Report on Capital Gains Tax Under Australian Taxation Law: Analysis

This report provides a detailed analysis of capital gains tax (CGT) within the framework of Australian taxation law. It examines the applicability of CGT to property sales, including main residences and rental properties, and other assets such as paintings and collectibles. The report outlines exemptions, cost base calculations, and the treatment of capital losses. It includes specific examples to illustrate how CGT is computed on the sale of a house (main residence and rental property) and artwork. The report also discusses the discount rule and the impact of holding periods on taxable capital gains. The document includes the computation of capital gains and losses for various scenarios, and it concludes with a summary of taxable capital gains. References to relevant sources such as the Australian Taxation Office (ATO) rulings and Australian Taxation Act, 1997, are also provided to support the analysis.

Australian Taxation Law

Table of Contents
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REFERENCES................................................................................................................................5

MAIN BODY
Capital gain taxes:
Applicability:
 In case a property is owned or acquired on or after 20th September 1985 and is
sold in subsequent period profit or loss arising out of such transaction is liable for
capital gain taxes (Calculating Capital Gains Tax in Australia, 2018).
 Ownership is established when property is purchased or is received as a gift.
Exemptions: following assets are exempted from capital gain taxes:
 Main place of residence
 A car or motor cycle
 Depreciating assets used for taxable purpose only;
 Assets acquired before 20th September 1985.
 collectables purchased for less than or had a market value of $500 or less. It includes
painting, sculpture, drawing, engraving or photographs.
Date of ownership:
 When an asset is purchased under a contract such a real estate than date of ownership of
such property is date, when contract is entered into for purchase of asset not the date of
settlement.
 In case property is received as inheritance date of acquisition is date of death of person
who bequeathed it (Capital gains tax, 2018).
Cost base for real estate:
For calculation of capital gain or loss two figures are must:
1. Cost base/cost of v acquisition to compute capital gain;
2. Reduced cost base to calculate a capital loss.
Rules for real estate:
Costs of owning: while commuting reduced cost base for real estate, following must not be
included:
 Rates
 Insurances
 Land tax
 Cost of maintenance
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 Interest on the borrowed funds for purchase or improvement of property.
These amounts can be added in cost base, if
 Property is acquired under a contract and which is entered into after 20th August 1991.
 Deductions for the cost can not be clammed if property is not used to generate assessable
income.
Cost base adjustments for capital work deductions:
For calculation of cost base and reduced cost base for a property which is used to generate
taxable income certain deduction are allowed which are as follows:
 reduced cost base of the asset;
 the cost base of the asset.
Sale of Rental property
Amount received from sale of a rental property is eligible for capital gain taxes (CGT) and if
profit arises on property (Property, 2018). CGT is charged on the same amount and if loss is
incurred it can be carried forward and deducted for capital gains in later years.
Capital gain and losses are commuted difference between cost base and amount received on
sales of the property (Gourio and Miao, 2014).
Computation of capital gains and losses:-
Assumption:
The property purchased has two separate parts flats at ground and first floor. There is no
specific ratio is given regarding the distribution of cost of acquisition, sale proceeds and other
incidental expenses related to the property (Burman, 2015). It is assumed that all cost and
revenues for the property is distributed in ratio of 50:50.
Sales of house main residence:
As per the Australian taxation office rulings and Australian taxation Act, 1997, any
property which is used for whole time residential purpose and is owned after 20 September 1985,
subsequently sold is exempt form capital gain tax liability. Certain condition related with main
residence are :
 Person must have a construction over a land, vacant land is not considered as property of
main residence
 person must have lived in that property for whole time
 No income is generated form that house.
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In present case all the above conditions are fulfilled regarding the flat on ground floor so amount
realized on sale of such property is exempt form capital gain tax.
Particular Amount in $
Sales proceeds of whole house 1,820,000
Amount incidental to flat at 1st floor 910000
Reason:
There is on tax applicable of profits generated from sales of this house as this is main
resident of
Jeremy and Maxine.
Sales of rental property:
Particular Amount in $
Cost base
Cost of Acquisition (15/4/2015) 625000 (1,250,000*50/100)
Add:
Transportation and accommodation cost -
Stamp duty 36000 ( 72000*50/100)
Legal expenses 2150 (4300*50/100)
Total cost base 663150
Discount rule is applied in this case as house was owned for more than 12 months, hence only
half of the capital gain amount will be charged to CGT.
Sales proceeds: 910000
Capital gain 245850
Taxable capital gains 123425
No deductions are claimed for this property as purpose to purchase this property was to generate
rental income but this was given to parents of the owners rent free for full times so no income
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was generated form this house. Further, house was not used for living by the owner so is not
considered as main resident for purpose of capital gain tax.
Sale of painting:
Particular Amount in $
Cost of Acquisition (purchased on 10/12/2013) 7000
Sales price (sold on 23/6/2017) 8500
Capital Gain on sale 1500
Taxable amount for purpose of capital gain
taxes
750
Discount rule: if a property is hold by the owner for a period of more than 12 months then only
50% of the capital gain is chargeable to CGT.
Sale of Ming vase:
Particular Amount in $
Cost of Acquisition (purchased on 22/2/2014) 10000
Sales proceeds 200
Capital loss 9200
Treatments of capital losses:
This amount can be deducted form capital gains of the current year and if any left will be carried
forward to subsequent accounting years (Woellner and et.al., 2016).
Total capital gain
Capital gain/loss Amount
sale of property 123425
Sale of painting 750
Sale of Ming vase (9200)
Taxable capital gain 114975
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