Tax Law 30 June 2019 Seminar 6: Capital Gains Tax (CGT) Analysis

This document presents a comprehensive solution to a tax law assignment, specifically focusing on Capital Gains Tax (CGT) and its application to various scenarios. The solution addresses two main questions. The first question involves evaluating the correctness of several statements related to CGT, providing explanations and citing relevant sections of the Income Tax Assessment Act 1997 (ITAA 1997). The second question requires the calculation of capital gains and losses arising from the sale of various assets, including a jet ski, painting, rare book, investment house, and shares. The analysis involves determining CGT events, identifying CGT assets, considering exemptions, and calculating capital gains or losses based on the cost base and capital proceeds. The solution provides step-by-step calculations and explanations for each asset, ensuring a clear understanding of the CGT implications. The document highlights the relevant sections of the ITAA 1997 and provides a detailed breakdown of each transaction to determine the resultant capital gains or losses.

Tax Law
30 June 2019
Seminar Number 6
[The focus of this seminar is Chapter 7 of the Study Guide]
Question 1
In relation to CGT, which of the following statements are correct? Explain your answer citing
the relevant law.
(a) When disposal of property (CGT event A1) is by gift, the capital proceeds are
taken to be nil.
The statement is not correct. This is because under the “section 116-30 of the
ITAA 1997” the capital proceeds must be taken on the basis of market value at
the time of gift. A change in ownership occurs from the taxpayer to another entity
and the market value of the CGT asset is regarded as the substitute for the actual
capital proceeds.
(b) When an asset is sold with capital proceeds received in instalments, the capital
gain will be apportioned between the years when the capital proceeds will be
received.
The statement is incorrect. This is because under the “section 116-20 of the ITAA
1997” the entire amount of capital gains will be held for taxation purpose during the
year when the sale of CGT asset or the disposal of event A1 takes place.
(c) Net capital losses are not deductible against any assessable income other than a
capital gain.
This statement is correct. The net capital losses must be quarantined and it is only
allowed for offset against the capital gains. The net amount of capital gains is added
into the taxable income of the taxpayer under “sec 102-5, ITAA 1997”.
(d) The sale of the family sedan car may result in a capital gain or loss.
The statement is correct. Any kinds of capital gains or loss that are made from the
sale of car, motor cycle or similar vehicles is ignored under “section 118-5 (a), ITAA
1997”.
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Tax Law
30 June 2019
(e) On 20 October 2011 Evan signs a contract with ABC Builders to construct a
building on land that Evan acquired on 5 May 2009. Building work commences
on 31 October 2011 and the construction is completed on 20 April 2012. Evan
has acquired the building for CGT purposes on 20 April 2012.
It is necessary to consider the time of acquisition. Under the “section 104-10 (3),
ITAA 1997” the time of CGT event A1 represents the time when the contract for sale
is entered by the taxpayer. With respect to “section 109-10 (1)” the building is
acquired by Evans for CGT purpose on 31 October 2011 since it is the date when the
building work began.
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Tax Law
30 June 2019
Question 2
Janice Brown advises you on the following transactions – work out the resultant capital gains
and/or capital losses.
In anticipation of an interstate move, Janice Brown held a garage sale and sold the
following items (which were all kept for her personal use or enjoyment):
Date of
purchase Assets Cost $ Date of Sale Sale Price $
3 March 2014 Jet Ski 11,000 12 June 2019 4000
19 May 1990 Fine Art Painting 350 12 June 2019 1500
5 April 2003
A rare book that was
purchased as a set of 3
Janice purposely broke
the set up as he heard
that she may avoid a
capital gain that way
600
The value of the
book would be
a third of the
cost of the set
above
12 June 2019 1400
Janice also sold the following assets:
Date of
purchase Assets Cost $ Date of Sale Sale Price $
Date of contact
16 October
2010 (titled
transferred to
Janice on 16
December
2010)
Investment house
(which has been
rented out to tenants)
$280,000
Plus stamp duty
of $8,000 and
legal fees of
$2,100
Janice has also
paid interest on
a loan in
relation to the
House of
$40,000
Contract to
sell signed 12
May 2019
(and
settlement 12
July 2019)
$450,000
16 July 2016 Shares in Telstra Ltd $80,000 6 April 2019 $420,000
Advise Janice whether any capital gains or capital losses have arisen from the sale of these
items (Steps 1 to 5 only).
Five elements to the cost base of a CGT asset:
1. Acquisition costs
2. Incidental costs in s 110-35
3. Costs of ownership (post 20 Aug 1991 only)
4. Capital expenditure to increase value
5. Capital expenditure to establish or defend title to a right over an asset
Reduced cost base: elements 1, 2, 4, and 5 are the same, but the 3rd element is assessable
balancing adjustments.
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Tax Law
30 June 2019
Jet Ski
1 –
CGT event?
Yes, CGT event A1 – Janice disposed of the Jet Ski by sale so there’s been a _change of
ownership in the Jet Ski from Janice to the buyer: s _sec – 104-10_
Timing – change of ownership on _12 June 2019_: s 104-10(3)
 _2019_ income year
2 –
CGT asset?
Yes, the Jet Ski is a kind of property: s _sec 108-5 (1)_
The Jet Ski will be a _personal use asset as _it is mainly kept for the private enjoyment of
taxpayer_: s _108-20_
Acquired on _3 March 2014_when Janice became the owner, after 19 Sept 1985 so _post-CGT
asset_: s 109-5
3 – Exemption? CG from personal use asset is disregarded if the first element of cost is $10,000_: s _118-10
(3)_
Here the acquisition cost is $_11,000_so this exemption _does not_ apply.
4 – Rollover? N/A
5 –
Initial
CG or CL
Capital proceeds: $_4000_ s _116-20_
less Cost base $_11,000_ s _110-25_
Capital loss $_7,000_ s _108-20 (1)
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Tax Law
30 June 2019
Painting - Refer to the set out above for the Jet Ski to structure the answer for the painting. Ensure
that you are discussing the correct type of CGT Asset with regard to the painting. Be mindful of any
rules than apply for exemption.
1 –
CGT event?
Yes, CGT event A1 – Janice disposed of the Painting by sale so there’s been a _change of
ownership in the Painting from Janice to the buyer: s _sec – 104-10_
Timing – change of ownership on _12 June 2019_: s 104-10(3)
 _2019_ income year
2 –
CGT asset?
Yes, the Painting is a kind of property: s _sec 108-5 (1)_
The Painting will be a _Collectibles asset as _it is mainly kept for the private enjoyment of taxpayer_:
s _108-10 (2)_
Acquired on _19 May 1990_when Janice became the owner, after 19 Sept 1985 so _post-CGT
asset_: s 109-5
3 – Exemption?
CG from collectible asset is disregarded if the first element of cost is less than $500_: s _118-10
(1)_
Here the acquisition cost is $_350_so this exemption _does_ apply.
.
4 – Rollover? N/A
5 –
Initial
Capital proceeds: $_1500 s 116-20_
less Cost base $_350__ s _110-25__
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Tax Law
30 June 2019
Painting - Refer to the set out above for the Jet Ski to structure the answer for the painting. Ensure
that you are discussing the correct type of CGT Asset with regard to the painting. Be mindful of any
rules than apply for exemption.
CG or CL Capital gain $_1,150_ s _118-10(1)
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Tax Law
30 June 2019
Rare book from a set of 3 - Refer to the set out above for the Jet Ski to structure the answer for the
painting. Ensure that you are discussing the correct type of CGT Asset with regard to the book. Be
mindful of any rules than apply for exemption.
1 –
CGT event? Yes, CGT event A1 – Janice disposed of the Rare book from a set of 3 by sale so there’s been a
_change of ownership in the Rare book from a set of 3 from Janice to the buyer: s _sec – 104-10_
Timing – change of ownership on _12 June 2019_: s 104-10(3)
 _2019_ income year
2 –
CGT asset? Yes, the Rare book from a set of 3 is a kind of property: s _sec 108-5 (1)_
The Rare book from a set of 3 will be a _Collectibles asset as _it is mainly kept for the private
enjoyment of taxpayer_: s _108-10 (2)_
Acquired on _5 April 2003_when Janice became the owner, after 19 Sept 1985 so _post-CGT asset_: s
109-5
3 – Exemption?
CG from collectible asset is disregarded if the first element of cost is less than $500_: s _118-10 (1)_
Here the acquisition cost is $_600_so this exemption _does not_ apply.
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Tax Law
30 June 2019
Rare book from a set of 3 - Refer to the set out above for the Jet Ski to structure the answer for the
painting. Ensure that you are discussing the correct type of CGT Asset with regard to the book. Be
mindful of any rules than apply for exemption.
.
4 – Rollover? No
5 –
Initial
CG or CL
Capital proceeds: $_1,400_ s _116-20
less Cost base $__600__ s _110-25_
Capital gain $__800 s _152-1_
Investment House - Refer to the set out above for the Jet Ski to structure the answer for the
painting. Ensure that you are discussing the correct type of CGT Asset with regard to the house.
Be mindful of any rules than apply for exemption and whether they are relevant.
1 –
CGT event?
Yes, CGT event A1 – Janice disposed of the Investment House by sale so there’s been a
_change of ownership in the Investment House from Janice to the buyer: s _sec – 104-10_
Timing – change of ownership on _12 July 2019_: s 104-10(3)
 _2019_ income year
2 –
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Tax Law
30 June 2019
Investment House - Refer to the set out above for the Jet Ski to structure the answer for the
painting. Ensure that you are discussing the correct type of CGT Asset with regard to the house.
Be mindful of any rules than apply for exemption and whether they are relevant.
CGT asset? Yes, the Investment House is a kind of property: s _sec 108-5 (1)_
The Investment House will be a _other asset as _ it is not a collectables or personal use
assets_: s _108-5 (2)
Acquired on _16 December 2010_when Janice became the owner, after 19 Sept 1985 so _post-
CGT asset_: s 109-5
3 – Exemption? Any exemption apply?
No exemption is Applicable
4 – Rollover? N/A
5 –
Initial
CG or CL
Capital proceeds: $_450,000_s _116-20
less Cost base $_280,000 +8,000 + 2,100+ 40,000_ s _110-25__
Capital gain $_119,900_s _104-10 (4)_
Note interest on loan is a non-capital cost that is related to owning the asset and does not
qualifies as deduction for tax purpose under sec 110-25 (4). The same has been added intothe
cost base of the investment property._
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Tax Law
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Shares in Telstra Ltd - Refer to the set out above for the Jet Ski to structure the answer for the
painting. Ensure that you are discussing the correct type of CGT Asset with regard to the shares. Be
mindful of any rules than apply for exemption and whether they are relevant.
1 –
CGT event?
Yes, CGT event A1 – Janice disposed of the Shares in Telstra Ltd by sale so there’s been a
_change of ownership in the Shares in Telstra Ltd from Janice to the buyer: s _sec – 104-10_
Timing – change of ownership on _6 April 2019_: s 104-10(3)
 _2019_ income year
2 –
CGT asset?
Yes, the Shares in Telstra Ltd is a kind of property: s _sec 108-5 (1)_
The Shares in Telstra Ltd will be a _other asset as _it is not a collectables or personal use assets_:
s _108-5 (2)_
Acquired on _16 July 2016_when Janice became the owner, after 19 Sept 1985 so _post-CGT
asset_: s 109-5
3 – Exemption? Any exemption apply?
No exemption is applicable
4 – Rollover? No
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Tax Law
30 June 2019
Shares in Telstra Ltd - Refer to the set out above for the Jet Ski to structure the answer for the
painting. Ensure that you are discussing the correct type of CGT Asset with regard to the shares. Be
mindful of any rules than apply for exemption and whether they are relevant.
5 –
Initial
CG or CL
Capital proceeds: $_4,20,000_s _116-20
less Cost base $_80,000__s 110-25_
Capital gain $__340,000 s _102-5_
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