ACC3TAX Taxation Law Report: Income, Capital Gains, and Deductions

This report provides a comprehensive analysis of Chris Matthews' tax implications for the year ending 2017/18, focusing on income sources, capital gains, and deductible expenses. The analysis begins by addressing the tax consequences of selling a house, determining the taxable portion of capital gains considering the main residence exemption and business use. The report then examines the deductibility of legal fees incurred in defending against negligence claims, referencing relevant legislation and case law. Finally, it computes Matthews' taxable income, including assessable income from salary, cash allowances, patient fees, and capital gains, while considering allowable deductions such as subscriptions and cleaning costs. The report concludes with a calculation of the total tax refundable, offering a detailed overview of the tax liabilities and benefits, including the implications of the CGT discount.

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

1TAXATION LAW
Table of Contents
Introduction:...............................................................................................................................2
Tax Implications relating to sale of house:................................................................................2
Tax consequences of legal fees:.................................................................................................3
Computation of taxable income:................................................................................................4
Conclusion:................................................................................................................................5
References:.................................................................................................................................7

2TAXATION LAW
Introduction:
The present report is based on determining the tax consequences of Chris Matthews
for the year ended 2017/18. The report would take into the account the income and expenses
occurred by the taxpayer from the employment and private consulting business. Additional
considerations would be paid towards capital gains made from the sale of house and legal
fees incurred by the taxpayer in defending the legal charges.
Tax Implications relating to sale of house:
As stated by the ATO the main residence of the taxpayer is usually not included for
capital gains tax purpose. nevertheless, a taxpayer does not get the full exemption relating to
main residence if the taxpayer uses any portion of the house to generate income particularly
renting the room and running the business (Barkoczy 2014). In order to calculate the net
amount of capital gains a taxpayer is usually required to determine the market value of the
house such as the time the time the taxpayer used to generate income.
The property was bought by Chris on 1st March 1999 and the property was used for
producing income on 3rd July 2014. On 19th June 2018 the property was eventually sold for a
sale price of $1,000,000. The house was the main residence for Chris all through the
ownership. For a specific time period Chris used a part of the house to carry his private
consultancy business. Chris modified the rooms in order to make it suitable for business use
and the remaining for private and domestic purpose. Therefore, it represented 5% of the total
floor area of the house. Chris made the capital gains of $572,000 when the house was sold.
Therefore, Chris would only be entitled to obtain a partial main residence exemption from
CGT because the property was used to produce business income. Additionally, Chris held the
property for a minimum of 12 months’ period therefore, he can use the 50% CGT discount

3TAXATION LAW
method to compute the net amount of capital gains (Grange, Jover-Ledesma and
Maydew 2014). Below stated is the portion of capital gains that are taxable;
Capital Gains x Percentage of Floor area not used as main residence x Percentage of period
ownership that portion of house was not used for main residence = Taxable Portion
Particulars Amount ($) Amount ($)
CGT Event A1- (S 104-10(1))
Sales proceeds 1000000
Element 1 - Cost of Acqusition (S 110-25(1)) 400000
Element 2- Incidental Cost (S 110-25(2))
Stamp Duty 20000
Element 3 - Non-Capital Cost of Ownership
Conveyance Fees 8000
Total Cost of Acqusition 428000
Net Capital Gains 572000
Assessable Capital Gains 5%
Capital Gains 572000
Taxable Portion 22594
Calculation of Capital Gains
In the books of Chris Mattews
For the year ended 2017/18
Notes:
Capital Gains 572000
Percentage of Floor Area not used as main residence 5%
Percentage of period of ownership not used as main residence 79%
Taxable Portion 22594
Tax consequences of legal fees:
According to the “section 8-1, ITAA 1997” a deduction is permitted to the taxpayer
for kinds losses or expenditure up to the extent that they are occurred in gaining or producing
the taxable income except in the situation where the expenses are private, domestic or it is
related with the derivation of exempted income (Jover-Ledesma 2014). As held in the case of
“Herald & Weekly Times Ltd v FC of T (1932)” legal expenditure is allowed for deduction

4TAXATION LAW
if the expenditure have originated due to the income producing activities of the taxpayer and
the legal expenditure are not capital, private or domestic in nature (Krever 2013).
The legal expenditure of $25,000 that is occurred by the taxpayer for defending the
claims of negligence can be allowed as income tax deduction under the “section 8-1, ITAA
1997”. Citing the case of “Herald & Weekly Times Ltd v FC of T (1932)” it can be stated
that the legal expenses can be claimed as deduction because it originated for generating the
assessable income (Kenny 2013). The legal expenditure holds a clear connection with the
Chris medical practices and the expenditure are considered relevant to the medical practices
of deriving assessable income. There was no kind of enduring benefit generated by the
expenditure and hence it would be appropriate to consider the legal expenditure as on the
revenue account. Therefore, Chris would be entitled to obtain deduction under the legislative
provision of “section 8-1, ITAA 1997” for the legal expenditure that is occurred in respect of
defending the damages for claim.
Computation of taxable income:
As it has been defined in “section 6, ITAA 1936” income that are obtained from the
personal exertion or income obtained from the personal exertion includes the amount
received as salaries, wages, allowances, gratuities etc. in capacity of the employee for the
services rendered or proceeds derived from the business carried by the taxpayer. As per
“section 6-5, ITAA 1997” majority of the income that comes into the taxpayer is held as
ordinary income (Morgan, Mortimer and Pinto 2013). The taxation commissioner in “CT v
Scott (1935)” held that the income should not be viewed as the term of art and needs the
application of appropriate principles to determine the receipts in agreement with the ordinary
concepts (Woellner et al. 2014).

5TAXATION LAW
The receipt of salary and the cash allowances amounts to income from personal
exertion under “section 6, ITAA 1936”. Referring to “CT v Scott (1935)” the amount
received by Chris will be included for assessment purpose under “section 6-5, ITAA 1997”
because it is an income based on ordinary concepts (Sadiq and Coleman 2013). Gains
originating from business activities are treated as ordinary income. The patient fees $12,000
has been included for assessment because a sum of $3,600 was not received in the year
2017/18.
An individual taxpayer is permitted to claim deduction for the subscription to trade,
business or professional associations. The subscription to e-clinic is allowed for deduction
because it is associated to derivation of assessable income.
Particulars Amount ($) Amount ($)
Assessable Income
Receipts from Gross Salaries 1,20,000
Receipt of Cash Allowances 3000
Receipts from Patient Fees 12000
Net capital gain on disposal of Residential property:
Taxable Portion 22594
50% CGT Discount 11297 11297
Total Assessable Income 1,46,297
Allowable Deductions
Subscription to E-Clinic 1500
Cleaning Cost 400
Legal Expenses 25000
Total Allowable Deductions 26900
Total Taxable Income 1,19,397
Tax on Taxable Income 31808.89
Add: Medicare Levy 2387.94
Less: PayG Withhold 34320
Total Tax Refundable -123.17
Calcuation of Assessable Income
In the Books of Chris Matthews
For the year ended 2017/18

6TAXATION LAW
As evident from the above stated computation it can be stated that the Chris will be
entitled to total tax refundable of $123.17 for the year ended 2017/18.
Conclusion:
On a conclusive note, Chris would be entitled to only obtain a partial main residence
exemption from the capital gains tax derived from the sale of house property. The capital
gains made will be taxable by using 50% CGT discount and with total tax refundable being
$123.17 for the year 2017/18.

7TAXATION LAW
References:
Barkoczy, S. 2014. Foundations of taxation law.
Grange, J., Jover-Ledesma, G. and Maydew, G. 2014. Pinciples of business taxation.
Jover-Ledesma, G. 2014. Principles of business taxation: Cch Incorporated.
Kenny, P. 2013. Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.
Krever, R. 2013. Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.
Morgan, A., Mortimer, C. and Pinto, D. (2013). A practical introduction to Australian
taxation law. North Ryde [N.S.W.]: CCH Australia.
Sadiq, K. and Coleman, C. 2013. Principles of taxation law 2013. Sydney, N.S.W.: Lawbook
Co./Thomson Reuters.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2014. Australian taxation
law 2014.