Taxation Law: Capital Gains Liability for Property Sale and Collectibles

TAXATION LAW
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Introduction
The objective of the given report is to highlight the potential capital gains liability for Jeremy
and his wife Maxine taking into considering the various transactions enacted. Of significance
is the sale of duplex, which involved two floors under two different titles with the lower floor
being used as main residence while the upper floor being used a rent free residence by
Maxine’s parents. Also, in the given tax year, a painting and vase have also been sold which
also needs to be considered.
Tax Computations
I.The key objective is to determine whether the property sale would pave way to any CGT
liability or not. It is imperative to analyse this situation in the light of subdivision 118-B
ITAA 1997 which provides full exemption from Capital Gains Tax (CGT) on any capital
gains or loss derived from the sale of main residence1. As per s. 118-1102, for full exemption
it is imperative that the underlying property must continue to serve as main residence during
the complete period of ownership and must not be used for producing any assessable income.
Also, there can be only one main residence despite the taxpayer dwelling at multiple places.
In the given case, the imperative aspect is that the titles of the two floors are separate. This
implies that both the floors are considered to be separate properties from the tax perspective.
Only the bottom floor in which Jeremy and Maxine are staying is the main residence. Further,
they made the bottom floor as the main residence right from time of buying the floor and
continued to treat it as the main residence till the time of sale. Also, the bottom floor was not
used for any assessable income production. Hence, any capital gains on the bottom floor
would be considered exempt from CGT. However, the same cannot be said about the top
1 Barkoczy Stephen, Core Tax Legislation and Study Guide 2017 (Oxford University Press Australia, 2017)
2 Income Tax Assessment Act 1997

floor which was initially given on rent and later used by Maxine’s parents without paying any
rent. It is apparent that main residence exemption would not be applicable. Also, the given
property is not a pre-CGT asset and hence CGT liability would arise for the top floor.
II. The discussion regarding the various expenses is carried out below.
a) Expenses before property purchase – Deduction for expenses related to assessable income
production is permissible under s. 8-1 ITAA 1997. However, the expenses related to buying a
property which was not to be used for commercial purpose or income generation, Hence, no
deduction can be claimed in this regards3.
b) Purchase related stamp duty – It is part of the cost base of the property in accordance with
s. 110-25 ITAA 1997 and therefore a capital cost. No deduction for capital cost is permissible
under s. 8-1 ITAA 1997 irrespective of the presence of connection with assessable income4.
c) Legal expenses related to purchase - It is part of the cost base of the property in accordance
with s. 110-25 ITAA 1997 and therefore a capital cost. No deduction for capital cost is
permissible under s. 8-1 ITAA 1997 irrespective of the presence of connection with
assessable income.
Expenses d,e,f,jwould also form part of the cost base of the property and hence no deduction
for the same can be claimed as highlighted above5.
3 Krever Richard, Australian Taxation Law Cases 2017 (THOMSON LAWBOOK Company, 2017)
4 Ibid. 1
5 Ibid. 3