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Questions:

Dave Solomon is 59 years of age and is planning for his retirement. Following a visit to his financial adviser in March of the current tax year, Dave wants to contribute funds to his personal superannuation fund before 30 June of the current tax year. He has decided to sell the majority of his assets to raise the $1,000,000. He then intends to rent a city apartment and withdraw tax-free amounts from his personal superannuation account once he turns 60 in August of the next year. Dave has provided you with the following details of the assets he has sold:
 
(a) A two-storey residence at St Lucia in which he has lived for the last 30 years. He paid $70,000 to purchase the property and received $850,000 on 27 June of the current tax year, after the real estate agent deducted commissions of $15,000. The residence was originally sold at auction and the buyer placed an $85,000 deposit on the property. Unfortunately, two weeks later the buyer indicated that he did not have sufficient funds to proceed with the purchase, thereby forfeiting his deposit to Dave on 1 May of the current tax year. The real estate agents then negotiated the sale of the residence to another interested party.
 
(b) A painting by Pro Hart that he purchased on 20 September 1985 for $15,000. The painting was sold at auction on 31 May of the current tax year for $125,000.
 
(c) A luxury motor cruiser that he has moored at the Manly Yacht club. He purchased the boat in late 2004 for $110,000. He sold it on 1 June of the current tax year to a local boat broker for $60,000.
 
(d) On 5 June of the current tax year he sold for $80,000 a parcel of shares in a newly listed mining company. He purchased these shares on 10 January of the current tax year for $75,000. He borrowed $70,000 to fund the purchase of these shares and incurred $5,000 in interest on the loan. He also paid $750 in brokerage on the sale of the shares and $250 in stamp duty on the purchase of these shares. Dave has contacted the ATO and they have advised him that the interest on the loan will not be an allowable deduction because the shares are not generating any assessable income.
 
 

Answers:

Part 1:

Facts - The following are the details of Mr. Dave assets:

  • A residential property that is, a house in which he lived for the past thirty years, sold it on the date 27 June, 2016 for $850,000, and the price for which it was bought was 70,000 dollars. The agent charged commission on it for $15,000. The initial buyer forfeited 85,000 dollars to the concerned person Dave since the trade was ended.
  • The painting was bought for $15,000 on 20 September, 1985 and sold for $125,000

Sold Motor Cruiser at $60,000 and the price for which it was bought was 110,000 dollars in 2004

  • The shares of the mining company were advertised for the price of 80,000 dollars and were purchased at $75,000 in the present tax year. The stamp duty on purchase was for $250 and the brokerage cost on sale for $750. The dividends were bought through rented funds for 70,000 dollars and interest was paid on $5000.
  • Capital failure was brought for10,000 dollars.

Issue –

Based on the facts, the issue that arises here, what should be considered as the capital loss or capital gain and what should be done about it.

Relevant Rules and Laws:

Income Tax Assessment Act, 1997

Application:

When the auction earnings are lesser than the base cost of the advantage of capital or while the base cost is fewer than the auction income then a capital loss or capital gain is said to take place (Sharkey, 2015).

According to section 118 of the ITAA 1997, exceptions are given to the person who pays tax in which he is granted the right to relinquish the capital profit on capital benefits sale of amount of insurance, components of PST, superannuation, undertaking capital amounts and main residence (Woellner et al., 2012).

To reduce the gain of capital, indexation and discount are the two methods that are utilized to decrease the capital gain. This is explained in sections 115 and 114 of the Income Tax Assessment Act, 1997. Percentage rate is functional under discounting (Millar, 2016).

  1. When a property has attainment date or transported time to the fresh proprietor of the property on which the date is 20, 1985 September then such as asset is acknowledged as pre capital gain asset plus such an asset is subject to exemption from gain of capital. This is contained in Sections 104 to 110 of the ITAA 1997 (Brown, 2013).

Mr. Dave sold the dwelling home in which he stayed for more than thirty years plus the date of sale is 27/6/2016. The date of attainment if calculated thirty years reverse shall be 27 1986 June. This cannot be pre capital gain asset in addition to consequently shall not be subject to exemption as per sections 104 – 110.  

Capital gain or loss will be = Sale proceeds – Cost base = 850,000 – 70,000

$780,000 is the capital gain

Discounted capital gain = $390,000.

Capital gain = $390,000

Since the asset of capital is a dwelling house therefore, it is subject to exemption as per section 118 of the ITAA. Conclusively, the gain of capital is not chargeable (Sadiq et al., 2016).

  1. The picture of the concerned person Mr. Dave was collected during his lifetime. As per division, 128 – 156 (6) under the Income Tax Act, 1997 painting is collectable (Sawyer, 2015). If the capital loss is from a collectable then the compensation with the assets loss shall be a collectable barely. The value of sale of the picture was 125,000, dollars which was purchased on 20 September, 1985 for 15000 dollars. This is not considered as a pre – capital gain asset. The reason behind this is that the time of attainment was not until 20 September 1985.

Capital gain or capital loss = $sale proceeds – cost base

= $125,000 - $15,000

= $110,000

In this case, the deal is proceeded after September 20, 1999 and the discounting method can be used.

Capital gain discounted = $55,000

Taxable value of capital gain = 55,000. 

  1. In the third case Resources asset is a Motor Cruiser. It was bought in the year 2004 and since it is not a pre capital gain
  2. tax asset it will create the liability of tax on the asset of sale. The cruiser was bought for $110,000 and sold for $60,000

Hence, the capital gain or loss

= $60,000 - $110,000

= $50,000 capital loss

It will be allowed to place off beginning other resources gains or any other sourced income.

  1. Auction of dividends also leads to creation of tax accountability. As per this, the stamp duty and brokerage expenses should be added or deducted from the respective purchase or sale. In the given case study, the dividends are purchased and sold in the similar year; hence, the tax shall be calculated in the given current year, that is, 2016. In this, the capital loss or capital gain shall be allowed. The indexation technique shall not be all owed to deduct the capital gain under section 144 of the ITAA as the asset was detained for additional twelve months. However, the discounting technique can be functional to it (Saad, 2014).

Sale proceeds = Sale price – Brokerage = $80,000 - $750 = $79,250

Purchase price = Cost of acquisition + stamp duty  = $75,000 + $250 = $75,250

Capital gain or capital loss = Sale price – Purchase price = $79,250 - $75,250 = $4000

Reduced capital gain as per discount method @ 50 percent = $2000

Taxable capital gain = $2000

  1. The interest that is obtained from the loan amount shall not be taxable, as it was not utilised to construct any income under ITAA 1997. However, an expense can be subtracted as per section 8 subsection 1 of the Act, if the expense is created out of an income that is generated. In this case, the interest is not utilised to produce any earnings and consequently it is not to be considered as deduction (Saad, 2014).
  2. Total taxable capital gain

Capital gain from residence                                                                                 – Exempted

Capital gain from painting                                                                                         $55,000

Capital loss from motor cruiser                                                                               ($60,000)

Capital gain from shares                                                                                                2,000

Total Capital loss                                                                                                       ($3,000)

Brought forward capital loss                                                                                   ($10,000)

Total capital loss carried forward                                                                            ($13,000)  

 

Conclusion:

On 30th June 2016, there was a capital loss of the price for 3,000 dollars. The carried onward failure from previous year’s loss is10,000 dollars. Mr. Dave must not sell his asset at a enormous loss as no capital profit can be made from it. Capital gain can be achieved from house but that is excused. To hoard tax in the coming years a dwelling house can be bought and investments can be made that are free from tax and easy to avail  (Barkoczy, 2015). 

 

Reference List:

Barkoczy, S., Foundations of Taxation Law 2015, 6th ed. CCH Australia

Brown, C. (2013). Australia-taxation of trusts–the problem of aligning concepts of income. Asia-Pacific Tax Bulletin, 19(5).

Chalmers, J., Carragher, N., Davoren, S., & O’Brien, P. (2013). Real or perceived impediments to minimum pricing of alcohol in Australia: public opinion, the industry and the law. International Journal of Drug Policy, 24(6), 517-523.

Frazier, B. (2013). Resource Capital Fund III LP v. Commissioner of Taxation: Partners or the Partnership-Who Is the Relevant Entity under the Avoidance of Double Taxation Convention between the United States and Australia. Tul. J. Int'l & Comp. L., 22, 377.

Frecknall-Hughes, J., & McKerchar, M. (2013). Historical perspectives on the emergence of the tax profession: Australia and the UK. Austl. Tax F., 28, 275.

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

Langton, M., & Longbottom, J. (Eds.). (2012). Community futures, legal architecture: foundations for Indigenous peoples in the global mining boom. Routledge.

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