Taxation Consequences of Capital Asset Disposal and FBT Consequences for Rapid Heat

Taxation Theory, Practice & Law
STUDENT NAME/ID
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Question 1
It is known that the client has sold certain assets. In this backdrop, the objective is to highlight
the tax consequences to the taxpayer of these sold/disposed capital assets during the assessment
year i.e. 2017/18. In this regards, the hosts of aspects related to the transactions will be critically
analysed based on the relevant tax rulings and tax legislation.
Nature of Receipts
The main aspect to understand is that the taxpayer is not running a business and does not intent
to run an asset trading operation so as to generate ordinary income. However, she has many
collections as well as investments, among which she has sold a land block, shares of four
distinguish companies, a famous painting by Australian artist and a violin which she has used for
her interest. Moreover, there is also an asset called as antique bed which has been taken by
someone (Stolen). These assets are considered as capital assets of the taxpayer and liquidation of
these have resulted in capital receipts. These receipts are non-taxable under ordinary concepts
under s. 6(5) Income Tax Assessment Act 1997 but the underlying capital gains will be taxed as
per the provisions of Capital Gains Tax (CGT) (Woellner, 2017).
Exemption of CGT
The assets will be exempted from CGT only if they are classified as pre-CGT asset. This class of
assets are procured at the time when the capital gains were not considered for taxation which is
before September 20, 1985 (Sadiq, et.al., 2015). The assets whose ownership was assumed
before this specified era of CGT enforceability will not be taxed irrespective of the amount of
gains/losses, ownership or asset type or holding period and so forth. Further, special type of CGT
exemption would be applied on the capital assets which are categorised as collectables or
personal use asset. These two capital assets will only be taxed when the below highlighted
condition is satisfied (Nethercott, Richardson and Devos, 2016).
Collectables: Purchase price must be in excess of $500 (s. 118 (10) ITAA 1997)
Personal use item: Purchase price must be in excess of $10,000 (s. 108-20(1) ITAA 1997)
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Hence, it can be said that when the assets belonging to the above particular category would fulfil
the requisite condition then, the asset’s capital gains/loss will not be exempted from CGT
(Reuters, 2017).
Determination of CGT
There are different steps which are followed to compute the capital gains or capital losses from
the liquidation of the capital asset (Gilders, et. al., 2015). However, the main aspect in this
regards is to determine the nature of the transaction and its subclass so as to find the exact
procedure of determining the capital gains or losses. The complete summary of these transactions
are highlighted in s. 104-5, ITAA 1997 (Coleman, 2016). The assets disposal of the given case is
a CGT event and the subclass is A1. According to this subclass, the two central elements of the
computation of capital gains/losses are listed below (Hodgson, Mortimer and Butler, 2016).
 Proceeds received from sale
 Cost Base
Proceeds received from the sale can be contractual payment which the taxpayer will receive as
the sale income. Further, when there is an involuntary disposal has been occurred of the asset
then the income received from related insurance claim will also be considered as proceeds from
asset (Gilders, et. al., 2015).
Cost base includes associated costs or expenses that have been imposed on the taxpayer and
hence, all these payment has been paid by taxpayer only at the different stage of asset
procurement or selling as highlighted in s. 110 (25) ITAA 1997. There are five key components
which are associated with the cost base and are listed below (Krever, 2017).
It is essential to note that it is not necessary that all the five components of cost base are present
for every asset. Hence, in that case, the sum of the available component costs would become the
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cost base of asset. The calculated capital gains will be brought to adjust any present capital losses
which is either carry forwarded from previous year or derived from sale of asset under s. 102(5)
ITAA 1997 (Coleman, 2016). Further, if no capital losses are available then the capital gains will
be taken for concession based on the discount method. For long term capital gains which are
derived from the asset with reported holding period of more than 1 year would be entitled for a
net discount of 50%. (Krever, 2017). Furthermore, for short term capital gains which are derived
from the asset which are reporting holding period of less than 1 year, no discount on capital gains
would be available.
Consideration of Proceeds
According to the understanding drawn from TR 94/29, the taxpayer has to include the payment
which has been mentioned in the contract of sale of the asset irrespective of the timing of the
payment received (Sadiq et, al., 2015). It provides the clue that if the contract has been made
such a way that contract has been signed in the current year but taxpayer will be able to get the
payment in next year or later, then the consideration of the sale proceeds will be done in the year
of contract enactment (Reuters, 2017).
Taxpayer has disposed five assets during FY2017/18 at different point of time. The first step is to
determine which of them are categorised as pre-CGT asset because if the fall in pre-CGT asset
then no need to find capital gains/losses because they are exempted from CGT implication. The
key decision factor is buying date which represent that date which are prior to September 20,
1985 will refer to pre-CGT asset and thus, CGT exempted.
Painting
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