1. The tax deductibility of the various transactions is outlined as follows.
(a) In accordance with tax ruling TR 97/23, the expenses incurred by the taxpayer in relation to kitchen fitting replacement post damage is considered as repair. The facts provided clearly highlight that there was no intention to improve the character and thereby the same material and layout has been used (Krever, 2016).
Potential options for taxpayer (i.e. Ruby Pty Ltd) to claim deduction for the above repair expenses are in the form of s. 8-1 ITAA 1997 and s. 25-10 ITAA 1997. The former provides 100% deduction in the year of incurring the expenses provided the taxpayer is able to develop a sufficient nexus between the outgoing and assessable income generation (CCH, 2013). Additional condition is that the underlying expenditure must not be capital in nature. With regard sto s. 25-10 ITAA 1997 deduction for repairs is permissible provided the underlying expenditure is not capital in nature (Barkoczy, 2015).
In relation to kitchen fittings, TR 97/23 highlights that the underlying nature of these fittings is essentially permanent in nature and hence these are considered to be part of the property as a whole. Key examples could be cupboard, plumbing, fixed stove, sink. The implication is that any repair related expenditure would be considered as capital and reflects in asset cost base in accordance with ss. 110-25(5) ITAA 1997. Owing to the capital nature of this repair expenditure, tax deduction would not be available (Sadiq et. al., 2016).
(b) It is apparent that the incurring of legal expense is in relation with the rental property which produces assessable rental income. Hence, the underlying deductibility of the legal expense would be contingent on whether the underlying expense is capital or revenue in nature (Gilders, Taylor, Walpole, Burton & Ciro, 2016).
A crucial test to difference between the two has been highlighted in British Insulated and Helsby Cables Ltd v. Atherton  AC 205 case. The judge advocated that based on the nature of the advantage derived from the outgoing, the expenditure nature can be judged. Typically, in relation to capital expenditure, the advantage derived must be enduring or long lasting and not limited to only a given period (Deutsch, Freizer, Fullerton, Hanley & Snape, 2016).
It is noteworthy that the taxpayer has a real estate business whereby negligence related claims tend to frequently arise. Hence, the legal expense is not providing an enduring advantage as the benefit would only be limited to the negligence liability which would be limited in impact to the year when the case is settled. As a result, the underlying revenue would be revenue and deduction under s. 8-1 ITAA 1997 is available to the company (Woellner, 2014).
(c) Before moving into real estate, the company was a manufacturing company dealing with engine and associated parts. For manufacturing businesses, it is common that customers are at times provided defective parts which may lead to litigation. This would not only lead to financial outflow but the impact of this would also be on the reputation and thereby could adversely impact the future business (Gilders, Taylor, Walpole, Burton & Ciro, 2016).. In wake of this, it can be said that the underlying amount cannot be deducted under s. 8-1 ITAA 1997 because of the underlying capital nature. However, taking into consideration that the above claim amount was essentially an outflow related to business, hence, 100% tax deduction over five annual equal amounts can be availed as per. s. 40-880 ITAA 1997 (Barkoczy, 2015).
2. In the given scenario, the concerned taxpayer is an individual named Betty who is both an antique collector and also an investor. As a result, it would be appropriate to assume that the various transactions regarding asset sale would be capital and not revenue transactions.
Transaction 1- Painting Sale
As per s. 149-10 ITAA 1997, there is an asset class categorised as pre-CGT asset owing to their purchase before September 20, 1985. The key reason for the categorisation of this asset class is that the present CGT (Capital Gains Tax) regime came into existence only on September 20, 1985 and hence prior to this date, no tax was levied on any capital gains or capital losses derived from asset sale. Further, for pre-CGT assets, there is a 100% exemption from CGT (Krever, 2016).
In the given case, the underlying asset is a painting which would be a collectible as per s. 118-10 ITAA 1997. Further, the sale of the painting would yield capital proceeds which are non-taxable in accordance with s. 116-5 ITAA 1997 (Barkoczy, 2015). Also, considering that the painting is a pre-CGT asset, hence the underlying capital gains realised on asset sale would be ignored. Hence, it may be concluded that there is no tax implication of the painting sale for Betty (Gilders, Taylor, Walpole, Burton & Ciro, 2016).
Transaction 2- Shares
Based on the underlying date of purchase, it is apparent that none of the shares is a pre-CGT asset. Also, the share sale initiates an A1 CGT event as per s. 104-5 ITAA 1997. The A1 CGT event tends to deal with the disposal of asset. While the proceeds from share sale would be exempt from tax, CGT would be levied on any capital gains derived from sale. In order to derive the capital gains, a key input required is the cost base (CCH, 2013). The cost base has five key elements in accordance with s. 110-25(1) ITAA 1997 and these are summarised below.
The computation of the capital gains on the given shares is indicated below.
Total capital gains = 30700 + 30000 -6000 = $ 54,700
As per s. 102-5, previous capital losses need to be adjusted against shares but this is not possible for sculpture since it is a collectible item (Sadiq et. al., 2016).
Hence, net capital gains = 54700 – 7000 = $ 47,700
As the holding period of all shares is in excess of one year, hence the gains are long term and s. 115-25 ITAA 1997 discount method would be applicable (Woellner, 2014).
Taxable capital gains = 0.5*47700= $ 23,850
CGT liability = 0.3*23850 = $7,155
Transaction 3: Violin
A violin would be recognised as a collectible as per the definition in s. 118-10 ITAA 1997. In the given case, it is apparent that Betty tends to use the violin under consideration for deriving personal entertainment and that too on a frequent basis. Under the given circumstances, it would be appropriate to classify the underlying violin as a personal use item as indicated by s. 118-10 ITAA 1997 (Krever, 2016). A key requirement for these assets as per ss. 108-20(1) is that for the application of CGT on any potential capital gains is that the purchase price must exceed $ 10,000 (Woellner, 2014). The underlying violin which has been sold has a cost price of $ 5,500 which does fulfil the above mentioned requirement and hence no CGT would be applicable on the capital gains resulting from violin sale.
Barkoczy, S. (2015) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University Press.
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., & Snape, T. (2016) Australian tax handbook. 8th ed. Pymont: Thomson Reuters.
Gilders, F., Taylor, J., Walpole, M., Burton, M. & Ciro, T. (2016) Understanding taxation law 2016. 9th ed. Sydney: LexisNexis/Butterworths.
Krever, R. (2016) Australian Taxation Law Cases 2017 2nd ed. Brisbane: THOMSON LAWBOOK Company.
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, & Ting, A (2016) , Principles of Taxation Law 2016, 8th ed., Pymont: Thomson Reuters
Woellner, R (2014), Australian taxation law 2014 7th ed. North Ryde: CCH Australia