Case Study: CGT Implications of Property & Share Transactions 2019

This case study provides a detailed analysis of the Capital Gains Tax (CGT) implications for Lin, focusing on property and share transactions for the year ended June 30, 2019. It examines the tax consequences of inheriting a house in Carlisle, including its subsequent damage, demolition, subdivisi...Read More

Running head: TAXATION OF CAPITAL GAINS
Taxation of Capital Gains
Name of the Student
Name of the University
Author Note
Total Word

1TAXATION OF CAPITAL GAINS
Letter of Advice
To
Lin,
In order to discuss the CGT implications, for the transactions mentioned herein for the
year ended 30th June 2019, we would require an understanding of the CGT assets and
transactions. The effect of the previous year CGT transactions in the current year will also be
required to analysed.
Taxation Issue 1
Whether the above transactions will have any CGT implications for the year ended 30th
June 2019. Whether the previous transactions have any effect in the in the CGT implication
in the current year.
Rule
Capital Gain Tax
Capital Gain implies those gains, which are not taxable under any other form of taxation.
This tax is treated as a last resort. When proceeds from a transaction cannot be allocated to
any of the form of taxation, the same is required to be taxed under the CGT. The gains that
are taxed under the CGT generally implies statutory incomes. The transactions that are taxed
under the CGT generally implies proceeds from the disposal of the assets, which includes real
estate and shares. However, there are certain assets that are exempted from being taxed under
the CGT. The computation of the Capital Gains will include the assessment of the Capital
Gain asset, the Capital Gain event, the timing of the Capital Gain, Capital proceeds, Cost
Base, discount that might be applicable and any previous year tax that might have accrued.
The Rules relating to CGT are contained under the Income Tax Assessment Act 1997 (Cth).

2TAXATION OF CAPITAL GAINS
Capital Gain Asset
The definition of the Capital Gain asset has been provided under section 108-5(1) of the
the Income Tax Assessment Act 1997 (Cth). This provision defines a capital gain asset as a
property in any form and includes contractual claims, goodwill and other legal rights. Any
collectibles that has been acquired for the purpose of personal use can be included under the
definition of Capital Gain asset as provided under section 108-10(2) of the Income Tax
Assessment Act 1997 (Cth), but the value of such collectible for the purpose of this section
needs to be anything exceeding $500. The assets that are meant to be used for personal
purposes are not included in the definition of collectibles and are not to be taxed under the
CGT when its value does not exceed $10 000. These assets includes furniture, television, car
and other similar assets.
Capital Gain Event
In order to have a CGT implication, an occurrence of a CGT event is necessary under
section 102-20 of the Income Tax Assessment Act 1997 (Cth). Section 104-5 of the Act
identifies the events that are regarded as a CGT event. The most basic event that are
construed as a capital Gain event is listed as the A1 event. This includes the disposal of a CG
asset. The event is said to have occurred when the a contract for the disposal of such a
property has been effected by the taxpayer. These events also includes the destruction or loss
of CG assets, creation of legal or contractual rights, a granting of a lease any other receipt
arising from a CG event.
Timing of Event
In case of A1 event under the CGT events, time of the event is when the contract for
disposal have been entered into or when the ownership of the assets passes on to the party
other than the taxpayer.

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Cost Proceeds
Capital proceeds has been defined under the section 116-20 of the Income Tax Assessment
Act 1997 (Cth) as property of money, the receipt of which has arisen as a direct consequence
of a CGT event. In the event of an occurrence of a sale, the consideration received by the
taxpayer in return of such a sale is regarded as the cost proceeds. However, this basic
definition of the cost proceeds can be subjected to six modification under Division 116-20.
These modifications include the market value modification, apportionment modification,
Non-receipt rule, Repaid Rule, Assumption of liability rule and Misappropriation Rule.
Cost Base
The cost base has been defined under section 110-25 of the Act as the expenditure that the
taxpayer has incurred for acquiring the CG asset and includes all the expenses that have been
incurred for the purpose of the maintenance of those CG assets. Under this section the cost
base consists of five elements. These elements includes the cost of acquisition of the asset,
the cost that has been accrued incidental to the purchase of the asset, any expenditure of
capital nature that has accrued from the asset, any capital expense that has been accrued for
the purpose of maintaining, preserving, establishing and defending the title with respect to the
CG asset. Under section 112-20 of the Act, the cost base may be substituted by the market
value. There exists several rules in relation to the Cost Base of several assets. For the purpose
of assets of personal use the third element of the Cost base will not be considered. In case
there is a Capital loss incurred by a taxpayer with respect to a capital asset, the Cost base in
such a case will be regarded as the Reduced Cost Base. In this case also the third element is
not included within the cost base.
Capital Gain or Loss
The computation of the Capital Gain or the Capital Loss can be made by deducting the
Cost Base form the Cost Proceeds. In case the amount arrived at after making the deductions

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is positive, the event can be regarded as a Capital Gain and in case the deduction inflicts a
negative amount the same will be regarded as the Capital Loss. The loss that has be construed
to be the capital of the previous year can be utilised to offset the Capital Gain calculated with
respect to the current year. However, under section 118-10 of the Act, the loss arrived at with
respect to collectibles in the previous year can be adjusted against collectibles only in the
current year.
Discount
Under division 114 of the Act, a person is allowed a discount of 50% when he makes a
purchase of the property, for the purpose of owing it for a period more than 12 months and
the purchase has been made after 21st of September 1999.
Implications
The House in Carlisle
This CGT event falls in case of the house in Carlisle falls partly under the A1 category, C1
category and F1 category. This is because the property has been inherited by Lin in 2009
after the death of her aunt. The cost of acquisition incurred by her aunt was $34,000 in 1984.
The cost of the property when inherited by Lin was $350,000. The house was build upon a
land of 1000 sq. m. After the inheritance of the property, it has been rented tenants. In July
2018, the house was severely damaged. This event falls under the C1 category. At this stage,
the property was valued at $600,000, and the insurance company paid $50,000 in respect of
the damage. However, Lin decided not to repair the house but to demolish the house and
develop the site. She subdivided the site into two lots and built a house on each site. This
falls under the C1 category. The larger site, 700 sq. m, had building costs of $350,000. The
house on the smaller lot, 300 sq. m, cost $300,000. Site works to demolish the house and
prepare the land for rebuilding cost another $50,000. Construction was completed in the
current income year. Lin put both properties on the market. She sold the larger house soon

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after construction was completed for $750,000, paying marketing costs of $10,000. This falls
under the A1 category of event. The smaller property did not sell straight away. The best
offer was a lease for one year, with rent of $1,800 pm. This falls under the C1 category. In
June 2020 the lessee has an option to buy the property at the current market value of
$500,000. Lin paid legal expenses of $600 for the lease contract, and marketing expenses of
$7,500.
Hence, the cost proceeds of the property will be will include the following:
 Proceeds amounting to $50,000 from the insurance company.
 Proceeds from the sale of the larger house amounting to $750,000.
 Proceeds from the lease of one year at the rate of $1800 per month (1800*12).
The cost base of the property will include the following:
 The market value of the property at the time of the death amounting to $350,000.
 Rebuilding cost amounting to $50,000.
 Payment marketing costs of $10,000.
 The larger site, 700 sq. m, had building costs of $350,000.
 The house on the smaller lot, 300 sq. m, cost $300,000.
The CGT will be computed by deducting the sum of the cost base from the sum of the cost
proceeds.
Capital Gain= $(50,000+ 750,000+ 21600) - $(350,000+50,000+10,000+ 350,000+
300,000)
= (-) $238,400 (loss)

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The Property in Cottesloe
The property in Cottesloe does not fall under the CGT event as the same is not subjected
to sale and the same has been owned by Lin as a residential house.
The Furnishings from the Property
In case of the furnishings, the same were sold in the local market in August 2018 for a
total of $3,000, an overall loss of $4,000. A dining setting that cost $5,000 in 2006 was sold
for $8,200; and a wardrobe that had cost $360 in 2002 was sold for $4,200. In this situation,
the first step will be to treat the furniture separately from the collectibles.
Therefore, the cost proceeds from the furniture includes the following:
 Proceed from the sale of furnishings in the local market amounts to $3,000.
 Proceeds from the sale of dining setting $8,200.
 Proceeds from wardrobe $4,200.
The cost base from the furniture includes the following:
 Cost of the furnishings sold in the local market amounts to $7,000 (proceed +loss).
 Cost of dining set amounting to $5,000.
 Cost of wardrobe amounting to $360.
The difference between the cost proceeds and the cost base will be taxable under CGT as
the tangibles under question are worth more than $10,000.
Capital Gain= $(3,000+ 8,200+ 4,200) - $(7,000 +5,000+360)
= $ 3040 (gain)* 50% discount
=$1520

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Collectibles
Several antiques were sold to dealers. An antique dresser that had cost $4,000 in 2004 was
damaged by the tenants and the insurance company reimbursed $2,500. A collectible loss of
$5,000 in 2015 that have not yet been recouped.
Therefore, the cost proceeds from the collectibles includes the following:
 The proceeds from the reimbursement received from the insurance company with
respect to the antique dresser amounting to $2500.
The cost base from the collectibles includes the following:
 Cost of the antique dresser amounting to $4000.
The collectibles in the present case will be considered for CGT as the worth of the same
exceeds $500. This requires the cost base to be deducted from the cost proceeds. And the
amount so arrived will also be effected by the collectible loss of $5,000 in 2015 that have not
yet been recouped. As the previous year losses that has not been considered can be
appropriated as a setoff in the current year.
Capital Gain= $(2,500) - $(4,000) - $(5,000)
= (-) $6,500 (loss)
The Shares
In November 2018 she sold shares that had been purchased for $34,000 in January 2018
for $40,000, and shares that had cost $15,000 in 1984 for $72,000. The shares being an
intangible asset can be taxed under CGT. But as the shares purchased in January 2018 were
not held for one year they will not come under the purview of CGT and will be treated as
ordinary income. Shares are regarded as CG asset.
Therefore, the cost proceeds accrued from the sale of the shares:

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 Proceed from the sale of shares amounting to $72,000.
The cost proceeds accrued from the sale of the shares:
 Cost of the shares purchased in 1984 amounting to $15,000.
The amount, which is required to be considered for taxation under the CGT will be
derived by deducting the cost base from the cost proceeds of the shares. The cost proceeds of
the shares are taken to be the amounts for which they are bought as both the companies, from
which the shares are obtained, are trading listed on the Australian Stock Exchange. Hence,
the purchase price will be treated as market value.
Capital Gain= $(72,000) - $(15,000)
= $57,000 (gain)* 50% discount
=$ 28500
Total Capital Gain/ Loss from all the transactions= (-) $238,400 (loss)+ $ 1520 (gain)+ (-)
$6,500 (loss) + $28500
= (-)$ 214,880 (loss)
Taxation Issue 2
Whether Lin has any options available in respect of the Cottesloe property when she
moves to China and the CGT consequences of each alternative.
Rule
Under the Australian Taxation Laws, a person leaving Australia for a temporary period
has two option with respect to the residential assets that the person owns in Australia. The
person can either rent out the property or keep it vacant. In case, the person decides to keep
the residential property vacant, he can treat that property as a residential property for the

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purpose of CGT for an unlimited period. However, in case that person decides to rent out that
property, he can treat that property as a residential property for the purpose of taxation up to a
period of six years.
However, in case a resident of Australia ceases to be a resident of Australia and after such
an event decides to sell out his residential property in situated in Australia, the proceed of
such a sale will be subjected to CGT and will be taxed under the same. In case a person
ceases to be an Australian resident during his stay overseas, property he owns, which are not
to be taxed as an Australian property will be deemed to have been disposed of for the
purposes of CGT. This will make the person liable to pay CGT.
A person will not prefer this kind of operation having the effect of the deemed disposal of
the property to apply. However, in case such a person chooses to dispose of his property in
such a situation, the CGT will be considered for the whole period for which the ownership
existed. In case of the computation of a loss or gain with respect to such a property under the
CGT, the period for the which the taxpayer was not a resident of Australia will also be taken
into account.
With the acquiring or losing of the status of an Australian resident, the variety of assets
upon which the CGT will be payable by a person will also change. In case a person ceases to
be an Australian, all his properties, which are not taxable as an Australian property, will be
deemed to have disposed of. Such a deemed disposal will be considered to be effected as per
the market value of such property that exists when the person residential status of the person
in Australia ceases.
However, in deciding the tax implications of a person, his residential status needs to be
determined initially. The term Australian resident does not implies the same meaning in the

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Department of Immigration and Border Protection as it does for the tax purposes. A person
needs to satisfy three tests for the determination of his residential status.
The primary test for the determination of the residential status is the resides test. This
requires the person to reside in Australia for being considered as an Australian resident for
the tax purposes. Another test for the determination of Australian resident is the domicile test.
This requires a person to be domiciled in Australia permanently. The third test for the
determination of the Australian resident of a person is the 183-day test. This test is applicable
to the persons who arrived at Australia. If a person arriving at Australia and stays for more
than 183 days in Australia in the current year, he will be considered to be a resident for the
tax purposes. A person needs to satisfy any of the three tests to be considered as a resident in
Australia for the tax purposes.
Application
In the present situation, Lin has been offered a promotion by her employer, which is a
company with global operations, effective 1 September 2019. The employment was five year
contract based in China, with accommodation provided by her employer. At the end of this
contract, she desires and expects to be promoted to a higher level position, which could be in
Australia or another offshore position. Moreover, Lin has no family in Perth, and is excited
by the prospect of developing a career that will give her opportunities to live away from
Australia. This provides Lin with two options. She can either rent out the property or keep it
vacant that was owned by her and used for the purpose of residential property situated in
Cottesloe. Lin also has the option to keep the residential property vacant, she can treat that
property as a residential property for the purpose of CGT.
However, in case Lin decides to rent out that property, she can treat that property as a
residential property for the purpose of taxation up to a period of six years. But in the event of

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her choosing the property to be left vacant, she can the property as a residential property for
the purpose of CGT for an unlimited period.
In case Lin decides to develop a career away from Australia, she may cease to become a
resident in Australia.
In such a case she may decides to sell out her residential property situated in Australia, the
proceed of such a sale will be subjected to CGT and will be taxed under the same. In case she
ceases to be an Australian resident during his stay overseas, property she owns, which are not
to be taxed as an Australian property will be deemed to have been disposed of for the
purposes of CGT. This will make her liable to pay CGT for the same.
Conclusion
Lin has two options available in respect of the Cottesloe property when she moves to
China, she can either keep the residential property vacant or she can treat that property as a
residential property for the purpose of CGT.

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Reference
https://www.ato.gov.au/, "Home Page", Ato.Gov.Au (Webpage, 2019)
<https://www.ato.gov.au/>
Income Tax Assessment Act 1997 (Cth)
Woellner, Robin, et al. "Australian Taxation Law 2016." OUP Catalogue (2016).