Tax Implications for Transactions Incurred by House R Us and Employee Jamie

TAXATION
Student Name
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Question 1
Issue
Taking into consideration, the transaction enacted by Amber, the potential tax implications need
to be highlighted with special reference to CGT (Capital Gains Tax) but not limiting the purview
to only CGT. The key issues pertaining to the transactions that Amber has enacted are mentioned
as follows.
1) The tax implications of the various assets which comprise the shop particularly in relation to
potential CGT liabilities.
2) Another key issue is to highlight if the receipts on account of restrictive covenant would be
revenue or capital in nature.
3) The potential tax implications in relation to the proceeds obtained from liquidation of
apartment in inner city which was inherited after Amber’s uncle died in 2013.
Law
The applicable law in relation to the key assets has been presented below.
Sale of Shop
A key question which arises is whether goodwill would be a capital asset or not. This can be
answered using s.108-5 ITAA 1997 which besides listing other capital assets also highlights
goodwill as a capital asset. This is critical since proceeds from the sale of capital assets are
capital proceeds which are not subject to taxation. Only the capital gains that are derived by the
taxpayer on account of disposal of these assets may be put to tax in the form of CGT. One
exception in this regards is trading stock which as per s. 118-25 ITAA 1997 would not consider
the underlying capital gains (Barkoczy, 2017).
For CGT implications to arise, it is required that as per s. 104-5, capital event has to happen. The
capital event that related to the capital asset disposal is termed as A1 event. Each of the events
listed in s. 104-5 ITAA 1997 tend to also highlight the respective mechanism for computation of
capital gains (Coleman, 2015). For event A1, this involves deduction of the cost base of the asset
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under consideration from the proceeds derived from selling the asset. Once this capital gains is
computed, it can be reduced using either the indexation method or discount method whichever
provides a lower taxable value. Rebate to the extent of 50% is available under s. 115-25 ITAA
1997 if the underlying capital gains are long term in nature (Krever, 2017). The indexation
method relies on reducing capital gains by increasing the cost base by multiplying it by the
inflation index adjustment factor. The more common of the two methods is discount method
which is particularly useful when the capital gains are quite high.
Restrictive Covenant
The most important issue that needs to be answered in context of restrictive covenant is to decide
the nature of the proceeds. This is critical as no tax is levied on the capital receipts but the same
is not true for revenue receipts. Revenue receipts would be reflected in the assessable income of
the taxpayer. In case of proceeds being capital, potential impact would be in form of CGT on any
capital gains that are derived. To highlight the nature of proceeds, a case that merits discussion is
Reuter v. FC of T 93 ATC 4037; (1993) 24 ATR 527 (Reuters, 2017). In this case, compensation
was given to the party which allowed not exercising the right to sue. It was highlighted during
the case discussion that putting restrictions on available legal rights for proceeds would result in
proceeds being capital. This is because the right is essentially a legal asset which can potentially
bring future inflows for the individual. The concept in the above case can also be replicated for
restrictive covenant. This is because the business seller has the right to establish business without
any restrictions in terms of time and geography and this new business can provide future profits.
Hence, by restrictions on setting up business, right is being curtailed resulting in capital proceeds
for the taxpayer. The above treatment also is supported by TR 95/35 which also terms these
proceeds as capital (Nethercott, Richardson & Devos, 2016).
Inner City apartment-
CGT exemption is available for any asset which has been acquired by the taxpayer in the pre-
CGT era i.e. when there was no capital gains tax. This period corresponds to the time before the
threshold date of September 20, 1985. This is as per s.149-10 ITAA. Also, it is essential to note
that death does not result in capital gains or tax computed on the asset since it is not a capital
event in accordance with s. 104-5 ITAA 1997 (Wilmot, 2016). However, the CGT implications
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would arise for the legal heir who would dispose the asset which would lead to an A1 event. It is
noticeable that the cost base of asset for the legal heir is the asset’s market value when the asset
is transferred in the name of legal heir. Additionally, in capital asset sale especially involving
property owing to larger denomination involved, there tends to be a time lag between signing of
the sale contract and settlement of the same. This time difference can result in the two events
being present in different tax years and thereby posing a dilemma for the taxpayer (Sadiq, et. al.,
2015). TR 94/29 provides help in this regards, since it states that CGT related liability ought to
be levied on the taxpayer in the same year when the property sale is concluded in terms of
agreement and does not depend on the actual cash being received. Besides, in case f residential
properties, a particular CGT exemption worth discussing is the main residence exemption
(Wilmot, 2016). This exemption arises when the taxpayer has used the property as permanent
residence and not for income generation. This is in accordance with subdivision 118-B ITAA
1997. Further, partial exemption under main residence clause can also be availed depending on
the income derived, years of main residence and other factors (Nethercott, Richardson & Devos,
2016).
Application
Sale of shop
The shop comprises of various assets which are capital assets and therefore the underlying
proceeds derived would be capital and hence non-taxable. Therefore, the potential tax
implications would arise owing to any capital gains that are realised on sale of shop. The shop in
the given case is an asset which is comprised of several assets and hence the treatment of these
individual assets needs to be considered.
A pertinent asset is goodwill whose disposal would lead to enactment of A1 event and the
resultant capital gains computation. The respective cost price and sale proceeds related to
goodwill have been offered in the question which can be used for finding the capital gains.
Besides, discount method would be applicable to reduce the capital gains which are subject to
CGT as these are long term capital gains.
With regards to the equipment, the underlying capital gains computation would consider the
sales proceeds and the asset book value. This would be considered since depreciation has been
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