Tutorial 10 CA - Specific Deductions: Capital allowances (Div 40), capital works (Div 43), Black PDF

Preview

Summary

Specific Deductions: Capital allowances (Div 40), capital works (Div 43), Black hole expenditure
Interaction of GST with deductibility for income tax purposes
NOTE: Please support your answers to these tutorial questions with relevant case law and legislation where applicable- your exam...

Description

Specific Deductions: Capital allowances (Div 40), capital works (Div 43), Black hole expenditure Interaction of GST with deductibility for income tax purposes NOTE: Please support your answers to these tutorial questions with relevant case law and legislation where applicable- your exam also requires you to support answers with case law and legislation

Question 48 a) In what circumstances can a taxpayer claim deduction under Div 40 ITAA97? (Capital Allowance on Depreciable Assets) - Where the taxpayer holds a depreciating asset that is used for a taxable purpose (s40-25) b) In what circumstances can a taxpayer claim a deduction under Div 43 ITAA97? (Decline in Value on Capital Works) - Where the taxpayer has construction expenditure in relation to capital works that are used for income producing purposes- includes building costs but not the cost of acquiring the land and not expenditure on demolition or landscaping (s4370) c) In what circumstances can a taxpayer claim a deduction under s. 40-880 ITAA97? (Blackhole Expenses) - Where the taxpayer is carrying on a business and has capital expenditure connected to carrying on the business that cannot be otherwise deducted under a more specific section – amount is deducted inequal proportions over 5 years

Question 49 a) What is a depreciating asset? Provide some examples of assets that are not depreciating assets. - An asset that has a limited effective life and can reasonably be expected to decline in value over the time it used – excludes land, buildings, trading stock, certain intangible assets etc. (s40-30) b) Can an asset be a CGT asset in the hands of one taxpayer and a depreciating asset in the hands of a different taxpayer? Explain. - Yes; it depends on whether the asset is used for a taxable purpose - If so, it will be a depreciating asset for taxpayers using it for business purposes 9Div 40 rules will apply), and a CGT asset for those taxpayers who do not use it for business purposes (CGT rules will apply)

Question 50 Jack and Jill jointly own and run a small motel business, J & J Bed and Breakfast. The business is registered for the GST. Jack and Jill also own an investment

property that they purchased together, which is not part of the business. During the year, the following occurred: a) An air-conditioner was purchased for their investment property for $2,200 (GST incl) on 15 March 2019. The air-conditioner was installed on 20 March 2019 is expected to last for eight years, although the Commissioner states the effective life to be 10 years. b) An additional accommodation unit was constructed at the rear of the premises. Jack and Jill entered into a contract to build the unit with Bob the Builder on 1 July 2018; construction commenced on 1 September 2018 and was completed on 1 March 2019. The total cost to build the unit was $60,000 (GST incl) and this included demolition of an existing structure at a cost of $10,000 (GST incl). Required: Advise Jack and Jill of their income tax consequences arising out of the above for the year ended 30 June 2019.

(a) Air Conditioner Expense - Depreciable asset, so decline in value can be claimed (1). Using Prime Cost Method: (s.40-75) Asset’s cost = $2,200 (why we haven’t reduced GST or input tax credit) Days held = 20 March – 30 June 2020 (inclusive) = (12+30+31+30) = 103 days Asset’s effective life = 10 Apply Formula (s.40-75) = $2,200 * 103/365 * 100%/10 = $62 (2.) Using Diminishing Cost Method Base Value = $2,300 Days held = 103 Asset’s effective life = 10years Apply Formula = $2,200 * 103/365 * 200%/10 = $124 (b) Construction Expense - Construction expense can be claimed (demolishing expense not claimable) - Eligible construction costs = $50,000 - $4,545 = $45,455 (we reduce input tax credit from expense = $50,000/11 = $4,545) - Number of days (1 Mar.2020 to 30 Jun.2020) = 31+30+31+30 = 122 days Assume 4% over 25 years $45,455 * 122/365 * 4% = $608

Question 51 On 1 July 2018, Chester purchased a new laptop computer for $6,000 for use in his business. The Commissioner has assessed the effective life of laptop computers as three years. Chester decided to upgrade to a new laptop computer and sold the old one to a reputable second-hand dealer for $3,000 on 31 August 2019. Chester estimates that he used the laptop computer for business purposes 90% of the time.

Required: Advise Chester of his income tax consequences arising on the disposal of the laptop computer under the diminishing value method.

Computer is a depreciating asset and deduction can be claimed (s.40-25) to the extent used for taxable purposes. For 2018-19 (using diminishing value method – s.40-72) Base Value * Days Held/365 *200%/ asset’s effective life $6,000 (assuming he is not registered for GST) * 365/265 * 200%/3 = $4,000 (taxpayer can only claim 90% of this as a deduction = $3,600) For 2019-20 (1 July to 31 August 2019 – 62days) Base value for 2019-20 = $2,000 $2,000 * 62/365* 200%/3 = $226 (taxpayer can only claim $226*90% as a deduction i.e. $203) Consequence of sale of computer s.40-285 provides the formula to determine the amount of assessable income or deduction that Chester has a result of selling the laptop (p.511 of textbook) Balance Adjustment = Termination Value – Adjusted Value = $3,000 - $1,774 = $1,226 Statutory Income = $1,226 *90% = $1,103 Interaction of deductions with CGT cost base Question 52 (This question illustrates the intersection of general deductions and specific deductions with the CGT cost base. Your tutor will decide whether to cover this in Tutorial 10 or Tutorial 11) Colette is a Chartered Accountant with her own business. Due to the retirement of a number of her clients, the business was starting to make a loss for the first time in twenty years. To cover the loss, she decided to start disposing of her assets. Her portfolio is as follows:

Item

Purchase Purchase Date Price

Sale Date

Sale Price

Property in Thornbury

1 May 1985 $20,000

30 June 2018

$700,00 0

Subaru Outback Wagon (Vehicle) private use only

1 Oct 2012

1 May 2018

$15,000

$40,000(incl GST)

Sculpture

18 Sep 1985

$11,000 (incl GST)

1 May 2018

$55,000

Colette sold her Thornbury property to her brother, and the transaction settled on 1 July 2018. At the time of sale, the market value of the property was $900,000. When she bought the property on 1 May 1985, it was a vacant block of land. A broker sourced the land for her after undertaking preliminary investigations of the surrounding areas. The broker’s fee was $900. On finding the property, the acquisition costs included legal fees of $990 and stamp duty of $10,000. On 1 July 2014, Colette built a house on the property at a cost of $200,000 (land was valued at $400,000). The house has been rented out since completion and Colette pays bank interest of $25,000 per annum. On 22 September 2017, Colette inspected the Thornbury property and decided to renovate it, undertaking the following: a) Replacement of the kitchen at a cost of $50,000 (incl GST); b) Replastering and repainting a wall which had been damaged due to a leak costing $20,000 (incl GST); Colette also has a carry forward capital loss from the sale of shares from the 2011-12 income year in the amount of $6,000. Required: Using relevant legislation and case law to explain your answer: a) Explain to Colette whether the cost to build the house of $200,000, bank interest of $25,000, replacement of kitchen of $50,000 and replastering and repainting the wall of $20,000 would be deductible for income tax purposes; and b) Explain how Collette’s net capital gain would be determined in relation to the disposal of her capital assets (show relevant calculations). c) Discuss any GST issues related to these facts.

Part (a) of the question Cost of building the house - House is used for income producing purposes, Collette can claim a deduction under Div 43 for eligible construction costs (s43-10) - Construction was completed on 1 July 2016 and the property is sold on 30 June 2020, therefore Collette has a Div 43 claim for construction for 2016-17, 2017-18, 2018-19 and 2019-20 - Claim for each of the four years = $200,000 * 4% * 365/365 = $8,000 Bank Interest of $25,000 - Claimable as a general deduction under (s8-1) (Munro)

- Satisfies the first positive limb and is not caught by any of the negative limbs. Note: she therefore cannot include the interest in the cost base for the CGT calculation (amount claimed as a specific deduction and cannot be included in cost base in 2019-20) Part (b) of the question CGT rules are used to calculate her net capital gain: - CGT event A1 occurs on 30 June 2020 when she sells the property (which includes preCGT Land + the separate CGT asset being the building) Step 1(s.102-5): calculate the capital gain or loss from each CGT event - There is only 1 CGT event here i.e. the sale of the property/building - The Subaru car is an exempt asset (s118-5) - The sculpture is a pre-CGT asset so the gain is ignored - The land is Thornbury is pre-CGT but the building is a separate CGT asset as construction contract was post 20 September 1985 - Capital Gain = Capital Proceeds (s116-20) less Cost Base (s110-25) Property in ThornburyCapital Proceeds - The land is a pre-CGT asset but the building is a separate CGT asset so at the time of sale we must calculate how much of the capital proceeds are attributed to the building and how much is attributed to the land. The only available information to determine this is from 2016, so we need to use this: - Building: $200,000; land:$400,000 -> total value is $600,000 - So building is worth $200,000/$600,000 i.e. 1/3 of the capital proceeds can be attributed to the building and 2.3 to the land - Also the capital proceeds must be adjusted to take account of the market substitution rule as the taxpayer sold the property to her brother at less than the market rate. She was entitled to received $900,000 so that is the capital proceeds (s116-20) - Therefore the capital proceeds are 1/3 * $900,000 = $300,000 Cost Base - Element 1 = $200,000 - $32,000 (see above calc) = $168,000 - Element 2 = No costs – the broker, legal fees and stamp duty all relate to the land (pre CGT) - Element 3 = No costs – the interest is claimed as a s8-1 deduction here because the asset is used for income producing purposes, so cannot be included in the cost base - Element 4 = The kitchen renovation costs that have not been claimed under Div 43 are included here i.e. $50,000 - $1,545 (last year’s construction cost i.e. 4% x $50,000 x 282/365) = $48,455 - Element 5 = no costs here (element 5 is usually legal costs related to disputes over boundaries etc.) - So the cost base is $168,000 + $48,455 = $216,455 - Therefore the capital gain on the property is $300,000 - $216,455 = $83,545 Step 2: apply carry forward losses - There is a carried forward loss of $6,000 on shares (from 2013-2014) - This is applied against the gain from the sale of the property - $83,435 - $6,000 = $77,545 Step 3: apply the CGT discount if taxpayer is eligible

- The taxpayer is eligible because she has held the asset for at least 12 months (also note that she is not a company) - The CGT discount for individuals is 50% (s115-10) = $77,545*50% = $38,772.50 Step 4&5 (not applicable on these facts): the net capital gain = $38,772.50 - She must include this amount in her assessable income (as statutory income s102-5)...