Holmes Institute Taxation Law Assignment: CGT and Depreciation

This assignment addresses two key taxation issues: Capital Gains Tax (CGT) and depreciation. Question 1 analyzes the CGT consequences for Jasmine, examining the sale of various assets including a house, car, business, furniture, and paintings. It applies relevant sections of the ITAA 97 to determine whether CGT events are triggered and calculates potential gains or losses, considering exemptions and concessions like the small business concession. Question 2 focuses on depreciation, specifically the cost of a CNC machine. It explores the components of the cost base, considering purchase price, associated expenses, and the timing of depreciation calculations, referencing the definition of depreciating assets and relevant sections of the ITAA 97 to determine the correct cost base and depreciation start time for the machine. The assignment provides a detailed breakdown of each transaction and calculation, offering a comprehensive understanding of taxation principles and their application.

Running head: TAXATION
Taxation
Name of the Student
Name of the University
Author Note

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Table of Contents
Question 1............................................................................................................................2
Issue.....................................................................................................................................2
Rule......................................................................................................................................2
Application..........................................................................................................................4
Sale of house....................................................................................................................4
Sale of Car.......................................................................................................................4
Sale of business................................................................................................................4
Sale of furniture...............................................................................................................5
Sale of paintings..............................................................................................................5
Conclusion...........................................................................................................................6
Question 2............................................................................................................................6
Issue.....................................................................................................................................6
Rule......................................................................................................................................6
Application..........................................................................................................................7
Conclusion...........................................................................................................................8

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Question 1
Issue
Whether CGT consequences have been inflicted upon Jasmine as accrued from the given
transactions.
Rule
ITAA 97, s 102-20: A CGT gain or loss is said to have been invoked if there can be said
to have a CGT event that has happened.
ITAA 97, s 104-10: In case there has been a transaction that involves the disposal of a
CGT asset, any event that involves the same would depict a CGT event and any gain or loss that
might have been accrued to such a person by virtue of such an event would be subjected to
taxation as a CGT gain or loss. The determination of the occurrence or non-occurrence of a CGT
event can be evidenced from the change of ownership as per the arrangement between the
taxpayer and the other person upon whom the ownership has been transferred. On the other hand,
any change of legal ownership to a beneficial ownership should not be brought under the
purview of purview of the concept of change of ownership. Timing of such a disposal is the point
of time when the contract having the effect of change of ownership have been instituted.
ITAA 97, s 110-25(1): The cost base of a capital asset is to be computed in adherence to
the principles of this provision and this provisions points towards the cost base of a capital asset
to be composed of five elements.
ITAA 97, s 110-25(2): the first element that is to be included within the cost base of a
transaction of disposing off any asset is the expenditure in monetary value that has been

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undergone in procuring the asset. When the expenditure is not of a monetary value and has been
suffered as a giving up of another asset in exchange, the market value of that asset needs to be
considered in the cost base.
ITAA 97, s 110-25(3): the second element that is to be included within the cost base of a
transaction of disposing off any asset is the expenditure in monetary value that has been
undergone as incidental expenditure to the acquisition of the concerned asset.
ITAA 97, s 110-25(4): the third element that is to be included within the cost base of a
transaction of disposing off any asset is the expenditure in monetary value that has been
undergone in relation to the owning expenses. However, for the inclusion of this element the date
of procuring this asset needs to be subsequent to 20.08.1991. This portion of the cost base may
include the interest on loan availed for buying or for any major alteration the asset and other
related costs like repairs and maintenance. This element will not be considered in case of
collectibles.
ITAA 97, s 110-25(5): the fourth element that is to be included within the cost base of a
transaction of disposing off any asset is the expenditure in monetary value that has been
undergone in relation to the preservation or enhancement of the asset.
ITAA 97, s 110-25(6): the fifth element that is to be included within the cost base of a
transaction of disposing off any asset is the expenditure in monetary value that has been
undergone in relation to the defending or establishing the title of the asset.
ITAA 97, s 116-20: cost proceed needs to be computed by finding the summation of all
the receipts that has been accrued to against the disposing off of a property. When the receipt is

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not of a monetary value and has been suffered as a giving up of another asset in exchange, the
market value of that asset needs to be considered in the cost base.
ITAA 97, s 115: a fifty percent of discount would be available upon a capital gain if the
asset involved has been held for a period over 12 months.
Application
Sale of house – According to the above discussed rule the house is a pre-CGT asset as it
has been purchased before 20th September 1985. In addition as per the provisions of section
118.20 if a house which has been used for the purpose of main residence by TP would not be
eligible for CGT. This means that any tax to be payable as a result of capital gain event being
triggered due to the sale of the house (Event A1) would not result in any tax consequences for
the TP as the CGT is exempt.
Sale of Car - Jasmine purchased a car in 2011 for $31,000 and is now worth around
$10,000. In this situation the sale off car will be CGE A1 under. The CG will be capital proceeds
minus cost base. In the present situation a loss is inevitable and thus the reduced cost base needs
to be considered. This means that element 3 of the cost base which would have depreciation
would not be considered in calculating the RCB. If the car is sold for $10000 there is a capital
loss of $21000. As this is a personal use item, the loss cannot be used to offset any other kind of
capital gain.
Sale of business – Jasmine commenced her ‘small cleaning business’ herself and now
found a buyer to take over the cleaning business for $125,000. The sale price includes $65,000
for all of the business equipment, which cost $75,000, and $60,000 for goodwill. In this
situation she may be able to get small business concession. The sale of the business equipment,

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which cost $75,000 will result in Capital gain event A1 and on the other hand the sale of
goodwill will be CGE C2 under s.104-20. The cost base for C2 will be any legal fee involved in
making the contract. The CB for A1 will be cost price and cost of ownership. The SBC will be
available is net worth of the TPs assets is less than $6m. The TP would also be able to claim a
50% discount any CG made as the business was held for more than 12 months and the TP is an
individual as per section 115-10 and 115-5 of ITAA97.
Sale of furniture - Jasmine is also selling her furniture for $5,000. No single item offered for
sale cost more than $2,000. In this situation it needs to be noted that any CGT of an asset which
was acquired less than $10000 is disregarded. In this situation also it is assumed that the price of
the furniture will not be more than $10000 as it is a personal use asset. Thus any CGT on the
same will also be disregarded.
Sale of paintings - Jasmine has several paintings and is now selling them all for $35,000. All
of her paintings were purchased in second hand shops or markets and no single painting cost
more than $500. The one exception was a painting she purchased direct from an artist for $1,000.
This painting is being sold for $5,000. Paintings are collectibles as under the provisions of (s
108-10(1)). Collectibles have a low value exemption. This mean that under the provisions of
s118-10 any collectible which has been purchased for $500 or less is disregarded for CGT
purpose. In this situation Jasmine has several paintings and is now selling them all for $35,000.
All of her paintings were purchased in second hand shops or markets and no single painting cost
more than $500. Thus the sale of paintings for $35000 will not have any CGT consequences. On
the other hand the painting worth $1000 which is sold for $5000 will have CG of $4000 which is
CP under section 116.20 ($5000) minus cost base under section 110-25 of $1000. She may also
get a 50% discount under div 115 of the ITAA97.

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Conclusion
CGT consequences will be as discussed above
Question 2
Issue
Whether the cost of the CNC machine for the purpose of calculating the capital
allowance. There are three sub issues involved as follows
1. Discussion of the first element of the cost of the CNC machine
2. Discussion of the second element of the asset’s cost, i.e. the start time for calculating the
decline in the value of the CNC machine.
3. Concluding discussions regarding the exact start time of holding the CNC machine for
depreciation purposes, and the total cost of the machine.
Rule
The definition of depreciating asset is give under s.40-30(1). This is an asset which has a
limited effective life and is expected to have a decline in value with respect to the time it is used.
Division 40, ITAA97: the amount equaling the decline in value with respect to an income
year in relation to an asset that depreciates. Any asset that can be attributed to have a limited
effective life would be referred to as a depreciating asset.

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The term depreciating asset’s declining value is to be construed to have been commenced
from start time. As per the prime cost formula, the value decline is to be computed as percentage,
which is constant over the cost of the asset. The decline in value needs to be computed as,
Decline in Value = cost of asset*(days for which it has been held /365)*(100%/effective
life)
The decline in value initiate from the state time which under s 40-60 is the time when the
asset is ready to be effectively used. The cost of a depreciating asset is determined in accordance
with Subdiv 40-C. the cost of the asset is made up of two elements as per section 40-175. The
first element is the amount which the holder has paid for the purpose of getting the asset as per
s40-185. This is calculated at the time when the holder actually starts holding the asset. The
second element is calculated when the asset is under the holder. This includes the expenses the
holder incurs for every economic benefit in relation to getting the asset to its present state and
location from time it started to hold the asset such as cash paid to transfer the asset.
Application
In the present situation, John purchased an industrial computer numerical control (CNC)
machine imported from Germany on 1 November 2014 for $300,000. This means that the
purchase price of the asset according to element 1 will be $300,000. John visited the CNC
factory to inspect the CNC machines and place his order. The only reason for his visit to
Germany was to purchase the CNC machine. The trip to Germany cost John $12,000. However,
this cost has been incurred prior to the asset being held by John and thus it will not be a part of
the cost of the asset under the rules of section 40-185. This is because the second element is
calculated when the asset is under the holder. This includes the expenses the holder incurs for

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every economic benefit in relation to getting the asset to its present state and location from time
it started to hold the asset such as cash paid to transfer the asset. Further, the installation of the
machine had cost around $25000. This will be added to the cost of the asset as the second
element is calculated when the asset is under the holder. This includes the expenses the holder
incurs for every economic benefit in relation to getting the asset to its present state and location
from time it started to hold the asset such as cash paid to transfer the asset. Further, Once the
CNC machine was installed and John started using the CNC machine he discovered that the
CNC machine required an additional guiding rod to make it more effective. This guiding rod was
installed on 1 February at a cost of $5,000. This means that the application of section 40-185 will
add the $5000 to the cost of the machine. The asset was effectively used from 1 February. This
mean that the start time for calculating the decline in value of the asset is 1 February as he
decline in value initiate from the state time which under s 40-60 is the time when the asset is
ready to be effectively used.
Conclusion
The cost of the CNC machine is 330000
The start time for calculating the decline in value of the asset us 1 february

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References
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
Income Tax Assessment Act 1997 (Cth)