Download - TABL 2751 Assignment

z5001560TABL2751Assignment

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Introduction

RobertwhoisanAustralianresidenttaxpayerboughtahouseat$500,000in

Sydneyon1July2003.Therearevarioustransactionsoccurredwithregardto

thispropertybeforehesellitat1March2016.Thepaperprovidesadviceonthe

taxconsequenceforeachofthetransactionincludingcalculationofcapital

gain/lossonthesaleoftheproperty.Allsectionsthatareappliedinthepaper

arefromIncomeTaxAssessmentAct1997.

Rentalincome

ReferringtoYanchepSunCityPtyLtdvCT(WA)1,rentispaymentreceivedbya

lessorinreturnfortheusebyalesseeofproperty.Rentalincomeisordinary

incomethatisincludedintaxpayer’sassessableincomeunders6-5.Therefore,

rentRobertreceivedfromtenantsduring1July2005to1July2012and1

August2012to1August2013ishisassessableincome.

Incomeyear Rentalincome(assessableincome)

1/7/2005–30/6/2012 500/7*365=$26071perincomeyear

1/8/2012-30/6/2013 650/7*334=$31014

1/7/2013-30/6/2014 650/7*31=$2879

Purchasetheproperty

At1July2003,Robertsignedacontracttopurchaseahousefor$500,000that

consistsofadepositof$50,000anda25-yearsmortgageof$450,000.The

acquisitioncostisnotdeductibleunders8-1(1)2 becauseitdoesnotincurin

1 YanchepSunCityPtyLtdvCT(WA)(1984)15ATR11652


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gainingorproducingassessableincome.Besides,itviolatenegativelimbsunder

s8-1(2)3owingtothefacttheoutgoingisdomesticexpenditure.

Stampduty&conveyancingfees

Thestampdutyandconveyacingfeeisnotdeductibleunders8-1orspecific

deductionprovision,astheyarenotnexustotheincome.However,referringto

s110-354,theseincidentalcostsareincludedinthecostbaseas2ndelement5,

whichwillraisetaxbenefitsinthedisposalofthepropertyinthefuture.

Borrowingexpense

Theborrowingexpenseisnotdeductibleunders8-16 becauseitiscapitalin

nature.However,unders25-257,taxpayercandeducttheborrowingexpenseto

theextentthattheborrowedisusedforthepurposeofproducingassessable

income.Therefore,borrowingexpenseisnotdeductibleuntilRobertrendthe

propertyoutat1July2005.Thedeductionisspreadovertheperiodthatis

either5yearsorthelifeoftheloanifitislessthan5years.Thenon-deductible

amountofborrowexpensecanbeincludedinthe2ndelementofthecostbase.

Interestexpense

Interestexpenseisdeductibleunders8-18 totheextentthatborrowedmoneyis

usedtogenerateassessableincome.Thusinterestexpenseincurredbya

3 4 5 6 7 8


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purposeotherthangeneratingassessableincomeisnotdeductibleunders8-19.

AsMunrovFCT10,the‘use’testwasestablishedtoevaluatewhetheraninterest

expenseshasbeenincurredinthecourseofproducingassessableincome,and

apportionisimpliediftheprincipalisnotsolelyusedforthepurposeof

producingassessableincome.Theproportionofdeductibleinterestwillbeequal

totheproportionofcapitalthathadbeenusedtoderiveassessableincome11.In

thiscase,thehouseisnotsolelyforthepurposeofearningrentalincome.Thus,

theinterestexpenseincurredduringtenancyisdeductibleotherwisetheinterest

expenseisincludedinthecostbaseas3rdelement12.

Costofrepainting

Therepaintingexpenseincurrednotdeductibleunders8-1becausetheexpense

iscapitalinnature13.Thisexpenditureisnotdeductibleunderdivision25aswell

becausetheexpenserelatedtotheperiodbeforethepropertybecamean

income-producingproperty14.Similartoinitialrepairinlawshippingcase,the

expenditureisnotdeductiblebecausethedisrepairrelatedtopredecessor’s9 10 11 TR95/2512 s110-2513 s8-1(2)14https://www.ato.gov.au/printfriendly.aspx?url=/Individuals/Ind/Rental-properties---claiming-repairs-and-maintenance-expenses/

Incomeyear Deduction

1/7/2005-30/6/2012 450,000*7%=$31500perincomeyear

1/7/2013-30/6/2014 31500*93/365=$8026

Totaldeduction

(1/7/2005-1/10/2013)

31500*8+8026=$260,026

Totalinterestexpense

(1/8/2003–1/3/2016)

(12+214/366)*31500=$396,418

Non-deductibleinterestexpense $136,392(willbeincludedincostbase)


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trade.ReferringtoLunneyvFCT15,expensewithregardtoprerequisiteto

produceincomedoesnotmeanitisincurredingainingassessableincome.In

thiscase,thepurposeofrepaintingistoputpropertyintoarentalcondition,and

thedisrepairincurredbyprivateuseorpredecessor.Thus,theexpenditureof

repaintingisconsideredascapitalinnature.However,Robertcanclaim

deductionforthisexpenseundercapitalworkallowancedivision43.Asthe

propertyisnotsolelyboughtforrentalpurpose,apportionmentisrequired.

Referringtos43(c),youcanonlydeducttheamountofyouuseyourareainthe

incomeyearinthewaysetoutins43-140.Thereforeonlytheportionof

repaintingexpensewithregardtoproduceassessableincomeisdeductible..

Onceconstructioniscompleted16,taxpayerisentitledtodeductionatrate

specifiedunders43-25.

Appliedsection:s43-25 40yearsat2.5%


1/7/2004-30/6/2005

(Constructioncompletedat15/6/2005)

16/365*8000*2.5%=$9

1/7/2005-30/6/2013 8000*2.5%=$200perincomeyear

1/7/2013-30/6/2014 93/365*8000*2.5%=$51

Totaldeduction 200*8+9+51=1660

Nondeductibleamount 8000–1660=$6340

(willbeincludedincostbase)

Plumber

Expendituresincurredforrepairsarenotdeductibleifrepairsarecapital

expenditure17.Inthiscase,clarifyingadistinctionbetweenrepairand

improvementisrequiredinordertoclaimdeductionforthisexpensebecause

15 LunneyvFCT(1958)100CLR47816 s43-3017 s25-10(3)


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expensesincurredbyimprovementarecapitalinnature.WThomas&Cocase

18highlightsthatrepairsinvolvesrestorationofathingtoaconditionitformerly

withoutchangingitscharacter.Fixingdrippingtapswasclearlytorestoretaps’

functionsothatthehousewouldreturntotheformercondition.Thisrepairisa

specificdeductionunders25-10,andthisexpenseisalsodeductibleunders8-1.

However,referringtos8-10,taxpayerscannotclaimdoubledeductionandis

requiredtoclaimdeductionunderthemostappropriatedivision.

ApportionmentisrequiredbecauseRobertdidnotholdthepropertysolelyfor

income-producingpurpose19.Nevertheless,itisdifficulttodeterminethe

proportionattributedtotheincome-producingpurpose.Iassumethedisrepair

isfullyincurredbytenants.

Appliedsection:s25-10


1/7/2009–30/6/2010 $400

Costofreplacingtheentireroof

Replacementoftheentireitemisnotarepair,andthusitisnotdeductibleunder

s25-10.ReferringtoLindsayvFCT,functionalentitytestisestablishedtoassess

whetherwhatisdoneisthereplacementofsubsidiarypartofanentirety.Inthis

case,thereplacedroofisasubsidiaryofanitemratherthananentirety.

However,astheissueinvolvedfixingdrippingtaps,thedistinctionbetween

improvementsandrepairsisrequiredbeclarifiedwithregardtoreplacementof

theroof.ReferringtoWesternSuburbsCinemacase20,thereplacementofentire

ceilingdidmuchmorethanmeetaneedforrestorationduetousingabetter

material,andthusitisanimprovement.Similartothiscase,Robertreplacedthe

entireroofwithmaterialsthatarebetterthantheoriginalmaterialssothatthe

18 WThomas&CovFCT(1965)115CLR5819 s25-10(2)20 FCTvWesternSuburbsCinema(1952)56CLR102


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newroofchangedcharacterofpropertybyaddingnewfunction.Therefore,the

replacementofroofisimprovementwhichisnotdeductibleunders25-10.

However,theexpenseofreplacingtheroofisdeductibleunderdivision43.As

discussioninrepaintingexpense,immediatedeductionisnotallowedunder

division43buttaxpayerscanclaimdeductionsoverthelifeoftheassetunder

capitalallowancesregime.Thus,Robertisentitledtodeductionattherate

specifiedunders43-25oncetheconstructioniscompleted21.Apportionmentis

appliedtothisexpenseasthesamereasonforrepaintexpense.

Appliedsection:s43-25 40yearsat2.5%


1/7/2010-30/6/2011

(Constructioncompletedat

1/9/2010)

303/365*(11000+3000)*2.5%=

$291

1/7/2011-30/6/2013 14000*2.5%=$350perincomeyear

1/7/2013-30/6/2014 93/365*350=$89

Totaldeduction 350*8+291+89=$780

Nondeductibleamount $13220

Costofreplacingcarpets

Thisexpenseiscapitalinnature,andthusitfallsunderuniformcapital

allowancedivision40thatallowstaxpayerstodeductanamountequaltothe

declineinvalueofdepreciatingassetsthattheyholdforthetaxablepurposes.

Referringtos40-30,carpetsaredepreciatingassets.Sincethecarpetwas

purchasedpost10May2006usingdiminishingvaluemethod,s40-72isapplied

here.Basevalue,effectivelife,anddaysholdarekeyfactorsincalculating

deductionfortheassets22.Basevalueatbeginningyearisdefinedbys40-10(1),

21 s43-3022 s40-72


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consistingfirstelementandsecondelementinthecostbase23oftheasset.Under

s40-10(1),daysholdarecountedfromthefirstdaythattaxpayersholdassets,

whichisthepurchaseddateinthiscase.Effectivelifeofassetscanbe

determinedeitherbycommissionerorbytaxpayer24.ReferringtoTR2015/2,

effectivelifeforcarpetis10years.Intermsofdeductionsinsubsequentyears,

basevalueiscombinationofopeningadjustablevalueand2ndelement25 ofcost

forthatyear26.Thedeductionratesarethesameduringthelifeoftheassetbut

choiceofdepreciationmethodcannotbechanged27.Aspreviousdiscussion,the

apportionmentisrequiredinthiscasesothatthedeductionreducedwhere

asset’sdeclineinvalueattributabletoitsuseforapurposeotherthanataxable

purpose.


Effectivelifeofcarpet(TR2015/2) 10years

Basevalue(s40-10) $8000


1/7/2012-30/6/2013

(startholdingtheassetat1/7/2012)

8000*365/365*200%/10=$1600

1/7/2013-30/6/2014 (8000-1600)*93/365*200%/10=

$326

Balancingadjustmentofcarpets

Intheproblem,balancingadjustmentevents28 relatedtocarpetshaveoccurred

twiceon1July2012and1March2016respectively.Theformerhappenedwhen

23 24 s40-9525 26 s40-8527 s40-130(2)28 s40-295(1)


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originalcarpetswerereplacedduetobeingworn.Thelatterhappenedwhen

Robertsignedcontracttosellthepropertysothathestoppedholdingthenew

carpets.Ifterminationvalueexceedsadjustablevalue,excessisincludedin

assessableincome29.Otherwiseitisdeduction30.Basedonthefact,the

terminationvalue31 oftheoldcarpetiszerobutthereisnosufficient

informationtoderiveitsexcess.Intermsofthenewcarpet,terminationvalueis

includedinthetotalconsiderationforthehouseandthusapportionmentis

requiredindeterminingitsterminationvalue32.Thereisnosufficient

informationtocalculateitsexcessaswell.


Adjustmentvalueofoldcarpet Insufficientinformation

Terminationvalueofoldcarpet $0

Adjustmentvalueofnewcarpet 8000-1600-1280-1020-(245/365*

4100*200%/10)=$3550

Terminationvalueofnewcarpet Insufficientinformation

Legalfees&damages

Legalfeescanbeclassifiedeithercapitalorrevenueinnaturedependingonthe

purposeofincurringthelegalfees33.Undergeneraldeductionprovision,

taxpayerscanclaimdeductionforanylossoroutgoingtotheextentthatitis

incurredinproducingassessableincome34.AsRobertdidnotcarryonabusiness

withregardtorentalproperty,the1stlimbunders8-1(1)(a)isappropriatefor

thiscase.Itconcernedwithexpenseincurredintheactualcourseofproducing

assessableincome.Incidentalandrelevanttestdevelopedfromthedecisionin

29 s40-28530 ibid31 s40-30032 s40-31033 Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; 8 ATD 19034 s8-1(1)


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HeraldandWeeklyTimesLtdvFCT 35inwhichLegalfee&damagesincurredby

libelaredeductiblebecausetheywereincidentaltotaxpayer’sbusiness.The

principlesadvocatedinHeraldcasewereappliedinCaseC1236 whereallowing

adeductionforthesettlementofdamagesclaimwithregardtotenant’sinjuries

causedbyrentalproperty.ReferringtoAustralianTaxationofficeinterpretative

decision2003/48437,taxpayerscanclaimthecostofdefendingadamagesclaim

inrespectofinjuriessufferedbyathirdpartyontheirrentalproperty.Therefore,

theLegalfee&damagesfordefendingadamagesclaiminrespectofinjuryis

deductiblebecauseitincurredinthecourseofgainingassessableincome.


1/7/2012-30/6/2013 $30000

Advertisingfortenants

Expenseincurredbyadvertisingfortenantsisdeductibleunders8-1.Tobe

deductibleunders8-1,outgoingshavetobenexustoincome.Incidentaland

relevanttestisoneofjudicialteststhatareusedtoconfirmwhetherthereisa

sufficientnexusbetweentheexpenditureandtheincome.Advertisementfor

tenantsdoesnotdirectlygenerateassessableincome.However,tenantsare

sourcesofrentalincome,wherebyitisincidentaltoproduceassessableincome.

AsWNeil&CompanyLtdvFCT38,theredundancypaymentdidnotgenerateany

incomebutitisdeductiblebasedontheobjectofexpense.Apportionmentisnot

requiredherebecausetheadvertingexpenseissolelyforthepurposeof

producingassessableincome.

35 HeraldandWeeklyTimesLtdvFCT(1932)48CLR11336 CaseC12(1952)3TBRD10037http://law.ato.gov.au/atolaw/view.htm?rank=find&criteria=AND~negligence~basic~exact&target=J%20JA&style=html&sdocid=AID/AID2003484/00001&recStart=1&PiT=99991231235958&recnum=4&tot=7&pn=ALL:::JA38 WNeil&CompanyLtdvFCT(1937)56CLR290


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1/7/2013-30/6/2014 $900

Mortgagedischarge

However,thisexpenseisdeductibleunderspecificdeductions25-30thatallows

deductionofmortgagedischargeexpensetotheextentthatyouusedthemoney

orpropertyforincomeproducingpurpose.Inthiscase,onlypartoftheexpense

isdeductibleunders25-30butthenon-deductibleportioncanbeincludedinthe

costbaseas2ndelementssothatitwouldminimizehistaxableincome.


Totallengthofmortgage 4597days(1/8/2003-1/3/2016)

Income-producingperiod 3015days(1/7/2005-1/10/2013)


1/7/2015-30/6/2016 1000*3015/4597=$656

Totalexpense $1000

Non-deductibleamount $344(willbeincludedincostbase)

Advertisingforsale&Realestatecommission&Stampduty&legalfees

Similartotheincidentalexpenseofacquiringproperty,expensesincurredinsale

ofthepropertyarenotdeductiblebutcanbeincludeincostbase39 as2nd

elementsothattheycanreducecapitalgainfromdisposalofproperty.

Realestatefees&councilandwaterrate

Theseexpensesincurredinthecoursesofgainingassessableincome,andthus

therearesufficientnexusbetweenexpensesandincome.Hence,theseexpenses

aredeductibleunders8-1.Onlypartofpre-paidcouncilwaterrateexpenseis

attributedtoincome-producingpurposeduring2013,andthustheexpenses39


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needtobeapportioned40.


1/7/2005-1/7/2012 2000+2300=$4300perincomeyear

1/7/2012-30/6/2013 2500+2400=$4900

1/7/2013-30/6/2014 200+3/12*2600=$850

Constructionexpenditureoftheproperty

Asdiscussioninrespectofrepaintingexpense,division43allowsdeductionfir

constructionexpenditureonbuildingsandothercapitalworks.Duetothefact

thatthehouseisrentedtoproduceassessableincome,Robertisentitledtoclaim

deductionforconstructionexpenditureonthepropertyunderdivision43atrate

specifiedins43-140duringtherentalperiods.Duetothefactthatdeduction

cannotoverwhelmamountofun-deductedconstructionexpenditure41,the

amountthatRobertisentitledtoclaimdeductionforconstructionexpenditure

dependstheamountthatpredecessorhadbeenclaimed.Thereisnosufficient

informationtoderivethedeductionthatRobertisentitledto.Besides,if

taxpayerhasclaimeddeductionforconstructionexpenditure,itwillreducecost

baseoftheproperty42.Consequentlyitwillaffectcapitalgaintaxwithregardto

disposaloftheproperty.Thereisnobalancingadjustmentwithregardtocapital

worksonsale.

Disposaloftheproperty

CapitalgainorlosscanonlybemadewhenCapitalGainTax(CGT)event43

40 s8-141 s43-1542https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Real-estate/Calculating-the-cost-base-of-real-estate/?page=243 s104-5


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happened.44 ThepropertyisaCGTasset45,andCGTeventA1occurwhenRobert

signsalecontract.46 Hence,thecapitalgainorlossfromdisposingtheproperty

isrecognizedon1March2016.Ifthecapitalproceedsexceedcostbased,the

excessiscapitalgain.47 Referringtos116-20,capitalproceedsis$870,000,and

thecostbaseispresentedinthefollowingtableconsistingoffiveelements48.

Roberthasheldthepropertyformorethan12monthssothatthecapitalgain

canbediscountedby50%49.

Mainresidenceexemption

RobertdidnotacquireanewpropertyinMelbourne,andassumingthathedid

nothaveanyotherpropertyinAustralia.Mainresidenceexemptioncanbe

appliedtodisregardcapitalgainfromdisposaloftheproperty50.However,

Robertcannotobtainthefullmainresidenceexemptionbecauseheusedthe

propertytoproduceincomeduringpartialownershipperiod.Accordingto

specialruleforfirstusetoproduceincome51,taxpayersareentitledtoafull

exemptionforthedwellingimmediatelybeforetheybeginrentingitout.

Furthermore,taxpayersaretakentohaveacquiredthedwellingatitsmarker

valueatthetimethattheyusedittoproduceincome52.Referringtoabsence

rule53,iftaxpayerusestheirmainresidenceforthepurposeofgenerating

assessableincome,themaximumperiodthatthepropertycanbetreatedasmain

residenceis6years.Hence,themarketvalueat1July2005isusedincalculating

costbase,andRobertisfullyexemptedfortheperiodbeforethisdate.Besides,

Robertisentitledtotreatthepropertyasmainresidenceduringhisabsencefor

44 s102-2045 s100-2546 s104-1047 s104-10(4)48 s110-2549 s115-25&115-1050 s118-11551 s118-19252 ibid53 s118-145


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sixyearsthatisformoneJuly2005tothirtyJune2011.

Capitalgaintax&Mainresidenceexemption

CGTEventA1 ITAA97 Value

Capitalproceeds $870,000

MoneyreceivedfromCGT

event

s116-20

(Less)Costbase s110-25

1stelement:acquisition

cost

Purchaseofproperty

s110-25(2)

s119-192(2)

$600,000

(Marketvalueat

1/7/2005)

2ndelement:incidental

cost

Stampduty(acquiring+

disposal)

Advertising(disposal)

Legalfees(acquiring+

disposal)

Borrowingcost

remaining

Mortgagedischarge

remaining

s110-25(3)

$18,000+$30,000

$1,500

$1,000+$1,800

$1,001

$344

3rdelement:costof

ownership

Interestexpense

remaining

s110-25(4)

$136,392


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Repaintexpense

remaining

$6,340

4thelement:expenditure

toincreaseor

preserve/installormove

anasset

Replacementofroof

remaining

s110-25(5)

$13,220

5thelement:expenditure

toestablish,preserveor

defendtitle

s110-25(6) Nil

Totalcostbase s110-25 $809,587

Capitalgain s104-10(4) $60,403

Mainresidenceexemption:s118-115

Specialruleforfirstusetoproduceincome:s118-192

Absencerule:s118-145

Ownershipperioddays 1/7/2005-1/3/2016 3897days

Non-mainresidencedays 1/7/2011-12/31/2013 915days

TotalCapitalGain*(Non-mainresidencedays/Ownershipperioddays)=

60403*(915/3897)=$14,182

(Less)Capitaldiscountof

50%

s115-10 $14182*50%=

$7091

Netcapitalgain s102-5 $7091