HI6028 Taxation theory, practice and law|Sample Assignment

Question 1 (10 marks)

You are working as a tax consultant in Mayfield, NSW. Your client is an investor and antique collector. You have ascertained that she is not carrying on a business. Your client provides the following information of sales of various assets during the current tax year:

• Block of vacant land. On 3 June of the current tax year your client signed a contract to sell a block of vacant land for $320,000. She acquired this land in January 2001 for $100,000 and incurred $20,000 in local council, water and sewerage rates and land taxes during her period of ownership of the land. The contract of sale stipulates that a deposit of $20,000 is payable to her when the contract of sale is signed and the balance is payable on 3 January of the next tax year, when the change of ownership will be registered.

• Antique bed. On 12 November of the current tax year your client had an antique four-poster Louis XIV bed stolen from her house. She recently had the bed valued for insurance purposes and the market value at 31 October of the current tax year was $25,000. She purchased the bed for $3,500 on 21 July 1986. Although the furniture was in very good condition, the bed needed alterations to allow for the installation of an innerspring mattress. These alterations significantly increased the value of the bed, and cost $1,500. She paid for the alterations on 29 October 1986. On 13 November of the current tax year she lodged a claim with her insurance company seeking to recover her loss. On 16 January of the current tax year her insurance company advised her that the antique bed had not been a specified item on her insurance policy. Therefore, the maximum amount she would be paid under her household contents policy was $11,000. This amount was paid to her on 21 January of the current tax year.
• Your client acquired a painting by a well-known Australian artist on 2 May 1985 for $2,000. The painting had significantly risen in value due to the death of the artist. She sold the painting for $125,000 at an art auction on 3 April of the current tax year.
• Your client has a substantial share portfolio which she has acquired over many years. She sold the following shares in the relevant year of income:
• 1,000 Common Bank Ltd shares acquired in 2001 for $15 per share and sold on 4 July of the current tax year for $47 per share. She incurred $550 in brokerage fees on the sale and $750 in stamp duty costs on purchase.
• 2,500 shares in PHB Iron Ore Ltd. These shares were also acquired in 2001 for $12 per share and sold on 14 February of the current tax year for $25 per share. She incurred $1,000 in brokerage fees on the sale and $1,500 in stamp duty costs on purchase
• 1,200 shares in Young Kids Learning Ltd. These shares were acquired in 2005 for $5 per share and sold on 14 February of the current tax year for $0.50 per share. She incurred $100 in brokerage fees on the sale and $500 in stamp duty costs on purchase.
• 10,000 shares in Share Build Ltd. These shares were acquired on 5 July of the current tax year for $1 per share and sold on 22 January of the current tax year for $2.50 per share. She incurred $900 in brokerage fees on the sale and $1,100 in stamp duty costs on purchase.
• Your client also has an interest in collecting musical instruments. She plays the violin very well and has several violins in her collection, all of which she plays on a regular basis. On 1 May of the current tax year she sold one of these violins for $12,000 to neighbor who is in the Queensland Symphony Orchestra. The violin cost her $5,500 when she acquired it on 1 June 1999.

Your client also has a total of $8,500 in capital losses carried forward from the previous tax year, $1,500 of which are attributable to a loss on the sale of a piece of sculpture which she sold in April of the previous year.

Required:

Based on this information, determine your client’s net capital gain or net capital loss for the year ended 30 June of the current tax year.

Your client is an investor and antique collector. You have ascertained that she is not carrying on a business. Your client provides the following information of sales of various assets during the current tax year. Based on this information, determine your client’s net capital gain or net capital loss for the year ended 30 June of the current tax year.

(a) Block of vacant land. On 3 June of the current tax year your client signed a contract to sell a block of vacant land for $320,000. She acquired this land in January 2001 for $100,000 and incurred $20,000 in local council, water and sewerage rates and land taxes during her period of ownership of the land. The contract of sale stipulates that a deposit of $20,000 is payable to her when the contract of sale is signed and the balance is payable on 3 January of the next tax year, when the change of ownership will be registered.

10. a) The sale of land is considered as CGT event and the land is CGT asset from s 108-5 then the sale of land triggers Event A1 which occurs when the contract is signed on 3 June: s 104-10. The capital proceeds are $320,000 and the fact that $20,000 of the sale price is paid next year irrelevant in this case. The total cost base is $120,000. This is calculated by adding together the following amounts:

• $100,000 (the first element of the cost base: acquisition under s 110-25 (2)).
• $20,000 (the third element of the cost base: rates and land taxes under s 110-25(4) as the land was acquired after 20 August 1991)

Therefore the capital gain exists because the capital proceeds are greater than the total cost base and capital gain is $320,000-$120,000=$200,000, this amount is an eligible discount capital gain under s 115-25 (1).

(b) Antique bed. On 12 November of the current tax year your client had an antique four-poster Louis XIV bed stolen from her house. She recently had the bed valued for insurance purposes and the market value at 31 October of the current tax year was $25,000. She purchased the bed for $3,500 on 21 July 1986. Although the furniture was in very good condition, the bed needed alterations to allow for the installation of an innerspring mattress. These alterations significantly increased the value of the bed, and cost $1,500. She paid for the alterations on 29 October 1986. On 13 November of the current tax year she lodged a claim with her insurance company seeking to recover her loss. On 16 January of the current tax year her insurance company advised her that

the antique bed had not been a specified item on her insurance policy. Therefore, the maximum amount she would be paid under her household contents policy was $11,000. This amount was paid to her on 21 January of the current tax year.

1. b) The loss of this CGT asset, in this case, the antique bed is stolen triggers the CGT event C1 under s 104-20 (1). The time of event occurs when the compensation from the insurance company proceeds on 21 January.

The question is whether the antique bed is collectable will depend on whether the item falls under one of the kind list and what is purpose of the client when purchased it. In this case, the antique bed, as the name suggested, clearly is a antique under s 108-10(2). In addition, this antique bed is more likely to be considered for personal use then both of the limbs of the definitions are satisfied then it is a collectable. Therefore, any capital gains and capital loss are not disregarded because the asset’s cost base is greater than $500 (see the following calculation) according to s 118-110(1)

The capital proceeds are $11,000 as s 116-25 excludes market value substitution rule for event C1, therefore the market value of $25,000 is irrelevant in this case. On the other hand, the total cost base is $5,000. This is calculated by adding together the following amounts:

• $3,500 (the first element of the cost base: acquisition under s 110-25 (2)).
• $1,500 (the fourth element of the cost base: expenditure incurred to increase the asset value under s 110-25(5).

The capital gain is $11,000-$5,000=$6,000, which is an eligible discount capital gain under s 115-25 (1).

In addition, indexation applied to the cost base because the antique bed was purchased before 21 September 1999 under s 114-1:

• Index number when the bed purchased = 77.6 (September quarter ending 1986)
• Index number when alterations made = 79.8 (December quarter ending 1986)
• Index number when the bed is stolen = 123.4 (Index number for the quarter ending on September ending 1999) according to s 960-275.

Therefore the index factor amounts to:

• 4÷ 77.6 = 1.590 (round it to 3 decimal places: s 960-275 (5))
• 4 ÷ 79.8 = 1.546 (round it to 3 decimal places: s 960-275 (5))

Therefore the indexed cost base is calculated by adding together the following amounts:

• First element of cost base: $3,500 × 1.590 = $5,565
• Fourth element of cost base: $1,500 × 1.546 = $2,319

Then the index cost base amounts to $5,565 +$2,319 = $7,884. Therefore capital gain exist as the capital proceeds greater than the indexed cost base: $11,000 – $7,884=$3,116

(c) Painting. Your client acquired a painting by a well-known Australian artist on 2 May 1985 for $2,000. The painting had significantly risen in value due to the death of the artist. She sold the painting for $125,000 at an art auction on 3 April of the current tax year.

c)The question is whether the painting is collectable, to be more specific, an artwork will depends on the nature or purpose of the owner when he or she purchased it. In this case, the client purchased from a famous Australian artist and subsequently sold the painting because of increase value after the death of the artist, therefore, the purchase is more likely to be considered as investment rather than to enjoy, hence the painting will not be considered a collectable. The sale of the painting can be considered as CGT event which falls within Disposals under s 104-A. Here the painting is regarded as any kind of property of the client then it is a CGT asset. The disposes of the painting trigger the event A1(s 104-10(1)). The capital proceeds are $125,000 and total cost base is $2,000 then the capital gain is $125,000-$2,000=$123,000. However, as the painting was purchased on 2 May 1985 which before 20 September 1985 then it is a Pre-CGT asset then the capital gain is disregarded under s 104-10(5).

(d) Shares. Your client has a substantial share portfolio which she has acquired over many years. She sold the following shares in the relevant year of income:

(i) 1,000 Common Bank Ltd shares acquired in 2001 for $15 per share and sold on 4 July of the current tax year for $47 per share. She incurred $550 in brokerage fees on the sale and $750 in stamp duty costs on purchase.

1. i) As share in a company is CGT asset under s 108-5, then the sale of shares (dispose of CGT asset) will result to the change of the ownership of the shares then will trigger CGT Event A1 (s 104-10(1)). Change of ownership occurs when the shares are sold on 4 July. As the shares were purchased after 21 September 1999 then indexation does not apply to the cost base of the shares. In this case, the capital proceeds are the total amount of money the taxpayer has received or entitled to receive in respecting the event happening, i.e. $47×1000=$47,000. However, the total cost base is $16,300. This is calculated by adding together the following amounts:

• $15×1000=$15,000 (the first element of the cost base: acquisition cost under s 110-25 (2))
• $550 (the second element of the cost base: brokerage fees under s 110-35)
• $750 (the second element of the cost: stamp duty cost under s 110-35)

Therefore this client makes a capital gain of $47,000-16,300 = $30,700. This amount is an eligible discount capital gain under s 115-25 (1).

(ii) 2,500 shares in PHB Iron Ore Ltd. These shares were also acquired in 2001 for $12 per share and sold on 14 February of the current tax year for $25 per share. She incurred $1,000 in brokerage fees on the sale and $1,500 in stamp duty costs on purchase.

500. ii) As share in a company is CGT asset under s 108-5, then the sale of shares (dispose of CGT asset) will result to the change of the ownership of the shares then will trigger CGT Event A1 (s 104-10(1)). Change of ownership occurs when the shares are sold on 14 February. As the shares were purchased after 21 September 1999 then indexation does not apply to the cost base of the shares. The capital proceeds are $25×2,500=$62,500 whereas the total cost base is $32,500. This is calculated by adding together the following amounts:

• $12× 2,500=30,000 (the first element of the cost base: acquisition cost under s 110-25 (2))
• $1,000 (the second element of the cost base: brokerage fees under s 110-35)
• $1,500 (the second element of the cost: stamp duty cost under s 110-35)

Therefore this client again makes a capital gain of $62,500 – $32,500 = $30,000. This amount is an eligible discount capital gain under s 115-25 (1)

(iii) 1,200 shares in Young Kids Learning Ltd. These shares were acquired in 2005 for $5 per share and sold on 14 February of the current tax year for $0.50 per share.

She incurred $100 in brokerage fees on the sale and $500 in stamp duty costs on purchase.

iii) As share in a company is CGT asset under s 108-5, then the sale of shares (dispose of CGT asset) will result to the change of the ownership of the shares then will trigger CGT Event A1 (s 104-10(1)). Change of ownership occurs when the shares are sold on 14 February. As the shares were purchased after 21 September 1999 then indexation does not apply to the cost base of the shares. However, in this case the client is making a capital loss. The capital proceeds are $0.5 ×1,200= 600 whereas the total cost base is $6,150. This is calculated by adding together the following amounts:

• $5 × 1,200=$6,000 (the first element of the cost base: acquisition cost under s 110-25 (2))
• $100 (the second element of the cost base: brokerage fees under s 110-35)
• $500 (the second element of the cost: stamp duty cost under s 110-35)

Therefore this client makes a capital loss of $6,000

(iv) 10,000 shares in Share Build Ltd. These shares were acquired on 5 July of the current tax year for $1 per share and sold on 22 January of the current tax year for $2.50 per share. She incurred $900 in brokerage fees on the sale and $1,100 in stamp duty costs on purchase.

2. iv) As share in a company is CGT asset under s 108-5, then the sale of shares (dispose of CGT asset) will result to the change of the ownership of the shares then will trigger CGT Event A1 (s 104-10(1)). Change of ownership occurs when the shares are sold on 22 January. As the shares were purchased after 21 September 1999 then indexation does not apply to the cost base of the shares. the capital proceeds are $2.5×10,000=$25,000 whereas the total cost base is $11,900. This is calculated by adding together the following amounts:

• $1× 10,000=10,000 (the first element of the cost base: acquisition cost under s 110-25 (2))
• $900 (the second element of the cost base: brokerage fees under s 110-35)
• $1,100 (the second element of the cost: stamp duty cost under s 110-35)

Therefore this client again makes a capital gain of $25,000 – $12,000 = $13,000. This gain is not an eligible discount gain under s 115-40 because the shares were purchased in July of the current tax year and subsequently sold in January of the same current tax year therefore not held for 12 months.

1. e) Violin. Your client also has an interest in collecting musical instruments. She plays the violin very well and has several violins in her collection, all of which she plays on a regular basis. On 1 May of the current tax year she sold one of these violins for $12,000 to neighbour who is in the Queensland Symphony orchestra. The violin cost her $5,500 when she acquired it on 1 June 1999

Base on the fact that the client has an interest in collecting musical instruments and they are used mainly for personal use and enjoyment as she plays on a regular basis. Therefore the violin is a personal use assets under s 108-20(2). The sale of the violin will trigger CGT event A1 because of the change of the ownership under s 104-10(1). Because the cost acquisition (first element of the cost base) of violin was $5,500 which is less than $10,000 then one of the specific rules apply that the capital gain of $12,000- $5,500=$6,500 from the sale of personal use asset is disregarded.

Step 1: Reduce the capital gains for the income year by the capital losses for the income year

• In order to minimize the total net capital gain for the client, applying current year capital losses to any of the capital losses that are not eligible for 50% discount under s 115-25 (1). Therefore applying $6,000 capital loss from Young Kids Learning shares against $13,000 capital gain from Share Build shares, leaving capital gain of $7,000

Step 2: Reduce any remaining capital gains, by any unapplied net capital losses for previous income years

• The capital loss from previous year was $8,500. $1,500 of $8,500 was attributable to a loss on a sale of collectable (sculpture is more likely to be the collectable as it is artwork under s 995-1 and it is more likely to be used for enjoyment purposes). Therefore the quarantine can only be applied to offset the capital gain from other collectable. In this case, $1,500 prior year capital loss against the capital gain from the antique bed, resulting an indexed capital gain of $1,616 or an eligible discount gain of $4,500

• In order to minimum the total net capital gain, the remaining $7,000 prior year capital loss is necessary to offset any non-eligible capital gain, i.e. applying $7000 capital loss against the remaining gain of $7,000 from Share Build shares (from step 1), yield nil balance (zero balance).

Step 3: Reduce any remaining discount capital gain s by the discount percentage

The following remaining capital gain are all eligible for the discount percentage (50%).

1. Land: $200,000 × 50%=$100,000
2. Antique bed: $4,500 × 50% = $2,250. Because this amount is greater than indexed capital gain ($1,616), so elect to use the indexed capital gain to calculate the total net capital gain in order to minimize the total net capital gain.
3. Common Bank shares: $30,700 × 50% = $15,350
4. PHB Iron Ore shares: $30,000× 50%= $15,000

Step 4: The further 50% discount for small business does not apply in this case as the client is not carrying on a business.

Step 5: Adding up all any remaining capital gains that are not discount capital gains and any remaining discount capital gains to compute the net capital gain and this is assessable income.

1. Land: $100,000
2. Antique bed: $1,616
3. Common Bank shares: $15,350
4. PHB Iron Ore shares: $15,000

The total net capital gain = $100,000 + $1,616 + $15,350 + $15,000 = $131,966

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