Australian Taxation Law
Assignment 1 Assistance Guide:
- Answering the assignment problems:
For Questions 1-5 identify which items are assessable and which items are deductible. Follow Figure 2.3 of ‘Principles of Taxation Law’ textbook to answer the problems:
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Step 1: Understand the question and the facts
Step 2: Identify the taxation law issues that are raised (see below items)
Step 3: Research the relevant legislation and case (see ‘Principles of taxation law’ Topics, 2, 5, 6,7,8, 9,11,12,13,14, 25.)
Step 4: Apply the law to the problem, referring to relevant cases and legislation
Step 5: Form a conclusion.
Q1: Items to be identified:
- Salary
- Airfares
- Hotel Accommodation
- Acquisition of property in Bendigo
- Rent
- Interest
Q2: Items to be identified:
- Cost of Ramp
- Structural Improvement and capital works
- If an item comes with Division 40 (depreciating asset) and Division 43 (capital works), Division 43 takes priority
Q3: Items to be identified:
- Sale of property
- Real estate agent’s commission
- Solicitor’s fees
- Cost base of a CGT asset.
Q4: Items to be identified:
- FBT
- Reimbursements
Q5: Items to be identified:
- Rent
- GST
- FBT
- Deductible expense
- Suggested Method/Steps for Approaching an Item of Expenditure
1.Is the expenditure deductible (which may include an analysis as to whether the expenditure is of a capital nature) under s 8-1? If “Yes”, then the amount is fully deductible under s 8-1. Deductions are not available elsewhere. If “No”, you should proceed to Step 2.
2.Is the asset/advantage a “Depreciating Asset” within Division 40 (ss 40-30(1) and 40-30(3))? If “No”, then no deductions are available under Division 40. From there, the most likely step is the CGT Regime (i.e. cost base inclusion). We can generally jump directly from Division 40 to the CGT Regime (i.e. ignore Division 43) because it is very unlikely that Division 43 will apply to an item that cannot meet the definition of a Depreciating Asset in Division 40. In other words, something that comes within the definition of buildings (and extensions to buildings) or structural improvements (and extensions to structural improvements) in s 43-20 will, in all probability, come within the definition of a depreciating asset within s 40-30.
If “Yes” (i.e. item is a Depreciating Asset within Division 40), we cannot automatically assume deductions will be available under Division 40. We need to see whether Division 43 applies to the expenditure? There is a need to work through the requirements of s 43-10, in conjunction with s 43-70. For example (the most common example), if the item is “plant”, it will be excluded from Division 43. Therefore, if the item is plant, deductions will be available under Division 40. On the other hand, if the requirements in s 43-10 are satisfied (which includes the conclusion that the item is not plant), then Division 43 will apply to confer deductions.
3.Rare, but if the item does not come within Division 40 or Division 43 (e.g. unimproved land), then the cost of acquisition goes solely into the cost base of the CGT asset under the CGT Regime.
Handout 1: Capital Allowance Regimes andTax Accounting for Trading Stock (One page)
Tangible Assets and Property: Overview of Tax Treatment under Four Regimes, and Co-ordination between the Four Regimes
| Trading Stock
(ss 6-5 and 8-1 and Division 70) |
“Depreciating Assets” under Division 40 |
“Capital Works” under Division 43 |
CGT Assets |
| 1. Broad point (not technically accurate point) is that a profit on sale of trading stock is assessable income, and a loss is a deduction
2. In tax technical terms, the cost of purchase is a deduction, and the sale proceeds is assessable income (income) 3. Excess of trading stock on hand at year-end over trading stock at beginning of year is assessable income 4.Excess of trading stock on hand at beginning of year over trading stock at year-end is a deduction 5. No other rules apply to trading stock (i.e. excluded from Division 40 and CGT regime) |
1. Attracts deductions for the acquisition cost over the effective life of the item where item used fully (or partly) for income production
2. Choice to use “generous” DVM of depreciation which accelerates deductions 3. Sale or disposal leads to a balancing adjustment (assessable income if sale proceeds are more than WDV, and a deduction if WDV more than sale proceeds) 4. No other rules apply to depreciating assets (i.e. excluded from trading stock regime, Division 43 and CGT regime) |
1. Attracts deductions for the cost of construction over a statutory period (usually 40-years) where item used for income production
2. Generally, no balancing adjustment on disposal 3. Cost of construction can also form part of the cost base of a CGT asset 4. “Unusual” aspect of Division 43 is that the purchaser of capital works (new owner) obtains deductions under Division 43 based on the cost of construction of the capital works by the original owner. The same point applies to all subsequent owners 5. If, an asset (capital works), satisfies the qualifying rules for both Division 40 (depreciating asset) and Division 43, Division 43 applies (Division 40 is excluded) |
1. Actual costs incurred (construction or acquisition) attract cost base inclusion, most likely under the fourth element of the cost base of a CGT asset. This is the case even if the construction costs to original owner attracted Division 43 deductions
2. A Division 43 capital work will usually not be a separate CGT asset on its own. It will usually form part of another asset 3. If an amount was deductible by the taxpayer under Division 43, the deductible amount must be excluded from cost base (to prevent double counting). This will be done at the time of the CGT event occurring to the relevant asset. This applies whether or not the taxpayer originally constructed the capital works 4. Gains/losses on sale of a depreciating asset that has attracted Division 40 deductions, and sale of trading stock, will be disregarded under the CGT regime |
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