Principles of Taxation Law2020
Answers to Questions
CHAPTER 14 – CAPITAL ALLOWANCES
On 1 June 2018, Roganpurchased a new scooter for $6,000 for use in his business. The Commissioner has assessed the effective life of scooters as three years. Rogandecided to upgrade to a scooter and sold the old one to a reputable second-hand dealer for $3,000 on 31 August 2019. Rogan estimates that he used the scooter for business purposes 90% of the time.
Advise Roganof his income tax consequences arising on the disposal of the scooter under both the diminishing value method and the prime cost method. Assume that Rogan does not qualify as a small business entity.
Prime cost method (s 40-75):
Decline in value:
Adjustable value = $6,000 – $2,504= $3,496:ITAA97, s 40-85
Termination value = $3,000
Termination value < Adjustable value, therefore Rogan has a deduction of $496for the year:ITAA97, s 40-285(2).
However, as Rogan only used the scooter for business purposes 90% of the time, his depreciation deductions would have been reduced by 10%; therefore, his balancing adjustment deduction must also be reduced by 10%. Therefore, balancing adjustment deduction = $496x 90% = $446: ITAA97, s 40-290.
Diminishing value method (s 40-72):
Decline in value:
Adjustable value = $6,000 – $4,324= $1,676:ITAA97, s 40-85
Termination value = $3,000
Termination value > Adjustable value; therefore Rogan has an assessable income amount of $1,324for the year:ITAA97, s40-285(1).
As Rogan only used the scooter for business purposes 90% of the time, his depreciation deductions would have been reduced by 10%; therefore, his balancing adjustment amount must also be reduced by 10%. Therefore, balancing adjustment amount= $1324x 90% = $1,192: ITAA97, s 40-290.
Jack and Jill jointly own and run a bed and breakfast business. The business is run through their partnership, J & J Bed and Breakfast. Jack and Jill also own an investment property together which they purchased in equal proportions. During the year, they undertook the following transactions:
Advise Jack and Jill of their income tax consequences arising out of the above information under both the diminishing value method and the prime cost method (if relevant) for the year ended 30 June 2020. Assume that the business does not qualify as a small business entity.
Jack and Jill can each claim half of the depreciation expense as a deduction.
Gil has had a long-running dispute with his landlord regarding his tenancy agreement for his store’s premises. Although he has a 10-year lease over the premises, the landlord is trying to get him to vacate the premises early. The premises are integral to the business as Gil has a post office licence which is area specific and Gil would not be able to lease any other premises in the area due to availability and zoning.
Advise Gil of his tax consequences in relation to any legal fees incurred in defending his tenancy agreement.
The legal fees are likely to be non-deductible under s 8-1 as they are a capital expense. The fees relate to Gil’s income earning structure rather than his income earning activities (Sun Newspapers):see [12.170]–[12.210].
Consider whether the expenses are deductible under s 40-880 of ITAA97as capital business-related expenses:see [14.180]–[14.210].
Acme Pty Ltd acquired a machine from its parent company for $500,000 on 1 January of this year. The market value of the machine at that time was $300,000. The parent company has owned the machine for three years and calculated its depreciation deductions using the prime cost method and an effective life of eight years. Calculate the decline in value of the machine for Acme this income year. Assume that it is not a leap year and Acme is not a small business entity.
Following on from 14.4, Acme sold the machine to an unrelated party for $400,000 on 1 December of this year. Advise Acme of its tax consequences on disposal of the machine.
An extract of the asset register of Alpha Pty Ltd (“Alpha”) for the 2018-19 income year is as follows:
|Asset||Cost||Opening Adjustable Value||Method||Effective Life||Decline in Value for This Period||Closing Adjustable Value|
|Desktop Computer||1,350||1,350||Diminishing Value||3 years||450||900|
|Furniture||5,000||3,000||Prime Cost||10 years||500||2,500|
|Filing Cabinets||1,200||1,080||Prime Cost||10 years||120||960|
All depreciable assets are for 100% business use and Alpha uses a low-value pool for all eligible assets. The closing value of the low-value pool at 30 June 2019 was $5,300. Alpha purchased a printer on 5 June 2020for $700.
Advise Alpha of the income tax consequences arising out of the above information for the 2019-20 income year assuming Alpha is not a small business entity.
|Step 1||Low cost assets x 18.75% Printer purchased: $700 x 18.75%||$131.25|
|Step 2||Second element costs relating to the low-value assets added to the pool x 18.75% Nil|
|Step 3||Multiply the closing pool balance for the previous year and the opening adjustable value of low-value assets added to the pool by 37.5% Closing pool balance at 30 June 2019: $5,300 x 37.5%Low-value assets added to the pool (computer): $900 x 37.5%||$1,987.50 $337.50|
|Step 4||Sum of amounts from steps 1, 2 and 3 equals the decline in value for 2019-20:||$2,456.25|
Jacaranda Pty Ltd is a new company operating in Perth, West Australia. The company signed a commercial lease for a period of several years with an option to further extend the lease at its discretion. The company incurred various expenses in making the leased premises suitable for its business. The expenses relate to the leased premises and are considered a capital expense.
Advise Jacaranda as to its income tax consequences arising out of the above information.
The expenses are not deductible under s 8-1 or s 25-10 as they are a capital expense. They relate to leased premises therefore not related to Jacaranda’s capital asset. Therefore, the expenses should be deducted over 5 years under s 40-880.
Based on ATO PBR Authorisation Number: 1051508300142.
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