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PoTL 2018 Ch 14 Answers.docx - Principles of Taxation Law...

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Principles of Taxation Law 2018 Answers to Questions CHAPTER 14 – CAPITAL ALLOWANCES Question 14.1 On 1 June 2016, Rogan purchased a new scooter for $6,000 for use in his business. The Commissioner has assessed the effective life of scooters as three years. Rogan decided to upgrade to a scooter and sold the old one to a reputable second-hand dealer for $3,000 on 31 August 2017. Rogan estimates that he used the scooter for business purposes 90% of the time. Advise Rogan of 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. Answer Prime cost method (s 40-75) : Decline in value: 1 June 2016–30 June 2016: $6,000 x (30/365) x (100% / 3) = $164 1 July 2016–30 June 2017: $6,000 x (366/365) x (100% / 3) = $2,005 1 July 2017–31 August 2017: $6,000 x (62/365) x (100% / 3) = $340 See [14.70] [14.90] . Adjustable value = $6,000 - $2,509 = $3,491: ITAA97, s 40-85 Termination value = $3,000 Termination value < Adjustable value, therefore Rogan has a deduction of $491 for 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 = $491 x 90% = $442: ITAA97, s 40-290. See [14.100] [14.120] . 1 © 2018 Thomson Reuters (Professional) Australia Limited
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Diminishing value method (s 40-72) : Decline in value: 1 June 2016–30 June 2016: $6,000 x (30/365) x (200% / 3) = $329 1 July 2016–30 June 2017: ($6,000 - $329) x (366/365) x (200% / 3) = $3,791 1 July 2017–31 August 2017: ($6,000 - $329 - $3,791) x (62/365) x (200% / 3) = $213 See [14.70] [14.90] . Adjustable value = $6,000 - $4,333 = $1,667: ITAA97, s 40-85 Termination value = $3,000 Termination value > Adjustable value; therefore Rogan has an assessable income amount of $1,333 for the year: ITAA97, s 40-285(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 = $1333 x 90% = $1,200: ITAA97, s 40-290.
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