Capital gains tax - Australia

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EXECUTIVE SUMMARY

One of the most controversial issue in Australian taxation law was the introduction of capital gains tax. It was introduced in 1985 by the Whitlam Labour Government. Capital gain can be seen as the income derived from the selling of a capital asset. These could range from property, shares, collectables etc. the gain or appreciation is basically the original price paid for the asset plus any incidental cost such as stamp duties, legal fees, transfer cost, advertising etc, that would form part of the capital base minus the money received when the asset is sold. Capital gains tax is therefore a tax that is paid on capital appreciation of a capital assets. It can be calculated using three different methods which are: 1) the indexation method, 2) the discount method and 3) where no discount is applied because the asset was held for less than a year. This report will outline how capital gains tax is applied and the implications of capital gains tax.

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ANALYSIS

a) A motor vehicle for $25,000. Jason originally acquired the motor vehicle for $45,000 on 1 June 2010.

In giving you advice, we need to consider to possible scenarios. This is due to a lack of relevant and sufficient information to come up at decisive conclusion. These include:

Initially we need to establish whether Jason had a capital gain event or not. According to CGT Event A1: (Section 104-10): Disposal of a CGT Asset, there was a capital gain event. This is derived from the fact that; the capital asset (motor vehicle) was acquired after 19 September 1985 which would entail that it is an asset that capital gain tax could be applied to. According to sec 109-5(2), the date of acquisition of the motor vehicle is the date that the contract was entered into, which would be the 1 June 2010.

Due to the fact that the asset was acquired after 21 September 1999, the cost base of the asset cannot be indexed when section 114-1 is used. The method that would be available if s115-10 to 115-25 were to be applied would be the Discount method which is calculated as follows:

Discount Method:

Capital Proceeds$25,000

Less: Cost Base ($45,000)

Capital Loss before Discount ($20,000)

Less: 50% CGT Discount

Capital Loss after 50% discount$10,000

The $10,000 Capital loss can be used to offset any capital gains. If the capital losses are still unabsorbed they can be carried forward to offset future capital gains. This can be done indefinelty until all the capital losses are used up.

Or

If Jason sold the motor vehicle to Fred according to sec 118-5(a) ITAA 97, it would be exempt from CGT if it is a motor vehicle, car and similar vehicle which was made to carry a load of less than one tonne or less than nine passengers.

b) A cutting machine for $35,000. This machine was originally acquired by Jason for $50,000 on 1 April 2011 and Jason had claimed a tax deduction for depreciation in his tax returns in respect of this machine.

A company is considered a separate legal entity under the law; therefore Jason was not supposed to claim a tax deduction on the cutting machine in his tax return. I would advise Jason that he needed to amend his 2010/2011 assessment. This however raises the question where the deduction was meant for the company and would there be included in the cost base of company assets.

c) Business premises for $880,000. Jason had inherited this building on the death of his father on 1 June 2006. Jason’s father was also a carpenter and had acquired the building in 1982 for $60,000 and it was valued at $520,000 at the time of his death. In 2012 a storage facility was installed on the side of the building for a total cost of $77,000.

If your father had sold the business premises, the premises would have been exempted from CGT because according to section 100-25(1) because it was an assets that was acquired before 20 September1985.

I would inform Jason that, section 128-10 states that any assets acquired through inheritance are generally disregarded for CGT purposes, that is a capital gains or losses are not recognised when you die.

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When you inherited the business premises from your father, you are considered to have acquired the asset on that date, which is 1 June 2006. There is a need to know the value of the business premises (cost base) so that later on, you would be able to calculate the capital gains or losses of the asset when you decided to dispose of it. The cost base of the business premises is the market value on the date of death which is $520,000 (s 128-15(4) item 3B) and its acquisition date is 1 June 2006, according to sec 128-15(2). An heir or beneficiary, is considered to have acquired the asset on the day you die.

As for the storage facility, the $77,000 is considered as a capital improvement. It is therefore added to that cost base of the business premises. If however the business premises were still under Jason’s father control. We could apply sec 108-55(2) it says that a building or structure that is constructed on land that you acquired before 20 September 1985 is taken to be a separate CGT asset. In that case the storage facility will become a separate CGT asset.

Discount Method:

Capital Proceeds$880,000

Less: Cost Base (s 110-25)

Original Asset$520,000

Capital Improvements $77,000

Cost Base ($597,000)

Capital Gain before Discount $283,000

Less: 50% Discount

Capital Gain after 50% discount $141,500

d) A large painting hanging in the building was also sold. The painting was acquired by Jason in 2011 for $29,000 and sold for $26,500.

I would advise you paintings are considered as collectables under s 108-10(2) and are usually kept for personal use or pleasure. The list of collectables includes: antiques, Works of art (eg- paintings, sculptures); Jewellery, Rare books and Manuscripts, Rare stamps, coins etc. if any capital losses from collectables occurred, they are set apart and can only be offset against capital gains on other collectables. Section 118-10(1) and (2) states that CGT on collectables are disregarded if they were bought for less than $500.

Capital proceeds $26,500

Cost base ($29,000)

Capital loss ($2,500)

The capital losses from painting and jewellery cannot be used against the capital gains from shares or other assets, as capital losses from collectables are quarantined and can only be applied to capital gains from collectables, s108-10(1). If some or all of a capital loss from a collectable cannot be applied in a financial year, the unapplied amount can be applied in the next financial year for which your capital gains from collectables exceed your capital losses (if any) from collectables……..

e) Fred paid Jason an additional $20,000 for Jason’s promise not to carry on another carpentry business in the local area for the next 4 years commencing 1 May 2013.

The contract between Fred and you would be assessed under CGT event D1, s104-35 ITAA1997. It is said to be a restrictive covenants and if any breach of contract was to occur, Fred could enforce his contractual rights. A perfect example of this was the case Hepples v fct. According to sec 104-35(2) the time of the event is 1 May 2013, which is the date you entered into the contract or created the other right.

f) Legal fees and associated costs on disposal of the building and artwork totalled $14,500 and $450 respectively.

I would inform you that legal fees are considered as incidental cost. When we are ascertaining the cost base of an asset we include incidental cost that were involved in acquiring and disposing of an asset. The cost of tax advice can only be included in the cost base if the advice is given by a registered tax agent or a legal practitioner: sec 110-35(2). So therefore the cost base for the building is ($520,000+$14,500=$534,500) and artwork ($29,000+$450=$29,450).

Jason also disposed of 500 shares in BHP for $11,200 on 1 May 2013. Of the 500 shares 250 were acquired in 1984 for $600 and the 250 were acquired in April 2002 for $3,600

Jason has a carry forward capital loss of $23,000 as at 30 June 2012 from the sale of shares in 2011.

I would advise you that shares in a corporation are taxed the same way when calculating CGT as any other CGT asset. If the shares were obtained before 20 September 1985, they would not be subject to CGT, however all shares after that date are subject to CGT. Therefore the 250 shares are not considered for CGT because they were purchased before 20 September 1985 according to sec 104-135(5). The remaining 250 shares purchased post 20 September 1985 would be subject to CGT. If a non-stock broker was to sell his shares, they would be subject to CGT event A1, due to the fact that they is a change in ownership of the shares. If however the shares are redeemed or cancelled a CGT event C2 occurs……..

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Calculations: April 2002 shares

Discount Method:

Capital Proceeds$5,600

Less: Cost Base ($3,600)

Capital Gain before Discount ($2,000)

Less: 50% CGT Discount

Capital Gain after 50% discount $1,000

Capital Loss Carried Forward ($23,000)

Capital loss to b/d $22, 000

Capital loss to be carried forward for future years $22,000.

After retiring Jason is considering relocating with his wife to live permanently in Canada as he is passionate about skiing and would like to live out his days on the ski slopes of Canada. Include in a separate part of the written report the potential capital gains tax implications on his remaining assets, being the family home in Australia and shares in Telstra, should Jason become a non-resident of Australia in 2014. (3 marks)

CGT Event I1: Section 104-160 addresses the issue when an individual or company stops being a resident of Australia. You will need to establish whether you have any capital gains or losses for each asset that you own just before you cease to become a resident, apart from the ones that have the necessary connection with Australia………… you are also deemed to have sold any CGT assets at the market value when you cease to become a resident of Australia. Hence the Telstra shares and the family home will be deemed sold at the market value when you ceased your residency.

CONCLUSION

So basically if you have an asset that might be eligible for CGT

So basically if you make the move to Indonesia, the circumstances l have outlined above are likely to have you treated as a foreign resident for tax purposes in Australia and so your salary package will not be assessable income because its foreign sourced so you will only be taxed in Indonesia. As l mentioned above, any interest earned in Australia like your bank interest and rental income are however subject to tax in Australia as they are Australian sourced