Taxation: Capital Gains Tax Implications and CGT Events

Running head: TAXATION
Taxation
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1TAXATION
Table of Contents
Letter of Advice.........................................................................................................................2
References:...............................................................................................................................10

2TAXATION
Letter of Advice
To Lin
From Tax Agent
Date: 19th March 2019
Subject: Capital gains tax implications
CGT Implications on sale of subdivided lots:
Capital gains tax is not treated as the separate tax but it is integrated in to the tax
regimes. According to the “section 102-5, ITAA 1997” the assessable income comprises of
the net capital gains for the year. While the capital losses are quarantined and is only
permitted to offset against the capital gains (Woellner et al. 2016). Under the capital gains
tax, when the net capital gains have been accrued to the taxpayer during the particular income
year, then such capital gains in included into the taxpayer’s taxable income for that year. On
the other hand, the capital loss is not allowed for deduction from the taxable income but it is
allowed for off-set against the capital gains for the year that is occurred or for the future years
to ascertain the net capital gains.
As evident you have inherited the house during the year 2009 following the death of
your aunt. The information furnished suggest that the house was used as the main residence
of your aunt before it was rented out to the tenants following her death. The last tenants that
stayed in the inherited property was till the month of July 2018 before the house was
demolished. Instead of opting to repair the house you decided to demolish and subdivided the
plot for further development of the site.
There are numerous instances where the property owners possess the opportunity of
subdividing and selling the land that is owned by them for a longer period of time (Barkoczy
2016). These generally happens where the primary produces possess the land at the outskirts
of the urban centres and the residential expansion signifies that the best use of land is for the
residential purpose. This brings forward the question that the extent of developmental activity
undertaken may be such that the it signifies carrying on of the business of property
development. However, prior to embarking on the detailed analysis it is necessary to
understand that the developing the land is the mere realisation and also necessary to
determine that if the land was actually acquired or bought with the actual intent of resale at

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profit or development (Davison Monotti and Wiseman, 2015). The profit that is made from
the sale or development of the subdivided land would be treated as the ordinary income
notwithstanding of the sale of project. Therefore, when providing you advice in respect of
these issues it is noteworthy to determine whether there is any prevalent indication of
deriving profit while acquiring or inheriting the property.
The same problem was confronted to the taxpayer in the case of “Reiger v
Commissioner of Taxation (2002) AATA 1989” (Saad 2014). The problem for the taxpayer
was that after acquiring the property the intention of the taxpayer was to subdivide the land
with the strategic objective of creating the opportunity of constructing the housing lots.
Therefore, such statement of intention to subdivide the land was regarded as the fatal to the
argument of the taxpayer that the taxpayer intention is to establish the business on the land.
We would like to inform you that, as per the Australian Taxation Office it views the
issues in a manner that the court has considered whether the taxpayer that develops the land
has undertaken the activities of mere realisation or embarked on the profit making activities
or business (Miller and Oats 2016). Similarly, in the case of “Westfield v Commissioner of
Taxation (1991)” once it is understood that activity of buying and selling resulted in the
profit was the activity under the ordinary business course, then the profit that is in question
would only become the part of the taxable income of the appellant by virtue of the being the
income in respect of the ordinary concepts of mankind, provided that the appellant has the
profit making intention during acquisition.
The information furnished by you suggest that you subdivided the land into two lots
and constructed a 700 m2 house on it for a costs of $350,000 while the smaller house costed
you $300,000 for 300 m2. Following the completion of the property you put the property for
sale in the market and eventually sold the larger 700 m2 for a sum of $750,000.
Descending from the above made explanation it is clear that the activity of
subdividing the land and selling the same constituted business activities with the clear
intention of making profit (Barkoczy 2017). You carried the profit making intention at the
time of inheriting the property. The property was developed by you in the enterprising
manner and this development involved carrying on the business of land development. The
gains that that you made from the property would be considered as taxable capital gains.
Citing the example of “Californian Cooper Syndicates v Harris (1904)” held that gains
made from the sale of land was assessable capital gains (Sadiq 2018).