- A capital gain from any of the CGT events is not a discount capital gain (despite section 115-5 of ITAA, 1997) where the asset has been held for less than 12 months. These are not eligible for discount capital gains as the CGT asset involved in the CGT event comes into existence at the time of the event, hence does not fulfil the 12 month criteria, says Wilmot, (2012). The event in the case study is C-1 (loss of a CGT Asset) and the asset was held by the taxpayer for more than 12 months, the capital gain made on it shall be subjected to capital gains tax.
- Section 108 (10)2 defines antiques as ‘Collectible’ and all collectibles costing less than $500 are exempt from CGT. But in this case study, since the cost of the antique was $600, the taxpayer will pay CGT on capital gain of $400.
- Cost base of a CGT Asset is defined under Section 110 (25)1 and all incidental costs incurred on acquisition of the CGT asset shall be included in the cost base. Since the amount was paid to the lawyer for preparing documents related to acquisition of the CGT asset, it shall be added to the cost of the CGT asset.
- Section 110 (25)1 also specifies that all costs incurred by the taxpayer for ‘preserving’ the ownership of the CGT asset shall also be added to the cost base of the CGT asset.
- Same as above, the taxpayer’s acceptance of the debt of $30,000 is related to the acquisition cost of the CGT asset and shall be added to the coat base of the CGT asset.
- This is known as ‘Negative Gearing’. The taxpayer can claim the loss from the ordinary income for the year but will not claim interest under deductible expenses, as per Reynolds, Williams & Savage, (2000).
Answer – 01
This is CGT Event A-1 and the income shall be subject to CGT as Susan inherited the property in January 2016 after her father’s death. Since she remained the owner till the disposal of the asset, it is immaterial when and at what cost the asset was acquired by her father. For Susan’s tax purpose, this is a CGT event under section 102-20.
Cost of acquisition (section 110 (25)1) $390,000
Cost of the bathroom $20,000
Total Cost Base $410,000
Sale Proceeds $510,000
LESS: Advertisement costs $7,000
Net Sale Proceeds $503,000
Gross Capital Gain $93,000
50% Discount Method $46,500
Net Capital Gain Amount for Tax $46,500
Since Susan is an individual and the asset was acquired by her post-1999 period, she will be entitled for the 50% Discount Method under section 115-5. Hence, Susan will report a Net Capital gain amount of $46,500 in Income Statement for the year, say Nethercott, Devos & Richardson, (2010).
- Travel costs from home to office as an employee cannot be claimed as deductible expenses against the salary by an employee as per section 8(1)2.
- Till 2006, the ATO allowed political donation up to $100 to be claimed as a deductible expense. In 2006, this threshold was increased to $1,500. Hence, keeping under the current limit, the mining company can claim the deduction, says Lomas, (2011).
- This amount cannot be claimed as a deductible expense by the taxpayer because it is only an anticipatory amount. The annual leave amount has not been fixed not is there any certainty that the employee will be in the company to avail the annual leave.
- Since the loan has been procured for purchase of an asset (section 25-25), any interest portion on such a loan cannot be claimed by the taxpayer as a deductible expense under section 8-1 of ITAA, 1997, as per Lindahl, (2008).
- Deduction of 90% of depreciation calculated on the computer, using Diminishing Value Formula shown below, can be claimed for the income year as 10% usage is personal. The Diminishing Value Formula under Section 40-70 of ITAA, 1997 is:
Deduction = Base value x (Days held divided by 365) x (200% / Asset’s effective life)
= ($2,000) x (181 x (200% / 3) x (90%)
= ($2,000) x (66.66%) x (90%)
= $1,333.40 x (90%)
= $1,200.06
- All kinds of alterations / modifications done to an existing asset, which help in accelerating the performance of the asset can be claimed as deductible expenses provided the asset is used for income producing purposes, as stated under Section 25-10 of ITAA, 1997, asserts McCouat, (2012). Hence, the taxpayer can claim the amount of $2,000 as deductible expense.
Under the ITAA, 1997, deductions are classified as ‘General’ which are covered by section 8 of the Act and ‘Specific’ which are covered by section 8-1 of the Act. Further, under the Specific Deductions, section 40-880 defines certain ‘Black-hole Expenditures’ which apart from other specified conditions, explains that expense incurred by a business for changing its ‘Business Structure’ can be claimed as deductible expenditure, provided the claim is adjusted by the taxpayer company over a 5-year period, explain Reynolds, Williams & Savage, (2000).
Answer – 02
Under the light of the circumstances explained above, it is apparent that Gym Pty Ltd can proportionately claim the expense amount of $30,000, which it paid to various law firms under its restructured business policy, over a period of 5 years by claiming $6,000 every year.
- If the legal dispute is related to preserving the income earning capability of the organisation, then the compensation received shall be considered as an CGT asset treated as CGT event C-1.
- Goodwill is treated as a CGT asset because it is created as an asset of the organisation over the period during which the organisation continued with its income earning activities. It estimates the brand value of the organisation’s products.
- This, whether it is for an individual or an entity, has nothing to do with the income earning capabilities of the individual or the organisation, Hence, this cannot be held as a CGT asset, as per Reynolds, Williams & Savage, (2000).
- All personal use assets of the value exceeding $10,000 are treated as CGT assets as defined under section 118-10(3) of ITAA, 1997. Hence, this gold ring cannot be classified as a CGT asset and shall be treated only as an artefact.
Jack purchased the Melbourne property on 1 January 2009 and retained it as an owner for a total of 100 months, till 5 May 2017 when he finally sold it. Jack used the property as his personal residence for 52 months in two phases – from 1 January 2009 till 1 March 2013 (50 months) and from 1 March 2017 to 5 May 2017 (2 months). Out of the total 100-month period of ownership, Jack put on rent the property for 48 months, from 1 March 2013 till 1 March 2107. The capital gain amount, which has been calculated below shall be subjected to the 50% Discount Method, because Jack is an individual and had purchased the property post-1999 when only this method was applicable. However, the CG Tax implication on Jack will proportioned on the basis self-occupation period and the rented-out period in a 52:48 proportion, explains McCouat, (2012).
Purchase Price of the House (1 January 2009) $300,000
Sale Proceeds $600,000
LESS: Advertising $5,000
Net Sale Proceeds $595,000
Gross Capital Gain Amount $295,000
LESS: 50% Discount $147,500
Net Capital Gain Amount $147,500
Capital Gain Amount
(on which Jack will pay tax) 48% of $147,500 $70,800
The ITAA, 1997 specifies that deductions can be classified either as ‘General’ and these are covered under section 8 of the Act or as ‘Specific’, which are covered under section 8-1 of the Act. Further, the Act also specifies that no expense, which does not directly make an impact on the earning capability of the taxpayer, shall be treated as deductible expenditure by the taxpayer, asserts McCouat, (2012).
In this case study, Jason, incurs the following expenses and these have been explained –
Electricity Bills $2,000 – Directly affects the income capability
Internet Expenses $3,000 – Directly affects the income capability
Tax Return Preparation charges $250 – Directly affects the income capability
Interest Payment on Mortgage $3,000 – Does not affect income capability
Hence, Jason can only claim a total of $5,250 as deductible expenses.
- In this case study, the taxpayer has bought an item which is for personal use of the taxpayer, as defined under section 118-10(3) which also specifies that any personal use asset will be exempt from CGT if its vale is LESS than $10,000. Hence, the television, which is a personal use asset and is costing only $8,000 cannot be subjected to any CGT regime on the gains or loss made.
- This is an CGT Event C-1. The taxpayer is liable for capital gains tax on the amount of $50,000 received as ‘Consideration’ from the employer. However, the legal fee of $2,000 can be claimed as expense from this compensation amount.
List Of Reference
Lindahl, D. 2008, How Small Investors Can Get Started and Make It Big. John Wiley & Sons, Hoboken, NJ.
Lomas, M. 2011, How to Invest in Managed Funds. John Wiley & Sons, Hoboken, NJ.
McCouat, P. 2012, Australian Master GST Guide, 13th ed. CCH Australia Limited, Sydney, NSW.
Nethercott, L., Devos, K. and Richardson, G. 2010, Master Tax Examples 2010/11, 9th ed. CCH Australia Limited, Sydney, NSW.
Reynolds, W., Williams, A. J. and Savage, W. 2000, Your Own Business: A Practical Guide to Success, 3rd ed. Cengage Learning Australia, Sydney, NSW.
Wilmot, C. 2012, FBT Compliance Guide 2012. CCH Australia Limited, Sydney, NSW.
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