Capital Gains Tax And Taxable Income: A Case Study

Principles of Capital Gains Tax on Real Estate and Shares

Question:

Discuss About The Christopher Fisher Principles Of Australian?

The current situation is based on the determination of the capital gains derived from the sale of capital asset in the form of real estate or shares and they usually make capital gains or losses. The capital gains represent the difference between cost of acquisition of the asset and the amount received from the disposition of the asset[1]. An individual is required to include the capital gains or losses in their assessable income at the time of filing taxable return and pay the tax on the capital gains. Even though it denoted as the capital gains taxation-law but eventually forms the part of the income tax[2]. However, on the event of suffering capital loss an individual taxpayer is not allowed to set-off against other income but the same be used to reduce the capital gains.

As evident from the current situation, it is found that Duncan incurred a capital gain from the sale of town house in Malvern. However, Duncan also reported a capital loss from the town house. As evident capital gains derived from the sale of house can be offset from the capital loss bought forward by Duncan[3].

In the following circumstances it is noticed that Duncan held a shares in Westpac Bank. Additionally, the shares were acquired in 18/6/95 and the same were sold in the year 2017 for a sales proceeds of 22,369. According to the Australian taxation office shares in a company or units trust are treated in the identical manner as any other asset for the purpose of the capital gains tax[4]. For an investor, capital gains tax is application on the capital gains that is derived from the shares or unit when the capital gains tax event takes place. Similarly, in the present context it is found shares from Westpac Bank yielded profit however the capital loss bought forward from the sale of BHP shares can be offset against the gains derived from the Westpac.

As defined under section 118-5 of the ITAA 1997 which brings forward that an individual can disregard the capital gains or capital loss that is made from the car, motor vehicle or any similar form of vehicle[5]. A car can be regarded as the capital gains tax asset under division 108. A car might be considered as the collectable in terms of the subsection 108-10 (2) given that the car is regarded an antique.

Allowable Deductions for Taxable Income

A car might be considered as the private usage asset under the subsection 108-20 (2) given the asset is used or reserved mostly for their private usage or enjoyment. In either of the situation, the car will be considered for the purpose of the section 118-5 and any form of capital gains or capital loss is not considered under that section[6]. In the present case of Duncan, it is found that ultra-flight aircraft is an asset under section 108-10 (2). However, the loss derived from the sale of will be included the assessable income of Duncan.

Additionally, sale of painting is a Pre-CGT asset and the proceeds derived from the sale of painting cannot be included in the assessable income since it is regarded as the Pre-CGT asset and it is disallowed from being included. The total accounting of indexed capital gains derived from the sales proceeds for Duncan represents 9477.18 and total amount of capital gains tax payable for the year ended stood 591.

The current issue is based on the ascertaining the assessable proceeds and tax payable of Christopher for the year ended 2017. As apparent from the existing case study, it is noticed that gross salary derived by Christopher will be taken into the considerations for tax assessment under section 6-5 of the ITAA 1997[7]. As defined under the Taxation Ruling of 97/23 there are circumstances where outlay that is sustained by the taxpayer related to repairs will be accounted as permissible deductions under section 25-10 of the ITAA 1997.

An individual incurring expense on repairs and maintenance of the premises that an individual use to generate income will be considered for allowable deductions as long as the expenditure are not capital in nature. As evident from the current situation of Christopher he incurred an expense of $1000 for repairs for which he can an immediate deduction.

Additionally, Christopher reported an interest on borrowed money to purchase the income producing property. With reference to section 8-1 of the ITAA 1997 an expenditures occurred in gaining or generating the taxable revenue can be considered as allowable deductions[8]. The payment of interest will be considered for allowable deductions since it has been incurred for the purpose of producing income.

As defined under section 25-10 expenditure incurred for repairs of capital nature is not deductible. As held in the case of Hallstroms Pty Ltd v. FC of T (1946) expenditure incurred on replacing or enlarging the profit generating structure instead of working or operating expenditure then such expenses are not allowed as for deductions.[9] It was noticed that the taxpayer had incurred an expenditure of $11,000 on replacing tin roof on rental property with tiled roof represents a capital expenditure and a deduction for the same cannot be claimed.

Case Study of Christopher’s Tax Assessment for 2017

As stated by the Australian Taxation Office claims relating to medical expenditure offset is restricted the net eligible expenditure incurred. The total medical expenditure that is incurred by the taxpayer will be subtracted from the refunds that is received from Medicare. Therefore, in the present situation it is found that Mary incurred a medical expense and the same can be claimed for deductions by subtracting the refund of the medical expenses.

Subsection 51 (1) of the ITAA 1936 defines that a deduction can be claimed for work related expenditure up to the extent of gaining taxable income. As held in the case of Ronpibon Tin NL v. FC of T (1949) For an expense to meet the test of deductibility there should be connection among the expenditure and taxable earnings so that the expenses incurred is subsidiary and relevant in gaining taxable income. As evident in the current situation, it is found that Christopher incurred an expenditure on calculator and expenses incurred on Ipad will be allowed as allowable deductions.  

The taxation ruling of TR 93/30 provides a comprehensive explanation of the treatment for home office expenditure[10]. Cost that is associated with the employee home are generally considered as the private expenditure or having a domestic nature. As held in the case of Thomas v. FC of T (1972-73) a deduction will be considered as allowable up to the proportion of the expenditure that is associated with the employee home[11]. Similarly, in the current instance it is noticed that Christopher incurred home office expenditure and an allowable deduction for the same can be claimed since it was incurred for the purpose of income producing activities.

From the current situation of Christopher, it is found that he derived a rental income of $18,250 and according to the definition of section 6-5 of the ITAA 1997 rental income gained by the taxpayer will be taken into the considerations in the taxable earnings of the taxpayer. For that reason, the rental income derived by Christopher will be incorporated in the taxable income and the same will be assessable.

An Australia resident for taxation purpose will be considered for taxation purpose for their worldwide income and hence they are required to declare such income in their taxable return[12]. The foreign income comprises of the overseas investment income in the form of dividends and such income will be considered for taxation purpose in the sourced country however it will be potentially subjected to double taxation. In order to overcome the circumstances of double taxation and exemptions can be claimed by the taxpayer. Similarly, Christopher can claim a foreign income tax offset relating to bank interest derived from the New Zealand.   

Reference List:

Barkoczy, Stephen et al, Foundations Student Tax Pack 3 2016 (Oxford University Press Australia & New Zealand, 2016)

Coleman, Cynthia and Kerrie Sadiq, Principles Of Taxation Law 2013

Harris, Jason et al, Theory And Law In The Regulation Of Business

Kenny, Paul, Michael Blissenden and Sylvia Villios, Australian Tax 2017

Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)

Keyzer, Patrick, Christopher Goff and Asaf Fisher, Principles Of Australian Constitutional Law(LexisNexis Butterworths)

Krever, Richard E, Australian Taxation Law Cases 2013 (Thomson Reuters, 2013)

Mangioni, Vince, Land Tax In Australia

Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian Taxation Law (CCH Australia, 2013)

Nethercott, Les, Ken Devos and Livia Gonzaga, Australian Taxation Study Manual

Sadiq, Kerrie, Principles Of Taxation Law 2016 (Law Book Co of Australasia, 2016)

Woellner, R. H, Australian Taxation Law 2012 (CCH Australia, 2013)

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order