Taxation Case Study: Capital Gains Tax Implications and Advice for Lin

This case study provides a detailed analysis of the capital gains tax (CGT) implications for Lin, a new client. The study examines the tax consequences of selling her inherited family home, which was subdivided into lots. It covers the application of CGT to the sale of furnishings, antiques, and shares. The analysis considers the relevant sections of the ITAA 1997, including CGT event A1 and C1, and evaluates factors such as the intent of the taxpayer, the holding period of assets, and the application of the 50% CGT discount. The study provides advice on the tax treatment of various transactions, including the sale of a subdivided property, collectibles, and shares, offering insights into how CGT applies to different types of assets and transactions, and it covers important aspects like pre-CGT assets and the implications of the sale of assets held for less than a year.

Running head: TAXATION
Taxation
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Letter of Advice.........................................................................................................................2
References:...............................................................................................................................10

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Letter of Advice
To Lin
From Tax Agent
Date: 19th March 2019
Subject: Capital gains tax implications
CGT Implications on sale of subdivided lots:
Capital gains tax is not treated as the separate tax but it is integrated in to the tax
regimes. According to the “section 102-5, ITAA 1997” the assessable income comprises of
the net capital gains for the year. While the capital losses are quarantined and is only
permitted to offset against the capital gains (Woellner et al. 2016). Under the capital gains
tax, when the net capital gains have been accrued to the taxpayer during the particular income
year, then such capital gains in included into the taxpayer’s taxable income for that year. On
the other hand, the capital loss is not allowed for deduction from the taxable income but it is
allowed for off-set against the capital gains for the year that is occurred or for the future years
to ascertain the net capital gains.
As evident you have inherited the house during the year 2009 following the death of
your aunt. The information furnished suggest that the house was used as the main residence
of your aunt before it was rented out to the tenants following her death. The last tenants that
stayed in the inherited property was till the month of July 2018 before the house was
demolished. Instead of opting to repair the house you decided to demolish and subdivided the
plot for further development of the site.
There are numerous instances where the property owners possess the opportunity of
subdividing and selling the land that is owned by them for a longer period of time (Barkoczy
2016). These generally happens where the primary produces possess the land at the outskirts
of the urban centres and the residential expansion signifies that the best use of land is for the
residential purpose. This brings forward the question that the extent of developmental activity
undertaken may be such that the it signifies carrying on of the business of property
development. However, prior to embarking on the detailed analysis it is necessary to
understand that the developing the land is the mere realisation and also necessary to
determine that if the land was actually acquired or bought with the actual intent of resale at

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profit or development (Davison Monotti and Wiseman, 2015). The profit that is made from
the sale or development of the subdivided land would be treated as the ordinary income
notwithstanding of the sale of project. Therefore, when providing you advice in respect of
these issues it is noteworthy to determine whether there is any prevalent indication of
deriving profit while acquiring or inheriting the property.
The same problem was confronted to the taxpayer in the case of “Reiger v
Commissioner of Taxation (2002) AATA 1989” (Saad 2014). The problem for the taxpayer
was that after acquiring the property the intention of the taxpayer was to subdivide the land
with the strategic objective of creating the opportunity of constructing the housing lots.
Therefore, such statement of intention to subdivide the land was regarded as the fatal to the
argument of the taxpayer that the taxpayer intention is to establish the business on the land.
We would like to inform you that, as per the Australian Taxation Office it views the
issues in a manner that the court has considered whether the taxpayer that develops the land
has undertaken the activities of mere realisation or embarked on the profit making activities
or business (Miller and Oats 2016). Similarly, in the case of “Westfield v Commissioner of
Taxation (1991)” once it is understood that activity of buying and selling resulted in the
profit was the activity under the ordinary business course, then the profit that is in question
would only become the part of the taxable income of the appellant by virtue of the being the
income in respect of the ordinary concepts of mankind, provided that the appellant has the
profit making intention during acquisition.
The information furnished by you suggest that you subdivided the land into two lots
and constructed a 700 m2 house on it for a costs of $350,000 while the smaller house costed
you $300,000 for 300 m2. Following the completion of the property you put the property for
sale in the market and eventually sold the larger 700 m2 for a sum of $750,000.
Descending from the above made explanation it is clear that the activity of
subdividing the land and selling the same constituted business activities with the clear
intention of making profit (Barkoczy 2017). You carried the profit making intention at the
time of inheriting the property. The property was developed by you in the enterprising
manner and this development involved carrying on the business of land development. The
gains that that you made from the property would be considered as taxable capital gains.
Citing the example of “Californian Cooper Syndicates v Harris (1904)” held that gains
made from the sale of land was assessable capital gains (Sadiq 2018).

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We would like to inform you that subdividing and selling the newly block of land and
the profits that is made by you will be treated as the taxable capital gains and will be
subjected to capital gains tax. The rationale for this is that, you held the intention or the
purpose of deriving profit or gains at the time of entering into the transaction (Morgan,
Mortimer and Pinto, 2018). Additionally, a transaction was entered into by you and the profit
was eventually made upon the sale of new constructed 700 m2 square house in the due course
of carrying on of the business or executing the business or commercial transaction. A capital
gain was made by you when you sold the land. A “CGT event A1” happened under “section
104-10(1) of the ITAA 1997” when the house was sold (Pert, Chen and Carvosso 2018).
To calculate your capital gains the date when you inherited the property and
subdivided the land is the date you have bought the original parcel of land (Robin 2019). The
costs of the actual land are divided among the subdivided block of land on the reasonable
basis.
CGT implications on the sale of furnishings and antiques:
In the later part of the year you reported the sale of furnishings at the local markets
that fetched you a sum of $3,000 however you made an overall loss of $4,000 from the sale
of furnishings. Additionally, some of the antiques were also sold by you to the dealers which
included the dining sets, wardrobe and the antique dresser.
According to the “section 108-10(2) of the ITAA 1997” collectibles includes any
kind of artwork, jewellery, an antique or the coin or the medallion (Robin and Barkoczy
2019). The collectibles also comprise of the rare portfolio, manuscript or book and includes
the postage stamp or the first day cover. The collectables are generally kept by the taxpayer
for their own personal enjoyment or usage. We would also like to make you aware that there
are some kind of special rules that are applicable to the collectibles (Kenny, Blissenden and
Villios 2018). This includes that the capital gains and capital losses that are made from the
collectables should be disregarded when the first element of a collectable acquisition price is
lower than $500.
We seek to inform you regarding the quarantining rule that relates to collectable. This
includes that the capital loss that are made from the collectibles is only allowed to be offset
against the capital gains that are made from the collectibles (Sheffrin 2018). As per the
transactions reported by you, a capital gain of $3,000 was made from the furnishings of the

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property however, there was also the loss of $4,000 from the furnishing. The capital loss
incurred by you on furnishings can be offset against the same.
In the later part it is noticed that there were several antiques held by you was sold to
the dealers. This included the dining set for a sum of $8,200 that was bought in 2006 for a
sum of $5,000. According to the “section 108-15 of the ITAA 1997” collectables sold as a
set are considered as a single collectible (Auerbach and Hassett 2015). The antique dining set
is considered as a set of collectible and hence the sale of antique resulted in CGT event A1
under “CGT event A1” based on the “section 104-10(1) of the ITAA 1997”.
On the other hand, you also reported the disposal of wardrobe for a sum of $4,200.
The wardrobe was originally acquired at a cost of $360 in 2002. As noticed that cost of the
wardrobe is below the first element of the collectibles cost base of less than $500. Therefore,
the capital gains that you have made from the sale of collectibles is disregarded and hence not
included for taxable purpose.
In the later instances it is noticed that an antique dresser that was acquired for a cost
of $4,000 was damaged by the tenants and a reimburse amount of $2,500 was given by the
insurance company. According to the “section 104-20(1) a CGT event C1” occurs when the
CGT asset that is owned by the taxpayer is either lost or destroyed (Faccio and Xu 2015).
However, it is necessary to determine the time of CGT event such as when the taxpayer first
received the compensation for the lost or destroyed asset.
As evident in the information furnished by you, the antique dresser was damaged by
the tenants and as a result of this a sum of $2,500 was received by the insurance company for
the reimbursement of the same. Similarly, the receipt of sum from the insurance company
resulted in the CGT event C1 under “section 104-20(1) of the ITAA 1997”. The sum is
included in determination of your net capital gains for the income year ended June 2019.
Sale of Shares:
According to the “section 108-5 of the ITAA 1997” a CGT assets includes any kind
of property or the legal or equitable rights which is not treated as property. It also includes the
shares in the listed company and units in the unit trust (Alpanda and Zubairy 2016). As
evident from the information stated by you, it is noticed that during the month of November
2018 shares held in the Australian listed company amounting to $34,000 was sold for a sum
of $40,000.

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The shares were only held for a period of 11 months in the current income year. It is
noteworthy to denote that to be eligible for indexed capital gains the asset should be held for
at least a period of 12 months during the year (Bankman et al. 2018). As per the information
furnished by you the shares were held less than a year and hence no indexation method can
be applied in this case. However, the 50% CGT discount method can be implemented in your
case.
On the other hand, you also reported receipts from the disposal of shares that was
purchased in 1984 for a cost of $15,000. The disposal of shares bought in 1984 yielded
capital gains. We would like to inform you that under the capital gains tax regime, CGT is
only applicable to the assets that are bought on or after the 20th September 1985 (Biørn 2017).
Subsequently, the terms of pre-CGT and post-CGT is commonly used to make reference to
the assets that are bought or events that takes prior or following that date. Furthermore, the
system of capital gains tax is reliant on the realised capital gains or losses that originates from
the sale of assets or from the other specified events (Saez and Stantcheva 2018). Similarly,
the capital gains that is made from the sale of the shares bought in 1984 should be
disregarded from the capital gains as it is pre-CGT assets.
According to the transactions furnished by you it is noticed that you have derived a
previous year loss of $10,000 in 2016. As evident the capital loss reported by you can be
included to offset against the capital gains that is made during the year. Furthermore, the
capital loss that is reported during the year 2015 can be bought forward to offset the same
from the capital gains that is made from the collectibles by you during the year ended June
2019. It is noteworthy to denote that under “section 108-10(1) of the ITAA 1997”, that the
capital loss from the collectables is only allowed to offset against the capital gains from the
collectables.
Options available in relation to the Cottesloe property:
As per the information that has been furnished by you suggest that you bought another
property in Cottesloe during the year 2004 for a sum of $520,000. The property bought was
used as your main residence. However, if you decide to move to China then there are certain
options that you must take into the account. We would like to inform you that in order to
obtain the main residence exemption the dwelling must be qualified as the main residence for
the taxpayer. If a person has more than one residence, then it becomes necessary to determine
which is the main residence of the taxpayer and therefore capable for exemption. Where a

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taxpayer has only one dwelling, then it is not considered sufficient to reflect that dwelling
should be treated as the main residence of the taxpayer.
Whether an individual’s dwelling qualifies for the main residence of the taxpayer then
it becomes the question of fact. There are certain factors that you must take into the account
such as the length of time a person has resided on the dwelling (Schmalbeck, Zelenak and
Lawsky 2015). Place of residence where the taxpayer’s family resides and the intention of the
taxpayer to occupy the dwelling. An individual’s main residence is generally exempted from
the capital gains tax. However, in order to obtain the main residence exemption, the property
must be having the dwelling on it and one must have some kind of physical occupancy in the
dwelling. An individual is not entitled to claim full main residence exemption from the
capital gains tax for the vacant block.
A taxpayer’s main residence is usually exempted from the capital gains tax. However,
a taxpayer is not allowed to obtain the full main residence exemption if the taxpayer uses any
part of the dwelling for producing the income such as renting out the room or running the
business (Buenker 2018). It is noteworthy to denote that the main residence exemption is not
entirely based on the single factor and weightage must be given to every factor based on the
situation of the taxpayer. The time length one stays and the intention in occupying the
property is also relevant.
Preceding from the above stated explanation, there are two possible options for capital
gains tax purpose. You would be allowed to claim a full main residence from the capital
gains tax for the length of the time you have lived in the dwelling. Presently your Cottesloe
property bought in 2004 has been your main residence ever since the property has been
bought by you. If you make the decision of moving to China and dispose your Cottesloe
house, then you will be allowed a full main residence exemption from the capital gains tax.
In an another option if you are not the Australian resident for the purpose of tax while
you were residing in China, then you are not likely to meet the requirements of the main
residence exemption. As you have been offered to take up the employment in China you
would cease to be an Australian resident for the period of five years. If you are the foreign
resident for the taxation purpose and when a CGT event takes place to your residential
property at Cottesloe, then you might not be allowed to claim for the main residence
exemption. There are certain kinds of special capital gains rules that you should know if you
cease to be an Australian resident. These rules would create an impact when you dispose your

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residential property in Australia (Abrams and Leatherman 2019). If you are not the Australian
resident for the purpose of tax, then your residency status for the previous income year would
become irrelevant.
In the final option if you decide to move to China and let out the property for the
period of your stay away from Australian then you would be entitled to partial main residence
exemption. In other words, as per the Australian Taxation Office, an individual is not allowed
to claim full main residence exemption if you use any portion of the dwelling for producing
the income such as renting out house.
To summarise the overall findings, net your capital gains tax for the year amounts to
$182,100. The amounts include the capital gains made from the disposal of subdivided plots,
sale of antiques and shares held in the Australian listed companies. We hope that the letter of
advice has helped in serving your purpose and we look forward to hear from you soon in the
future again.
Thank You
Computations of Capital Gains Tax
For the year ended 2019
Particulars
Amount
($)
Amount
($)
Proceeds from disposal of Furnishings (CGT Event A1 (s
104-10(1)) 3000
Loss from sale of furnishings 4000 -1000
Sale proceeds from Dining Set (CGT Event A1 (s 104-10(1)) 8200
Element 1: Cost of Acquisition (s110-25(1)) 5000
Gross Capital Gains 3200
Less: 50% CGT Discount 1600 1600
Sale proceeds from Dresser (CGT Event A1 (s 104-10(1)) 2500
Element 1: Cost of Acquisition (s110-25(1)) 4000
Gross Capital Loss -1500
Less: Capital loss from Collectible -5000
Net Capital loss from Antiques -5900
Sale proceeds from Larger House (CGT Event A1 (s 104-
10(1)) 750000
Element 5: Capital Expenditure (s110-25(1))
Construction Cost 350000

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Element 2: Incidental Costs (110-25(2))
Marketing Cost 10000
Cost Base 360000
Gross Capital Gains 390000
50% CGT Discount 195000
Sale proceeds from Shares in November (CGT Event A1 (s
104-10(1)) 40000
Element 1: Cost of Acquisition (s110-25(1)) 34000
Taxable Capital gains 6000
50% CGT Discount 3000
Gross Capital Gains 192100
Less: Carry forward capital loss from previous year 10000
Net Taxable Capital gains 182100

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