HA3042 Taxation Law Individual Assignment T22019
QUESTION 1 (10 MARKS)
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:
- 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.
- Jasmine purchased a car in 2011 for $31,000 and is now worth around $10,000.
- 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.
- Jasmine is also selling her furniture for $5,000. No single item offered for sale cost more than $2,000.
- 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. Advise Jasmine of the CGT consequences of the above sales. Include relevant legislative references to support your answer.
QUESTION 2 (10 MARKS)
John owns a motor vehicle parts and accessories manufacturing company. The business produces certified BMW parts. John purchased an industrial computer numerical control (CNC) machine imported from Germany on 1 November 2014 for $300,000. John visited the CNC factory to inspect the CNC machines and place his order. The only reason for his visit to Germany was to purchase the CNC machine. The trip to Germany cost John $12,000. The CNC machine needed to be installed by specialists and bolted to his factory floor. The installation of the CNC machine was completed on 15 January at a cost of $25,000. Once the CNC machine was installed and John started using the CNC machine, he discovered that the CNC machine required an additional guiding rod to make it more effective. This guiding rod was installed on 1 February at a cost of $5,000. Calculate the cost of the CNC machine for the purpose of calculating the capital allowance. What is the start time for calculating the decline in value of the asset? Include relevant legislative references to support your answer
Abstract
The assignment covers two areas of Australian tax, i.e., Capital gains tax and capital allowances. Answer 1 discusses how capital gains may be calculated upon the sale of assets by an Australian resident, Jasmine. It also includes discussion of exempt cases which will be of high benefit to Jasmine as she would be liable to a lesser taxable amount.
The second Answer discusses the calculation of the cost base of an asset that is to be solely used for the purpose of business. This also included how and when the asset must be declined in value once the owner has held it for usage in the business. Capital allowance may also be named as Tax depreciation in the industry.
Answer 1
Capital gains tax (CGT) is the tax that is paid by a chargeable person on the disposal of chargeable assets. CGT was introduced in the Australian taxation system in 1985. Capital gains tax is only applicable to assets acquired on or after this date. Any assets with gains or losses owned before this date are not subject to capital gains tax in their taxation law. Jasmines is an Australian resident, and therefore CGT applies to her assets all over the world (Taxpayers Australia Inc, 2014). The taxation law is made such that all kinds of assets are taxed under CGT; however, many exemptions exist regarding several assets.
We will now move on to discuss capital gains/losses made by jasmine upon the sale of her assets listed below:
A-Capital Gains Tax-Family Home
Jasmine purchased her home in 1981 and has remained her main residence since then. It was purchased for $ 40,000 and sold for $650,000 hence making a capital gain of $610,000. As per CGT rules any assets bought on or before 1985, when CGT came into existence, is exempt from taxation. Any gains or losses are disregarded in the case of pre-CGT assets. So, the gain of $610,000 is not subject to any taxation under an Australian taxation law. Moreover, property that has remained the main residence of the owner is also exempt from any CGT that incurs upon the sale of it.
B-Capital gain/loss from the car
Jasmine is also selling her car that was in her personal use. It was purchased for $31,000 and is now being sold for $10,000, which means she is incurring a loss of $21,000. As per the taxation law cars and other small motor vehicles of passenger capacity of up to 9 people are also exempt from CGT. Jasmine did not incur a gain on this sale but a loss. Hence this exemption is a disadvantage to her she could use this loss to be set off against other taxable gains on disposable of assets.
C-Capital gain in relation to the sale of the business
There are several things that need to be considered when selling or closing businesses. Capital assets when being disposed may bring GST implications with it. Sales of going concern businesses that is in operating condition and is generating profits may bring with it GST payables or tax credits. Along with these concerns, CGT may also arise as a result of the sale of assets when selling a business. Any capital losses may be deducted from total capital gains and a net be then taxed. Jasmine is selling her small business at a profit inclusive of goodwill, however the assets connected to it are being taken up on a loss (Nethercott et al., 2019). The purchase cost was $75,000 but is being sold for $65,000. Hence a loss of $10,000 is made. CGT is calculated on assets not the business as a whole.
Moreover, small businesses may enjoy CGT concessions to reduce their CGT liabilities. The 15-year exemption frees the owner of the business from any CGT liabilities if a capital gain is made while selling or closing it if the business is held for more than 15 years. However, Jasmine would not need any such exemptions for this particular sale as she is not obtaining any gains from the sale of business assets (Australian Government, 2019).
D-Capital gain in relation to the selling of furniture
Jasmine has also put up her furniture for sale for $ 5000. Each item of furniture did not cost more than $ 2,000. Furniture is a personal use asset as defined under the CGT law. Personal use asset is anything other than collectibles kept for own use or convenience (Australian Taxation Office, 2019). Any asset that comes under the definition of personal use is disregarded for the purpose of capital gains tax if it costs less than $ 10,000. This condition is being fulfilled for the furniture Jasmine is selling off as none of the furniture initially costs more the $10,000. So, the sale of furniture would be disregarded in this case.
Furthermore, as per ITAA1997 loss from a personal use asset is also disregarded in CGT. If jasmine makes a loss from the sale of this furniture, it would be disregarded in CGT rules. Hence losses on personal use assets cannot be used in the reduction of capital gains that resulted in the sale of other personal use assets.
E-Capital gain in relation to the selling of the paintings
Collectables, as defined by CGT law, are assets used personally mainly for the individual’s enjoyment or the enjoyment of his/her associates. Collectables include jewelry, antiques, coins, medallions, books, paintings, sculptures, engravings, photographs, etc.
Moreover, a right to acquire one of the above items is also included in the definition of collectibles. A gain or loss is disregarded at the disposal of individual collectable if it was acquired for $500 or less.
Jasmine is selling off her paintings for $35,000 as all of the paintings included in this sale cost less than $500 as they were purchased from second-hand shops. One painting was an exception which cost $1000 and being sold for $5,000, that means a gain of $4,000. All other paintings are disregarded for the purpose of CGT in taxation law as they cost less than $500. The $4,000 gain from the exemption painting is chargeable under CGT.
Capital losses that incur as a result of disposal can be used to set off capital gains incurred on the sale of other collectibles of the same year or future years. There is no limitation on carrying forward the CGT loss on these collectables.
Jasmine I overall in a favorable situation even after selling all of her assets as she has not incurred significant capital gains. The gains that she obtained freed her from any CGT liabilities as most of them were exempted from CGT. The only taxable gain for Jasmine was the exception of one painting that was both for $1,000 and sold at $5,000.
Answer 2
Issue
The case of John’s manufacturing company relates to the cost of CGT assets, i.e. how it may be calculated. There is a list of elements and events that occurred in the purchase and installation of the computer numeric machine that was imported from Germany. We need to identify which cost would add up to make the total cost of the asset.
Law and application 1
The five major elements that add up to make the cost of the assets are as below:
(I)-Amount or property paid to acquire the asset
The money being paid in order to purchase the asset based upon the true market value of it.
(II)-Incidental costs relating to the event of purchase
There is a list of incidental costs that are included as part of the total cost of the asset. This includes charges of the service provider for the purchase such as a surveyor, auctioneer, accountant, broker, etc. Stamp duties and costs of transfer are also included in the cost of the asset. Advertising and valuation costs are also a must to add to the original total cost. Searching fees such as titles of lands and other related fees. However, searching costs exclude the cost of traveling to search for the asset under consideration. The cost also includes borrowing costs related to any mortgage or loan application fee. Expenditure incurred directly to obtain ownership of the asset that is being purchased.
(III)- Costs of owning the asset
The cost of owning the asset is not included in the cost of the asset if it was acquired before August 1991. All taxes, rates, repairs, insurance must be included in the cost of owning the asset if acquired after August 1991.
(IV)-Capital costs that enhance the value of assets or its installation or its relocation:
The cost incurred to enhance the value of CGT asset or preserving its original value. The installation charges incurred in setting up the asset are also included as part of this element of the cost of the asset.
(V)-Capital costs for defending the ownership title of the CGT asset
Finally, the capital expenditure incurred upon defending or preserving the entitlement or rights connected to the asset.
Based upon these five elements of the cost we will now calculate the total cost that would legally be added up to make up the cost of Computer numerical control machine that John imported from Germany.
| Cost Base | $ 300,000 |
| Installation charges | $ 25,000 |
| Value addition cost | $ 5,000 |
| Total | $ 330,000 |
Installation and value-adding costs will be added up with the base cost in calculating the total cost of the asset for taxation purposes. However, the traveling cost that John incurred to search for the asset will not become part of the cost of asset. Hence, the total cost of CNC machine would be $ 330,000.
Law and application 2
In order to start declining the value of the asset, it is important to know the cost of the asset. As per the USA, there are two elements for the cost of depreciating the asset. The first element is being counted since the asset was first purchased and held. This includes the purchase price of CNC machine. The amounts must all be directly connected to the holding of asset.
The second element includes costs that have been incurred upon the asset after it has been purchased in order to bring it to the required location and start its operations effectively. This includes installation and improvement costs. In case of John the traveling cost he incurred to look for the asset would be included in the first element and the rod cost he incurred to increase efficiency of machine would be added to the second element. In order to calculate the declining value of a depreciating asset, the rule of uniform capital allowance 2001 will be applied (Woellner et al., 2019).
As per UCA, the CNC machine would start declining in value when its installation is completed on-site for its first use for any purpose including personal usage of the asset. However, the decline in value is only done to the part that is being used in business for taxable purpose. The CNC machine is solely intended to be used in the business so full value would be considered under the UCA rules. John imported the CNC machine in November 2014 however it was installed for its first usage in January 2015, when John would be able to start declining the value of the asset.
Concluding discussion
The first and second elements of the cost base of depreciating asset have been discussed in detail as per the UCA rules. Almost all of the costs related to the CNC machine were eligible to be added up to make calculate the total cost of the asset. The asset then starts off declining its value once it is installed for using. The depreciation can either be calculated by the diminishing value method or prime cost method. It depends upon the choice of owner.
Conclusion
In conclusion it can be said that John’s high-value asset capitalizes all costs of the asset except for the traveling cost. This makes the cost of CNC machine rise up and allows higher depreciation as part of the declining value of CNC machine based upon UCA rules.
References
Australian Government, 2019. Changing, selling or closing your business – things to consider. [Online] Available at: https://www.ato.gov.au/Business/Changing,-selling-or-closing-your-business/In-detail/Things-to-consider/ [Accessed 17 September 2019].
Australian Taxation Office, 2019. CGT assets and exemptions. [Online] Available at: https://www.ato.gov.au/general/capital-gains-tax/cgt-assets-and-exemptions/ [Accessed 17 September 2019].
Nethercott, L., Devos, K. & Gonzaga, L., 2019. Australian Taxation Study Manual 2019: Questions and Suggested Solutions. 29th ed. Oxford University Press Australia & New Zealand.
Taxpayers Australia Inc, 2014. The Taxpayers Guide 2014-2015. 26th ed. John Wiley & Sons.
Woellner, R. et al., 2019. Australian Taxation Law Select 2019: Legislation and Commentary. 1st ed. Oxford University Press Australia & New Zealand.
