Taxation Law: Calculation Of Capital Gains Tax, Allowable Deductions, And Depreciable Items

Calculation of Cost base of Property

Answer to question B:

A CGT asset refers to any type of property or any legal or rights of reasonable nature which is not classified as property. CGT assets namely comprises of the land and buildings, stocks in the corporation or units in the trust or options. A “CGT event A1” takes place in “section 104-10 (1), ITAA 1997” when the CGT asset is disposed to some other person (Barkoczy, 2014). A “CGT event A1” transpires when the CGT asset is sold or there is a change in the ownership that occurs by an individual to another entity. A “CGT event A1” happens in “section 104-10 (1), ITAA 1997” when the contract for the sale of the asset is taxpayer entered into by the taxpayer (Brokelind, 2014). A CGT event A1 also takes place when there is no contract or only where there is a change in the ownership.

In the current situation the sale of investment property can be classified as the “CGT event A1” under “section 104-10 (1), ITAA 1997”. The calculation of the net amount of capital gains that is made by Louisa which is liable for the capital gains tax is stated below;

2.Discussing to the “section 8-1, ITAA 1997” an individual taxpayer is provided the permission of claiming the allowable deductions for all the losses and outgoings that up to the extent to which that is incurred by the taxpayer in achieving or generating the taxable income (Coleman & Sadiq, 2013). An exception to this rule is that a deduction is not permissible to the taxpayer when the incidentals are in the nature of capital, domestic or private in nature and relating to the derivation of the exempted income.

Cost of hairdressing by a model: The cost of hair dressing by the model can be defined as the relevant and incidental cost. The model can claim the admissible deductions under “section 8-1, ITAA 1997” because the cost of hair dressing forms the incidental and relevant in the derivation of model’s assessable income (Grange et al., 2014). In the alternative situation if it is noticed that the model had 3 hair dressing appointments each week on the average to fulfil the requirements of her employer, the answer in such situation would remain same.

Citing the event of “Ronpibon Tin NL and Tongkah Compound NL v F C of T (1949)” the court established that the expenses that are incidental and relevant in the derivation of the taxable income will be allowed as deductions (James, 2015). Therefore, the model will be permitted to claim an allowable deduction under the common provision of “section 8-1 of the ITAA 1997”.

Type of CGT Event and Calculation of Capital Gains Tax

Additional food and vitamins consumed by a professional athlete: According to the section 8-1, a deduction is only permissible to the taxpayer when the outlays are experienced in the derivation of the assessable income except the expense are private or domestic in nature. In the existing circumstances it is noticed that the taxpayer incurred expenses on the additional food and vitamins. Quoting the event of “Hallstorms Pty Ltd v F C of T (1946)” the court of law established that the nature of the character relating to the expenses follows the advantage that is sought to be gaining by occurring the expenses (Jover-Ledesma, 2014). If the taxpayer gains the advantage of capital in nature, then the expenditure incurred forms the part of capital nature. In the current case the additional vitamins constituted an advantage that is sought is of domestic or private in nature and no deductions is allowed in this situation.  

Sunscreen worn by the bricklayer: For an expense to be allowed as deductions the expense should be incurred as the outgoing in generating or deriving the taxable income, the expense should be incidental and relevant to that end. In the brief substance, to classify the expenses under the subsection it should be both necessary as well as sufficient that the instance of loss or outgoings must be found in derivation of the taxable income. “FCT v Herald & Weekly Times” a deductions were allowed the taxpayer relating to the costs that were incurred in defending the suits or action bought against the taxpayer (Kenny, 2013). Similarly, in the current situation the sunscreen worn by the bricklayer is incidental and relevant to his work and holds sufficient nexus between the expenses and the derivation of taxable income.

An alarm clock owned by the night shift worker: The alarm clock worn by the night shift worker holds adequate nexus in the derivation of his taxable income since the nature of the profession requires the night shift worker to wear the clock (Krever, 2013). The expenses satisfy the eligibility test of incidental and relevant test therefore a deduction for such cost is allowable under “section 8-1 of the ITAA 1997”.

Moisturising cream worn by flight attendant: The moisturising cream worn by the flight attendant forms the part of an allowable deduction as the outgoing that is occurred in producing the taxable income and is incidental and relevant in derivation of assessable income.     

3.As per “section 40-30 of the ITAA 1997” a depreciating asset can be defined as the asset that has the restricted real life and may be practically anticipated to drop in the value over the years it is used.

1. Buildings in respect of Division 43 deductions are available: Non-Depreciating assets under the “section 40-30 of the ITAA 1997”. The building can be referred as the non-depreciating assets because it does not have the effective limited life and the value of the building does not usually fall over the time the building is used (Morgan et al., 2013).   
2. Patents:Depreciating assets under “section 40-30 of the ITAA 1997” since it has the restricted real life and can be rationally be anticipated to drop in the value over the years of time.
3. Goodwill:Non-depreciating assets under “section 40-30 of the ITAA 1997”.
4. Land:Non-Depreciating assets under “section 40-30 of the ITAA 1997” as the value of land is not anticipated to decline over the years of its use (Woellner, 2013). The asset does not have any effective limited life and cannot be reasonably anticipated to fall in the value over the years.
5. Trading Stock:The trading stock under “section 40-30 of the ITAA 1997” can be defined as the non-depreciating assets. The trading stock refers the item of stock is used in the day to day business activities therefore it is an item of non-depreciating assets (Bankman et al., 2017).

Allowable Deduction and Incidental and Relevant Expenses

4.When the employers give the employee with a loan then in such a circumstances the loan fringe benefit happens. A lesser amount of interest rate can be defined as the rate that is a smaller amount than the statutory rate of interest (Schenk, 2017). The assessable worth of the loan fringe benefit can be defined as the difference between the interest rate which might have been accrued during the FBT year if the statutory rate of interest was applied on the remaining regular balance of the loan and any amount of interest that is originally accrued.

In the current is situation of Yan it is noticed that his employer provided him with the loan of $100,000 at the lower interest rate of 2.25%. With reference to the explanation made under “Division 4 of the FBTAA 1986” a loan fringe benefit has originated for Yan’s employer (Murphy & Higgins, 2016). The chargeable cost of the loan fringe benefit would constitute the difference between the actual amount of the interest rate during the FBT year against the statutory rate of interest. The employer of Yan however in the current situation would be able to reduce the tax liability by claiming an permissible income tax deduction under “section 8-1 of the ITAA 1997”, for the interest on loan that is payable by the employer of Yan since the interest represents the outgoings that is incurred in gaining the assessable income (Hill & Mancino, 2014).

The calculation of the taxable value of the loan fringe benefit is given below;

Taxable value of Loan Fringe benefit = (Amount of Loan x Statutory rate of interest) – (Amount of Loan x Actual rate of interest charged)

= ($100,000 x 5.65) – ($100,000 x 2.25%)

= $3, 400

What would happen if Australia did not have the provision of claiming deductions?

1. An individual taxpayer would not have been able to claim an allowable deduction for the money spent for the business
2. The taxpayer may not have been able to claim the operating expenses that they incur while producing the assessable income (Bloom & Joyce, 2014).
3. The capital expenses would not have been allowed for deductions over the long period of time.

Should deductions be capped at reasonable expenses rather than actual expenses?

1. The actual expenses are generally larger item of expenditure than the actual expenses.
2. For a taxpayer it wise to cap the deductions at reasonable expenses rather than actual expenses as time would enable the taxpayer in having the enduring benefit for the business (Kiprotich, 2016).
3. The reasonable expenses might quality as the allowance and the expenditure might be effectively treated similar to that of the actual expenses.
4. All the actual expenses are not allowed as the deductions for the taxation purpose.
5. The actual expense might be allowed as disallowed expenses since they are not allowed to be added back.
6. There might be some actual expenses that cannot be capped into the account because they are partly for the business and personal purposes.

The actual expenses may not be allowable as the taxpayer might be required to make certain adjustment relating to the profits that is shown in the accounts.

Further assumptions that the following amounts are not allowed as deductions under the genera provision of ITAA 1997 or under the specific provision of deductions

1. Cost of travelling to work:The court of law in “Lunney v Federal Commissioner of Taxation (1958)” held that travel between the home and the taxpayers place of work is not allowed as the deductions. Additionally, in “FCT v Payne” deduction was denied to the taxpayer for the cost incurred in travelling between his home and place work (Miller & Oats, 2016). As per “section 8-1, ITAA 1997” travel between two unconnected place of work is usually not allowed as deductions.
2. Cost of child minding for a working parent:Expenses or loss that are in the nature of private or domestic in nature it will not be allowed as deduction because it does not meet the requirements of the positive limbs. The expenses are also not deductible under the second negative limbs of “s 8-1 (2) (b)”. The court in “Lodge v FCT” disallowed the taxpayer in claiming deductions for the expenses incurred in having the child minded so that the taxpayer can attend the work is non-deductible (James & Nobes, 2016). This is because the expenses are neither incidental nor relevant in the derivation of the taxable income of the taxpayer.
3. Knee reconstruction cost for a footballer:The cost incurred by the professional footballer for knee reconstruction will not be allowed as deductions under the provision of “section 8-1, ITAA 1997”. In “Cooper v FCT (1957)” the court denied the taxpayer for private or domestic expenses (Kiprotich, 2016). The cost of knee reconstruction is a domestic or private expense and hence not deductible under the provision of “section 8-1 of the ITA Act 1997”. 
4. Education Expenses:Self education expenses relating to the occupation in which the taxpayer is not engaged currently is not allowed as deductions because the nexus test is not met.  
5. Income Tax:The general provision of section 8-1 denies taxpayer from claiming deductions relating to the income tax.

Net results of income tax regimes:

1. The net results of the income tax regimes for personal income tax would not have been progressive tax.
2. The rates of taxation for the residents and foreign individuals would reflected a different outcome.
3. The current tax-free threshold limit for the residents might surpass the marginal tax rate for the individuals.

The expenses can be allowed as deductions by providing the taxpayer with an opportunity under the concessional basis. Furthermore, no deductions would be having been applicable on the contributions. Lower amount of taxes would have been imposed to minimize the tax liability. A tax break subsidy at the same time can create the similar outcome as the concessional basis by providing taxpayer with the selective tax breaks as through the cash payment.

Tax free-threshold:

The tax free threshold would partly help in addressing the issue as this will enable the taxpayer in claiming the tax free threshold to lower down the value of tax that are withheld from their pay. The tax-free threshold would help in meeting the taxpayer their end of the year tax liability. The taxpayer would not be out of pocket as the amounts that are withheld would credited when income tax return is lodged.    

References: 

Bankman, J., Shaviro, D. N., Stark, K. J., & Kleinbard, E. D. (2017). Federal Income Taxation. Wolters Kluwer Law & Business.

Barkoczy, S. (2014). Foundations of taxation law.

Bloom, I. M., & Joyce, K. F. (2014). Federal Taxation of Estates, Trusts, and Gifts. LexisNexis.

Brokelind, C. (2014) Principles of law.

Coleman, C., & Sadiq, K. (2013) Principles of taxation law.

Grange, J., Jover-Ledesma, G., & Maydew, G. (2014) principles of business taxation.

Hill, F. R., & Mancino, D. M. (2014). Taxation of exempt organizations.

James, S. R., & Nobes, C. (2016). Economics of Taxation: Principles, Policy and Practice. Fiscal Publications.

James, S. (2015) The economics of taxation.

Jover-Ledesma, G. (2014). Principles of business taxation 2015. [Place of publication not identified]: Cch Incorporated.

Kenny, P. (2013). Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.

Kiprotich, B. A. (2016). Principles of Taxation. governance.

Krever, R. (2013). Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.

Miller, A., & Oats, L. (2016). Principles of international taxation. Bloomsbury Publishing.

Morgan, A., Mortimer, C., & Pinto, D. (2013). A practical introduction to Australian taxation law. North Ryde [N.S.W.]: CCH Australia.

Murphy, K. E., & Higgins, M. (2016). Concepts in Federal Taxation 2017. Cengage Learning.

Schenk, D. H. (2017). Federal Taxation of S Corporations. Law Journal Press.

Woellner, R. (2013). Australian taxation law 2012. North Ryde [N.S.W.]: CCH Australia.

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