Detailed Capital Gains Tax Report for Rain Smart (2017 Revenue Law)

This report provides a comprehensive capital gains tax (CGT) analysis for Rain Smart, focusing on the sale of an office building, shares, and a painting, in accordance with the ITAA97. The analysis includes detailed calculations of capital gains and losses, considering relevant provisions such as Section 100 to 149 of ITAA97 and CGT event A. The report examines the cost of assets, selling prices, and applicable exemptions, like those for share sales within a group. It also addresses the implications of asset destruction and subdivision of land. The report concludes that capital gains provisions will be applied when blocks of land are sold, as the activity is not in the ordinary course of business for Rain Smart Ltd. The report references various sources including the Australian Tax Office, and academic journals. The report also includes working notes, and discusses the implications of the sale of assets, and the tax implications.

Revenue Law
2017

Table of Contents
Part A.........................................................................................................................................3
CAPITAL GAIN RELATING TO OFFICE BUILDING.....................................................3
CAPITAL GAIN ON SALE OF SHARES............................................................................4
CAPITAL GAIN ON SALE OF PAINTING........................................................................5
Total capital loss of Rain smart for the year ended on 30th June 2017...................................5
Part B..........................................................................................................................................6
Applicable Provision..............................................................................................................6
Relevance to the Present Case................................................................................................6
Assumption............................................................................................................................7
Conclusion..............................................................................................................................7
REFERENCES...........................................................................................................................8

PART A
CAPITAL GAIN RELATING TO OFFICE BUILDING
Provisions:
Section 100 to 149 of ITAA97 specifies the regulation regarding general rules for
ascertaining capital gain tax liability and special topics. Capital gains are assessable as
statutory income and are part of assessable income as per section 102 -5(1) of ITAA 97.
Section 104-10 CGT event A applies in case the asset is purchased after 19/9/85 and must
have been sold to other entity. In case asset is not sold, though ownership is change even than
provision of CGT will be applied. A capital gain is assessed in case capital proceeds exceed
the cost of asset; on the contrary capital loss is assessed in case it is less in comparison to cost
of asset (Australian Tax Office. Working out your capital gain or loss, 2016.).
Section 108.5 (1) specifies that any kind of property or legal right which is not a property will
be considered as asset for CGT purpose. Further, rights relating to personal service and right
to bring action for personal service injuries are not deemed to be asset for CGT purpose.
Applicability
In present case as Rain smart has purchase land after 19/09/85 i.e. in Jan 2000 and disposal of
asset (office building) has been made to another entity; the provision of CGT will be applied
in present scenario. Building is an asset in accordance with provision of section 108 -5 (1) of
ITAA 97 thus the same will be taxed in accordance with specified provision (Australian
Taxation Office. Capital gains tax, 2016). Elements which are been required to be included in
cost have been specified in section 110-25; section 110-35, section 110-38; section 110-40;
section 110-45 of ITAA 97. Thus incidental cost relating to disposal of asset and capital
expenditure relating to asset for maintaining or increasing the value of asset is treated as part
of cost (Yinger, Bloom and Boersch-Supan, 2016). Thus, in present case all relevant cost of
office building has been treated as part of cost of office building.
Computation of capital gain
Capital gain relating to sale of Melbourne office

Selling price of asset $4500000
Cost of asset (Working note -1) $2649000
Capital gain $1851000
(Selling price – total cost of asset)
Three method of calculating capital gain have been specified in ITAA97. In first method
which is known as discounting method in which if asset held for more than twelve month
than 50% of taxation gain is taxable for individual and trust. However, discounting method is
not applied in case company disposes an capital gain tax asset (Jones, 2016). Thus, in present
case as it is a company capital gain will be computed in accordance with other method i.e.
(Selling price – Cost of asset).
Working note 1
Cost of Melbourne office
AASB 116 specifies the provision relating to Property, plant and equipment. Para 11 to 14
specifies explanation relating to initial and subsequent cost of asset which is to be recognized
in books of accounts. As per the specified provision all expenditure made on an asset with are
required to prepare the asset for its intended use are included in cost of asset (Vernimmen and
et.al; 2014).
Purchase cost $1800000
Cost relating to painting and other expenditure necessarily required $430000
Strip of land $360000
Legal cost $25000
Incidental cost of acquisition and sale of office $34000
Total $2649000
CAPITAL GAIN ON SALE OF SHARES
Selling price $800000
Cost of shares $12000000

Sale of shares generally triggers capital gain tax; and the same is calculated by reducing cost
from selling price (Jacob, 2016). Further, an exemption has been provided that no CGT
provision applies on sale of shares between members of same group; whether the shares
relate to company outside the group. Thus, in present case of capital gain tax provision will
be applied as the company is selling its own shares. Similar description is provided under
case of FCT v. Lamesa Holdings BV.
CAPITAL GAIN ON SALE OF PAINTING
Section 24 of ITAA97 specifies the provision regarding situation when asset are lost or
destroyed. It has been provided in sub-section 1 that in case the entire asset is lost or
destructed it will deemed as disposal of asset whether or not any sum has been received as
compensation. Thus, computation of capital loss in present case will be done in following
manner:
Sellin100000g Price Nil
Cost of acquisition
1st Painting $100000
2nd Painting $70000
Total $170000
However, as compensation has been received than loss will be
reduced to same extent; thus compensation in present case is $160000
$110000 and $50000 for second painting
Capital loss $10000
Total capital loss of Rain smart for the year ended on 30th June 2017
Capital gain from sale of office building $1851000
Capital gain from sale of own shares 0.00
Capital gain from sale of painting -$10000

Total capital gain $1841000
(As capital loss from one asset can be set off against capital gain of another
asset in same year. (Harding, 2013))
PART B
Applicable Provision
The specified asset is CGT as per provision of section 108-5 (1) of ITAA 97. If a
block of land is subdivided, each part land will be registered with a separate title. For the
purpose of capital gain, the original piece of land is divided into separate assets (Australian
Taxation Office. Subdividing land, 2016). Mere sub division of land does not in itself result
into capital gain, if the ownership is retained by the original owner. No capital gain or capital
loss arises at the time of subdividing land. For this purpose case study of Scottish Australian
Mining Co Ltd v FC of T (1950) 81 CLR 188 can be considered. Capital gain arises only
when there is a clear intention by the owner of selling the subdivided land (Gitman, Juchau
and Flanagan 2015). For calculating the capital gain or capital loss, the date on which a
person acquires the land and further sub divided it is to be considered. The cost of original
land is sub divided into the number of sub divisions on reasonable basis.
The profit which arises from the sale of subdivided land may be treated as capital gain
or ordinary income, depending upon the situation. If a block of land is subdivided and sell the
blocks which are newly created than the profit is treated as a capital gain and is subjected to
the tax provisions. Same is cited under provisions of Federal Commissioner of Taxation v.
Whitfords Beach Pty. Ltd. However, as per views of Faccio and Xu, (2015) if the sole
intention of subdividing the land is to create profit or gain in the normal course of business
than the profit will be treated as ordinary income.
Relevance to the Present Case
According to the taxation ruling, TR 92/3, Rain smart’s sale of constructed premises
of 20 subdivided lands will be treated as capital gain. Since, the land was not acquired for the
sole intention of making profit and the profit does not arises in the normal course of business;
the gain will not be treated as ordinary income. Moreover, as far is capital gain is concerned,
it will only arise when the subdivided land is sold and a transaction arises on the part of Rain
smart (Clark, 2014). Distinction between income and capital receipts have been specified in

Sec26 (a) and section 25A of ITAA36; thus in accordance with provision of specified section
the receipts which will be received on sale will be treated as capital receipts. Thus the
difference between the cost of acquiring the land and the proceeds from its sale will be
considered as the capital gain (Nicola, 2016). The cost at which the land was acquired will be
divided rationally amongst the 20 sub divided land.
Assumption
The assumption on which the above conclusion is drawn is that since the purchase of
the land by Rain smart is for the use of proceeds from sale of shares, the purchase will be
treated as an investment.
Conclusion
In accordance with above provision it can be concluded that capital gain provision will be
applied when blocks of land will be sold as the activity is not in ordinary course of business
for Rain smart Ltd.

REFERENCES
Clark, J. (2014). Capital gains tax: historical trends and forecasting frameworks. Economic
Round-up. (2), P.35.
Faccio, M. & Xu, J. (2015). Taxes and capital structure. Journal of Financial and
Quantitative Analysis. 50(3). Pp.277-300.
Gitman, L.J., Juchau, R. & Flanagan, J. (2015). Principles of managerial finance. Pearson
Higher Education AU.
Harding, M. (2013). Taxation of dividend, interest, and capital gain income.
Jacob, M. (2016). Tax regimes and capital gains realizations. European Accounting Review.
Pp.1-21.
Jones, D. (2016). Capital gains tax: The rise of market value?. Taxation in Australia. 51(2),
P67.
Vernimmen, P. & et.al. (2014). Corporate finance: theory and practice. John Wiley & Sons.
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.
Online
Australian Tax Office. Capital gains tax. (2016) [PDF]. Available through <
https://www.ato.gov.au/General/Capital-gains-tax>. [Accessed on 8th October 2017].
Australian Tax Office. Subdividing land. (2016) [PDF]. Available through <
https://www.ato.gov.au/General/Property/Land---vacant-land-and-subdividing/
Subdividing-land/> [Accessed on 8th October 2017].
Australian Tax Office. Working out your capital gain or loss. (2016) [PDF]. Available
through < https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-
capital-gain-or-loss/>. [Accessed on 8th October 2017].
Nicola Webber. Real Commercial, Commercial News. (2016) [Online].Available through <
https://www.realcommercial.com.au/news/capital-gains-tax-means-commercial-
property>. [Accessed on 8th October 2017].