Australian Taxation Law Report

This report provides a comprehensive analysis of Australian taxation law, focusing on capital gains tax implications for various scenarios involving pre-CGT and post-CGT assets. It includes detailed calculations and legal references to guide taxpayers in understanding their obligations and potential tax liabilities when selling properties. The report emphasizes the importance of selecting the appropriate method for calculating capital gains tax and discusses the implications of major capital improvements on pre-CGT assets.

Running head: AUSTRALIAN TAXATION LAW
Australian Taxation Law
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Answer to Question 1:.....................................................................................................................3
Introduction:................................................................................................................................3
Tax Consequences for Normal Condition:..................................................................................3
Tax Consequences for Pre-CGT Assets:.....................................................................................4
Tax Consequences for Building the Home on 20th May 2003:....................................................6
Tax Consequences for Building the Home on 20th May 2017:....................................................7
Conclusion:..................................................................................................................................8
Answer to Question 2:.....................................................................................................................8
Introduction:................................................................................................................................8
Income tax legislations applicable for dwellings built on pre-CGT assets:................................8
Conclusion:..................................................................................................................................9
References:....................................................................................................................................10

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Answer to Question 1:
Introduction:
Rosemary had bought a vacant land, worth $50,000, on 20th October 1997 and build a
house on that land on 20th May, 1999. She intends to sell the property for $300000 on 1st
June,2017. She likes to know the tax consequences for selling the property.
The report is prepared to provide advice to Rosemary on the capital gain tax
consequences under the said scenario and, also, for some alternative situation.
Tax Consequences for Normal Condition:
Rosemary had acquired the land and build the house after 20th September, 1985. Hence, it
cannot be considered as pre-CGT asset. She is liable to pay tax on sale of the property. However,
as Rosemary is an individual taxpayer and the acquisition dates of both the assets are before 21st
September, 1999, both the reduction method and indexation method can be applicable for
computing the capital gain for taxation purpose. It is advised to Rosemary that she should select
the method, which would cause lower capital gain tax, between the two methods for tax return
purpose (Barkoczy 2017).
To measure the outcomes of the two methods, the capital gains under the two methods
are calculated below:
Particulars
Cost
Base
Discount
Method
Indexation
Method
Proceeding from Sale $300,000 $300,000 $300,000
Cost of Land $50,000 $50,000 $51,422

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Cost of Building $100,000 $100,000 $100,881
Total Cost of Property $150,000 $150,000 $152,303
Capital Gain from Sale of Property $150,000 $147,697
Less: 50% Discount $75,000 $0
Net Capital Gain on Sale $75,000 $147,697
As per the reduction method, the accumulated value of original purchase price of the land
and building cost of the building is considered as the cost base of the property. Moreover, the
individual taxpayer can apply for 50% discount on the total capital gain if the individual
possessed the capital assets for more than 12 months. Rosemary has held the ownership of both
the land and building for more than 12 months and hence, she is eligible to get 50% discount on
the total capital gain. The table exhibits that the net capital gain of Rosemary under reduction
method would be $75,000 (Miller. and Oats 2016). Under Income Tax Assessment Act 1997,
Division 115, Subdivision 115-A, and Section 115-15, directly mentions about using the
discounted capital gains method, which could only be used for capital gains conducted after CGT
(Ato.gov.au 2017).
In indexation method, the original costs of the assets are indexed in accordance to the
consumer price index. It causes increase in the cost base of the property and helps to reduce the
capital gain. However, if the costs are indexed then the taxpayer cannot apply for 50% discount.
In accordance to the above table, the net capital gain of Rosemary under indexation method
would be $147,697. Under Income Tax Assessment Act 1997, Division 960-General,
Subdivision 960-M, and Section 960-275, directly mentions about using the indexation method,
which could only be used for capital gains conducted before the augmentation of CGT
(Ato.gov.au 2017).

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As the capital gain under reduction method is lower than indexation method, Rosemary
would have to pay tax on the capital gain, amounted to $75,000.
Tax Consequences for Pre-CGT Assets:
It is assumed that the land had been purchased on 20th October, 1984. However, the
building was built on the actual date. In such case, the building would be considered as major
capital improvement on the pre-CGT asset. The sale proceedings are also divided between the
pre-CGT asset and the post-CGT capital improvement. Taxpayers are liable to pay tax on the
capital gain, derived from the sale of post-CGT capital improvement only. Capital gain from the
pre-CGT asset would be exempted for the taxation purpose (Saad 2014). The implication of GST
is mentioned under Division 100 and Section 100-45 directly states about the treatment of asset
post GST (Ato.gov.au 2017).
Rosemary would like to sell the whole property for $300000. The current market value or
the present value of the land is not stated in the case study. However, the total cost of the
property is $150000 and the proportion of the land value and building value in the total cost are
33% and 67% respectively. Hence, the 33% of the selling price would be deducted from the total
sales consideration for the association of the pre-CGT asset. Rosemary would have to pay tax on
the 67% of the total sales value only. Moreover, as the building had been built on 20th May 1999
and held it for more than 12 months, she can again select any of the reduction method and
indexation method for determining the capital gain on building (Yinger et al. 2016).
As per the discussion, capital gain on the sale of the property for this situation, is
calculated in the following table:

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Particulars
Cost
Base
Discount
Method
Indexation
Method
Proceeding from Sale $300,000 $300,000 $300,000
Less: Sale Value of Land $100,000 $100,000 $100,000
Net Selling Price of Building $200,000 $200,000 $200,000
Less: Cost of Building $100,000 $100,000 $100,881
Capital Gain from Sale of Property $100,000 $99,119
Less: 50% Discount $50,000 $0
Net Capital Gain on Sale $50,000 $99,119
The table depicts that Rosemary would not have to pay any tax for the proportionate sale
of land. However, she is liable to pay tax on $50000 under discount method, as the capital gain
under indexation method would be higher than the discount method.
Tax Consequences for Building the Home on 20th May 2003:
If the home would be built on 20th May, 2003, then it would not be considered for
indexation method. However, as the house would be under the possession of Rosemary for more
than 12 months, she can apply for 50% discount. On the other hand, as the acquisition date of the
land, is before 21st September, 1999, she can select any of the two stated methods for capital gain
determination (Taylor and Richardson 2013). Tax ruling of GSTR 2003/3 mainly indicates the
measures that need to be taken into consideration before calculating the CGT of an asset
(Ato.gov.au 2017).
Particulars
Cost
Base
Discount
Method
Indexation
Method
Selling Price of Land $100,000 $100,000 $100,000
Less: Cost of Land $50,000 $50,000 $51,422
Capital Gain on Land $50,000 $48,578

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Less: 50% Discount $25,000
Net Capital Gain on Land $25,000 $48,578
Selling Price of Building $200,000 $200,000 $200,000
Less: Cost of Building $100,000 $100,000 $100,000
Capital Gain on Building $100,000 $100,000
Less: 50% Discount $50,000
Net Capital Gain on Land $50,000 $100,000
Total Capital Gain on Property $75,000 $148,578
The table implies that for this situation also discount method would result in lower capital
gain than the indexation method. Hence, under the discount method, Rosemary has to pay tax on
the capital gain of $75000.
Tax Consequences for Building the Home on 20th May 2017:
If the building is built on 20th May, 2017 and Rosemary plans to sell it in June,2017, then
the building would be under possession for less than 12 months. Therefore, she would not be
eligible to get any discount on the capital gain on the sale of building or reduce it by increasing
the cost base through indexation me thod (Faccio and Xu 2015). However, as the land had been
purchased on 20th October, 1997, both the discount method or indexation method for determining
the proportionate capital gain on the sale of the land. The calculations are shown below.
Particulars
Cost
Base
Discount
Method
Indexation
Method
Selling Price of Land $100,000 $100,000 $100,000
Less: Cost of Land $50,000 $50,000 $51,422
Capital Gain on Land $50,000 $48,578
Less: 50% Discount $25,000
Net Capital Gain on Land $25,000 $48,578

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Selling Price of Building $200,000 $200,000 $200,000
Less: Cost of Building $100,000 $100,000 $100,000
Capital Gain on Building $100,000 $100,000
Total Capital Gain on Property $125,000 $148,578
As per the calculations, if discount method is applied to determine the capital gain on
land, then the total capital gain on the property would be $125000. Under indexation method, the
capital gain would be $148,578. Hence, Rosemary has to pay $125,000 tax on the capital gain if
the building had been built on 20th May,2017. Under Capital gains tax 2017 relevant calculation
of CGT obligations could be identified (Ato.gov.au 2017).
Conclusion:
It should be noted that Rosemary has used the property for her main residence. Therefore,
she would get full exemption on the capital gain, generated from the sale of property irrespective
of any difference in the acquisition dates.
Answer to Question 2:
Introduction:
This report is prepared to advice whether the Commissioner of Taxation had expressed an
opinion on matters relating to income tax legislation. The main emphasis had been given on land
that is acquired before the advent of capital gains tax.
Income tax legislations applicable for dwellings built on pre-CGT assets:
From the previous question, it is understood that capital gains implications differs largely
before the advent of capital gains tax and after the advent of capital gains tax. From the case

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study, Rosemary purchased a vacant block of land for $50,000 on 20th of October 1997. The year
1997 is after the advent of capital gains tax, so the amount is subject to Capital Gains tax.
In the next part, a situation arises when the land was purchased on 20th of October 1984.
The year 1984 is before the advent of capital gains tax and this is the condition where the amount
is not subject to Capital Gains Tax. If the taxpayer sells the land later, then the capital gain on
such event is generally exempted from tax.
However, in many cases, it has been observed that many taxpayers had increased the
value of the pre-CGT assets through major capital important after the advent of capital gain tax.
If such properties or assets are sold later, then the capital gain would include gains from the both
the pre-CGT assets and post-CGT capital improvements. According to Taxation determination of
TD 97/3, Income Tax Assessment Act 1997 Part 3-1 and Part 3-3 directly suggest the
consideration of capital gain before CGT (Ato.gov.au 2017).
For such instances, the tax authority suggests that in any case, capital gain from pre-CGT
assets are tax exempted and capital gain from post-CGT assets or major capital improvements
are taxable. Hence, if the selling price of the post-CGT asset cannot be identified separately from
the sale price of the property, then it is advised to take the current market value of the pre-CGT
assets as its selling price. If the current market value is not available, then the selling price of the
whole property should be divided proportionately between the post-CGT and pre-CGT assets in
accordance to the proportions of the original costs of the assets. After determination of the
current value of the pre-CGT asset, it should be deducted from the total selling price to obtain
individual selling price of the post-CGT capital improvement for ascertaining the capital gain

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(Barkoczy 2016). Under Income Tax Assessment Act 1997, Division 100-A, and Section 100-25,
capital gains conducted after CGT is mentioned (Ato.gov.au 2017).
Conclusion:
Construction of any dwelling on the land, acquired before the advent of the capital gain,
is a form of major capital improvement. Therefore, it should be treated in the same method, as
discussed above, for capital gain taxation purpose. However, it has been noticed that the taxpayer
often face issues to determine the current market value of the pre-CXGT assets. Moreover, the
proportionate distribution of the selling price is also not appropriate, as the index values before
the advent of capital gain tax and after the advent of capital gain differs highly with each other
(Tanzi 2014).

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References:
Ato.gov.au. (2017). Legal Database. [online] Available at:
https://www.ato.gov.au/law/view/document?docid=PAC/19970038/115-15 [Accessed 6 Sep.
2017].
Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue
Barkoczy, S., 2017. Core Tax Legislation and Study Guide. OUP Catalogue
Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative
Analysis, 50(3), pp.277-300
Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-
Social and Behavioral Sciences, 109, pp.1069-1075
Tanzi, V., 2014. Inflation, indexation and interest income taxation. PSL Quarterly
Review, 29(116)
Taylor, G. and Richardson, G., 2013. The determinants of thinly capitalized tax avoidance
structures: Evidence from Australian firms. Journal of International Accounting, Auditing and
Taxation, 22(1), pp.12-25
Yinger, J., Bloom, H.S. and Boersch-Supan, A., 2016. Property taxes and house values: The
theory and estimation of intrajurisdictional property tax capitalization. Elsevier