Part A
(a)
Event A1 happens when Party Time sale the factory under s 104-10. In order to calculate the net capital gain or loss, we should follow the steps under s 100-50. 1. Calculate Party Time current year capital gains 2. Less current year capital losses of Party Time if there is 3. Less unapplied net capital losses for previous year of Party

Capital gain=capital proceeds- cost of base
Under s 116-20, the capital proceeds are the money or the market value of any property received in relation to a CGT event, or which the taxpayer is entitled to receive.
Under s110-25, cost base include several elements such as purchase price, incidental costs, the costs of ownership (for assets acquired after 20/08/1991), capital expenditure. More specifically, under s110-25(3), the incidental costs incurred to acquire the CGT asset or that relate to CGT event (for example, the disposal of a CGT asset).

In this case, Party Time entered into a contract to sell the factory for $2.35 million on
1 May 2014, so the capital proceeds is $2.35 million. The purchase price of factory is
$700000. Incidental costs include legal fees ($12000) which incurred to acquire factory and agent’s fee ($50000) which incurred to dispose factory. As a result, the total cost base equal to $700000 + $12000 + $50000 = $762000.

Net capital gain or loss for the year ended 30 June 2014

capital proceeds | $2,350,000 | cost base | (762,000) | notional capital gain | 1,588,000 | less: capital loss for previous year | (60,000) | net capital gain | 1,528,000 |

(b)
The issue here is whether the trading stock costing ($25000) which is still delivered until 30 June 2014 should be included in the balance of stock on hand as at 30 June 2014. We should consider whether 1) this trading stock is ‘on hand’ on 30 June 2014.
2)
The Party Time should add the trading stock costing $25000 in the balance sheet. Firstly, by the end of financial year the trading stock was on hand because the trading stock is been delivering and Party Time hold the bill of lading as at 30 June 2014 (all states Frozen Food Pty Ltd v FC of T90 ATC 4175). What’s more, goods are considered to be “trading stock on hand” because the company is in a position to dispose of the goods even though title may not have passed or the trader does not have physical possession of the stock (taxation Ruling IT 2670). Lastly, in the year 2013/2014, the cost of trading stock is deductible because it becomes trading stock on hand in the same year (Under s 70-15). As a result, the $25000 cost of trading stock should be included in the balance sheet which is $80000+$25000=$105000.
(c)
Loan interest：
The deductibility of interest expenditure is considered under ITAA97 s 8-1. Interest expense can deduct that it is incurred or necessarily in gaining or producing assessable income and must not be of a capital, private or domestic nature

Taxation ruling IT 2606, interest is deductible where the relevant borrowing are used to finance the acquisition of an income- producing capital asset.

In this case, whether the interesting expense is deductible depends on the “use test”(FC of T v Munor; FC of T v RobertsεSmith). Obviously, the company borrowed money to purchase the office, warehouse and factory so they put money into gaining or producing assessable income. So the $2500 interest expense of this loan should be deductible under s8-1.

$2500 establishment fees: In this case, Party Time paid $2500 upfront establishment fee which is the cost of borrowing expense. Establishment fee is regarded as capital in nature and not deductible under s 8-1. However, the $2500 of cost of borrowing money can be deductible because the borrowing money is used to purchase the office, warehouse and factory in order to produce assessable income (s25-25(1) ITAA97). Assume that in the year 2013/2014, the borrowing money is solely used for producing assessable income. The $2500 is traded as borrowing expense and deduct over 5 years(s 25-25(5)). 1. The amount of the expenditure is $2500 2. The loan period is 5 years form 01/07/2009(1825days) 3. The expenditure divided by the number of days is $1.37 4. $1.37×335days(days from 1 June 2013 to 1 May 2014 )=$458.95. The amount of deduction in 2013/2014 is $458.95. Part b (a) The issue is whether Mr and Mrs Formosa have CGT consequences of their assets or not when they stop being Australia residents. s 104-160(1): CGT event I1 happens when individual or a company stops being a resident . 1. Family home: Div 118-D said that capital gain or loss that happens to a dwelling that is generally ignored- only one main residence per family. In this case, we assumption the family home is their main residence per family and the capital gain or loss will be ignored. 2. Motor vehicle: Under Div 118, motor vehicles designed to carry a load of less than on tone and less than 9 passengers are exemptions. In this case, we assume that the Motor vehicle is designed for that purpose. So capital gain or loss is ignored. 3. Shares: In this case, Mr and Mrs Formosa stop being residents of Australian form 1 July 2014, so CGT event I1 happens. They will make a capital gain or loss under CGT event I1, when they stop being Australian residents( s 104-160(4)). If Mr and Mrs Formosa chooses, shares will be regarded as taxable Australian property and no until actually dispose(s 104-165(2)and (3)). However, if they don’t choose, the assets which are not ‘taxable Australian property’ are deemed to have disposed at market value(s 104-160(2)). There is CGT consequence. 4. Art collection: In this case, art collections are collectables (s 108-B ITAA97 (s 108-10 to 108-17)). If capital gain or lose of these art collections is $500 or less than, it will be disregarded(s 118-10(1)). Otherwise, they can choose to regard these collections as taxable Australian property. If they choose, there is no CGT consequence until actually dispose. (b) The issue is whether Mr and Mrs Formosa’s salary and wages are assessable income for Australian income purpose. Under ITAA97 s 6-5(3) for a foreign resident, the assessable income includes the ordinary income they derived directly or in directly from all Australian sources during the income year. In this case, Mr and Mrs Formosa are non-residents of Australian during the year 2014/2015. What’s more, form I July 2014, the company’s operation has been relocated to China, and so their salary comes from China sources rather than Australian sources during income year. As a result, Mr and Mrs Formosa’s salary and wages are not assessable income for Australian income purpose. Part C (a) The disposal of shares will trigger CGT event A1 (ITAA97 s 104-10). Under Div 115, discount method would be used for CGT events occurring on or after 21 September 1999 in respect of assets held for at least 12 months and for individuals the discount would be 50%. In this case, Mr and Mrs Formosa sold shares in 2014 which is after 21 September 1999, so discount method is used to calculate the capital gain or loss. What’ more, they have a $25000 capital loss but it cannot against capital gain because it is capital losses from collectible and can only be offset against capital gains on other collectables (s108-10(1)) . Sale of 100 shares capital proceeds | $520,000 | cost base | (100,000) | notional capital gain | 420,000 | less: CGT discount 50% | (210,000) | net capital gain | 210,000 | (b) Under s 104-35, CGT event D1 happens when creating contractual or other rights in another entity. In this case, Mr and Mrs Formosa accept $100000 for agreeing not to carry on a similar business in Sydney, NSW for the next 5 years. There is the contractual right under the agreement, so CGT event D1 happens. As a result of CGT event D1 under 104-35(3), the amount got from capital process ($100000)less the incidental costs is the accessible income.

Reference Woellner, Barkoczy, Murphy, Evans & Pinto 2014, Australian Taxation Law, 24th edn, CCH Australia Limited, Sydney.