Questions:
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 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? (10 marks, max. 1000 words). Case study 2: Fringe Benefits Tax Periwinkle Pty Ltd (Periwinkle) is a bathtub manufacturer which sells bathtubs directly to the public. On 1 May 2015, Periwinkle provided one of its employees, Emma, with a car as Emma does a lot of travelling for work purposes.
The capital gain defined as the divergence between acquisition cost of capital gain tax asset and capital proceeds. Capital gain can be calculated using three methods. The first method is known as Discount method which is applied more than 12 months before the capital gain tax event. The second method is known as Indexation method which is applied when assets are acquired before 21st September and apprehended for more than 12 months immediately before relevant tax event on the capital gain (Warren 2014). The third and the final method is the residual method which is applied when assets are held for less than 12 months. Hence, the computation of capital gain is calculated by applying these three methods only (ato.gov.au 2016)
Any property acquired before 20th September 1985 which are:
Concerning the topic, we will define the long-term and the short-term capital losses arising from the capital gains.
Capital Loss in the long term: the factor that works for the capital loss raised from long-term loss can apply against the gain acquired from the capital gain in the long term. No other set off is possible in this context. The loss attained from the long-term capital loss gets to carry forward for an unlimited period unless such place gets rectified with an alternative (Blundell et al. 2013). So, there are subsequent indefinite years of assessment that gets set off precisely against capital loss regarding Long term.
We will discuss the capital loss arising regarding short term: similarity with the source, the short term loss of capital gets set off from the same source of capital gain regarding Long term (Jacob and Jacob 2013). Likewise, the capital loss regarding short term also gets carried forward for an unlimited period of the assessment years which are set off against the capital gain with terms of the Short-term as well as for the long terms.
(a) With the given question Mr. Dave Solomon, who lived in a two-storey building for last 30 years purchased for $ 70,000. He sold the building for $ 8, 50,000 on 27th June of the current tax year. The resident initially sold at an auction and buyer paid $85,000 as advance money against the purchase. But subsequently, the buyer did not have enough funds to proceed with such purchase. Hence, the money was forfeited. Hence, $ 85,000 received be charged to “Income from other sources.”
Calculation of capital gain
Sale proceed$8, 65,000
It exempted from the definition of CST I.E Family home exemption
(b) a pro-Hart painting was purchased for $15,000 and sold at the price of $1,25, 000 on 20th September 1985
Hence, Capital Gain is as follows:
Sale Proceed $ 1, 25,000
Less: Indexed cost of acquisition
15,000*123.4/71.3 $25,961
(c) the purchase of the luxury motor cruiser was for $1,10,000 on late 2004 and sold at the price of $ 60,000 to a boat broker on 1st June of the present and current year.
Hence, capital gain will be as follows
Sales proceed $ 60,000
With Less: Indexed cost for acquisition $ 1,10,000
d) He sold a parcel of shares in a newly listed mining company on 5th June of the current year for $ 80,000. He purchased these shares on 10th January of the current year for $ 75,000. To purchase these shares he borrowed a loan of $ 70,000 and paid interest on the loan of $5,000. He also paid $750 as a brokerage for the sale of the shares and $250 in stamp duty for a purchase of the share. As per income tax law, interest on the loan is not a part of the cost of acquisition. Hence, interest on the loan has not been included (Jin 2016).
Hence, capital gain will be as follows:
Sale proceeds $ 80,000
Less: Brokerage $ 750
Less: cost of acquisition $75,000
Short term capital loss $ 4,000
So Capital gain for the year is as follows:
capital gain with Long term on the sale of residential property $ NIL
capital gain in Long term on the sale of painting$ 1, 50,961
the capital loss in Long Term on the sale of Boat $ 50,000
Short Term Capital Gain on the sale of share $ 4,000
Capital gain in long term $ 1,04,961
Now the tax return of Mr. Dave for the year end 3oth June of the previous year shows a net capital loss of $10,000 from the sale of shares. Hence, it can be adjusted with current year capital gain in concern to long term.
Hence, the net amount of the capital gain regarding the long terms for the present and current year is $ 1, 04,961-$10,000 =$ 94,961
Net Capital Gain is a summation of all gain arrived from sale from the sale of the capital asset minus all loss incurred on the sale of the capital asset which includes loss on sale of the capital asset from the previous year as well (Damodaran 2012). So we can draw an assumption that the capital gain cannot differentiate with any other form of tax, it is not a separate tax. Rather, the capital gain is the asset which forms the part of the assessable income of an assessed and subsequently tax should pay on gain arising on sale of the capital asset in the relevant income year in which sale took place (Smith 2015). Thus, Mr. Dove has earned the gain on sale of an asset. As a result, he can contribute fund to his personal superannuation fund. Mr. Dove has to maintain relevant records when some important and major transaction took place which includes, Interest on loans, Purchase receipts; Expense paid in regards to litigation fees, legal fees, etc. Records regarding repairs and maintenance of assets and records of brokerage paid on shares.
Net Capital Loss is a summation of all loss arrived from the sale of the capital asset which includes loss from previous year. Assessee cannot set off his capital loss from another source of income but should carry forward for subsequent years and deduct it from capital gain arrived in subsequent years (Becker et al. 2013). A capital loss can be carry forward for indefinite periods. An assessee does not have the right to choose not to set off capital losses against any capital gain however they can deduct such loss as per their choice with the capital gain (Edwards 2012.). If Dave does not have a positive capital gain, he shall sell more of his assets or acquire loan so that he can contribute to his personal superannuation fund and then buy a rented city apartment and withdraw a tax-free amount from his personal superannuation fund once he attains the age of 60 in August of next year.
References:
Ato.gov.au. (2016). Capital gains tax | Australian Taxation Office.
Becker, B., Jacob, M. and Jacob, M., 2013. Payout taxes and the allocation of investment. Journal of Financial Economics, 107(1), pp.1-24.
Blundell-Wignall, A. and Roulet, C., 2013. Long-term investment, the cost of capital and the dividend and buyback puzzle. OECD Journal: Financial Market Trends, 2013(1), pp.39-52.
Burkhauser, R.V., Hahn, M.H. and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.
Damodaran, A., 2012. Investment valuation: Tools and techniques for determining the value of any asset (Vol. 666). John Wiley & Sons.
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