1. Discuss the deductibility of the $70 000 expense for Paper Co.
2. Explain, citing sections, whether or not the following expenses can be incurred in the cost base for each of the following situations. Note that all assets are post CGT.
3.Showing workings, calculate Claude’s net capital gain or loss (assuming he has no other CGT events)
4. Calculate the highest deduction for depreciation available for Matthew for the financial year ended 30 June 2017. Please ignore the small business immediate write off for the purposes of this question.
5. Discuss briefly, citing sections, whether the following are deductible (1 mark each).
6. Showing workings, calculate Lucy’s net capital gain or loss for House A (assuming she has no other CGT events).
7. Consider whether the $50 000 is deductible for the taxpayer.
8. For the following transactions sate for the taxpayer the CGT event, whether there is a capital gain/loss, and whether the Division 115 discount is available
9. Discuss the deductibility of the $1 000, $4 000 and $450 amounts for Joey.
10. Showing workings, calculate Steph’s overall net capital gain or loss (consider both the house and the shares but assume she has no other CGT events).
In accordance with s. 8(1), expenses would be considered deductible provided that they are related to assessable income production. However, it is imperative that the underlying expense must be of revenue nature and should not be capital in nature.
As per the decision in the Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634, legal expense may be termed as either capital outgoing or revenue outgoing depending on the underlying use. In the given case, the legal fees have been incurred for defending the directors against bribe charges. It is apparent that the outgoing in the form of legal fees would not result in any enduring benefit to the company which would extend over time and hence in accordance with principles outlined in ATO ID 2003/484, the given expense would be considered revenue and hence deduction can be claimed under s. 8(1) ITAA 1997.
- As per s. 110(25) ITAA 1997, any cost incurring in preservation and appreciation of asset value would be added to the cost base. However, since the property is rental and producing assessable income, hence the repairing expense would be categorised under s.8(1) and hence not added to the cost base.
- Any incidental expenses related to the sale of the capital asset is reflected in cost base as per 110(25) ITAA 1997. Hence, the expenses that are paid to the auctioneer would be represented in the cost base.
- The land taxes are permissible under cost base under s. 110(25) if the asset is purchased after August 21, 1991. Considering, the land fulfils the above condition, hence land taxes would be represented in cost base.
- As per s. 110-25(2), the market value of asset at acquisition time is a key component of cost base and hence $400,000 would be part of cost base.
It is not highlighted that the given home is the main residence, hence it is assumed for computational purpose that the given property is not the main residence.
The various additions to the cost base of the property as per s. 110-25 are highlighted below.
- Purchase price of house = $ 300,000
- Incidental costs related to buying = $ 10,000
- Preservation of title & wall dispute = $ 12,000
Hence, total cost base of the house = 300000 + 10000 + 12000 = $ 322,000
While considering the selling, it is essential to consider the market value of the property which would include both house and boat. Hence, proceeds from sale = 600000 + 40000 = $ 640,000
Thus, gross capital gains = 640,000 – 322,000 = $ 318,000
Also, as per. S115(25), 50% discount on long term capital gains would be available.
Hence, taxable capital gains = 0.5*318000 = $ 159,000
With regards to depreciation, s.40-65 provides a choice to the taxpayer with regards to choose either the prime cost method or diminishing value method. Since the objective is to secure maximum depreciation, hence the diminishing value method would be preferred. The relevant formula for this method is outlined in s. 40-72 as shown below.
Hence, depreciation charged = 8000*(60/365) *(2/6)*0.9 = $394.52
Adjustment has been made above considering that 90% use is business use and 10% is personal use. Depreciation would be charged only to the extent of business use.
- Under s. 8(1), outgoings which are related to production of assessable income would be deductible and hence outgoings are non-deductible since it is not a professional requirement but a private expense.
- In accordance with the relevant facts of the given case law, travel costs borne on account of fulfilment of job related responsibilities would not be termed as private cost. As a result, the positive limb of s.8(1) is satisfied, leading to travel cost being deductible.
- It is apparent that the outgoing is likely to arise the next year and hence no potential deduction in this year. However, since this expense would be related to staff benefit, hence deduction under s. 8(1) would be available when the outgoing is actually incurred.
- It is apparent that the business loan is in relation of capital asset and hence it would be termed as capital expense which as per s. 110-25 would be reflected in the cost base of the asset i.e. new factory.
In the given case main residence exemption would be applicable under s. 118-120 ITAA 1997. This is because of the following factors.
- Lucy moved into the house as soon as she purchased it
- Even though she moved out in 2013 but she rented a house in apartment in Melbourne and returned back within the permissible period of 6 years.
Purchase price of house = $450,000
Incidental expenses related to selling = $3,000
Hence, cost base of the house (s. 110-25) = 450000 + 3000 = $ 453,000
Selling price = $ 600,000
Therefore capital gains = 600000 – 453000 = $ 147,000
However, considering that the house continues to be the main residence, hence no capital gains is applicable on the house as per Division 118 B.
In order to satisfy the positive limb of s. 8(1), it is necessary that the outgoings must contribute to production of assessable income. Additionally, in accordance with the negative limbs highlighted in s. 8(1), the outgoing must not be related to production of non-assessable income and also the outgoing should not be of capital nature.
In the given case, there is an outgoing to the extent of $ 50,000 made to the Victorian government. It is apparent that the given outgoing would be of revenue nature since the benefits(if any) are expected to be realised till the time the advertising campaign lasts. Also, owing to the outgoing, it can be expected that incremental assessable income would be generated since the government would promote the taxpayer.
- As per TR95/35, the compensation obtained from insurance would have the same character as the underlying loss it seeks to compensate. In the given case, the compensation is provided for a capital asset i.e. factory and hence would be termed as capital receipts. Hence, there would be capital gain for the company in this case since the compensation receipts are higher than the original cost of factory. Further, since the taxpayer is a company, hence Division 115 discount would not be available.
- In accordance with verdict in Higgs v Olivier  Ch 899, the receipts under trade restraint clause would be considered as capital receipts. Since they are capital receipts, hence capital gains tax would be applied. Capital gains would be made by Marcia. Also, 50% deduction under Division 115 would be available considering that the taxpayer is individual.
Based on the given information, the home office for Joey is more out of convenience considering that he has to look after his child. Hence, no occupancy expenses would be deductible. However, under s. 8(1) deduction on internet expenses can be availed to the extent that the internet cost relates to Joey’s work
In accordance to s. 25-5 ITAA 1997, deduction can be claimed by taxpayer in relation to any cost which is related to managing tax affairs. Since the fee paid for income tax return preparation to the accountant falls within this domain, hence $ 450 would be deductible for tax.
The interest payments on the mortgage would be reflected in the cost base of the asset in accordance with s. 110(25) ITAA1997. Even though, there is a home office but it is more driven by convenience than the need to have a home office, hence deduction for interest under s. 25(30) ITAA 1997 would not apply here.
In accordance with s. 104-135, any capital losses cannot be adjusted against the taxable income and instead can be only adjusted against capital gains if any.
Capital losses on sale of shares = 50000-25000 = $ 25,000
It is apparent that Steph’s friend has purchased the house in the pre-CGT era considering that CGT was introduced on September 20,, 1985. Hence, when the asset is passed to Steph, no CGT implications would arise and also the previous costs are ignored.
Cost base of the house for Steph in accordance with s. 110-25 = $500,000
Sale proceeds from house = $ 700,000
Capital gains on sale of house = 700000 – 500000 = $ 200,000
Please note that main residence exemption under Division 118-B would not apply owing to Steph not residing in the house and using for rent instead.
Net capital gains = 200000 – 50000 = $ 150,000
After Division 115-B deduction, taxable capital gains = 0.5*150000 = $ 75,000