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3106AFE Revenue Law Trimester 3, 2017 Seminar Number 8 [The focus of this seminar is Chapter 8 of the Study Guide] 1 3106AFE Revenue Law Trimester 3, 2017 Question 1 You are required to just calculate Joe Smyth's \"net capital gain\" for the 2016/17 income year. Assume Joe is not entitled to use any of the small business concessions in Division 152 ITAA 1997. In addition the transactions listed below, Joe also received salary income of $120,000 in the 2016/17 and an unfranked divided of $3,000 from BHP shares Joe also has carried forward capital losses from: the sale of Optus Shares of $2,000, and the sale of an antique clock of $1,800 As we determined in Seminar #7 Joe had the following capital gains and/or losses (prior to considering any capital losses, indexation method or discount method Initial capital loss of $11,700 on Plasma TV (acquired 3 March 2014; disposed 12 June 2017); Initial exempt capital gain of $450 on Sculpture (acquired 19 May 1990; disposed 12 June 2017); Initial capital gain of $580 on Rare Book (acquired 5 April 2003; disposed 12 June 2017); and Initial capital gain of $7,000 on Investment Apartment (acquired 25 September 2005; disposed 12 May 2017) Initial capital gain of $380,000 on Google Shares (acquired 10 November 2015; disposed 3 January 2017). Parkview Property Joe signed the contract to purchase A 0.2 hectare property at 26 Hope Street at Parkview on the Gold Coast on 22 March 2003 for $310,000. Ownership transferred to him on 23 April 2003. Joe has lived in Parkview Property as his home from the 23 rd of April 2003 until to 25 October 2012. On 26 October 2012, he decided that he and his family might enjoy a change. So he and his family moved out of the Parkview Property and instead moved into a beachfront house at Broadbeach which they just rented. From the 26 October 2012 the Parkview Property was rented out to tenants and Joe received approximately $15,000 a year in rent. Joe later placed the Parkview Property on the market and sold his Parkview Property for $597,000 under a contract dated 26 June 2017. In relation to the sale, he paid a $15,800 commission to the real estate agent and $2,300 in legal fees to his lawyer. The ownership of the Parkview Property transferred to the new owner on 28 July 2017. 2 3106AFE Revenue Law Trimester 3, 2017 Logan Property On 23 May 1985 Joe Smyth purchased a block of land for $35,000 in Logan on which to build a house. After receiving many quotations, Joe signed a contract on 18 June 1987 with Rapid Builders Ltd to construct the house. The house was constructed and completed in the September 1987 quarter at a cost of $65,000. Instead of moving into the house, Joe rented it out to tenants. He continued to do this until he eventually sold the residential property for $640,000 under a contract dated 10 June 2017 with the ownership transferring on 14 July 2017. An independent valuation revealed that the land was worth $500,000 at the time of sale. (Hint! Could the house be considered as separate asset to the land?) =================== 3 3106AFE Revenue Law Trimester 3, 2017 Group 1 1- CGT event? Parkview Property (do complete answers as per seminar #7 format) 2- CGT asset? 3- Exemption? 4 - Rollover? N/A 5- Initial CG or CL Capital proceeds: less Cost base Capital gain $ $ $ s 116-20 s 112-30 s 104-10(4) BUT ___________________! 3106AFE Revenue Law Trimester 3, 2017 Group 2 1- CGT event? Logan Property (do complete answers as per seminar #7 format) 2- CGT asset? Are there two separate assets? (check section 10855(2)) 3 - Exemption? 4 - Rollover? 5- Initial CG or CL N/A The capital proceeds must be apportioned between the ____________ and the ____________ ________________________ $____________ - $____________ = $____________ . . Capital proceeds less Cost base Capital gain $____________ $____________ $ ____________ s 116-40 s 110-25 s 104-10(4) as they 3106AFE Revenue Law Trimester 3, 2017 Group 3 Can Joe use the indexation method? If so what is the indexed cost base? Logan Property Joe acquired the house in the _______ quarter and disposed of it on ______________so he has held the asset for more than _______. He acquired it before 11:45am EST 21 September 1999, but disposed of it after that time. So he can use either the _______ method or the _______ method (but not both!) to calculate the capital gain, and choose whichever method gives him the best result: s 114-10(1); s 115-15, and s 115-25. If he chooses the indexation method, he will calculate the indexed cost base at this step. To use the indexation method we need to index the cost base. Cost base - s ______________. For this asset there is only the 1st element of the cost base 1st element costs - Acquisition costs Acquisition cost $_______ s 110-25(2) Joe Smyth acquired the house in _______1987 quarter. The CPI index number was _______ He disposed of the rental property on _______, which is in the _______quarter. However indexation was frozen on _______ so the _______ CPI index number will apply, which is _______. In accordance with s _______ the indexation factor is determined by: index number for the _______ _______ quarter index number for the quarter the cost was _______ _______ = _______ (rounded to _______ decimal places: s 960-275(5)) _______ Indexed acquisition (1st element) costs: $_______ x _______ = $_______ There are no other elements to the cost base. 3106AFE Revenue Law Trimester 3, 2017 Capital proceeds less indexed cost base Indexed capital gain $_______ s 116-40 ($_______) s 114-1 $ _______ Through using the indexation method there is a capital gain of $_______ - we would want to consider if the discount method is available and whether gives better result. As it would appear that 50% of $75,000 of $37,500 would be lower than $44,580. (but capital losses could affect this). 3106AFE Revenue Law Trimester 3, 2017 Group 4 Calculating Joe's net capital gain: First need to consider the eligibility requirements in Division 115 for each current year capital gain. The discount method is not relevant to these CGT assets as they did not result in a capital gain (as either capital loss or exempt capital gain): capital loss of $_______ on _______ exempt capital gain of $_______ on _______ exempt capital gain of $_______ on ______________ Div 115 eligibility criteria Eligible taxpayer? CGT event happened after 11:45am EST 21 September 1999: s 115-15 Did not use indexation method to work out capital gain: s 115-20 CGT asset acquired by entity at least 12 months before CGT event: s 115-25 (From 8 May 2012) Not a foreign or temporary resident s 115-105 ENTITLED TO USE DIV 115? Rare book (from set of 4) $7,000 on Investment Apartment $380,000 on Google Shares $ 75,000 Logan Property (House only) 3106AFE Revenue Law Trimester 3, 2017 Group 5 Calculating Joe's net capital gain: Losses: Joe has carried forward capital losses from sale of Optus Shares of ($2,000) (this would be regarded as an '_______ asset', and from sale of an antique clock of $1,800 (this would be regarded as _______ capital loses). Note - The losses from collectables can only be used to ____________________________: s108-10(1). The $11,700 capital loss from the plasma television (last week) will be _____________________as the plasma television is a ______________asset: s 108-20(1). Current year capital gains less current year capital losses less carried forward capital losses Balance Apply 50% discount Div 115 Apply small business concessions Div 152 Net capital gain Rare book (from set of 4) $____ Investment Apartment $____ Google Shares $____ Logan Property (________ only) $ ________ $____ ($_______) $____ ($________) $____ $____ $____ $____ $____ $________ ($________) $________ ($________) $________ ($________) N/A N/A N/A N/A $____ $________ $____________ $____________ Total $____________ 3106AFE Revenue Law Trimester 3, 2017 Net capital gain of $__________________ will be included in Joe's 2016/17 assessable income: s _________. Note Joe will have a __________________ carried losses still of $_________ Note in addition to his net CGT gain - Joe's assessable income would also include his _________ (s _________) and _________ _________ (s _________)