Taxation Law Question Solutions

This document provides solutions to various taxation law questions related to capital gains tax, cost base, CGT assets, and more. It includes explanations and examples to help understand the concepts and relevant legislation. The questions are categorized based on when they were discussed - before, during, and after a workshop. The solutions provide a comprehensive understanding of the topic.

Taxation Law Question Solutions

Contents
Week 9 Capital Gains Tax Questions before workshop..................................................................3
Question 1........................................................................................................................................3
Question 2........................................................................................................................................3
Question 3........................................................................................................................................3
Question 4........................................................................................................................................4
Questions during workshop.............................................................................................................4
Question 1........................................................................................................................................4
Question 2........................................................................................................................................4
Question 3........................................................................................................................................4
Questions after workshop................................................................................................................5
Question 1........................................................................................................................................5
Question 2........................................................................................................................................5
Workshop 8 Week 9 Capital Gains Tax..........................................................................................6
Question 3........................................................................................................................................6
References........................................................................................................................................9

Week 9 Capital Gains Tax Questions before workshop
Question 1.
Following are CGT assets, collectables or personal use assets:
a) An engagement ring that cost $5,000 – collectable: s 108-10(2) of ITAA97 includes jewellery
in the definition.
(b) A second-hand car purchased for $2,000 – if it is for personal use the car will be a personal
use asset: s 108-20(2). However, a capital gain or loss made from a car is exempt.
(c) shares in BHP – CGT asset.
(d) your home – CGT asset. However, your home may be exempt if it is your main residence:
Subdiv. 118-B.
(e) A painting hung in the foyer of your accounting firm – a CGT asset. It is not a collectable as
it is not used or kept mainly for your personal use or enjoyment.
(f) A holiday house at Byron Bay – CGT asset
Question 2
Following can form a part of cost base of rental property applied for the income producing uses:
a. Repairs to broken window - NO
b. Rates and land tax - NO
c. Interest expense on loan - NO
d. Legal fees on purchase - YES
e. Legal fees on mortgage(loan) NO
f. Stamp duty of purchase -YES
g. Stamp duty on mortgage (loan) NO
h. Purchase price - YES
i. Extensions to build extra room -YES
If deduction has been here claimed, or should have been claimed, according to cost base's
strict rules, it cannot be included in cost base. Repairs, prices and taxes, as well as interest
on loan, are all deductible under the S8-1 ITAA97 because rental property's intent is to generate
assessable income figure. Legal fees including stamp duties on purchase are all fixed expenses
that are included in cost base. Borrowing charges, like legal fees including stamp duty, aren't
included in cost base (Murphy, 2019).

Question 3
Subdivision
Subdivision on its own does
not trigger CGT as there is
no change in beneficial
ownership.
The cost of subdivision and
other fees will form part of
the cost base and be
assigned equally
to the blocks assuming they
are the same size and value
to give the cost base of
each block.
The sale of each block is
CGT event A1 and is dealt

with according to CGT
principles. The
first fact to check is
whether the land is a pre-
CGT asset.
Sale of granny flat
This would not be a
principal place of residence
and so the exemption does
not apply. A quirk
in CGT legislation indicates
the land and the house are
separate assets, so
theoretically an
apportionment of the
capital proceeds between

the land and the house
would need to be done.
This is of particular
importance if the land is a
pre-CGT asset and the
house is not.
Subdivision
Subdivision on its own does
not trigger CGT as there is
no change in beneficial
ownership.
The cost of subdivision and
other fees will form part of
the cost base and be
assigned equally

to the blocks assuming they
are the same size and value
to give the cost base of
each block.
The sale of each block is
CGT event A1 and is dealt
with according to CGT
principles. The
first fact to check is
whether the land is a pre-
CGT asset.
Sale of granny flat
This would not be a
principal place of residence
and so the exemption does
not apply. A quirk

in CGT legislation indicates
the land and the house are
separate assets, so
theoretically an
apportionment of the
capital proceeds between
the land and the house
would need to be done.
This is of particular
importance if the land is a
pre-CGT asset and the
house is not.
Subdivision
Subdivision on its own does
not trigger CGT as there is

no change in beneficial
ownership.
The cost of subdivision and
other fees will form part of
the cost base and be
assigned equally
to the blocks assuming they
are the same size and value
to give the cost base of
each block.
The sale of each block is
CGT event A1 and is dealt
with according to CGT
principles. The
first fact to check is
whether the land is a pre-
CGT asset.

Sale of granny flat
This would not be a
principal place of residence
and so the exemption does
not apply. A quirk
in CGT legislation indicates
the land and the house are
separate assets, so
theoretically an
apportionment of the
capital proceeds between
the land and the house
would need to be done.
This is of particular
importance if the land is a

pre-CGT asset and the
house is not.
Subdivision
Since there is no alteration in beneficial ownership, subdivision doesn't really trigger Cap
gains tax. Cost of subdivision as well as other fees would be included in cost base and distributed
evenly among the units, assuming that they are all same size as well as value. Every block's sales
is CGT event A1 and therefore is handled as according CGT rules. The first thing to look for is if
the land is pre-CGT asset.
Sale of granny flat
As it wouldn't be a primary residence, the exception would not here apply. Since the land
as well as house are considered separate assets under CGT law, an apportionment of capital
proceeds between land and house would be required. When land is pre-CGT asset but house is
not, this is especially important (Bevacqua and et.al. 2020).
Question 4
Only the discount method is available to Jan
NCG = [(CG – CL)] x 0.5
NCG = [(50000 – 2000 – 10 000)] x 0.5
NCG = 38000 x 0.5 = 19000
According to the legislation the loss must be applied before the relevant discount percentage
Questions during workshop
Question 1
This is not so. In order for CGT to be triggered a CGT event must occur to a CGT asset. Disposal
is CGT event A1, however not all assets are CGT assets. For example, a family car is an asset,
however, cars are not CGT assets. Therefore, disposal of a car does not trigger CGT.
Question 2
Yes, there is. The market substitution rule indicates the capital proceeds = $500000 Therefore,
the capital gain = 500 000 – 250 000 = 250 000 The CGT discount can apply.

Question 3
(1) Vacant land sold in June 2018 for $300,000 that had been bought by him on 21/3/2006 for
$25,000. This is being paid in 12 instalments of $25 000, however the purchaser has declared
bankruptcy and the last two instalments due next financial year will not be paid.
Aramis can apply the discount method. The capital proceeds will be $250 000 as the
instalments will not be received. As the asset is land there is no income production associated,
therefore the interest deductions can be added to the cost base.
Capital gain = 250 000 – 85 000 = 165000
(2) An exempt asset therefore not relevant = 0.
(3) A personal use asset acquired for less than $10 000 therefore any capital gain or loss will be
disregarded =0
(4) Aramis has the choice of the discount or indexation method on the sale. Best result is
discount method. Capital gain = 180 000 – 95 000 = 85 000
(5) A collectible. The gain can be calculated by either the indexation or discount method.
Discount If the discount method is used the loss is applied first then the discount = (11 000 -
6000) = capital gain of 5000
(6) A collectible resulting in a capital loss of $8 000 which may only be offset against gains from
a collectible. The loss is applied first then the discount = (11 000 - 6000) = capital gain of 5000 –
5000 (Antique loss) = 0. and a carry forward loss of $8000 – 5000 = 3000 Overall net capital
gain (165 000) x 0.5 = 82500 (85000) x 0.5 = 42500 Net capital gain = $125000 and a carry
forward collectible loss of $3000
Questions after workshop
Question 1
Basically, as there is equivalent value there will be a rollover relief and no CGT implications at
the time of replacement. The cost base of the old shares will be the first element of the cost base
of the new shares.
Question 2
$5 each
Cost base = 1375 + 825 = 2200
Element 1 = 2.75 x 500 = 1375
Element 2 = 825

Factor = 68.7/59 = 1.164
Indexed cost base = 2200 x 1.164 = 2560.80
Capital proceeds = 500 x 5 = 2500
Therefore, the capital proceeds fall between the cost base and the indexed cost base. This is the
tax-free zone, and as it does not meet the definition of a capital gain or a capital loss it is a tax
nothing. Your advice to your client would be to use the indexation method and have no tax
implications. It is not necessary to consider the discount method, you will not get a better
outcome than cash in pocket no tax (Colic-Peisker, Ong and Wood, 2015).
$2.50 each
Cost base = 1375 + 825 = 2200 = Reduced cost base
Element 1 = 2.75 x 500 = 1375
Element 2 = 825
Capital proceeds = 500 x 2.5 = 1250
This is a capital loss situation; therefore, the reduced cost base must be used. The reduced cost
base is the cost base without the third element costs. As there are no third element costs the cost
base = reduced cost base.
Capital loss = 2200 – 1250 = 950
Capital losses are not discounted so under both methods the outcome is the same, CL = 950
$7.50 each
Cost base = 1375 + 825 = 2200
Element 1 = 2.75 x 500 = 1375
Element 2 = 825 Factor = 68.7/59 = 1.164
Indexed cost base = 2200 x 1.164 = 2560.80
Capital proceeds = 500 x 7.50 = 3750
Indexation method Capital gain = 3750 – 2560.80 = 1189.20
Discount method Capital gain = 3750 – 2200 = 1550 x0.5 = 775
Therefore, choose the discount method.
Workshop 8 Week 9 Capital Gains Tax
Question 3
a) The capital gain arising on the sale of the house is: Capital proceeds (s 116-20) $500,000
Less: Cost base – Div 110 includes Acquisition cost $92,000

(inc incidentals s 110-25 Elements 1 and 2)
Capital expenditure regarding title to the house $10,000
(s 100-25 Element 5, also see [Note 1])
Cost of improvements ($23,000 + $8,000) $31,000
(s 110-25 Element 4) [Note 2]
Repairs (s 110-25 Element 3) $2,000
Incidental costs of disposal (s 110-25 Element 2) $1,400
Cost Base $136,400
Taxable capital gain = capital proceeds – cost base = 500 000 – 136 400 = $363,600
Note 1: Lucky’s personal efforts worth $2,000 cannot be included.
Note 2: The cost of extending the verandah can now be included. There is no longer the need to
have the improvement reflected in the asset at the time of the sale of the beach house.
Taxable capital gain $363,600
Less 50% CGT discount ($181,800)
NET CAPITAL GAIN (s 102-5) $181,800
Indexation method
The capital arising on sale of the house is calculated as follows:
Capital proceeds (s 116-20) $500,000
Less: Indexed cost base (div 114) Note 1 Acquisition cost (s 110-25 Element 1)
$90,000 x 68.7 = (1.147) 59.9 $103,230
Incidental acquisition costs (s 110-25 Element 2)
$2,000 x 68.7 = (1.147) 59.9 $2,294
The capital arising on sale of the house is calculated as follows:
Capital proceeds (s 116-20) $500,000
Less: Indexed cost base (div 114) Note 1 Acquisition cost (s 110-25 Element 1)
$90,000 x 68.7 = (1.147) 59.9 $103,230
Incidental acquisition costs (s 110-25 Element 2)
$2,000 x 68.7 = (1.147) 59.9 $2,294
Summary:
Capital proceeds $500,000
Less: Acquisition cost $103,230
Incidental acquisition costs $2,294
Capital expenditure regarding title 11,490

Cost of improvements 24,771
Verandah 8,000
Repairs 2,000
Incidental disposal costs 1,400
Indexed Cost Base 153,185
Taxable net capital gain = Capital proceeds – indexed cost base = 500 000 – 153 185 = $346,815
b) Since businesses cannot extend general 50% discount, the response would change if the
discount approach was used. The indexing method will remain unchanged.
c) Since there is capital loss, the decreased cost base will require to be computed. The reduced
cost base will be identical to unindexed cost base, other than that expenditures for maintenance
on Feb 1, 2008 will be excluded (see s110-55(1) and 110-55(2)). (Braithwaite and Reinhart,
2019). Capital loss in this case is $14,400, with reduced cost base of $134,400 including capital
proceeds of $120,000.

References
Books and Journals:
Murphy, K., 2019. Moving towards a more effective model of regulatory enforcement in the
Australian Taxation Office. Centre for Tax System Integrity (CTSI), Research School of
Social Sciences, The Australian National University.
Bevacqua, J and et.al. 2020. Australian Taxation.
Braithwaite, V. and Reinhart, M., 2019. The Taxpayers' Charter: Does the Australian Tax Office
comply and who benefits?. Centre for Tax System Integrity (CTSI), Research School of
Social Sciences, The Australian National University.
Colic-Peisker, V., Ong, R. and Wood, G., 2015. Asset poverty, precarious housing and
ontological security in older age: an Australian case study. International Journal of
Housing Policy, 15(2), pp.167-186.