ILAC format to be followed with all the instructions
Taxation Law 30 June 2021 In preparation for a move interstate Travis Williams decides to dispose of some of his assets. Set out below are the details of the items sold. Assume that Travis is an Australian resident taxpayer. Travis advises you that he has carried forward capital losses of $300 from the sale of a rare book and $1,500 from the sale caravan. Date purchased Assets Cost $ Sale details Sale amount 1 August 2020 Boat $15,000 14 June 2021 $21,000 15 September 2010 Art sculpture $1,200 10 April 2021 $1,000 30 January 2015 Television $12,000 1 November 2020 $3,000 1 May 2008 House 10 Grey Road Ashgrove Qld Travis lived in the house from the time he purchased it until it was sold. $850,000 PLUS Stamp Duty $ 17,000 Legal Fees $2,200 Council search fees $400 Contract date 1 March 2021, settlement date 1 May 2021. $1,500,000 PLUS Advertising to sell the property $900 Legal fees $600 1 September 2014 Rio Tinto Shares $8,000 31 August 2020 $5,000 15 February 2019 on the date that Travis’ grandfather James passed away. The market value at date of death was $900,000. Travis inherited a unit at 2/22 Park Lane Broadbeach from his grandfather James. James purchased the unit under a contract signed 1 July 1985. The property settled on 31 July 1985. $300,000 when James acquired it on 1 July 1985. Stamp duty was payable at $6,000 and legal fees of $300. Contract signed 5 May 2021, settlement date 5 July 2021. At the time of sale, the property was vacant, and Travis had been using it only when he was on holidays. $1,200,000 PLUS Legal Fees $800 Marketing costs to sell the property $1,200 Required: You are required to determine Travis Williams’ ‘net capital gain’ for the 2020/2021 income year. You should consider the transactions listed above and carry out the necessary steps to determine whether a capital gain or loss is realised for each transaction before carrying out the necessary steps to calculate net capital gain. You should also consider the information provided relating to losses carried forward from prior years. Please disregard indexation (Div 114) and small business concessions (Div 152). Case Study Assessment – Question 2 Chapter 8 – Capital gains tax 30 June 2021 Tax Law Chapter 6 – Capital gains tax Objectives The aim of this chapter is to introduce you to the fundamental concepts involved in determining whether a taxpayer has had a capital gain or capital loss in an income year, and then to guide you through the actual calculation of the taxpayer’s ‘net capital gain’ for an income year. Chapter 6 – Capital gains tax - overview: 1. Introduction 2. Format of the CGT provisions 3. Residency of taxpayer 4. CGT events 5. CGT assets 6. Timing of acquisitions 7. Cost base 8. Capital proceeds 9. Prima facie capital gain 10. Basic exemptions 11. Main residence exemption 12. Overlap between CGT and income 13. Net capital gain (NCG) steps 14. Current year capital losses 15. Carried forward prior year capital losses 16. Discount capital gain or Indexation of cost base 17. Small business concessions 18. Inclusion of NCG in assessable income 19. Restrictive covenants 20. Conclusion 1.Introduction Students are reminded that capital gains are not ordinary income, and are in fact statutory income. A net capital gain is included in a taxpayer’s assessable income under section 102-5 of the ITAA97. 1.1Features of the capital gains tax (‘CGT’) system Reading: · Text at paragraphs 7-000 and 7-030 The capital gains tax (CGT) legislation is contained in the ITAA97 (and the ITAA36 for CGT events that happened before 1 July 1998) and has its own derivation rules. Any resulting net capital gain is added to the taxpayer’s assessable income for the year, such that any resulting taxable income is then subject to the appropriate rate of tax. CGT applies to assets acquired on or after 20 September 1985 (or deemed to be acquired since that date). · Assets acquired on or after 20 September 1985 are referred to as ‘post-CGT assets’. · Assets acquired before 20 September 1985 are referred to as ‘pre-CGT assets’. CGT only applies to realised gains (that is, it is only when a taxpayer disposes of a CGT asset that the taxpayer becomes potentially liable for tax on it). · For assets acquired before 11:45am EST 21 September 1999, the taxpayer may be eligible to use the indexation method. · For assets acquired after 11:45am EST 21 September 1999, the taxpayer may be eligible to use the discount method if certain conditions are met. · With assets acquired before 11:45am EST 21 September 1999 but disposed of after 11:45am EST 21 September 1999, the taxpayer may choose between the indexation and discount methods (if they meet the eligibility conditions) and select the method that gives them the smallest capital gain. Capital losses are “quarantined” – they can only be offset against capital gains. They cannot be used to offset other assessable income. 1.2Summary of the September 1999 tax reforms In response to recommendations made by the Ralph Review of Business Taxation, the Federal Government implemented a number of CGT reforms, including: · The removal of the averaging provisions from 21 September 1999 · Indexation is frozen at 30 September 1999. · The discount method was introduced for assets acquired from 11:45am EST 21 September 1999 1.3Assets acquired prior to 20 September 1985 Reading: · Text at paragraphs 7-015 and 6-490 · Section 25A of ITAA36 · Section 15-15 of ITAA97 · FCT v Whitfords Beach Pty Ltd (1982) 150 CLR 355; 82 ATC 4031 Most capital gains were not assessed; however, section 25A of the ITAA36 (formerly paragraph 26(a)) attempted to tax a profit arising from the sale by the taxpayer of any property acquired by him or her for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme. However, this provision was not very effective as it relied on proving the taxpayers’ intention. If a taxpayer bought and sold property within a year that was a pretty good indication that the taxpayer's intention was to make a profit by sale. If the taxpayer held the property for a longer period that would indicate that they intended to hold it as an investment. It has always been difficult to prove what a person’s intentions were at the time of acquiring an asset. Nonetheless when dealing with pre-CGT assets, you still need to be aware of two provisions that may apply to pre-CGT assets: s 25A of the ITAA36 and s 15-15 of the ITAA97. There are still land, shares, and other assets in Australia which have been acquired by the taxpayer before 20 September 1985, and which may not be sold for another few decades. Therefore, the pre-CGT intention-based system is still relevant. 1.3.1First limb of section 25A Section 25A had two limbs. The first limb still applies to property acquired prior to CGT with a profit-making by sale intention. Section 25A would only apply to a sale of pre-CGT property with a profit making by sale intention, which is not a profit making undertaking or plan. If you think about it, anyone who acquired property before 20 September 1985 with a profit making by sale intention probably would have sold it by now. A profit making by sale intention has to be the taxpayer’s dominant purpose when they acquire the property. Indications of a taxpayer’s dominant purpose include: the length of time between purchase and sale, the use of the asset between purchase and sale, the reason for selling, any past history of similar transactions, prior attempts to sell the property, the taxpayer’s occupation, the nature of the property, and improvements made to increase the value. 1.3.2Second limb of section 25A (now s 15-15) The second limb of section 25A has been replaced by s 15-15 of ITAA 97 dealing with profit-making undertaking or plans. Section 15-15 has a limited application. It would apply where a profit would not be assessable as ordinary income, and it’s from a profit-making undertaking or plan that involves the sale of pre-CGT property. For example, where a taxpayer owns pre-CGT land that they want to sub-divide and develop, this could be a profit-making undertaking involving pre-CGT property. 1.3.3Value shifting CGT may apply to some assets acquired before 20 September 1985 (pre-CGT assets) by companies and trusts where the underlying beneficial interest of the company or trust has changed. This is called "value shifting". The rules are designed to ensure pre-CGT assets held by companies or trusts do not get effectively transferred by selling the shares or units to different owners, and retain their pre-CGT status. If there is a change of majority ownership of the company or trust, then the pre-CGT assets are deemed to be acquired post-CGT at the date of the change. 1.3.4Superannuation funds There are unique rules for calculating capital gains for a complying superannuation fund. CGT applies in Australia to assets acquired after 19 September 1985. For assets acquired prior to the 20 September 1985, CGT does not apply. However, for complying superannuation funds, this is not the case by virtue of s 295-90 ITAA97, which deems all assets owned by the super fund on 30 June 1988 to have been acquired on that date. Hence complying super funds no longer have any pre-CGT assets. Note that this rule does not apply to non-complying super funds. The cost base for a pre-CGT asset that is caught as a CGT asset under this deeming rule is the market value of the asset at 30 June 1988 or the actual cost of acquisition, whichever gives the smaller gain or loss on disposal. The cost base is indexed from 1 July 1988 up until indexation was frozen at 30 September 1999. For assets acquired from 21 September 1999 the new CGT discount system applies such that a complying super fund may be entitled to a 331/3% discount on an eligible capital gain. The taxation of superannuation funds is covered in more detail in the advanced tax course