Tax law tute 8
Q1)

For the purpose of CGT, assets are divided into:
Collectables
Personal-use assets other assets exempt assets

The ordinary CGT rules apply to an asset that is not a collectable or a personal use asset. Special rules apply to collectables and personal use assets. Assets such as main residence trading stock and motor vehicles are made specifically exempt from CGT.

A) Family home
According to Section 118-110, any capital gain or loss that a taxpayer makes from a CGT event in relation to a CGT asset that is the taxpayer’s residence is disregarded if: - the taxpayer is an individual and - the residence was the taxpayer’s main residence throughout the entire ownership period (i.e. from the date of purchase to the date of sale of the property)
The family home by Lawrence will be exempt.

B) Speedboat
The speedboat is a personal use asset. As the speedboat was acquired for more than $10,000, it is subject to capital gains tax. However, the capital loss on sale of the speedboat of $16,000 is disregarded (section 108-20(1))

C) Shares in Flight centre LTD
The shares in Flight Centre constitutes an ‘other asset’. As the shares were acquired after 21 September 1999, Lawrence can only use the CGT discount method.
Under the CGT discount method, Lawrence’s undiscounted capital gain comes to $8,000 ($13,600-$5,600)

D) Diamond earrings
According to Section 108-10(2)(a) a collectable includes jewelry that is used or kept mainly for personal use or enjoyment by the taxpayer. A diamond ring qualifies as jewelry.

According to Section 118-10(1), any capital gain or capital loss is disregarded if the collectable was acquired for $500 or less. As the diamond ring was acquired for only $240, any capital gain arising from its sale is exempt.

E) ANZ Ltd Shares Transferred to Son
The shares in ANZ LTD constitutes an ‘other asset’. As the shares were acquired after 21 September 1999, Lawrence can only use the CGT discount method.
We are told that Lawrence acquired 1000 shares in ANZ on 14 August 2008 at a cost of $8,000. He transferred these shares to his son, Jayden on 5 April 2013 for no consideration.
However because Lawrence and his son are not dealing at arms length, by virtue of Section 116-30(2), the commissioner will substitute the $Nil capital proceeds with an amount of $28,000 (being the market value of the ANZ Ltd shares at the time)

Under the CGT discount method, Lawrence’s undiscounted capital gain comes to $20,000 (28,000-8,000)

F) Pro Hart painting
According to Section 108-10(2)(a), a collectable includes a painting that is used or kept mainly for personal use or enjoyment by the taxpayer.
According to Section 118-10(1) any capital gain or loss is disregarded if the collectable was acquired by $500 or less. As the painting was acquired for $1,200 any capital gain from the sale will be subject to CGT.

As the painting was acquired after September 1999, CGT discount method is to be used. Under the CGT discount method, Lawrence’s undiscounted capital gain comes to $2,000. ($3,200-$1,200)

G) Samsung LED smart TV
According to Section 108-20(2), a personal use asset is defined as a CGT asset (except a collectable) that is kept or kept mainly for the taxpayer’s personal use or enjoyment A television would qualify as personal use assets.
According to Section 118-10(3), any capital gain or loss is disregarded if the personal use asset was acquired for $10,000 of less. As the TV set was acquired for $3,200 any capital loss or gain is exempt.

H) Rolex watch
According to Section 108-10(2)(a) a collectable includes jewelry that is used or kept mainly for personal use or enjoyment by the taxpayer. A watch qualifies as jewelry.
According to Section 118-10(1), any capital gain or capital loss is disregarded if the collectable was acquired for $500 or less. However the watch was acquired for $16,000.

Lawrence purchased the Rolex watch after 21 September 1999; he can only use the CGT method. Under this method Lawrence’s capital loss comes to $10,000. (16,000-6,000). The reduced cost base is the same as the cost base as there is no third element and no Division 43 adjustment because the asset is a watch, not a building.

According to Section 108-10(1) capital losses from collectables can only be used to offset capital gains from collectables. They cannot be used to offset against capital gains from other types or classes of assets.

Hence the $10,000 capital loss from the collectable can only be offset against any other capital gains from collectables in the income year or if there are none, or an excess, the loss will be carried forward.

Lawrence’s overall net capital gain is calculated as follows:

Exempt CGT assets:
Family home
Diamond ring (collectable acquired for $500 or less)
Samsung LED tv (personal use asset acquired for $10,000 or less)

Disregarded Losses:
Speedboat (Capital loss from a personal use asset)

Capital Gain on Collectables
Capital gain – Pro Hart painting (undiscounted gain) 2,000
Less: Capital loss – Rolex watch* (2,000)
Net capital gain – collectables (discount method) -

* The capital loss on the sale of the Rolex watch was $10,000. As $2,000 of the capital loss has been utilized against the capital gain from the sale of the Pro hart painting, the excess loss of $8,000 is carried forward in Lawrence’s tax return to be offset against future capital gains from collectables.

Other:
Capital gain – Shares in Flight centre * 8000
Capital gain – Shares in ANZ ltd 20000

Notional net capital gain 28000
Less: 50% CGT discount on ANZ shares ( as shares held > 12 months) (10000)

Net capital gain – other $18,000

*Not held for more than 12 months so discount is not applied

Calculation of Overall Net Capital Gain
The total net capital gain to be included in accordance to Section 102-5 of the ITAA (1997) comes to:

Net capital gain – collectables -
Net Capital gain – other $18,000

Total capital gains $18,000

Question 2)
I)

According to Section 118-110, any capital gain or loss that a taxpayer makes from a CGT event in relation to a CGT asset that is the taxpayer’s residence is disregarded. However the exemption is reduced if:
- The residence was only a main residence for part of the ownership period
- the residence was used for the purpose of producing assessable income

In Annie’s case, both of these exceptions apply to her accordingly, the capital gain arising from the disposal of the house will need to be apportioned based on:
- the time the property was used for income-producing purposes (731 days/1462 days)
- the percentage of floor space of the house that was used as her doctors surgery (25%)

As the residence was used partly as a main residence and as a place of business for the first time after 20 August 1996, then Annie is required to establish the market value of the property at the time the property is first used to product assessable income. As this was the same date that she acquired the property (1 April 2009) the market value was $520,000. The capital gain is then apportioned on a time and area bases.
As Annie bought and sold her house after 21 September 1999, she can only use the CGT discount method.

ii) Annie’s net capital gain:

Capital proceeds 880,000
Less: Cost base
-- Purchase of house -1st element (MV at 1 April 2009) (520,000)

Notional net capital gain $360,000

1st apportionment: Time Basis (Days):
$360,000 capital gain x 731 days/1462 days = $180,000 capital gain

2nd apportionment: Floor space (AREA):
$180,000 capital gain (from above) x 25% = $45,000 capital gain

CGT discount:

As that portion of her home has been used for income producing purposes for more than 12 months, she is entitled to the 50% CGT discount

Annie’s overall net capital gain is $45,000 x 50% = $22,500

Question 3)
Division 128 of the ITTAA (1997) deals with the CGT consequences concerning the death of a taxpayer in brief the division provides that where a taxpayer dies and:
- the asset was acquired by the deceased before 20 September 1985 (the asset is a pre-CGT asset), the asset is deemed to have been acquired by the beneficiary on the date of death at its market value or - the asset was acquired by the decrease on or after 20 September 1985 (asset is a post-CGT asset) the asset is deemed to have been acquired by the beneficiary on the date that the deceased initially acquired the assets at the deceased’s cost base or reduced cost base.

Calculation of the capital gain/loss in relation to each asset

a) Stamp collection (collectable)

The stamp collection will qualify as a collectable. A collectable to the deceased becomes a collectable to the beneficiary on the date of death. Furthermore, any capital gain or capital loss is exempt if the collectable was acquired for $500 or less. First we must ascertain the cost base to Emily.

The stamp collection was originally acquired by Judy between 1972 and 1983. (Pre-CGT asset) In the case of a pre-CGT asset, the beneficiary is deemed to have acquired the asset on 19 November 2012 (date of Judy’s death) for $12,200. This is the cost base to Emily. This is more than the $500 threshold.

She can only use the CGT discount method as she is deemed to have acquired the asset on 18 November 2012 and sold it on 4 June 2013.

As the capital precedes totaled $14,000, a capital gain of $1,800 eventuates (14,000-12,200). If an inherited pre-CGT asset is disposed of within 12 months of the date of death, the taxpayer only benefits from the 50% discount if they held the assets for more than 12 months from the date of death.

Since Emily did not hold the asset for more than 12 months, Emily is not eligible for the 50% discount. Hence Emily’s capital gain is $1,800

b) Land at Southport (other Asset)

The land at Southport is an ‘other asset.” The land was originally acquired by Judy on 9 June 1992. Hence it is a post-CGT asset. In the case of a post-CGT asset, the beneficiary is deemed to have acquired the asset at the deceased’s cost base or reduced cost base. Hence Emily is deemed to have acquired the land on 9 June 1992 for $126,000. This is Emily’s cost base.

She can use either method (discount or indexation)

Indexation method:
The CPI index factors for the quarter ended June 1992 was 107.3 and for September December 2012 was 123.4 (frozen) The index factor for each asset is 123.4/107/3 or 1.150046598 rounded is 1.150
The indexed cost base of the land is $144,900 (126,000 x 1.150). As the capital proceeds were $302,000 the capital gain under the index method comes to $157,100.

CGT method:
In the case of post-CGT asset, Emily can benefit from the 50% CGT discount if she sold the land more than 12 months after the date that her mother purchased the land. As Judy bought in June 1992 and Emily sold in June 2013 this is MORE than 12 months.
She is eligible for 50% discount. Under the CGT discount method. Emily’s capital gain comes to $88,000. (302,000-126,000) x 50%. Her net capital gain is $88,000.

Emily is better off using the CGT method.

C) Diamond ring (Collectable)

The diamond ring will qualify as a collectable. A collectable to the deceased becomes a collectable to the beneficiary on the date of death.
In section 118-10(1) any capital gain or loss is exempt if the collectable was acquired for $500 or less. First we must find out the cost base to Emily.
The diamond ring was originally acquired by Judy on 17 March 1994. It is a post-CGT asset. In the case of a post-CGT asset, according to Section 128-15(4) the beneficiary is deemed to have acquired the asset at the deceased’s cost base or reduced cost base.

Hence, Emily is deemed to have acquired the asset on 17 March 1994 for $3080. This is the cost base.

Emily is eligible to use either the index method or the CGT discount method as she is deemed to have acquired the asset on 17 March 1994. However in either case she has sold the diamond ring for only $620. The results in a capital loss of $2,460. A capital loss is not able to be discounted or indexed.

d) Shares in CSR LTD (Other Asset)

The shares are regarded as ‘other asset.’ The shares were originally acquired on 2 August 2012, is a post-CGT asset. In the case of a post-CGT asset, the beneficiary is deemed to have acquired the asset on the date the deceased initially acquired the asset at the deceased’s cost base or reduced cost base. Hence Emily is to have acquired the shares on 2 August 2012 for $30,200. This is her cost base.
However Emily disposed on 4 June 2013. As this is within 12 months of date of acquisition not entitled to 50% discount. Emily’s capital gain is $6,000 (36,200 – 30,200)
e) Fishing boat (Personal use asset)

The fishing boat is regarded as a ‘personal use asset”. The boat was originally acquired by Jude on 13 January 1984. It is a pre-CGT asset. In the case of a pre-CGT asset, the beneficiary is deemed to have acquired the asset at its market value on the date of death.

Emily is deemed to have acquired the boat on 18 November 2012 (date of death) for $10,870. This is emily’s cost base. This is more than the $10,000 threshold. However Emily disposed of the fishing boat on 4th June 2013 for $7,640. She has derived a capital loss of $3,230 (10,870 – 7,640)

However section 108-20(1) provides that capital losses from personal use assets are disregarded. A capital loss from a personal use asset cannot be used to offset against capital gains derived from the sale of a personal use asset nor can they be carried forward.

ii) Emily’s overall capital gain is calculated as follows

1. Collectables

Capital gain – stamp collection (no 50% discount as sold < 12 months) 1800
Less – Capital Loss – Diamond watch** (1800)
Net capital gain – Collectables Nill

2. Other assets
Gross capital gain- Land at Southport (eligible for 50% discount) 176,000
Gross capital gain – shares in CSR LTD (no discount as sold < 12 months) 6,000 182,000 Less: Carry forward capital loss (10000)
Notional Net capital gain 172,000

Less: 50% discount (cant be > 88,000 i.e. discount for Southport land) $86,000

Total net capital gain (Nil + 86,000) $86,000

** the collectable loss on the diamond watch was $2460. However any remaining capital loss from a collectable can be carried forward indefinitely and offset against future capital gains from collectables. Hence the capital loss balance of $660 (2460-1800) can be carried forward to be offset against future collectable capital gains.