In the given case, an antique furniture business is being owned and operated by Alice. The main issue was that the shop of Alice was damaged by a flood due to burst water in the main street outside her shop door. A claim was lodged by Alice with the local council for the damage of the amount $170000. The issue is to be examined as per the Australian taxation laws and regulations. Each and every individual has to follow the rules and regulations implemented by the Australian taxation office.
If an individual carries out a business then most the income received is to be assessable for the tax purposes as per the Australian taxation law. It consists of proceeds or gross earnings from the business including foreign income and capital gains. Ordinary income is incorporated in the assessable income as per section 6-5 ITAA 97 (Amatucci, 2012). The residents have to include ordinary income obtained directly or indirectly from all the sources in assessable income. Exempt income is not considered to be assessable income.
According to Australian taxation law, compensation which is being received in interest form for the temporary loss of utilization of money would be generally considered as an income nature. The pre-judgment interest received in case of personal injury is not an income in nature (Barkoczy, Rider, Baring & Bellamy, 2016). The payments that compensate or replace a taxpayer for the revenue items that would have received on the revenue account are considered to be income, for example, the loss of trading stock. The payments that compensate or replace a taxpayer for the loss of the capital asset are considered to be taken into capital account. Net capital gains are included in the assessable income as per the taxation law. The net capital loss cannot be claimed as a deduction.
According to Australian taxation law, the capital gains tax consequences can be there for the amount of compensation received by an individual. The compensation payment can be related to permanent damage or disposal of the underlying asset. The compensation amount is directly related to most of the underlying assets (Brown, 2011). If the payment is related to the disposal of the underlying assets then the compensation amount is to be treated as the extra capital proceeds from the sale of the asset.
Apart from this, if the payment is related to a permanent decrease in the value of or damage to the asset then the compensation amount is to be considered as the recovering part or all of the expense of asset. If the payment is not related to the asset then it is related to the clearance of the right of seeking compensations. The capital loss or capital gains would be the distinction between the compensation amount received and incidental costs.
According to Australian taxation law, if the personal use assets of an individual such as household goods or home are destroyed or damaged in a disaster then there would be no tax consequences for the compensation amount received. However, if the income producing assets of an individual are destroyed or damaged then an appropriate tax treatment is to be carried out for the compensation amount received (Coleman et al., 2013).
The compensation received for the personal items is not to be included in the tax return and the items used for generating income is to be included in the tax return. The compensation amount received for the loss of trading stock is to be considered as the assessable income. If the compensation is received for the destruction or damage of assets used for generating income then balancing amount is to be estimated. The balancing amount can be estimated by comparing the received amount for the damage of the assets with the adjustable values at the destruction time. The adjustable value is referred to the buying price of assets less decrease in the value. The amount received higher than adjustable value then the excess amount is to be included in the assessable income. The received amount less than adjustable value than the individual can claim for deduction for differences.
According to Australian taxation law, the determination of the compensation receipt is capital or income is to be based on the evaluation of the nature of the loss of the insured item. The insurance policy providing compensation for the loss of income then it would be taxed on the income account. If the capital gains tax events are associated with the compensation received then it would be taxed on the capital account (Hinchliffe & Teo, 2011). Section 15-30 of ITAA97 consists of the compensation received for the loss of the assessable income of the taxpayer. TR 95/35 sets out the views of the commissioner in the relation of the application of capital gains tax to the compensation received.
The determination of the capital loss or gains is based on the normal capital tax rules. When the underlying asset is damaged then the compensation amount received would decrease the cost base of the asset. As per 110-45 (3) ITAA97, the compensation is being treated as the recovering of the cost incurred during obtaining the asset and it is being taken out from the cost base of the asset.
According to Australian taxation law, if an individual receives a claim for personal injury then such payments are considered to be tax-free under certain conditions. The payment needs to be done under an accident or sickness insurance policy (Homburg, 2008). The compensation received for the personal injury is not considered as the assessable income for the tax purpose. Section 292-95 states an individual has to qualify for the exclusion of the tax deduction which consists of the following conditions:
The settlement of the claim is to be done under the following conditions:
If the claim is for personal injuries and other remedies then the exclusion is applicable to the extent which is being related to the injury suffered by the individual (Kirton & Madunic, 2009). The compensation for replacing the lost income is considered to be assessable income and the compensation for the loss of capacity is considered to be capital.
According to the Australian taxation law, the assessable income of a person is to be considered for the tax purpose. The amount received for compensating the revenue amount or items would be included on the revenue account. The revenue account is generally considered as assessable income (Parsons, 2011). The compensation received for the loss of trading stock of amount $70,000 is to be considered as the assessable income in revenue account of Alice.
The compensation amount received for the destruction or loss of the capital is to be included in the capital account. The capital gains will be incorporated in the assessable income. The compensation amount received for the damage to building and equipment is to be taken account for the estimation of the balancing adjustment (Patterson, 2009).
The tax consequences for the compensation payout on the loss of trading stock, damage to building and equipment can be examined on the basis of the case “Federal Commissioner of Taxation v. Wade” (iknow, 2018). The case shows that the compensation on loss of trading stock is considered to be assessable income which needs to be taxed. The case also shows that the compensation on the damage of business assets can be taxed on the basis of the adjustment balance. Alice lodged a claim for the loss of $170000 with the local council.
The damage to the building is $90000, damage to equipment is $10000 and loss of trading stock is $70000. Alice accepted $150000 in full settlement of the claim. Alice is making a capital loss which means the underlying assets would be included in the assessable income as per the Australian taxation law (Pogge & Mehta, 2016). The tax is to be paid on the compensation amount received for the loss of trading stock. The tax is not to be paid on the compensation amount received for the damage to building and equipment.
The tax consequences for the compensation of covering the medical cost for personal injury can be examined by case Federal Commissioner of Taxation v Slaven (1984). The case shows that the compensation for the personal injury cannot be considered as assessable income for the tax purpose (Tved, 2018). Alice received $5000 amount for covering the medical costs which were incurred after hurting her back. It is considered to be a personal injury of Alice. In case of personal injury, the compensation amount received is not considered to be assessable income. Thus, the tax is no be paid on the compensation received for covering the medical costs for personal injury.
Conclusion
The taxation consequences of Alice are being examined as per the Australian taxation law. The compensation amount is being received for the underlying assets used for generating income. It is considered to be assessable income of Alice. The loss of trading stock will come under revenue account and the compensation received is to be taxed as per the law. The damage to building and equipment will come under capital account and the compensation received is not to be taxed because of the capital loss incurred as per the law. The compensation received for the covering the medical costs is considered to be personal injury and not included in the assessable income for the tax purpose.
Issue
In the given case, an Australian resident Robert was died on 16 November 2016 leaving his house to his daughter in Canberra. The house was inherited by her mother who had died in April 1983. Amy had did not live in the house and sold it on 21 June 2018. Until the time of sale, the house was empty. The issue is to determine the tax consequences of Amy for the sale of the Canberra property.
Law
According to Australian taxation law, if an individual sells an asset such as shares or real estate then he or she makes a capital loss or capital gains. The difference between the cost of selling the asset and purchasing the asset is referred to capital loss or capital gains. The capital gains and losses should be shown on the income tax return in order to pay the tax amount on the capital gains (Robertson, 2008). The assets purchased after 20 September 1985 are included for the capital gains tax. However, most of the personal assets are exempted from the capital gains tax such as car, home, furniture etc. The capital gains tax cannot be applied to the depreciating assets.
According to Australian taxation law, the capital gains tax generally is not applicable to the inherited asset. However, the capital gains tax can be applied to the selling of the inherited asset in future. There are special rules for selling of an inherited dwelling such as exemption can be applied on the main residence in full or part. The cost base needs to be estimated unless the inherited asset is fully exempted. The cost base can be based on asset value when it was acquired by deceased or the value when he died (Thomas, 2010). When an individual dies then the asset can be passed directly to the beneficiaries, directly to the personal legal representative and personal legal representative to the beneficiary.
According to Australian taxation law, if a personal legal representative or beneficiary has acquired the asset when the person died then the capital gains tax is not applicable at the time of acquiring the asset. If the asset is sold in future then the capital gains tax is applicable (Ratnapala & Crowe, 2012). The date of the death of the individual can be taken into account for calculating the capital gains. If the main residence is inherited and it is sold in future then capital gains tax may not be applicable on the basis of the circumstances. The exemption from the capital gains tax depends on the following circumstances:
The capital gains tax rule is there for acquiring the dwelling by deceased before September 20, 1985 and he died after or on September 20, 1985. The dwelling in this circumstance need not be considered as the main residence of the person who has died (Walker, 2015). The capital gains tax is not being applicable to the dwelling on the following circumstances:
The dwelling can be considered as the main residence for people mentioned above, even if they are not living into it and continues to be treated it as the main residence. The dwelling can be considered as the main residence from the time when the ownership interest is being taken by the beneficiary.
Application
The case is to be examined on the basis of the capital gains tax as per the Australian taxation law. The capital gains tax is not applied to the inherited asset which is based on acquiring and selling the following asset. In the given case, the house was acquired by Robert in April 1983 from his mother and he lived there ever since. The case can b examined on the basis of Penfold v Predny (2016) case depicting the capital gain tax on the deceased estate.
At the time of his mother died, the market value of the property was $160000 (Ato, 2018). The value of the property on 16 November 2016 when Robert died was $520,000. Thus, Robert purchased the house before September 20, 1985 and he died after September, 20 1985. Thus, the house will not be considered as the main residence of Robert. However, the capital gains tax will not be applicable to the house on the basis of some conditions.
Amy sold the house for $580000 on 21 June 2018 and had no desire to live into the house. The house was empty till the time of sale and not used for anything. Amy sold the house within 2 years of the death of Robert. Thus, Amy fulfils one condition but whether the house is considered to be the main residence or not need to be examined. It is being found that the house from the death of Robert to the selling of the asset was not used for producing income. Amy had the right to occupy the dwelling because she was the daughter of Robert (Bell-Rehwoldt, 2005). The house is the main residence of Amy because even she was not living into it; the house was being treated as the main residence. Thus, Amy will not have to pay the capital gains tax because it was the main residence sold within two years after the death of Robert and also not used for producing income.
Conclusion
The case depicted that Amy is fulfilling all the terms and conditions of getting an exemption from the capital gains tax. She does not have to pay capital gains tax on the house because it was the main residence which was not used for producing income and sold within two years after the death of Robert.
A small farm of 25 acres was owned by Robert on the outskirts of Canberra. A small house was there at the property which was used on the occasional weekend by Robert. Robert used the farm for growing few different varieties of berry which he used to make jam and sold to friends and at the local market. The issue is that Amy is not sure whether to put the property on the market or to hold it.
law
According to Australian taxation law, the capital loss or gains are generally not considered when a property is passed to the personal legal representative or beneficiary of the deceased person. If a property is inherited after 20 September 1985 and sold it in future then the capital gains tax would be applicable. If the personal legal representative of the deceased person sells the property as the part to wind up the estate then the capital gains tax may be applicable (Prince, 2011). The capital gains tax amount depends on the original price of the asset which was purchased by the owner and the selling price of the asset. If the deceased person purchased the asset before 20 September 1985 then the cost of the asset is the value at the time of the death of the person. If the asset is purchased by the deceased after September 1985 then the cost would be the amount which was being paid by deceased at the time of purchase.
According to Australian taxation law, before September 1985, if the asset is inherited then it would not be considered for the capital gains tax. The capital loss or gain can be there for the individual who sells an inherited property. It can also be applicable to the farm property (Ato, 2018). The capital gain tax is being subjected to the capital gains tax consisting of discounts for trusts and individuals and concession for the small business. If the main residence is the part of working farm then it would be considered as the partial main residence. The acquisition of the property at the time of the death of the person is not the situation where the capital gain tax is applicable rather it is applied when it is sold in future. The date of death of the person is used for calculating the capital gain.
According to Australian taxation law, the capital gain gains and loss need to be included in the income tax return. The tax needs to be paid by an individual on the capital gains. The capital gains are being incorporated in the assessable income. Most of the personal assets of an individual are being exempted from the capital gain tax. The capital gain tax is not applicable to the depreciating assets such as equipment. The cost base of the inherited asset needs to be estimated when it was acquired by the deceased person on the basis of the circumstances (Kenny, 2005).
Farming is considered to be income producing activity if the grown crop or fruit is sold into the market. The inherited property will be considered as the main residence, only when the deceased person was living there. Apart from this, if the inherited property whether it is the main residence or other property is used for producing income then cannot be exempted from the capital gain tax. The capital gains tax will be applicable in that case. The Australian Taxation Office directs the citizen of the country to follow the taxation rules and regulations.
Application
In the given case, a small farm of 25 acres was owned by Robert on the outskirts of Canberra. Thus, the property is not considered to be the main residence of Robert. The property consists of a small house which was used on the occasional weekend by Robert. Apart from this, the property was used for farming and growing variety of berry which is sold to friends and at the local markets. Thus, it shows that the property was being used for producing income (KimSungKyun, 2007). The property is being inherited to Amy after the death of Robert. The property was being purchased by Robert for $240000 in May 2009. The property is purchased after September 1985 which means it would be considered for the capital gains tax purpose. The purchase price of the asset is the cost paid by Robert which is $240000.
The case of Penfold v Predny (2016) has depicted that the inherited property needs to be taken into account for the capital gain tax purpose. If Amy wants to sell the farm at the current market value then capital gains will be taken into account. The main reason is that the property is not considered to be the main residence of Robert; it was used for producing income and it was purchased after September 1985 (Contestingwills, 2018). The capital gain tax on the inherited asset would be applied to the difference between the amount of purchase price and selling price of the asset. Thus, if Amy sells the property then the capital gain tax would be applicable to the difference between the purchase price and selling price of the asset which is $170000 ($410000-$240000).
Conclusion
The case shows the taxation consequences for Amy if she sells the farm at its current market value. The property of Robert is not considered to be the main residence because he used on the occasional weekend. Apart from this, he used the land for farming and produced income from it. The land was purchased after September 1985 and it would be considered for the capital gains tax purpose. Thus, if Amy wants to sell the property then she has to pay the capital gains tax on the capital gains.
References
Amatucci, A. (2012). International tax law (10th ed.). Alphen aan den Rijn, The Netherlands: Kluwer Law International.
Ato. (2018). Deceased estates and inheritances. Retrieved from https://www.ato.gov.au/general/capital-gains-tax/deceased-estates-and-inheritances/
Ato. (2018). Inheriting property. Retrieved from https://www.ato.gov.au/General/Property/Inheriting-property/
Ato. (2018). Working farms. Retrieved from https://www.ato.gov.au/General/Property/Property-used-in-running-a-business/Working-farms/
Barkoczy, S., Rider, C., Baring, J., & Bellamy, N. (2016). Australian tax casebook (6th ed.). Melbourne, A: Oxford University Press (aust).
Bell-Rehwoldt, S. (2005). Law (2nd ed.). Detroit: Lucent Books.
Brown, B. (2011). Tax (4th ed.). [Wellington, N.Z.]: New Zealand Law Society, Family Law Section and Property Law Section.
Coleman, C., Hart, G., Bondfield, B., McKerchar, M., McLaren, J., Sadiq, K., & Ting, A. (2013). Australian tax analysis (8th ed.). Pyrmont, N.S.W.: Thomson Reuters (Professional) Australia Limited.
Contestingwills. (2018). Inheritance claim fails because plaintiff had already been awarded a house. Retrieved from https://www.contestingwills.com.au/document-6037332/inheritance-claim-fails-because-plaintiff-had-already-been-awarded-a-house
Hinchliffe, S., & Teo, E. (2011). Taxation law in context 2011-2012 (7th ed.). South Melbourne, Vic.: Oxford University Press.
Homburg, J. (2008). Cornerstone law series (10th ed.). [Adelaide]: Law Society of South Australia.
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KimSungKyun. (2007). Review of Inheritance Tax System?focused on unrealized capital gain?. Seoul Tax Law Review, 13(2), 375-413. doi: 10.16974/stlr.2007.13.2.010
Kirton, J., & Madunic, J. (2009). Global law (8th ed.). Farnham: Ashgate.
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Patterson, D. (2009). Tax (5th ed.). [Wellington, N.Z.]: NZLS, Family Law Section and Property Law Section.
Pogge, T., & Mehta, K. (2016). Global Tax Fairness (7th ed.). Oxford: Oxford University Press.
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