Calculating Janice's Net Capital Gain in Tax Law

This document provides a step-by-step guide on how to calculate Janice's net capital gain for the 2018/19 income year in Tax Law. It includes information on the capital gains and losses she incurred, exemptions that may apply, and the use of the indexation method. The document also discusses the eligibility criteria for using Division 115 and the small business concessions in Division 152.

Tax Law
30 June 2019
Seminar Number 8 T1 2019
Question 1
You are required to just calculate Janice Brown’s “net capital gain” for the 2018/19 income
year. Assume Janice is not entitled to use any of the small business concessions in Division 152
ITAA 1997.
In addition to the transactions listed below, Janice also received salary income of $150,000 in
the 2018/19 and an unfranked divided of $3,000 from BHP shares. Janice also has carried
forward capital losses from:
 the sale of a coin collection of $3,500, and
 the sale of shares in Rio Tinto of $10,000
Janice had the following capital gains and/or losses (prior to considering any capital losses,
indexation method or discount method
 Initial capital loss of $7,000 on Jet Ski (acquired 3 March 2014; disposed 12 June 2019);
 Initial exempt capital gain of $1150 on a Painting (acquired 19 May 1990; disposed 12
June 2019);
 Initial capital gain of $1,200 on Rare Book (acquired 5 April 2003; disposed 12 June
2019); and
 Initial capital gain of $159,900 on Investment House (acquired 16 October 2010;
disposed 12 May 2019)
 Initial capital gain of $340,000 on Telstra Shares (acquired 16 July 2016; disposed 6
April 2019).
Rainbow Bay Property
Janice signed a contract to purchase a house (on 0.2 hectares) at 19 Finders Street Rainbow
Bay on the Gold Coast on 15 August 2008 for $350,000. Ownership transferred to her on 15
September 2008. Janice lived in Rainbow Bay Property as her home from the 15th September
2008 until to 20th November 2014.
On 21st November 2014, Janice decided to move to Brisbane so that her children could attend
an exclusive private school. She rented the Rainbow Bay house to tenants from the 21st
November 2014 and received approximately $35,000 per year in rent. The family moved into an
apartment at Kangaroo Point which they rented through a local real estate agent.
In April 2019 Janice decided that her family had settled well into the Brisbane lifestyle and as a
result she would buy a home in Brisbane. As a consequence, she had to sell the Rainbow Bay
house to fund the purchase. She placed the property on the market and sold the Rainbow Bay
house for $800,000 under a contract dated 13 June 2019. In relation to the sale, she paid a
$16,000 commission to the real estate agent and $2,500 in legal fees to her lawyer. The
ownership of the Rainbow Bay house transferred to the new owner on 13 July 2019.
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Tax Law
30 June 2019
Springwood Property
On 10 January 1984 Janice Brown purchased a block of land for $20,000 in
Springwood on which to build a house. After receiving many quotations, Janice signed a
contract on 21 April 1988 with Construct with Us Pty Ltd to construct the house. The
house construction began on 1 July 1988 and was completed on the 31st October 1988 at
a cost of $95,000.
Instead of moving into the house, Janice rented it out to tenants. She continued to do this
until she eventually sold the property for $720,000 under a contract dated 11 June 2019
with the ownership transferring on 11 July 2019. An independent valuation revealed that
the land was worth $550,000 at the time of sale. (Hint! Could the house be considered
as separate asset to the land?)
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Tax Law
30 June 2019
Rainbow Bay Property - Refer to the set of CGT events from last weeks seminar to answer for the property. Ensure
that you are discussing the correct type of CGT Asset with regard to the house. Be mindful of any rules than apply for
exemption.
1 –
CGT event?
.
CGT event A1 (Section 104-10(1)), ITAA 1997
2 –
CGT asset?
CGT Asset – Land and Building (Section 108-5 (1), ITAA 1997
3 –
Exemption?
Consider main residence exemption here: have treated the dwelling as their main residence throughout the ownership
(1) are an individual;
(2) have treated the dwelling as their main residence throughout the ownership period; and
(3) did not inherit the property.
4 – Rollover? N/A
5 –
Initial
CG or CL
Capital proceeds: $ 781500
less Cost base $350,000
Capital gain $431,500
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Tax Law
30 June 2019
Group 2
Springwood Property - Refer to the set of CGT events from last weeks seminar to answer for the property. Ensure
that you are discussing the correct type of CGT Asset with regard to the house. Be mindful of any rules than apply for
exemption.
1 –
CGT event?
CGT event A1 (Section 104-10(1)), ITAA 1997
2 –
CGT asset?
Are there two
separate
assets? (check
section 108-
55(2))
Consider the treatment of the land and house here, particularly in relation to the dates acquired.
With respect to section 108-55 (2), the land is a separate asset (Pre-CGT Asset) and building house on the land is Post-
CGT Asset
Land - Acquisition Date – 11th January 1984 (Pre-CGT Asset)
House- Capital Improvement – 31st October 1988 (Post CGT Asset)
3 – Exemption? Land – 20,000 (Exempted as Post –CGT Asset acquired before 1985)
4 – Rollover? N/A
5 –
Initial
CG or CL
Think about the treatment of the proceeds received for the sale. How do you separate the value for the land and the
house.
Capital proceeds $720,000
less Cost base $95,000
Capital gain $ 625,000
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Tax Law
30 June 2019
Springwood Property
Can Janice use
the indexation
method?
If so what is the
indexed cost
base?
Janice acquired the house in the _31st December quarter and disposed of it on _11th July 2019 so she has held the
asset for more than 12 months__. She acquired it before 11:45am EST 20th September 1985, but disposed of it after
that time. So she can use either the _indexation method or the discount method (but not both) to calculate the capital
gain, and choose whichever method gives her the best result: s 114-10(1); s 115-15, and s 115-25.
If she chooses the indexation method, she will need to calculate the indexed cost base. To use the indexation
method we need to index the cost base.
Cost base –
1st element costs – Acquisition costs
Acquisition cost $95,000 s 110-25 (1)
Janice Brown acquired the house in the 30th June quarter. The CPI index number was 88.5
She disposed of the property 11th June 2019, which is in the 30th June quarter. However indexation factor so
the September 1999 CPI index number will apply, which is 68.7.
In accordance with s 114-1 the indexation factor is determined by:
index number for the disposal date quarter
index number for the quarter the cost was incurred
114.1/88.5 = 1.29 (rounded to two decimal places: s 114.1)
……………
Indexed acquisition (1st element) costs: $95,000 x 1.29= $122897
There are no other elements to the cost base.
Capital proceeds $720,000 s 116-40
less indexed cost base ($112897) s 114-1
Indexed capital gain $ 597103
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Tax Law
30 June 2019
We would want to consider if the discount method is available and whether gives better result.
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Tax Law
30 June 2019
Calculating Janice’s net capital gain:
First need to consider the eligibility requirements in Division 115 for each current year capital gain. The discount method is not relevant to these
CGT assets as they did not result in a capital gain (as either capital loss or exempt capital gain):
 capital loss of $7,000 on Jet Ski
 exempt capital gain of $1,150 on Painting
 exempt capital gain of $ 431,500 on Rainbow Bay Property
Div 115 eligibility
criteria
Rare book (from set of 3) $159,900 on Investment
House
$340,000 on Telstra
Shares
$ 597,103 Springwood
Property (House only)
Eligible taxpayer? Yes Yes Yes No
CGT event happened
after 11:45am EST 21
September 1999: s
115-15
Yes Yes Yes Yes
Did not use indexation
method to work out
capital gain: s 115-20
No No No Yes
CGT asset acquired by
entity at least 12
months before CGT
event: s 115-25
Yes Yes Yes Yes
(From 8 May 2012) Not
a foreign or temporary
resident s 115-105
No No No No
ENTITLED TO USE
DIV 115?
Yes Yes Yes Yes
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Tax Law
30 June 2019
Calculating Janice’s net capital gain:
Losses:
Janice has carried forward capital losses from sale of Rio Tinto Shares of $10,000 this would be regarded as an ‘ CGT asset’, and
from sale of a coin collection of $3,500 (this would be regarded as collectables capital loses).
Note –
 The $3,500 of losses from collectables can only _be used to reduce the capital gains from collectibles: Quarantining Rule.
Rare book
(from set of 3)
$159,900 on
Investment
House
$340,000 on
Telstra Shares
$
Springwood
Property (House
only)
Total
Current year capital gains $1200 $_159,000 $_340,000 $ 597,103
less current year capital losses $3500 $_000_ $_10,000_ $_000_
less carried forward capital
losses
($2,300) ($000) $_000 $_000
Balance $_2,300 $159,000 $_340,000 $_597,103
Apply 50% discount Div 115 NA ($79,500) ($170,000) ($298,551)
Apply small business
concessions Div 152
N/A N/A N/A N/A
Net capital gain $___-2,300__ $_79,500 $170,000_ $_298,103 $_545,303_
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Tax Law
30 June 2019
Net capital gain of $545,303 will be included in Janice’s 2018/19 assessable income: s 102-5, 1997.
Note Janice will have a $3,500 carried losses still of $2,300
Note in addition to her net CGT gain – Janice’s assessable income would also include her _Salary Income_ and _Unfranked
Dividend_
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