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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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Name of the Student:

Name of the University:

Authors Note:

Table of Contents

Answer to part 1: 3

Answer to part 2: 6

Answer to part 3: 7

References: 9

 Answer to part 1:

The Division 100 of the Income tax Assessment Act 1997 provides a guide to the capital or losses. The section 100-35 of the Income tax Assessment Act 1997 provides that a capital gain is made if the amount received from the CGT event is more than the cost associated with that CGT event and if it is vice versa then it is capital loss. That means on selling a capital asset, real estate, shares or other such assets, a person, whether an individual or an organization with separate legal identity, generally makes a gain or loss; these are termed as capital gain or capital loss of such person (Gitman et al. 2015). The difference between the cost of the asset that the person has incurred to acquire it and the amount that the person has received from the disposal of such asset is either capital gain or capital loss. When the amount received from the disposal of a capital asset is more than the cost incurred on acquiring such asset then the resultant will be capital gain. However, in case the cost incurred in acquiring the asset is more than the amount received on disposal of such asset then the resultant will be capital loss (Best et al. 2015).

The Section 6-5 of Income Tax Assessment Act, 1997, provides the meaning of the ordinary income. It states that income according to ordinary concept should be treated as ordinary income. On the other hand, the section 6-10 of the Income Tax Assessment Act 1997 states that income that is not an ordinary income is a statutory income. The section 6-25(2) of the Income tax Assessment Act 1997 states that if an income is caught between ordinary and statutory income then the specific provision shall apply. Therefore in accordance with the section 102-5 of the Income tax Assessment Act 1997 it can be said that the capital gain should be included in the assessable income as statutory income (Forsyth et al. 2014).

The Section 25-10 of ITAA provides that one can deduct expenditures incurred on repair and maintenance on a depreciating asset only if such asset has sole been used to generate or to produce assessable income. Thus, in case the sole purpose of the depreciating asset includes anything else apart from using it for generation and production of assessable income then the whole expenditures incurred on repair and maintenance of the asset would not be allowed as deduction for computation of assessable income of the tax payer concern (McLachlan 2013). According to sub-section 2 of this section (25-10 of ITAA) in case the property was party used for income generation and party used for other purposes then proportionate amount of such expenditures shall be allowed as deduction for computation of such assessable income (Hoffman and Smith 2014). No capital expenditure shall be allowed as deduction in computation of assessable income provided in sub section 3 of section 25-10 of ITAA.

In determining the capital gain the concept of first element costs has to be worked out in relation to a depreciating asset in accordance with the provision of section 40-180 of ITAA. According to the provision of this section the first element is,

(a) The amount specified in an item; or

(b) The amount that has been paid by the existing owner to hold the asset.

In this case since the requirement is only about advising the client, i.e. Cassandra Pty Ltd of the capital gain tax consequences other consequences of taxation has been ignored in this part of the document in respect of tax liability of Cassandra Pty Ltd (Douglas et al. 2014).

On the basis of the information provided in the case study Cassandra Pty Ltd has purchased a building inclusive of an attached building which had to be dismantled and demolished to construct a theatre for the company. After running its own theatre in the newly constructed theatre the Cassandra Pty Ltd decided to sale the theatre to another company. The sale proceeds from the disposal of the theatre will attract capital gain tax in accordance with the provisions of the ITAA, 1997.

Taking into consideration the financial transactions in relation to construction of theatre, land acquisition and subsequent disposal of the theatre the following calculation has made to ascertain the capital gain tax consequences of Cassandra Pty Ltd.

Computation of Capital Gain   


 Amount ($)

 Amount ($)

 A. Sale proceeds  


 Computation of cost base  

 Purchase price of the land  


 Demolition cost of derelict building  


 Theatre construction cost  


 Interest cost on bank loan  


 Stamp duty charges  


 Legal fees for purchase  


 B. Cost base  


 Capital gain (A-B)



Table 1: Computation of capital gain

(Source: created by Author)

  Thus, the capital gain of Cassandra Pty Ltd for the particular income year on sale of the theatre is $1343000.00. The cost construction, land acquisition cost, stamp duty charges, legal fees for purchasing the land, building demolition costs and interests for the duration of construction have been considered in calculating the cost base of theatre (Gurran and Phibbs 2013). Costs relating to theatre business have been ignored in computing the capital gain of the company as these are costs which would have been deducted if the assessable income of the company from theatre business was to be ascertained. As can be seen that the company will have to pay capital gain tax on $1343000.00, i.e. on the amount of capital gain it made on the sale of theatre.

Answer to part 2:

The amount of $500000.00 incurred by Oscar, the payment of which was decided to be made in four equal installments over a period of 16 months of which though the company failed to pay last two installments will not be allowed as deduction in computation of assessable income of Oscar Pty Ltd as the expenditure is capital expenditure in nature. Thus, the expenditure will be added to the cost of theatre on which the company can claim depreciation (Adhikari and Alm 2016). This depreciation would have been allowed as deduction in computation of the assessable income of the company from its theatre business. However, apart from that all the expenses incurred by the company for and only for the business of the theatre will be allowed as deduction in computation of assessable income of the company from its theatre business. Accordingly, the salary costs of $15000 per week to employees which include carpenter, stage and lighting technicians, finance manager and a marketing manager; material expenses of $50000 to be used for construction of stage requiring for the play; and all the payments to be made to actors i.e. $500 per rehearsal and $1000 per performance will be allowed as deduction in computing the assessable income / loss from the theatre business of the company for the particular income year to which these relate (van den Nouwelant et al. 2015).

Oscar Pty Ltd is an organization which is in the business of theatre and thus, all expenses incurred by the company in relation to the stage play and theatre will be allowed as deduction in computation of taxable income from theatre business provided these are expenditures revenue in nature. In case of capital expenditure such as construction or strengthening of the theatre building to protect from earthquake shall be added to the cost of building since the expenditure has strengthen the existing building and enhanced its life period by a certain margin and will protect the building from future earthquake like the one took place in Christchurch, New Zealand. Accordingly, the expenses incurred as discussed above for creating and developing plays to be performed in theatre will be allowed as deduction to compute the taxable income of the company from theatre business (Fitzsimons and Carr 2014).


 Amount ($)

 Allow ability / non-allow ability  


Strengthening work in building  


 not allowed  

 Capital expenditure in nature  

Salary costs of employees  

 $15000 Per week  


 Exclusively incurred for the purpose of business.  

Material cost necessary for stage  



 Exclusively incurred for the purpose of business.  

Rehearsal expenses  

 $500 Per rehearsal  


 Exclusively incurred for the purpose of business.  

Performance expenses

 $1000 to $1500 Per performance  


 Exclusively incurred for the purpose of business.  


Table 2: Expenditure

(Source: created by Author)

Answer to part 3:

In accordance with the concept of ordinary income as provided in section 6-5 of ITAA 1997 failed installment by customers will not be considered as an ordinary income until unless the installments have been paid at a later stage by the customers. Thus, in this case the contact between Ernest Construction Pty Ltd and Oscar Pty Ltd provided that the later will made four equal installment of $125000 within a period of 16 months to the former (Kucukvar et al. 2014). The former, i.e. Earnest Construction Pty Ltd will only be under an obligation to include the installments received from Oscar if the same has actually been received as provided in section 6-5 of ITAA 1997. Since in this case Oscar Pty Ltd has failed to make payment of the last two installments of $125000 to Earnest Construction Pty Ltd the later will obviously not include the installment in its revenue to ascertain its assessable income. The failed installments in-fact should be disclosed as bad debts in the books of accounts and shall be deducted from revenue, if already included, as bad debts to reduce its assessable income from business (Burkhauser et al. 2016).  

However, if at a later date, in case the Oscar Pty Ltd made good of its failed installments by making payment in the future to Earnest Construction Pty Ltd then, the later shall include the installments received as revenue of the business to ascertain its assessable income form business for the income year in which the installments were to be paid (McCluskey 2015).

Based on the above it is clear that only if at a future date Earnest Construction Pty Ltd gets to receive the installments of $125000.00 that Oscar Pty Ltd failed to pay during the income year to be ended on 30 June, 2018 then the same shall be included in assessable income of Earnest Construction Pty Ltd for the year in which the installments shall be received by the company.  


Adhikari, B. and Alm, J., 2016. Evaluating the economic effects of flat tax reforms using synthetic control methods. Southern Economic Journal, 83(2), pp.437-463.

Best, M.C., Brockmeyer, A., Kleven, H.J., Spinnewijn, J. and Waseem, M., 2015. Production versus revenue efficiency with limited tax capacity: theory and evidence from Pakistan. Journal of political Economy, 123(6), pp.1311-1355.

Burkhauser, R.V., Hahn, M.H. and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.

Douglas, H., Bartlett, F., Luker, T. and Hunter, R. eds., 2014. Australian feminist judgments: Righting and rewriting law. Bloomsbury Publishing.

Eccleston, R. and Gray, F., 2014. Foreign accounts tax compliance act and American leadership in the campaign against international tax evasion: revolution or false dawn?. Global Policy, 5(3), pp.321-333.

Fitzsimons, J.A. and Carr, C.B., 2014. Conservation covenants on private land: issues with measuring and achieving biodiversity outcomes in Australia. Environmental management, 54(3), pp.606-616.

Forsyth, P., Dwyer, L., Spurr, R. and Pham, T., 2014. The impacts of Australia's departure tax: Tourism versus the economy?. Tourism Management, 40, pp.126-136.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.

Gurran, N. and Phibbs, P., 2013. Housing supply and urban planning reform: The recent Australian experience, 2003–2012. International Journal of Housing Policy, 13(4), pp.381-407.

Hoffman, W.H. and Smith, J.E., 2014. South-Western Federal Taxation 2015: Individual Income Taxes. Cengage Learning.

Kucukvar, M., Egilmez, G. and Tatari, O., 2014. Sustainability assessment of US final consumption and investments: triple-bottom-line input–output analysis. Journal of cleaner production, 81, pp.234-243.

Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.

Mansell, K., 1. Capital Allowances–Division 40 References.

McCluskey, M.T., 2015. Framing Middle-Class Insecurity: Tax and the Ideology of Unequal Economic Growth. Fordham L. Rev., 84, p.2699.

McLachlan, R., 2013. Deep and Persistent Disadvantage in Australia-Productivity Commission Staff Working Paper.

van den Nouwelant, R., Davison, G., Gurran, N., Pinnegar, S. and Randolph, B., 2015. Delivering affordable housing through the planning system in urban renewal contexts: converging government roles in Queensland, South Australia and New South Wales. Australian Planner, 52(2), pp.77-89.

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