Lwb 364 Intro to Tax Seminar 6Richard Gallagher 02340640

Part A:

Time Line:

Burleigh House: subdiv 108-A

  • Purchased 23/8/91 $100,000
  • Dispute regarding title 1/1/93 $1,500
  • General re-painting $10,000
  • Full painting $9,000 1/12/97
  • Sold house $250,000 1/3/98

Purchase $100,000

Allowable deductions $9,000

Sale Price$250,000

Net Capital Gain on Asset$141,000

Indexing:

What has happened?

Item purchased then sold.

The sale of the item is CGT event A1 pursuant to section 104-10.

Time of event is:

When disposal contract is entered into or, if none, when entity stops being asset’s owner

Capital gain is:

Capital proceeds from disposal less asset’s cost base

Capital loss is:

Asset’s reduced cost base less capital proceeds

100-15

Has there been a Capital loss or gain?

Did a CGT event happen in the income year? Yes, CGT event A1.

Does an exemption apply?

Look to the validity of the painting and general repairs. As a general rule only amounts that can be factored into an increase in price. Namely expenditure of a capital nature is deductible. Therefore looking to the question the regular painting during the period of ownership would not be deductible but I believe the last painting would be because it would increase the value of the property, this is further evidenced by the fact that the property was valued at $230,000 before the painting and sold for $250,000 after the painting. Only the amount expended namely $9,000 would be deductible.

Peter’s legal fees will be deductible if they relate to him defending his title. Looking to the nature of the dispute in that is was relating to the boundaries of his property one could assume that it would be deductible therefore these amounts would also be used to lower his capital gain from disposal.

The rental income and expenses should be dealt with as ordinary income and deductions relating to ordinary income therefore have no effect on this CGT event.

Therefore Peter’s Cost Base is the purchase price ($100,000) + Painting expenses ($9,000) + Legal Expenses ($1,500) = $110,500

Capital Proceeds $250,000

Net Capital gain for this transaction $139,500

Peters Restricted Covenant: D1 104-35

Part B:

Simon is a Share Trader:

  • Beginning of year 2000 shares cost $4000 Cost $2 per share = G2
  • Sells 1000 shares $5000, $5 per share less $2 Cost = A1
  • Purchased 200 shares at $3 total cost $600 = G1
  • Final value $2,000 = G2

CGT event A1, G1, G2

The only relevant CGT event is the sale of 1000 shares at $5 each. From the information provided he has a cost base of $2000 and a capital sale return of $5,000. This less any brokerage would become his Capital Gain for this transaction giving him a tax liability of $3,000. The other events do not create a CGT tax liability at that point.