Questions On Taxation Law

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Question :


BA317 Taxation Law

Question 1  (5 marks)

On 20 September 2005 Louisa paid $500,000 for an investment property and incurred the following costs:

  • In October 2005 stamp duty and legal costs on acquisition $25,000
  • In June 2010 Louisa added an upstairs extension to the property at a cost of $250,000
  • In November 2015 Louisa paid $5,000 legal costs to defend title to her property as a result of a dispute with a neighbour in respect to the boundary line.
  • During the period of time Louisa owned the property she paid $25,000 rates and taxes which were tax deductible.

On1 June 2017 Louisa sold the property. The sale price was $1,500,000.

Louisa had a prior year capital loss amounting to $40,000

(a)Calculate the cost base of the property ( 2 marks)

(b)What type of CGT event is the sale of this property? Calculate the capital gain Louisa made that’s liable to capital gains tax ( 3 marks)

Question 2 ( 5 marks)

Which (if any) of the following expenses would be ‘incidental and relevant’ and have an essential character that stamps them as ‘business’ as opposed to ‘living’ expenses.  Cite relevant law.

(a)hairdressing costs by a model. Would your answer be different if she had 3 hair dressing appointments per week on average to meet requirements of her clients/employers?; (1 mark)

(b)additional food and vitamins and consumed by a professional athlete; (1 mark)

(c)sunscreen worn by a bricklayer; (1 mark)

(d)an alarm clock owned by a night-shift worker; (1 mark)

(e)moisturising cream worn by a flight attendant. (1 mark)

Question 3 (5 marks)

Consider whether any of the following will be depreciable items under s 40-30 of the ITAA and give reasons why?

  1. Buildings in respect of which Div 43 deductions are available: (1 mark)
  2. Patents  (1 mark)
  3. Goodwill: (1 mark)
  4. Land: (1 mark).
  5. Trading stock: (1 mark)

Question 4 (5 marks)

On 1 April 2017 Yan’s employer gave him a $100,000 loan at a low rate of interest (2.25%). He used $70,000 to buy his home which is his main residence, and $30,000 to buy a rental that he receives rent from

Advise Yan’s employer as to the FBT and income tax consequences of the above loan arrangement (including any deductions the employer might be entitled to) and calculate the FBT payable. Assume the employer is not liable to GST .



Instructions to Candidates:  

You can pick either Option A or Option B.

Option A

Pick an area of Taxation Law from the following list:

  • Fringe Benefits Tax ;
  • Capital Gains Tax; or
  • Taxation of companies and shareholders (including dividend imputation),

In relation to your chosen area of Taxation Law answer the following questions:

1.Discuss briefly this part of Taxation Law and its objective.  Here you can include discussions of revenue raising; economic or community benefit, equity and efficiency amongst others.

2.Discuss briefly the history of this tax measure.  Discuss any important amendments including any recent amendments.

3.How effective has this tax measure been in meeting its objectives? What if any changes would you suggest to the tax measure to better meet its objectives? Are you aware of any proposed changes?


Option B

Give a presentation on the issue on deductions.  Discuss what would happen if Australia did not have a deduction provision.  

You might consider situations where no deductions are allowable and we are taxed on net profits or where all losses and outgoings are deductible.

Should deductions be capped to what are reasonable expenses rather than actual expenses?

Further on the assumption that the following amounts are not deductible under ITAA97 s 8-1 or specific deduction provisions:

  1. Costs of travel to work.
  2. Costs of child minding for a working parent.
  3. Knee reconstruction costs for a footballer.
  4. Education expenses.
  5. Income tax.

What would be the net result of an income tax regime that allowed a deduction for all of the above items (as well as other worthy items you might care to add)?

Here you might discuss whether they should they be deductible in the course of determining a correct assessment of a taxpayer’s true income or deductible on some concessional basis or whether a cash subsidy is a preferred option?

Does the tax-free threshold partly address these issues?

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Answer :



Ans- As per the guidelines of American taxation office (ATO), the cost base of a property has the following elements [Guide to CGT (2003-04)]

  1. Amount paid to aquire the property asset 
  2. Incidental costs of the CGT event or of acquiring the CGT asset, excluding the expenditure for which there is a deduction for income tax purposes in any year
  3. Non-capital costs associated with owning the asset, e.g. rates, land taxes, repairs and insurance premiums, etc., excluding the costs for which there is a deduction for income tax purposes in any year
  4. Capital costs associated with increasing the value of the asset, e.g. any major addition to the body of the asset that increased its usefulness and value.
  5. Capital costs of preserving or defending the ownership of or rights to your asset

Hence, in the given situation, the cost base of the investment can be calculated as below-

                                = $500,000 + $25,000 + + $5,000 + $250,000

                                = $780,000


Ans- As per ATO guidelines, capital gains tax (CGT) events are the different types of transactions or events that might result in a capital gain or loss [Capital Gain Tax (2008)]. In this situation, the event sale of this property is a CGT event which is listed under ‘End of a CGT asset’. 

The capital gain incurred by Louisa that is chargable under capital gains tax is as calculated follows-

Sale price = $1,500,000

Prior year capital loss = $40,000

Cost base of the property = $780,000

Capital Gains taxable= $1,500,000 – [$780,000 + $40,000]

                                     = $680,000


Ans- As per guidance provided by the AASB [Characteristics of Expenses (2006)], the classification of expenses as business and living expenses on the given situations are as follows-

(a) The expense related to hairdressing by a model who earns a living in the show business. It has been mentioned that she generally has 3 hair dressing appointments per week on average to meet requirements of her clients/employers. This is a business expense.

(b) Additional food and vitamins and consumed by a professional athlete is a business expense, because maintaining health, strength and physique as per the requirement of the sport helps the athlete earn a living for himself. Hence, even if it’s an additional dosage it will be considered a business expense.

(c) The expense for sunscreen worn by a bricklayer is a non-business and personal expense, because even if he doesn’t apply the sunscreen it won’t affect his profession. It is his personal lifestyle expense. 

(d) An alarm clock owned by a night-shift worker is a non-business and personal expense, because alarm clock is not a necessity to the business. It is his personal need that he needs an alarm clock to wake up.

(e) The expense related to moisturising cream worn by a flight attendant is a non-business and personal expense, because looking good and maintain your skin does help you do the job but it isn’t a primary skill required for the job. Hence, it is her personal expense to maintain her beauty and health.


Ans- As per Sec 40-30 of the ITAA [Wolters Kluwer (May 2017)], 40-30(1)-

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, except:

(a) land; or

(b) an item of trading stock; or

(c) an intangible asset, unless it is mentioned in subsection (2).

As per subsection 40-30(2), these intangible assets are depreciating assets if they are not trading stock:

(a) mining, quarrying or prospecting rights;

(b) mining, quarrying or prospecting information;

 (c) items of intellectual property;

(d) in-house software;

(e) IRUs;

(f) spectrum licences;

(g) datacasting transmitter licences;

(h) telecommunications site access rights

As per the above definition, identification of a depreciable asset could be done in the given cases. Those are-

  1. Buildings in respect of which Div 43 deductions are available:  Not a depreciable item, because this section does not apply to capital works for which you can deduct amounts under [Division 43 Commonwealth Consolidated Acts (2008)].
  2. Patents : A depreciable item, because it provides access and ownership rights 
  3. Goodwill: Not a depreciable items as it is not included in the list of items. Also, because goodwill is not a tangible or intangible asset, it is a fictitious asset.
  4. Land: Not a depreciable items because even though it is a tangible asset, it is a part of the list of excluded asset which are not depreciable. Also because in real scenario, the value of land generally increases with time.
  5. Trading Stock: A depreciable item, because it falls under the list of intangible assets which are depreciable under section 40-30.


Ans- As per Chapter 8 of Fringe Benefits tax guide, issued by the Australian Taxation office [Loan and debt waiver fringe benefits (July 2018)], an employer is rightful to get fringe benefit taxation if he has cleared a debt of his employee or provided a loan to his employee at a very low or no rate of interest. The interest rate should be less than the statutory rate on interest which acts as a benchmark (currently 5.65%).

As per paragraph 8.5 of chapter 8, the taxable value of a loan fringe benefit is the difference between:

  1. the interest that would have accrued during the FBT year if the statutory interest rate had applied to the outstanding daily balance of the loan, and
  2. any interest that actually accrued.

This result is then further reduced by the otherwise deductible amount.

It is also to be noted that GST does not affect the taxable value of loan fringe benefits.

Let us now discuss in detail the case of Yan’s employer-

Loan provided by Yan’s employer = $100,000

Rate of interest = 2.25%

Amount spent on personal residence = $70,000

Amount received on a rental property where he gets rent from = $30,000

i.e., 70% personal use and 30% business use

Assumption: The employer is not liable to GST

Advice to Yan’s employer:

As we know that, the employer has the complete right to set the rate of interest on loan. He might or might not be aware of hoe Yan is going to use the fund borrowed. The employer should be mindful of the fact that  as per the guidelines, no FBT liability is assumed for that part of the loan which is used for commercial purposes, i.e. to produce income. 

Therefore, the employer should charge such a rate of interest that it is sufficient to avoid incurring FBT on that part of the loan used for private or domestic purposes. 

Calculation of FBT payable

The ideal taxable value of the loan fringe benefit without the otherwise deductible rule would be-.

= (Amount of loan x statutory interest rate) - (Amount of loan x actual interest rate charged)

= (100,000 x 5.65%) – (100,000 x 2.25%) = $3,400

If there was no interest on loan, the taxable value of the loan benefit would be-

= (Amount of loan x statutory interest rate)  

= (100,000 x 5.65%) = $5,650

In this situation of tax-free interest, the employee would have paid tax on the amount of-

= $5,650× 30% business use

= $1,695

Therefore, the taxable value = $3,400 – $1,695 = $1,705

And the tax benefit received to Yan’s employer will be on the amount of $1,705.