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Taxation Law For The Sales Of The Aircraft

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1. Advise Enviro-Spray Ltd of the deductibility of the $45,000 spent on the spray equipment.

2. Having installed the newly developed electronic system, could Enviro-Spray Ltd claim the cost of the amount they would have spent on the old out-dated equipment

3. What are the tax consequence for Dusters Ltd arising from the sale of the aircraft to Enviro-Spray Ltd?



Answer 1:

“Section 25-10 of the ITAA 1997” allows an individual to claim deductions for expenditure incurred in repairs to depreciating asset that is held or used for generating the taxable income. As held in “FC of T v Western Suburbs Cinemas Ltd (1952)” replacing a portion of structure i.e., old colotex with fibro represents a capital item and more than meets the needs for restoration. The ceiling provided considerable advantage over older one and it cannot be termed as repair.

The taxpayer in Enviro-Spray Ltd incurred $45,000 on the spray of new equipment. The cost incurred by Enviro-Spray Ltd was much more than meeting the needs of restoration, which provided considerable advantage over the old one. The replacement of worn out equipment with new spraying equipment represents capital in nature. Therefore, it is non-deductible.

Answer 2:

In compliance with the provision of tax legislation, tax payers are only allowed to claim deductions under section 25-10 of the ITAA 1997 for expenses incurred on notional repairs. As held in the case of “Western Suburbs Cinemas Ltd v FCT (1952)” the court of law defined “Notional repairs” as the cost which could have been occurred by the taxpayer given the taxpayer has repaired property instead of improving or replacing it entirely.

In the current case of Enviro-Spray Ltd if the taxpayer had replaced the worn out spraying equipment with the old outdate equipment then the taxpayer would not be allowed to claim deductions as the expenses represents notional repairs. This is because the expenses on spraying equipment would result on saving on future expenses for repairs which would be deductible.


Answer 3:

Determination of Capital Gains Tax consequences for Duster Ltd on sale of Aircraft to Enviro-Spray Ltd

Computation of Capital Gains tax

In the books of Dusters Ltd


Amount ($)

Purchase Price of Aircraft (A)

 $ 10,00,000

Less: Depreciation Claimed (B)

 $   4,00,000

Aircraft at Cost (A-B) = C

 $   6,00,000

Selling Price of aircraft (D)

 $   7,50,000

capital gain (D-C) = E

 $   1,50,000

Taxable capital gains (50% CGT Discount)

 $      75,000


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