Taxation Theory, Practice & Law: Capital Gains and Fringe Benefits

Taxation Theory, Practice & Law
HI6028
Student Name
[Pick the date]

Question 1
As a tax consultant, the objective here is to offer tax advice to the client keeping in mind the
relevant tax legislations and the taxpayer details with regards to the transactions enacted during
the given year i.e. 2017/2018. Pivotal information has been provided which serves as a starting
point. This relates to the fact that neither of the given transactions relate to business by client
which implies that any proceeds that is generated from the liquidation of various assets would be
capital in nature. Considering that capital proceeds do not attract any tax burden, hence the
relevant aspect would be only to focus on any capital gains or loss which would be derived and
hence may be subject to CGT.
Vacant Land
With regards to definition of capital asset in s. 108-5 ITAA 1997, it is apparent that vacant land
would be a capital asset. In relation to CGT application, a key aspect is the purchase data since it
is the deciding factor to separate the pre-CGT asset and non-pre-CGT assets. Any capital asset
purchased by taxpayer on or before September 19, 1985 will be labelled as pre-CGT assets while
others would not be pre-CGT assets (Wilmot, 2014). This separation is significant since s. 149-
10 ITAA 1997 states that pre-CGT assets capital gains or losses would be exempt from CGT
(Austlii, 2018).
The process of computation of capital gains is initiated with the obtaining of capital proceeds on
any asset which is referred to as a CGT event. The various CGT events are summarised in s. 104-
5. It is imperative to refer to the relevant CGT event which takes place as the underlying
computation of capital gains is driven by the type of CGT event. The relevant event when
disposal of an asset take place is referred to as A1. For computation of capital gains under this
event, a critical input that is required is cost base which has been explained in s. 110-25 ITAA
1997 (Krever, 2017). The key components accordingly that are included in cost base
computation as listed below.
1

In wake of the above five elements, land block cost base has been computed as follows.
Another issue which needs attention with regards to capital asset sale corresponds to those cases
where the sale proceeds are not received in the same tax year when the asset is sold. The result is
that a concern arises for the taxpayer as to whether the tax implications for the transaction would
be charged in the year of contract enactment or when the sale proceeds are received. In order to
guide on this dilemma, a pivotal role in played by tax ruling TR 94/29 which opines that the tax
implications of sale of land needs to be borne by the taxpayer in the year when the contract is
enacted without any regards to the receipt date of the arising cash flows (Wilmot, 2014). This
understanding would be relied on for the client with regards to land block sale where mismatch
does occur between enactment of contract and receipt of sale (ATO, 1994). However, the
relevant CGT consequences would arise in 2017/2018 since the agreement for land sale has
already been enacted (Sadiq, et.al., 2015).
The computation of land sale related capital gains are exhibited below.
2

Additional consideration needs to be given to the capital losses which have come forward and
stand at $ 7,000 (excluding sculpture losses) and the same be used to lower the capital gains
computed above. Post adjustment capital gains = 20000 – 7000 = $ 193,000
Concessions on the above capital gains can be gained in line with s. 115-25 ITAA 1997 which
highlights that as per the discount method, 50% of the capital gains can be reduced provided
these are long term in nature. The capital gains would be long term only if the ownership period
of the asset has exceeded 1 year period (Nethercott, Richardson and Devos, 2016). This is true
for the given asset.
Antique Bed
The act of stealing of the antique bed (which is not a pre-CGT asset) has triggered the CGT event
A1 as mentioned in a. 104-5 ITAA 1997. Thus, there is a need to determine the underlying
capital gains or losses on the antique bed by subtracting the cost base (computed as per s. 110-
25) from the receipts that asset sale produces (Krever, 2017). The relevant computation of cost
base is exhibited below.
It
Even though the sale of bed has not been conducted by the client, but the fact that disposal has
been done mandates the computation of capital gains. Further, the insurance proceeds are used
are as sale proceeds despite the market value exceeding the same.
Additional consideration needs to be given to the capital losses which have come forward and
stand at $ 1,500 sculpture losses and the same be used to lower the capital gains computed
above. Post adjustment capital gains = 6000-1500 = $ 4,500
3