MBS614 Taxation Principles: Analyzing CGT on Asset Transfer & Sale

This report addresses the tax implications of asset transfers and share sales by Mellisa L to Mel Lew Pty Ltd, focusing on Capital Gains Tax (CGT) under Australian tax law. It examines two scenarios: the initial transfer of assets acquired before 1985 and a subsequent sale of shares acquired after 1986. The analysis considers whether CGT events are triggered, the applicability of discounted capital gains and indexation methods, and relevant sections of the Income Tax Assessment Act 1997. The report concludes that the initial asset transfer, due to pre-1985 acquisition, is generally exempt from CGT, while the later share sale is subject to CGT, with potential eligibility for the discount method based on holding period. The report references key legal precedents and legislation.

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Question 1a (4 marks)
Section Discussion (200 words total)
102-5, ITAA
1997
Required taxpayer to include the income of net capital gain under the
assessable income for the purpose of taxation. Accordingly, in the
present circumstance any net gain made on disposal of such asset shall
be treated as ordinary gain for the purpose of taxation.
102-20 A tax payer shall be liable to tax inly if a CGT event happens to the
taxpayer. Further, the same happens when there is a disposal of CGT
asset. The same can be under the will of taxpayer or through operation
of law. Thus, a CGT event shall occur when the ownership of asset
changes. In the present case, since there has been change of ownership
of asset from Mellisa L to Mel Lew Pty Ltd. Thus, the conditions laid
down for CGT event has been triggered.
102 Under the Australian Income Tax, Capital Gain Tax was introduced on
20 September, 1985, Accordingly, any asset acquired before that and
disposed later on by the company is generally outside the purview of
taxation under the Act. Accordingly, in the present circumstance, asset
has been acquired by Mellisa L before 1985 to be precise in 1984 and
has disposed the same in July 2017. Thus, the same generally falls
under the exception and exemption category of Capital Gain Tax.
Thus, even after triggering the CGT event the same is not liable to
CGT and the gain of $1,00,000 shall not be treated as ordinary income
and no Capital Gain Tax shall be charged on the same.
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Question 1b (16 words)
Tax Issue Section Discussion (600 words total)
1. Is disposition of
Assets for share
and later on
disposition of share
for cash is a tax
event
102-20 A tax payer shall be liable to tax inly if a CGT
event happens to the taxpayer. Further, the
same happens when there is a disposal of CGT
asset. The same can be under the will of
taxpayer or through operation of law. Thus, a
CGT event shall occur when the ownership of
asset changes. In the present case, since there
has been change of ownership of asset from
Mellisa L to Mel Lew Pty Ltd. Thus, the
conditions laid down for CGT event has been
triggered for 1st Scenario.
In the second scenario, the shares of the
company have been disposed of to some
external third party and hence the same shall
give rise to a CGT event as ownership of the
asset has changes and CGT event is triggered.
2. How To treat Such
Income
102-5 The Section requires taxpayer to include the
income of net capital gain under the
assessable income for the purpose of taxation.
Accordingly, in the present circumstance any
net gain made on disposal of such asset shall
be treated as ordinary gain for the purpose of
taxation. Thus, the income of $1,00,000 and $
50,000 shall be treated as assessable Income.
Further, the law states that only net capital
gain shall be liable to tax which shall be
worked out on the basis of parameters
established under the Act.
3. Date of Acquisition 102 Since the date of acquisition of the asset is
after 20th September 1985 to be precise
December, 1986, the provisions of the section
shall apply and the gain on disposition of asset
shall be liable to Capital Gain Tax. Thus,
under the present circumstance Mellisa L shall
be required to pay Capital Gain Tax on both
of her disposal of assets and they shall be
treated as separate transaction for the purpose
of levy of capital Gain Tax.
4. Discounted Capital
Gains
115-A The provisions are applicable to individual,
life insurance companies, superannuation
entities. Under the said method, a reduction of
50% is allowed for individuals on the capital
gain made if certain conditions are satisfied:
(a) The transaction must take place after 21st
September, 1999 (Section 115-5)
(b) Asset must be held for 12 months before
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disposal (Section 115-25);
(c) Indexation method has not been used;
In the Present case under the first disposal the
holding period is greater than 12 months
hence the benefit of discounting method shall
be available to Mellisa L and assessable
income shall be $ 50000 as further reduced by
any carryover of losses if any;
Under the second disposal, the said benefit
shall not be available as the holding period of
asset is not for 12 months
5. Indexation Method Australia
n Tax
Office
The provisions are applicable to inidividual.
Under the said method, benefit of indexation
is allowed for individuals on the capital gain
made if certain conditions are satisfied:
(a) The asset has been acquired before 11:45
AM of 21st September, 1999;
(b) The asset has been owed for 12 months or
more;
Further the method comes with a limitation
that asset has been disposed of after 21st
September 1999, then also indexation benefit
shall be available uptill 30th September, 1999.
In the Present case under the first disposal the
holding period is greater than 12 months
hence the benefit of Indexation Method shall
be available to Mellisa L and assessable
income shall be determined by reducing
indexed cost and as further reduced by any
carryover of losses if any;
Under the second disposal, the said benefit
shall not be available as the holding period of
asset is not for 12 months
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Reference Page:
1. Prendergast v Inland Revenue Commissioners [1935] AC 462
2. P Benson & R Lender Taxation Law in New Zealand (Lexis Nexis, 2014), pp 207 – 209
3. P Sharpener ‘The University of Western Australia Law Review: Past, Present and Future’
(2005) 58 UWA L Rev 217
4. Income Tax Assessment Act 1997 (Cth), section 4-15
5. The High Court of Australia has overruled its previous decision: Sproggs Pty Ltd v Henry
Simpson & Co (2005) 225 CLR 123 [10 words].
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