios, S. (2016). Australian tax 2016.
Lam, D., & Whitney, A. (2016). Practical aspects of the new foreign resident CGT
withholding tax. LSJ: Law Society of NSW Journal, (21), 84.
Mahar, F. (2016). The distortive effects of the capital gains tax regime. Tax Specialist, 20(1),
16-20.
Mannix, J. (2017). An introduction to capital gains tax. Sydney: Butterworths.
Meadmore, J. (2016). How earn-out arrangements are affected by amended capital gains tax
rules. Mondaq Business Briefing, p. Mondaq Business Briefing, May 9, 2016.

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Novek, C. (2016). Investors guide to capital gains tax and land tax. Mondaq Business
Briefing, p. Mondaq Business Briefing, July 18, 2016.
Phan, L. (2016). Australia's Foreign Resident Capital Gains Tax Withholding Regime.
Mondaq Business Briefing, p. Mondaq Business Briefing, Sept 29, 2016.
Sadiq, K., & Marsden, S. (2014). The small business CGT concessions: Evidence from the
perspective of the tax practitioner. Revenue Law Journal, 24, 1-21.
Walrut, B. (2015). Capital gains tax and death. Bulletin (Law Society of South Australia),
34(11), 26-28.