Taxation Treatment of Capital Gains/Losses on Sale of Assets

Taxation Theory, Practice & Law
STUDENT NAME/ID
[Pick the date]

Question 1
In the current situation, the taxpayer has sold some of his assets during the income tax year
2017/18 which needs to be discussed for taxation treatment. Further, the taxpayer is not running
a business of the given assets and hence, the objective is not to treat the sale proceed as
assessable income of the taxpayer because the client would have capital gains/loss which would
then be analysed to comment on the Capital Gains Tax (CGT) implications. The main factors
which need to be analysed for the validity of the CGT on the received capital gains are
represented below.
Factor 1: PRE-CGT ASSET
As the name suggests, the assets which are acquired before the enactment of CGT are considered
as pre-CGT assets. The enactment of CGT has been done on September 20, 1985 which means
any asset of the taxpayer which he/she has acquired prior to this date would be recognised as pre-
CGT asset. When any pre-CGT asset is liquidated by the taxpayer, then the respective taxpayer
who has received capital gains/losses would not liable for CGT implication as evident from
s.140-10, ITAA 1997 (Austlii, 2018 c).
Factor 2: CAPITAL EVENT
When there is a disposal of capital assets then there would be capital gains or losses which need
to be computed. The summary of various CGT events is highlighted in s. 104-5, ITAA 1997
(Sadiq, et.al., 2015). Based on the current scenario, the transactions of disposal of assets belong
to A1 event which includes that capital gains or losses would be determined when the cost base
of the respective capital asset would be deducted from the received sale proceeds. Capital
proceed is normal amount which the taxpayer has earned from the buyer party after selling
his/her capital assets. However, the cost base of the asset involves five elements which are
essential to determine (Wilmot, 2014).
Factor 3: COST BASE OF ASSET
The relevant provision is discussed in s. 110-25, ITAA 1997 which shows the key costs/expenses
which may be borne by the concerned taxpayer for the asset. All the respective costs under cost
1

base of the asset would be deductible from the capital proceeds in order to find the net capital
gains/loss (Nethercott, Richardson and Devos, 2016).
Cost base element 1: The payment which the taxpayer had paid to the seller party while
purchasing the asset.
Cost base element 2: The numerous incidental costs which the taxpayer has paid while buying or
selling the asset.
Cost base element 3: Expenses which are essential to sustain the ownership of the asset. It
includes the payment made to complete the tax liabilities or any assumed interest payment for
the loan and so forth.
Cost base element 4: This depends on the choice of the taxpayer because if taxpayer pays any
amount in order to increase or conserve the market worth of the asset then the amount would be
taken as a part of cost base.
Cost base element 5: The amount spent by taxpayer so that he/she can preserve the title of the
asset would be last but imperative element of cost base of the asset.
If any of the above costs have been paid by the concerned taxpayer then the sum amount of the
costs would be termed as cost base of the asset.
Factor 4: 50% DISCOUNT ON CAPITAL GAINS
Long term capital gains are held taken for 50% discount because the taxpayer who has sold
capital assets which has holding period greater than a year. It means that taxpayer would be
entitled to get a rebate of 50% on capital gains for holding period higher than a year as per the
outlines of s. 115-25, ITAA 1997 (Nethercott, Richardson and Devos, 2016). Further, the
taxpayer would not liable to get 50% discount when there is short term capital gains from the
disposal of the asset.
Factor 5: ADJUSTMENT OF CAPITAL LOSSES
Previous capital losses would not reduce the taxable income of the taxpayer as they are adjusted
with the capital gains. Moreover, if in any financial year the taxpayer has received capital losses
2

but not the capital gains then the capital losses would be shifted to next financial and would
compensated against the next year’s capital gains (Nethercott, Richardson and Devos, 2016).
1. TAXPAYER SOLD BLOCK OF VACANT LAND
The date of acquisition defines that taxpayer has purchased land block in 2011 after the
enactment of CGT implication (September 20, 1985). As a result, the block of land is not pre-
CGT asset and the taxpayer will be liable for CGT on the derived capital gains/losses as per the
provisions outlined in s. 149(10), ITAA 1997 (Austlii, 2018 a). Further, the liquidation of land
asset is considered as capital event of A1 category as evident from s. 104-5, ITAA 1997 and
therefore, all the respective costs for the cost base of the asset would be deductible from the
capital proceeds derived from the sale in order to find the net capital gains/loss as per the
provisions of s. 110-25, ITAA 1997 (Coleman, 2016).
The TR 94/29 defines that in a situation when the contract of the sale has been executed in a
given tax year but no payment has been received by the taxpayer on the same year and would be
received in next financial years, then the capital gains/losses would be computed for the year in
which the sale contract has been irrespective of the situation that actually the sale proceeds have
not been received (ATO, 1994).
Income received from sale ¿ $ 320,000
Capital gains/losses ¿ $ 320,000 – $ 120,000=$ 200,000
Capital losses (Last years) ¿ $ 7,000
Capital gains after adjusting capital loss ¿ $ 200,000−$ 7000=$ 193,000
Long term capital gains and hence, 50% discount would be applicable on capital gains for CGT
implication.
3