Question 2:

Marcus acquired a rental property in Runaway Bay under a contract of purchase on 19 November 1993 for $420,000. Marcus borrowed $350,000 from ANZ to fund the acquisition of the property.

He had sufficient savings to pay for the balance of the purchase price as well as various other settlement costs.

Marcus incurred the following costs on 5 January 1994 (being the date of settlement):

$

stamp duty on acquisition of property 11,750

legal fees on acquisition of property 1,400

ANZ loan application fees (loan period is 20 years) 1,200

mortgage registration fees 800

Tenants were already occupying the rental property when Marcus purchased the property. In this respect, the property has been income-producing during the entire period of ownership.

Marcus provides you with a list of renovations to the property since he purchased the property:

Two weeks after settlement, the tenants complain of soft and creaking flooring in the third bedroom. After removing the carpets, Marcus becomes aware that the bedroom has badly damaged floorboards. He was not aware of this at the time of purchase. On 19 January 1994, Marcus spent $5,680 replacing the damaged floorboards.

On 5 August 1995, Marcus engages a carpenter to install built-in closets in all three bedrooms at a cost $8,460.

On 4 March 1997, Marcus completely renovates the kitchen at a cost of $14,310.

Marcus advises you that he has claimed the 2.5% capital works allowances under Division 43 totalling $25,900 under Division 43 on all eligible construction expenditure and capital improvements to the property from the date the property was first rented out to tenants to the date of sale.

Marcus has also incurred the following expenses in relation to the Runaway Bay rental property:

$

interest expense on loan 45,630

repairs to broken roof tiles 720

repainting of house due to extensive sun damage 14,560

landlord insurance 6,780

council rates and water charges 9,190

On 3 June 2022, Marcus sells his Runaway Bay rental property under a contract of sale for $700,000. Sales commission came to $21,400.

Required:

Calculate Marcuss net capital gain or loss in respect of the sale of the Runaway Bay property using the CGT discount method. Please refer to appropriate sections of the ITAA (1997).

Calculate Marcuss net capital gain or loss in respect of the sale of the Runaway Bay property using the indexation method. Please refer to appropriate sections of the ITAA (1997).

Assuming that Marcus wishes to minimise his taxable income, which method of calculating the net capital gain should Marcus adopt?

(d) How does your answer to (a) and (b) above change if Marcus has carry-forward capital losses of $140,000 which arose as a result of the sale of a business in a previous income year? Which method should he use?