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.
Dave has also indicated that his taxation return for the year ended 30 June of the previous year shows a net capital loss of $10,000 from the sale of shares. These shares were the only
assets he sold in that year.
(a) Based on the information above, determine Dave Solomon’s net capital gain or net capital loss for the year ended 30 June of the current tax year.
(b) If Dave has a net capital gain, what does he do with this amount?
(c) If Dave has a net capital loss, what does he do with this amount? 1000words
Distinction existing between capital receipt and capital expenditure on capital assets likely to generate a profit is known as capital gain. There are three methods for calculating capital gain. The discount method is the first method. The application is made one year prior to the capital gain tax event. The next methodology is indexation method. Under this method, the application is made if the acquisitions of the assets are made before September 21st and assets are in possession for more than a year before the applying capital gain tax event. Residual method is the third method when the application is made if the assets are possessed for less than 12 months. These three methods are used for calculation of capital gain (Larsson, 2014).
Removal of few items from the vending of non-revenue asset
Whichever, asset is bought prior to September 20th and it could be:
Carry Forward of Losses or set-offs from capital benefit
Capital Loss in Long Term
Long term capital gain can be used only for setting off the capital loss in the long term. Other set-offs are not applicable. Such loss will carry forwards to relevant indefinite Assessment Year, and capital gain in the long term can be utilized for setting off such loss (Ato.gov.au).
Capital Loss in Short Term
Short term capital gain and capital gain in the long term can be used for offsetting the capital loss in the long term. Such loss will be carried forward to relevant indefinite Assessment Year and capital gain in both short term and long term can be used to set off the capital loss in the long term (Larsson, 2014).
(a) Mr. Dave Solomon resided in building the house, which comprised of two stories. He resided in for the last 30 years, and the purchase price of the house wad $ 70,000. He decided to auction the house, and the selling price was fixed at $ 865,000. The buyer decided to advance out $85,000 at the initial stage of payment. However, the buyer failed to present remaining proceeds of the price, and it led to the forfeiture of the amount. The amount of $85,000 was categorized under “income from other sources.”
Computation of capital gain
Receipt from sale $865,000
There is exemption for such items under CST I.EF family home exemption
Capital Gain in long term = NIL
(b)A painting of pro hart, which was purchased on 20 September 1985 for $15,000 was subsequently sold for 1.25,000.
Computation of capital gain
Receipt from sale $125,000
Index Cost of purchase
(15,000*123.4/71.3) 25,961
Capital gain in long term $99,039
(c) A motor cruiser belonging to the luxury style was purchased at $110,000 in the latter part of 2004 and the receipt price for it was $60,000 from a local broker dealing in boats
Computation of capital gain
Receipt from sale $60,000
Index cost of purchase $110,000
Capital loss ($50,000)
(d) A group of shares of a new mining company was sold on 30 June of the current year. The purchase price of these shares on 10 January of the current year was 75,000. To execute the purchase, a loan of $ 70,000 was taken and subsequently loan of $5,000 was paid. During the sale, $ 750 was paid as brokerage and $ 250 was paid during purchase as stamp duty.
According to the law of income tax, interest on the loan is included in the purchase price of an asset. As a result interest on the loan is not used for calculation.
Computation of capital gain in short term:
Receipt from sale $80,000
(-) brokerage charges $ 750
(-) Purchase price $75,000
(-) Stamp duty $250
Capital gain in short term $4,000
So computation of capital gain for the year is as follows
(i) Capital gain on long-term from the sale of house = Nil
(ii) Capital gain on long-term from sale of painting = $99,039
(iii) Capital loss on short term from the sale of boat = ($50,000)
(iv) Capital gain on long-term from the sale of share = $4,000
Capital gain on long-term = $53,039
The tax return of Mr. Dave showed a net loss of $10,000 in the previous year. This needs to be set off against the current year long-term capital gain of $53,039. Therefore, the net capital gain on long term =53,039.
Net capital gain is the aggregation of all the capital gain earned on capital assets earned in the current year and the subsequent year. A capital loss can be set-off against such capital gain. A capital loss can be subtracted from a capital gain of the previous year as well as the current year. It can be said capital revenue is not a separate item, and it should be included in the evaluated profit of the assessee. The profit generated from the turnover of a capital asset should be charged for the year in which the turnover took place (Fisher, 2015). The assessed, Mr. Dave has generated a capital gain on the sale of assets and as a consequence he can provide the requisite fund to the superannuation fund. The assessed, Mr. Dave should maintain all necessary documents regarding the transactions. This includes loan interest, receipt of the purchase price, expenses including legal fees and litigation fees. He also needs to maintain all documents including records of brokerage charges incurred on shares as well all documents, which depict the maintenance and repair of assets.
A capital loss is the aggregation of loss, which is incurred from the sale of capital assets and it depicts the loss of the former year. It cannot be set off against any other type of income and should be carried forward to the next year and adjusted against capital profit in the next year. The assessee is not allowed to evade the setting off the capital loss against the capital gain (Brown, 2013). However, he is entitled to evaluate and choose the capital gain he would utilize to set off the capital loss. If Mr. Dave does not generate profit, he has the option of disposing of more of his assets and taking a loan to provide the requisite fund to his own superannuation fund. He can then by a rented house in the city and withdraw tax-free figure from his fund once the attainment of 60 years of age is done in coming August.
Reference List
Brown, C., 2013. Australia-taxation of trusts–the problem of aligning concepts of income. Asia-Pacific Tax Bulletin, 19(5).
Capital gains tax | Australian Taxation Office.
Fisher, R., 2015. Judicial dissent in taxation cases: The incidence of dissent and factors contributing to dissent. eJournal of Tax Research, 13(2), p.470.
Hopkins, B.R., 2015. The law of tax-exempt organizations. John Wiley & Sons.
Kenny, P.L., 2012, October. Assessing the impact of team based learning and the examination performance of undergraduate taxation law students. InAustralasian Tax Teachers Association National Conference Paper Series.
Kitagawa, Z., 2015. Administrative Regulations (Vol. 4). Doing Business in Japan.
Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.
Lang, M., Pistone, P., Schuch, J. and Staringer, C. eds., 2015. Introduction to European tax law on direct taxation. Linde Verlag GmbH.
Larsson, J.Å., 2014. Loopholes in Bell inequality tests of local realism.Journal of Physics A: Mathematical and Theoretical, 47(42), p.424003.
Levy, J., 2015. Ajay K. Mehrotra. Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877–1929. The American Historical Review, 120(3), pp.1034-1035.
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