Tabl2751 Assignment Submission

TABL2751 Essay Under the Australian tax system, statute law such as ITAA36 and ITAA97 and cases law rule out sets of legislation to deal with the tax issues in Australia with the aid of Australia Tax Office. In order to find out the taxable income in the case of Susan Michaels (“S”), which is generally described as the gross assessable income minus allowable deductions during the tax year1, her assessable income and allowable deductions are required to be carefully examined. The capital gain or loss in relation to the sale of S’s property would be also further discussed below. Assessable Income Assessable income can be divided into two parts which are ordinary and statutory income. There are two main sources of income for S for the tax year ended 30 June 2015, which are the salary payment and rental income from the house she purchased on 1 September 2012. The salary of $90,000 per annum and rental income of $23,000, totalling to $113,000, is classified as the ordinary income2 for S. Allowable Deductions Allowable deductions have been separated into two categories which are general and specific deductions under section 8-1 and 8-5 in ITAA97. The advertising expense of $200 and interest on mortgage of $26,2003 are considered as a source of outgoing amount incurred in gaining or producing the assessable income (i.e. rental income for S), stated in the first positive limb under general deductions, supported by the case of FCT v Munro4. Stated in the case of Allen (HM Inspector of Taxes) v Farquharson Bros & Co5, an “outgoing” is something the taxpayer pays out and comes out of his pocket, which is a kind of disbursement or expense deductible. The 25-year mortgage for $600,000 is not accountable here in the case. Also, the real estate fees of $2,800 paid to the real estate agent for inspecting, managing and collecting rent is also deductible. It would be disallowed unless the commission paid to the agent is for the sale or disposal of the rental property. 1 s 4-15 Income Tax Assessment Act 1997 (Cth) 2 s 6-5 ITAA97 3 s 8-1(1) ITAA97 4 (1926) HCA 58; 38 CLR 153 5 (1932) 17 TC 59 TABL2751 Essay Regarding the motor attached to the garbage door, it would be only deductible if it is a cost of repair or maintenance. Fixing the motor satisfies the definition of repair “involving restoration of a thing to a condition it formerly have without changing its character”, stated in the case of W Thomas & Co Pty Ltd v FCT6. Another key element for repair is whether the work is a replacement of a part of the item or the entire item. Lindsay v FCT7 has demonstrated a substantial item of equipment test, determining that the expenditure constituted the renewal of the slipway as an entirety in itself. Conversely, it is reasonable to make a judgement that the motor is only a subsidiary part of the electronic garbage door. Given the fact that installing a new motor in this case, the nature of garbage door is not affected even though S is replacing a new motor instead of fixing the old one. Installing a new motor does not change the initial character of the door or perform a separate function, which reached the functional entity test. Besides, the electronic garbage door with functioning motor has been installed since the beginning. The defaults of motor does not exist in asset at the time of acquisition of the house, as a result, that $1,200 should not be considered as the cost of acquisition or capital8. Similarly to the case of Oden Associated Theatres Ltd v Jones9, that $1,200 is a cost of maintenance deductible which distinguishes features from the case of Law Shipping Co v IRC. However, there may be an argument raised from the case of FCT v Western Suburbs Cinemas Ltd10, arguing whether to deduct $600 to patch up a ceiling or $3,000 to replace the entirety. This may also question the correct amount of deductions would be whether $900 or $1,200 for the repairing the motor in this case. Given the fact that the new motor installed for the same purpose as the old one, and provides the same function to the electronic garbage door, the character of garbage door and the adjustment of the price of property would not be significantly affected, resulting of $1,200 allowable deductions for it. Regarding the installation of insulation batts of $8,000 on 8 February 2015, it would be considered as a non-deductible item under section 25-10 as it is tended to be a notional repair costs, and does not fulfil the definition of “repair” in this case. Conversely with the motor mentioned before, the new installation of insulation batts actually changed the character of the property, which potentially lead to an increase in the sale price of property. There will be 6 (1965) 115 CLR 58 7 (1961) 106 CLR 377; 8 AITR 458 8 Law Shipping Co v IRC (1924) 12 TC 621 9 (1972) 1 All ER 681 TABL2751 Essay no deduction for notional repair costs, supported by the case of FCT v Western Suburbs Cinemas.10 It would be more appropriate to consider the insulation batts as a capital rather than a repair item since it has changed the nature of the property and added additional function in it. Moreover, it is not deductible under Division 40 since it is not a plant or article according to the definition in ITAA97 section 45-40. To be considered as a plant, the key issue is whether a building or structure is plant as distinct from merely being a convenient setting in which business operations are carried on. It could be explained that a plant has a passive function while a non-plant item does not11. The case of Imperial Chemical Industries of Australia and New Zealand Ltd v FCT12 illustrates that the removable sound-absorbing ceilings were not plants or articles due to its nature of mere comfortable setting. This has drawn a parallel between the sound-absorbing ceilings and the insulation batts in this case, explaining that the insulation batts only play a role of comfortable or convenient setting which is insufficient to be considered as a plant. However, the deduction applies under Division 43-20 as a capital work. There are three basic conditions for capital works, which are (a) the capital works have a ‘construction expenditure area’; (b) there is a pool of construction expenditure for that area; (c) the taxpayer uses the taxpayer’s area in the way set out in Table 43-14013 , which are all fulfilled by the insulation batts in the case. The deduction for structural improvement like insulation batts begun after 26 February 1992 is calculated in a rate of 2.5% in the 40 years following construction, which is $200 allowable deductions, stated in section 43-25 ITAA97. In summary, the total allowable deductions for S for the year ended 30 June 2015 would be $30,600. 10 (1952) 86 CLR 102 11 Wangaratta Woollen Mills Ltd v FCT (1969) 110 CLR 1; 1 ATR 329; 69 ATC 4095 12 (1970) 120 CLR 396; 1 ATR 450; 70 ATC 4024 13 Div 43 ITAA97 TABL2751 Essay Capital Gain / Loss in Relation to the Sale of Rental Property Capital gain tax (CGT), with effect from 21 September 1985, is a tax on capital gains for each tax payer which forms part of your income tax and is not considered as a separate tax according to Division 100 of Pt 3-1 ITAA97. Net capital gain is a form of statutory income. Before working out the cost base and capital proceeds of property, there are few elements to be considered such as the CGT event, qualified CGT asset, the date of acquisition and disposal of the property, and any special rules applied. A CGT event A1 occurs when S sells her rental property on 1 July 201514. The property of S, which is a rental house, is defined as a CGT asset under section 108-5(1)(a). The acquisition of house was made after 21 September 1999, when the discount capital gain comes effective. The house was purchased on 1 September 2012 and sold on 1 July 2015, which means S has been holding this asset for more than 12 months, leading to the eligibility for the discount capital gain of 50%15. The special rules such as personal use assets16 and collectables17 does not apply to this property. The house is purchased for rental purpose instead of main residence. Capital proceeds and cost base are the essential requirements in order to calculate the net capital gain or loss in CGT. According to the general rules in section 116-20(1)(a) ITAA97, capital proceeds from a CGT event is defined as the monetary payment a taxpayer is entitled to receive in respecting of the event happening, which is $850,000 of the sale price of the rental property in this case. Cost base consists of five elements such as the money paid for acquisition, incidental costs, costs of owning, expenditure to increase or preserve the value of asset, and expenditure to establish, preserve or defend title18. For the rental property, the cost of acquisition is $720,000. The total incidental costs including $1,500 of advertising fees, $2,000 of legal fees, $3,500 of borrowing expenses and $17,000 of real estate commission is $24,000. Under the section 110-25(4) ITAA97, the ownership costs are only incurred when the asset was acquired after 20 August 1991, which applies on S’s case. The $26,200 of 14 s 104-10(1) ITAA97 15 s 115-25(1) ITAA97 16 s 108-20(2) ITAA97 17 s 108-10(2) ITAA97 18 s 110-25 ITAA97 TABL2751 Essay interests on mortgage to acquire the house and $1,400 of repair costs are accountable for the cost of owning. With the aid of the figures and information above, the capital gains would be $78,400 (i.e. $850,000 - $720,000 - $24,000 - $26,000 - $1,400), given there is no previous unapplied net capital losses from earlier years. Since the discount capital gain applies in this case, the net capital gain would be $39,200 after deducting 50% from capital gains. In conclusion, the assessable income for S for the year ended 30 June 2015 is $113,000 while the allowable deduction is $30,600. She also has a net capital gain of $39,200 during the year 2015. TABL2751 Essay Bibliography Allen (HM Inspector of Taxes) v Farquharson Bros & Co (1932) 17 TC 59 FCT v Munro (1926) HCA 58; 38 CLR 153 FCT v Western Suburbs Cinemas Ltd (1952) 86 CLR 102 Imperial Chemical Industries of Australia and New Zealand Ltd v FCT (1970) 120 CLR 396; 1 ATR 450; 70 ATC 4024 Income Tax Assessment Act 1997 (Cth), Div 43 Income Tax Assessment Act 1997 (Cth), s4-15 Income Tax Assessment Act 1997 (Cth), s6-5 Income Tax Assessment Act 1997 (Cth), s8-1(1) Income Tax Assessment Act 1997 (Cth), s104-10(1) Income Tax Assessment Act 1997 (Cth), s108-10(2) Income Tax Assessment Act 1997 (Cth), s108-20(2) Income Tax Assessment Act 1997 (Cth), s110-25 Income Tax Assessment Act 1997 (Cth), s115-25(1) Law Shipping Co v IRC (1924) 12 TC 621 Lindsay v FCT (1961) 106 CLR 377; 8 AITR 458 Oden Associated Theatres Ltd v Jones (1972) 1 All ER 681 TABL2751 Essay Wangaratta Woollen Mills Ltd v FCT (1969) 110 CLR 1; 1 ATR 329; 69 ATC 4095 W Thomas & Co Pty Ltd v FCT (1965) 115 CLR 58


UNSW THE UNIVERSITY OF NEW SOUTH WALES AUSTRALIAN SCHOOL OF BUSINESS SCHOOL OF TAXATION AND BUSINESS LAW LEGT2751 – BUSINESS TAXATION SEMESTER 2, 2015 ASSIGNMENT DUE DATE AND TIME Tuesday, 6 October 2015, 6:00pm. LATE LODGEMENT Late lodgement not accepted unless prior arrangements have been made with the lecturerin-charge. PLACE OF LODGEMENT You must submit your assignment both electronically and in hard copy Electronic lodgement: via Course Moodle site Hard copy lodgement: Designated Assignment Box in the School of Taxation and Business Law - Quad Building Level 2, (next to room Quad 2055 which is opposite the school office). VALUE OF ASSIGNMENT LENGTH OF ASSIGNMENT 20% 2,000 words maximum ASSIGNMENT INSTRUCTIONS Read all instructions before completing and submitting the assignment. 1. You are required to submit an answer to the attached assignment question by the due date and time for lodgment. Any requests for extension must be made prior to the due date via e-mail to the lecturer-in-charge. 2. Your assignment must be submitted both in ‘hard copy’ and ‘soft copy’ via the link that will be made available on Moodle. 3. All hard copy assignments must include a completed copy of the assignment coversheet that will be made available on Moodle. Provided that you agree with the terms of the declaration, you must sign the declaration regarding plagiarism on the assignment coversheet. 4. Staple all pages (including the cover sheet) once in the top left hand corner. Do not use plastic sleeves; comb binding; other forms of binding or paper clips. 5. Your answer must not exceed 2,000 words. The word limit will be strictly enforced. Words in excess of the word limit will not be marked. 6. Your answer must be typed. You must use one and a half (1.5) spacing and a font size of 12. You must leave at least a 2.54 cm margin from both sides of the A4 page (note that this is the ‘normal’ margin setting in Microsoft Word). Single sided printing is preferred. 7. Ensure each page of your answer contains your student number and a page number as a ‘header’ or ‘footer’. 8. You can either use in-text referencing (Harvard) or footnotes (Australian Guide to Legal Citation). The important thing is to ensure your referencing style is consistent. If you use Harvard referencing, you must also attach a separate reference list to your assignment. 9. Footnotes are not generally counted in the word count. However, you must not place substantive parts or central parts of your answer or argument in footnotes. 10. Calculations are not included in the word count. 11. In preparing an answer, you will inevitably discuss issues raised by the assignment with other students. There is nothing in the UNSW rules prohibiting such discussions. Indeed, you are encouraged to discuss issues arising from the assignment with other students. However, in the end, you must be able to state that the work that you have submitted is your work. Importantly, you should ensure that you have not committed (either deliberately, or without intent) an act of plagiarism (e.g. presenting another’s work or ideas as your own, failing to acknowledge the source of a quotation, submitting the same or similar version of work to that of another student). Due to the potential for damage to reputation, plagiarism is taken very seriously by the university and the Australian School of Business. 12. Although the broad topics raised in the assignment will be topics covered in the course, the assignment will raise issues that will not necessarily have been discussed in lectures or tutorials. This means that you may have to go beyond the prescribed materials for the course in relation to some issues. 13. Given that this assignment is a problem type question that may require you to undertake research, no staff member working on this course, or any staff member in the School of Taxation & Business Law, will provide assistance to you in writing and researching your answer. Accordingly, please do not ask a staff member questions related to the assignment. If you require clarity in relation to any facts contained in the assignment question, these should be directed to the lecturer-in-charge. 14. You should carefully proof-read your answer (a number of times) before submission. Things like incorrect spelling and incomplete sentences will be reflected in the grade for your answer. 15. If you are dissatisfied with your grade, you should first collect your assignment and review the feedback given. Discussions regarding grades will not be entered into until you have reviewed your marked assignment. You should then discuss your grade with the lecturer-in-charge. If you are still dissatisfied with your grade, you are allowed to request a formal re-mark. Please note that such a re-mark can result in your grade either (i) staying the same; (ii) being increased; (iii) being reduced. Marking criteria Markers will be evaluating you assignments based on the following criteria:  Knowledge/Critical thinking and problem solving: For each transaction, have you: correctly identified the issue; correctly identified appropriate law (legislation and/or cases as appropriate); correctly applied the law to the facts; clearly argued points that may be in doubt; reached a conclusion as to the taxation treatment.  Written communication/Presentation: Does your assignment have a clear structure? Is it free of errors (such as spelling, grammatical or typographical errors)? Have presentation guidelines provided in the assignment instructions been followed? Have you used a consistent referencing style? ASSIGNMENT QUESTION Note: You are to ignore GST for the purposes of this assignment. Susan Michaels is an Australian resident taxpayer. She has provided you with the following information for the year ended 30 June 2015.    Susan is employed as a manager at an advertising firm in Sydney. Her salary is $90,000 per annum (excluding superannuation). (You can assume $90,000 (less any tax withheld from her employer) was paid into her nominated bank account between 1 July 2014 and 30 June 2015). You can assume she has no work-related deductions for the year ended 30 June 2015. Susan owns a rental property (a house) that she purchased on 1 September 2012 for $720,000. She was provided a 25-year mortgage by Oz Bank (an Australian resident bank) on 1 September 2012 for $600,000. Borrowing costs associated with the loan were $3,500. For the year ended 30 June 2015, the rental property was rented from 1 July 2014 to 2 February 2015, and from 15 February 2015 to 30 June 2015. Susan received $23,000 in rental income. During the year, she incurred the following costs in relation to the rental property: Interest on mortgage: $26,200 Real estate fees/commission (paid to real estate agent to manage the property): $2,800 Advertising expenses (advertising the property when it was vacant for approximately 2 weeks in February 2015): $200 On 5 December 2014, Susan was notified that the electronic garage door on the garage attached to the house is no longer opening. Through her real-estate agent, she arranges to have the door looked by a garage repair person. The problem with the door is the motor attached to it had overheated and damaged the internal circuitry. Susan is advised that the motor can be fixed, but due to the intricate nature of the internal circuitry, it will cost approximately $900 to repair it. For a cost of $1,200, she can have a new motor installed. Because of the small difference in cost, Susan decides to have a new motor installed. This occurs on 10 December 2014, and payment is made on this date. Susan is informed that the new motor is expected to last ten years. The tenants that moved out on 2 February 2015 complained that the house had been very hot in summer. Susan uses the two weeks in February when tenants are not in the house to have insulation installed in the ceiling, which is meant to cool the house in summer and help keep it warm in winter. (‘Insulation batts’ are laid between the roof and the ceiling). The cost was $8,000, and installation occurred on 8 February 2015. The company that installs the batts offer a 25-year guarantee. Required: (you must answer both questions) 1) Calculate Susan’s taxable income for the year ended 30 June 2015. (Note: you are not required to calculate tax payable). For each transaction described above, you are to advise what amount (if any) will be assessable income or an allowable deduction (as appropriate) and must explain why, through reference to relevant legislation and case law. If relevant, you should assume that Susan has uses ‘diminishing value’ method to calculate any deductions for depreciating assets. (15 marks) 2) Assume that on 1 July 2015, Susan signs a contract to sell the rental property for $850,000. Costs associated with selling the property are as follows:  Real estate commission: $17,000  Advertising: $1,500  Legal fees: $2,000 Calculate the capital gain or loss in relation to selling the property. (Note, you are not required to calculate her net gain or loss for the year as you do not have the necessary information to do so. You are only required to calculate the capital gain or loss in relation to the rental property). (Remember, there will be information included in the main facts that have an impact on the capital gains tax consequences. For this reason, you will be required to use some of the figures you have calculated for Question 1 to correctly answer Question 2 – if you have made errors in your calculations for Question 1 and these errors are ‘carried forward’, you will not be penalised in relation to Question 2). (5 marks)


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