Taxation Law: Capital Gains Tax and Income from Personal Exertion

TAXATION LAW
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Question 1
Issue
The issue is to offer legal advice to Helen regarding the Capital Gains Tax of the
transactions incurred for the sale of the capital assets during the tax year 2017-18 for
deriving funds for the business.
Law
Pre-CGT Asset
The time of acquisition of the assets is an imperative factor in CGT implications. All
the assets purchased earlier than September 20, 1985 would be termed as pre-CGT
asset under ss. 149 (10) ITAA 1997. The assets belonging to pre-CGT asset
category would not result in any CGT implication on the taxpayer as the derived
capital gains/losses from the disposal of pre-CGT asset would be ignored. Hence, it
is a pre-requisite step to determine whether the asset is a pre-CGT asset or not
(Coleman, 2016).
Collectibles
Antique items like jewellery, book, art work, painting, sculpture and pictures fall in the
class of assets termed as collectibles under ss. 108-10 ITAA 1997 (Austlii, 2019).
For levying CGT on collectible disposal, it is essential condition that the value of
purchase of asset must be higher than the benchmark amount that is $500 (Deutsch
et. al., 2016).
Capital gains/loss
The disposal of collectibles is termed as A1 CGT event under ss. 104-5 ITAA 1997.
The approach to find the capital gains/losses from the disposal of the capital asset
under A1 CGT event is highlighted in ss. 104-10 ITAA 1997. It indicates the formula
that capital gains/losses would be computed by removing the cost base of the asset
from the total income received from the disposal of asset (Gilders et. al., 2016).
Capital Gains Tax (CGT)
The long-term capital assets which the taxpayer has possessed for atleast 1 year is
considered for 50% rebate on the net CGT liability under the discount method
indicated in s.115-25 ITAA 1997. Another method for rebate on taxable capital gains
is indexation method which involves adjustment of cost base as per inflation
(Barkoczy,2018).
Application
Helen is the taxpayer who has sold painting, sculpture, jewellery and picture so as to
derive the income for her new jewellery design business.
Antique painting
It has been purchased by Helen’s father in February 1985 for a sum of $4000.
Clearly, the time of purchase is before September 20, 1985 and thereby, it will be
termed as pre-CGT asset. As it is a pre-CGT asset hence, CGT liability will not be
applicable on this asset.
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Sculpture
It has been purchased by Helen on December 1993 for a sum of $5500. Clearly, the
time of purchase is after September 20, 1985 and thereby, it will not be counted
under pre-CGT asset. Sculpture is a CGT asset of A1 type classified under
collectibles in accordance with the relevant provisions of ss. 108-10 ITAA 1997. The
purchase has been done for more than $500 and hence, the condition needed for
CGT implication applicability is satisfied. Therefore, CGT liability will be applicable on
this asset. The sale proceeds received from the sale of sculpture is $6000. The
capital gain/loss is computed from the formula defined in ss. 104-10 ITAA 1997 and
is shown below.
Capital gains or losses = sale proceeds ($6000) – cost base ($5500) = $500 (Capital
Gains)
The capital gains will be named as long-term considering that the holding period of
the sculpture is higher than 1 year. Thus, 50% rebate will be applicable on the net
capital gains remaining after offsetting capital losses (Krever, 2017).
Antique Jewellery
It has been purchased by Helen in October 1987 for a $14,000. Clearly, the time of
purchase is after September 20, 1985 and thereby, it will not be counted under pre-
CGT asset of Helen. Antique jewellery is also a CGT asset of A1 type classified
under collectibles in accordance with ss. 108-10 ITAA 1997. The purchase has been
done for higher than $500 and hence, the condition required for CGT implication is
satisfied. Therefore, CGT liability will be applicable on the capital gains/losses
generated from the disposal of asset. The sale proceeds received from the sale of
antique jewellery is $13,000. The capital gain/loss is computed from the formula
defined in ss. 104-10 ITAA 1997 and is shown below.
Capital gains or losses = sale proceeds ($13000) – cost base ($14000) = -$1000
(Capital Loss)
The capital losses would be adjusted against the capital gains derived from the
disposal of collectibles. Further, if there are no capital gains incurred from disposal of
collectibles, then these losses will be forwarded to next financial year and will be
adjusted against capital gains from collectibles (Reuters, 2017).
Picture
It has been purchased by Helen’s mother for a sum of $470. Pictures fall in the class
of collectibles under ss. 108-10 ITAA 1997. It is essential for collectible’s disposal
that the value of purchase of asset must be higher than the benchmark amount that
is $500. Here, the cost of purchase is not higher than $500 and therefore, the CGT
liability will not be applicable on this asset.
Net Capital Gains or Losses
Conclusion
Helen has a net capital loss of -$500 from the various transactions incurred for the
disposal of the capital assets. This cannot be offset against receipt that are revenue
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