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Taxation Law And Application, Holmes Institute, Australia

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Learning Outcomes: 1. Practical skills and knowledge of tax law concepts.

2. Ability to analyse tax law issues.

3. Ability to apply legal tax principles.

Question 1: Jasmine is an Australian resident. She is 65 years old and born in the UK, is now selling her Australian assets as she is retiring from her business as a cleaner and going back to the UK. Jasmine is selling the following assets:

A. Jasmine's home was purchased in 1981 for $40,000 and now worth $650,000. This home was Jasmine's main residence since she purchased the house.

Answer: According to income tax assessment act 1997, the assessable income of an individual consists of the net capital gain made during the financial year. In the given case, Jasmine sold her home for $650,000 which was purchased for $40,000 in 1981. The home was depicted to be the main residence of Jasmine. The main residence is generally exempted from CGT (Ato, 2019). The property should have the dwelling on and the taxpayer should have lived on it in order to get the exemption. For a vacant block, the exemption is not being entitled. A dwelling is considered to be the main residence if:

• The resident and his family live in it

• Personal belongings of the resident are in it

• The mails are delivered on the address

• Address was given on the electrical roll

• Power and gas services are being connected 

The exemption on the main residence is allowed when the dwelling:

• used by the residence, his partner and other people from the period it is being purchased

• has not been used for generating assessable income

• is on the property of less than or minimum of two hectares

The capital gain tax was commenced on 20 September 1985 and all the assets purchased since the introduction of the law are subject to CGT. Thus, Jasmine has not to pay the capital gain on the sale of the home because the asset was purchased before the beginning of the capital gain tax. Apart from this, the home is the main residence of Jasmine (Ato, 2019).

B. Jasmine purchased a car in 2011 for $31,000 and is now worth around $10,000.

Answer: In 2011, a car was sold by Jasmine for $10,000 which was purchased for $31,000. If a capital asset is being sold then an individual makes a capital loss or capital gain. It is considered to be the difference between the cost and selling price of the asset. The capital gains and losses need to be reported on the income tax return. The capital gain is being added into the assessable income which led to the increase in the tax payment (Ato, 2019). The capital loss made by an individual can be claimed against the other income and it can be utilized for decreasing the capital gain. The asset that had been purchased since the introduction of capital tax which was 20 September 1985 is subjected to CGT. However, exemptions are available as per the given law.

• The personal assets of the residence such as the main residence, furniture or car are being exempted from the capital gain tax.

• On the depreciating assets, capital gain tax is not applied which is solely used for the taxable property.

The analysis shows the car purchased by Jasmine is considered to be a personal asset and it is exempted from the capital gain tax.

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C. Jasmine commenced her 'small cleaning business' herself and now found a buyer to take over the cleaning business for $125,000. The sale price includes $65,000 for all of the business equipment, which cost $75,000, and $60,000 for goodwill.

Answer: The selling of a business is subjected to the capital gain tax. The capital gain tax concessions are available for the owner of the small business. The concessions can assist to decrease the capital gain tax. The concessions are as follows:

• 15-year exemption: The capital gain can be exempted from the business asset that has purchased for at least 15 years.

• 50 percent reduction on the active asset: The capital gain can be decreased that arises from the sale of asset (Business, 2019).

• Retirement exemption: Capital gain tax can be exempted if the active assets are sold that are used in the business. It is not applicable in passive assets such as investments.

• Rollover: The capital gain can be deferred for 2 years after the sale of the business asset.

Jasmine is 65 years old and sold an active business. The 15-year exemption states that an individual aged 55 or more and permanently incapacitated or retiring and have purchased active assets used in business for at least 15 years will not have to pay the capital gain tax. In this case, Jasmine has not to pay CGT. 50 percent reduction in active asset means an active business asset sold by an individual has to pay 50 percent of capital. In this case, the capital of Jasmine is $50,000 ($125000-$75000). Jasmine has to pay $25000 as capital gain tax.

D. Jasmine is also selling her furniture for $5,000. No single item offered for sale cost more than $2,000.

Answer: The Australian Taxation Office states most of the assets used for the personal purpose are being exempted from the capital gain tax. It can consist of care, family home, and furniture. Jasmine sold her furniture which amounted to $5,000. The selling cost of the furniture is $2,000. The furniture is considered to be a personal asset of Jasmine. Thus, it is clear that the personal asset of Jasmine is being exempted from the capital gain tax (Mirams, 2019).

E. Jasmine has several paintings and is now selling them all for $35,000. All of her paintings were purchased in second hand shops or markets and no single painting cost more than $500. The one exception was a painting she purchased direct from an artist for $1,000. This painting is being sold for $5,000.

Answer: If an individual sale thing such as real estate, shares, artworks or other assets that had purchased after 19 September 1985 then capital gain tax is to be paid. The collectables consist of items that are kept or used for personal enjoyment or use such as paintings, drawings, sculptures, photographs, antiques, jewelry, antiques, coins, books, postage stamps, portfolios, etc. Any capital loss or gain made by an individual from the collectable is not considered if any of the following is applied:

• Purchasing the collectable for amounted to $500 or less

• Received interest on collectable for amounted to $500 or less and before the date of 16 December 1995.

• Received interest in collectable that had the market value amounted to $500 or less.

The selling of individual collectables will be disposed off usually as a set. The capital gain tax will not be paid if the purchased collectables amounted to $500 or less. If the collectables are purchased before 16 December 1995 then it is not being applied (Ato, 2019). In the given case, Jasmine has sold several paintings for $35,000. Most of the paintings cost not more than $500 which means Jasmine do not have to pay CGT on the following paintings. Only one painting purchased for $1,000 from an artist sold for $5,000. In this situation, the capital gain tax would be applied.

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Question 2-A: Issue: Identify and discuss the problem.

Answer: In the given case, an industrial computer numerical control machine was imported by John from Germany for $300,000 on 1 November 2014. CNC factory was visited by John in order to inspect the machine and the cost of the trip was $12,000. The cost of installation on 15 January amounted to $25,000. After installation and start of the CNC machine, John discovered that additional guiding rod is needed for making it more effective which amounted to $5,000. Cost of the machine needs to be estimated in order to estimate the capital allowance.

2-B: Law and Application: Discussion of the first element of the cost of the CNC machine. Set out the legal principles that will be used to address the problem. Source legal principles from cases and legislation.

Answer: The cost of computer numerical control machine is to be calculated in order to estimate the capital allowance of the machine. The capital allowance in general terms is referred to as the tax depreciation within the property industry. The capital allowance is considered to be the tax deduction claimable for a decrease in the value of the capital assets. According to the Australian Taxation Office, expenditures on capital assets cannot be deducted immediately but the cost can be claimed over time reflecting the depreciation of the assets. The cost of the asset needs to be estimated in order to apply the depreciation method over it (Ato, 2019). A depreciating asset should have an effective life and should be expected to decrease in the value over the time it is used. The cost of the machine should consist of all the expenses incurred while installing and enhancing its performance. Section 40-100 of the Income Tax Assessment Act 1997 explains the estimation of the effective life of the depreciation asset. The cost base of the asset needs to be calculated by applying the cost base method. The cost base of the CNC machine would consist of purchasing cost, installation cost and cost of additional guiding rod. The costs should be associated with the asset while purchasing and installing (Lazarevich, 2011). 

2-C: Law and Application: Discussion of the second element of the asset's cost, i.e. the start time for calculating the decline in the value of the CNC machine. Set out the legal principles that will be used to address the problem. Source legal principles from cases and legislation.

Answer: According to the Australian Taxation Office, the uniform capital allowance rule was applied from 1 July 2001 on most of the depreciating assets. The deductions are calculated by the taxpayers for a decrease in the value of the depreciating assets. Uniform capital allowance system combined capital allowance provisions which consist of plant and equipment. General rules are applied for estimating deduction for a decrease in the value of the assets. According to the uniform capital allowance rule, the value of a depreciating asset starts to decrease when it is used for the first time for any purpose (Ato, 2019). However, the deduction for the decrease in the value is considered to be a part of the asset utilized for the taxable purpose. Thus, the rule states that if an asset is being used initially for private purpose and used for the taxable purpose in the later year then the taxpayer has to show the decrease in the value of the asset over the duration of its private use before working out the decrease in the value for the duration of taxable purpose. The start time for estimating the decline in the value of CNC would be from the date of installation which is 15 January. 

The general depreciation rule is being applied for most of the assets that can be claimed on the basis of the effective life of the assets. An individual as per the simplified depreciation rules can claim the immediate deductions on most of the depreciating assets which cost not more than $30, 00, 00. Either diminishing value or prime cost method can be used for estimating the depreciation. Prime cost technique is based on the assumption that the values of the depreciating assets declines over the effective life (Prince, 2011). The diminishing value technique is based on the assumption that the values of the depreciating assets declines more in initial period of the effective life. According to the Income Tax Assessment 1997, the effective life of the depreciating assets is being used for estimating the decline in the value of the asset. Under Division 40, the deduction is available for the decrease in the value of the depreciating asset to the extent that asset is being utilized for the taxable purpose.

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2-D: Law and Application: Concluding discussions regarding the exact start time of holding the CNC machine for depreciation purposes, and the total cost of the machine. Set out the legal principles that will be used to address the problem. Source legal principles from cases and legislation

Answer: The Australian Taxation law explains that the cost of the base of the CNC machine needs to be estimated for calculating the depreciation. Uniform capital allowance system shows the estimation of the cost of the asset. 

Cost of CNC machine

Particulars                              Amount ($)

Purchasing cost                        300,000

Cost of installation                      25000

Cost of installing guiding rod         5000

Total                                     3,300,00

The cost of CNC machine consisted of purchasing cost, installation cost and cost of guiding rod. The trip cost to Germany was $12000 will not be included in the cost of the asset because the cost is not associated with the CNC machine. TR 2018/4 income ruling shows the effective life of the depreciating asset (Ato, 2019). The depreciation will be charged on the CNC machine from the date it is first used for the business purpose. The first date of use will be the installation date of the CNC machine. The value of CNC machine will decrease from the 15 January. The depreciation can be estimated by either the prime cost method or the diminishing value method.

CNC machine

Assumption= 10 years effective life of the asset

Assumed days held= 365

Prime cost method = cost of asset *(365/365)*(100%/effective life of the asset)

= 3,25,000*10%

= $3,25,00

Diminishing value method= Base value *(days held/365)*(200%/effective life of the asset)

= 5,000*(365/365)*(200%/10)

= 3,25,000*20%

= $65,000

Guiding rod

Assumption= 10 years effective life of the asset

Assumed days held= 15

Prime cost method = cost of asset *(days held/365)*(100%/effective life of the asset)

= 5000*(365/365)*(100%/10)

= 5000 * 10%

= $500

Diminishing value method= Base value *(days held/365)*(200%/effective life of the asset)

= 5,000*(365/365)*(200%/10)

= 5000*20%

= $1,000

The total cost of the machine and depreciation are to be estimated as per the taxation law.

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Question 3: Conclusion: Stand back and play 'the judge.' Choose the argument and conclusions you think is the strongest and articulate what you believe to be the appropriate answer.

Answer: According to uniform capital allowance and Australian Taxation Office, the cost of the machine and depreciation need to be estimated by John. The value of the CNC machine will be decreased over time and John has to apply the required legislations and rules.

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