This report helps to understand the concept of Capital gain and capital allowance. Capital gain can be defined as the increase in the value of estate or capital assets that provide the high rate as compare to the price of purchase. Capital allowance is the value that can be spend on the assets of business and claimed against the taxable gain. It also analyse the concept of Capital gain tax (CGT) and their consequences on the sales. Apart from this it also calculates different costs of the assets.
Advise jasmine of the CGT consequences of the above sales. Include relevant legislative references to support the answer.
- According to the Australian tax laws, the main residence (home) is exempted from the capital gain tax. To get this exemption, it can be stated that the individual should resides in that particular property. As per the law, the empty property is not allowed for the exemption. It can be noted that if the person is living in the property but they are not the resident of Australia then in that situation they are not included under the main residence. There are certain situation in which dwellings can be considered as the main residence such as:
- The Personal belongings of the person are in it.
- The person and his family live in it.
- The address on which mail can be delivered.
- The address on the electoral roll.
- The services such as power and gas associated to house.
According to the Australian tax, the assets acquired before 20th September, 1985 in Australia is not included in the capital tax. So, it can be concluded that the jasmine’s home is purchased before the 1985 and it comes under the main residence. By observing both rules, it can be analysed that the main residence of jasmine’s does not comes under the ambit of capital gain tax and she is not bound to pay the tax on sale of his home (Kenny, 2012).
- According to the Australian tax law, motor vehicle and cars are exempted from the capital gain tax. As per the law, car can be exempted when it carry the passengers which are less in number that can be less than nine. This type of exemption can be applied to the private owner of the vehicle. It can be asserted that motor cars are exempted from the capital gain tax (ATO, 2019). There are certain cars which are not covered under the exemption , such as :
- Racing cars
- Taxi cabs
- Scooter or motorcycle
- Single seat sports car
- Van and other commercial vehicle
Therefore, it can be stated that jasmine sell the car and that can be exempted from the capital gain tax. In addition to this, the car of jasmine carries the less number of passengers and can be used for private purpose. Therefore, jasmine is not bound to pay the tax for the sale of car and she will neither gain nor loss anything.
- By observing the scenario, it can be asserted that jasmine is selling the small cleaning business that consist the business equipments and goodwill. According to the Australian taxation law, the sale of business includes the tangible and intangible assets. Tangible assets can be in form of inventory and machine. In tangible can be in form of trade name and goodwill. The capital loss and capital gain can be recorded in the income tax return and on that tax can be paid by person. Bu analysing this situation, it can be noted that the cost of acquisition is higher than the cost of sales as jasmine sold the equipments at less price. Therefore, it can be said that the jasmine suffers the capital loss (Kenny, 2012).
- It can be asserted that exemption comprises of the personal items that have been acquired for less than $10,000. Personal use items are those items that cannot be used for the business purpose; they can be used for the enjoyment or for personal use. According to the Australian tax laws, the assets which are below the value of $10,000 are not included under the ambit of CGT. It includes the assets such as furniture, boats, electrical goods and different items of household. If the value of assets can be sold for less than $10,000 then the person can be get exempted and the assets can be disposed. Therefore, it can be stated that the furniture sold by the jasmine does not included under the CGT (James, 2012).
- According to the Australian tax laws, the collectables consists those items that can be used for the personal purpose or for the enjoyment. It includes the antiques, jewellery, rare folios, coins and medallions etc. According to the rules of taxation, the collectable items have the value less the $5000 and that can be exempted under the capital gain tax. By analysing the scenario, it can be noted that jasmine acquired the painting worth $500; therefore no tax can be paid on the sale of paintings. But if she purchase a painting directly from the artist for the value of $1000 which mean that value of painting does not comes under the exemption as the value of painting is more than $500. Therefore there will be a capital gain on the sale of painting as jasmine purchased directly from the artist (Konvisarova, et. al., 2015).
In the given scenario, there are certain expenses that can be incurred towards the purchase of machine and that expenditures are related to the acquisition of CNC machine. It can be stated that the john visit the Germany and the main purpose of john to visit the Germany is to inspect the machineries. For this, he spends certain costs such as visiting cost that is $12000, installation cost etc. It also consists the cost of guiding rod and that will not be-treated as the part of assets (ATO, 2019). It also asserted the amount of depreciation and that becomes the liability on the person. The value of depreciation can be levied from the date of use of machinery or from other means (Ang, 2014).
Law and Application
According to the provisions of ATO, only those expenses form the part of cost which is necessary for the functioning of the product. In other words, all those expenditures which are relevant to form the assets and help them in their working As per the facts of the case, the value of CNC is $300000 and that will be recognised as the first cost. This value includes the cost which can be incurred or paid after 30 June 2005 and related to the assets. The other cost is installation cost that incurs the value of $25000 and that also comes under the ambit of assets. This type of assets starts depreciating when the firms begin to hold the value of asset.
In the case of MUNNERY v FC of T, Administrative Appeals Tribunal of Australia, 23 March 2012, the concept of cost is elaborated. In this the firm purchased the assets that are machine and they did not include the amount of installation. They also spend the amount for the purchase of assets and that can be recognised as the capital allowance. This type of allowance is helpful for paying the amount of tax and to track the rate of depreciation. These are non- recurring and long term in nature.
In addition to this, the second type of cost does not covered under the purview of first cost. It is that amount which can be paid after the installing and purchasing the assets of firm. These type of cost helps to maintain the standard and quality of assets and termed as the second type of cost. It also cost the different cost such as cost of destroying, maintenance and repairs, commission, advertisement and brokerage etc (Evans et. al., 2015).
According to the given scenario, the cost of guiding rod i$5000 includes in the expenses as it makes the programming faster and that leads to the effective system. It also includes the cost of travelling as it directly related to the value of assets. There are certain expenses which do not comes under the ambit of cost that is amount of tax. The expenses which are capital in nature and the deductible amount are not the part of cost.
Further, it can be stated that the machinery is imported in the month of November from Germany and installed in the month of January. So here the question arises regarding the date of starting and for the declining the asset value.
It can be analysed that the time limit for holding the machine for the valuation of depreciation can be treated as the assets and that can be used for the purpose of installation. Company also allowed the deduction in case of taxable amount and they also allowed the deduction when the amount is taxable and not amount to depreciate the company assets (James, 2012).
There are different types of expenditures that can be acquired by john for the installation of machinery. It is necessary to classify the expenses so that total amount of cast of capital assets can be reached. The main reason behind these classifications is the deductions that can be claimed against the expenditures which are necessary to create the product in running conditions.
Further to this, the company use the declining value as expenditure and that can be deducted from the value. If the person uses the assets for their own purpose then in that situation the tax is deductible. But on the other side if the asset can be used for the business purpose then in that case it is not deductible (Evans et. al., 2015). The company use the assets for different purposes; they can use for their own purpose and second for the office use. In this situation the tax can be levied when the assets can be used for the purpose of business.
In addition to this, the amount of machinery will be $33700 and on that value depreciation can be calculated, but if there is any generation in the value then in that situation depreciation can be charged on that additional amount. As per the rules, deductions can be allowed for the purpose of depreciation.
From the above description, it can be analysed that capital gain and capital allowance plays a vital role in the company. Capital gain can be for short and long term and that can be claimed on the income taxes. The assets determine the partial and full value and that can be claimed in the year. It also determines the amount of depreciation and that can be based on the value of assets. Apart from this, it can be stated that the cost can be fragmented in to two portions; the first portion is the direct cost that consist of labour cost and direct expenditure. The indirect cost includes the indirect expenses. The depreciation can be calculated according to the different methods that are through the diminishing or the prime cost. They have different method and that helps the organisation to specify the actual amount of assets.
- Ang, A., 2014. Asset management: A systematic approach to factor investing. Oxford University Press
- ATO. 2019. Capital gains tax. [online] Available at: https://www.ato.gov.au/General/Capital-gains-tax/ [Accessed on: 12th September 2019].
- Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: An alternative way forward. Austl. Tax F., 30, p.735.
- James, S., 2012. Australian Tax Research Foundation. In A Dictionary of Taxation, Second Edition. Edward Elgar Publishing Limited.
- Kenny, P., 2012. Post Implementation Reviews of Recent Australian Tax Reform. J. Australasian Tax Tchrs. Ass’n, 7, p.79.
- Konvisarova, E., Samsonova, I. and Vorozhbit, O., 2015. The nature and problems of tax administration in the Russian federation. Mediterranean Journal of Social Sciences, 6(5 S3), p.78.