Taxation Theory, Practice & Law: CGT Implications and FBT Assessment

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

Question 1
The given information clearly highlights that the client is not engaged in any business related to
antiques or land and hence the resulting implications of the transactions highlighted by the client
need to be outlined. Further, based on the individual analysis of each asset, the relevant CGT
implications need to be outlined so that the cumulative capital gains for the client for the given
tax year may be highlighted.
Block of Vacant Land
For CGT to be applicable on the capital gains arising from a capital event, it is imperative that
the underlying asset should not be a pre-CGT asset. This assets are those that the taxpayer
acquires on or before September 20, 1985 since before this data, CGT was not applicable on the
capital gains. Therefore, in accordance with s. 149(10) ITAA 1997, pre-CGT assets would not
involve any liability related to CGT (Gilders et. al., 2016).
For taxable capital gains to arise, it is imperative that a capital event must take place. The various
capital events have been classified in s. 104-5 ITAA 1997. This classification of the capital event
is essential since the capital gains computing methodology is also linked with the capital event
classification. Any capital asset disposal results in event A1 whereby the gross capital gains are
calculated by deduction of relevant asset cost base from the selling price of the concerned asset
(Woellner, 2014).
The asset cost base ought to be computed as per s. 110-25 ITAA 1997 which lists down five
elements comprising the cost base which are listed as follows (Sadiq et. al., 2016).
First element: Cost incurred on the asset acquisition
Second element: Incidental costs during the purchase and sale of assets
Third element: Asset related ownership costs that are spent by the taxpayer (key examples for
vacant land are water and sewerage taxes, local council taxes etc.)
Fourth element – A capital expenditure incurred for the purpose of either appreciation of asset
value or preservation of asset value.

Fifth element – Title preservation related capital expenditure in the form of lawsuits and other
legal expenses.
The cost base of vacant land block is computed in the manner illustrated as follows.
First element: Cost price of land block = $ 100,000
Third element: Ownership expenses (local council taxes, water tax, sewerage tax)= $ 20,000
Cost base: First element + Third element= $ 120,000
A pertinent issue which arises in this transaction is regarding the tax year in which CGT would
be levied. This dilemma arises as there is a time lag between the sale contract enactment and
receipts of requisite proceeds. At times, the time lag is such that these two events tend to lie in
separate tax years. Advice in such cases is provided by TR 94/29 which highlights that CGT
needs to be levied in that tax year when the agreement for sale of asset is enacted and not when
then the receipts are received (Deutsch et. al., 2016). Taking the above into cognizance, in the
given case also since contract for land block sale has been enacted, hence the CGT would be
applicable in the current year. The asset related capital gains as per A1 capital event is illustrated
as follows.
Further, the previous year capital loss of $ 7,000 would be brought to the current year to adjust
against the land based capital gains. Hence, the net capital gains derived from sale of land after
considering the previous losses = 20000 – 7000 = $ 193,000
Another crucial aspect is that for assets being held more than one year, the underlying capital
gains are tagged as long term and provided a 50% rebate before CGT is applied as per s. 115-25
ITAA 1997 (Nethercott, Richardson and Devos, 2016).
Antique Bed

The concerned capital event when the antique bed is disposed is A1 in accordance with s. 104-5
ITAA 1997. Any capital asset disposal results in event A1 whereby the gross capital gains are
calculated by deduction of relevant asset cost base from the selling price of the concerned asset
(Krever, 2017).
Taking the post 1985 purchase date, it is not a pre-CGT asset and therefore capital gains that the
client has realised from the asset sale need to be considered. The cost base of antique bed is
computed in the manner illustrated as follows.
First Element: Buying price of antique bed = $ 3,500
Fourth Element: Capital expenditure undertaken with intention of value increase of antique bed =
$ 1,500
Cost base: First Element + Fourth Element = $ 5,000
It is noteworthy that the antique bed has not been sold voluntarily but has been stolen for which
the taxpayer has derived insurance proceeds to the tune of $ 11,000 which would serve as the de-
facto selling price (Reuters, 2017).
Further, the previous year capital loss of $ 1,500 (related to sculpture) would be brought to the
current year to adjust against the land based capital gains. Hence, the net capital gains derived
from antique bed disposal after considering the previous losses = 6000-1500 = $ 4,500
Another crucial aspect is that for assets being held more than one year, the underlying capital
gains are tagged as long term and provided a 50% rebate before CGT is applied as per s. 115-25
ITAA 1997 (Coleman, 2016).
Painting
The pivotal factor to consider in relation to painting is the date of acquisition of this asset which
is before September 20, 1985. Considering s. 149-10 ITAA 1997, such assets are termed as pre-