Question 3

Herman enters into a contract with Jake on 1 January 2012 to purchase a factory from Jake for $1 million. Herman pays Jake $800,000 and also transfers to Jake shares worth $200,000. Additional costs of purchase are: (a) legal fees $10,000, (b) stamp duty $50,000, and (c) tax advice on how to structure the deal $8,000. On the basis of that advice, the factory is purchased in the name of Hermans family company.

Herman then uses the factory for income producing purposes.

Soon after taking possession of the factory, Herman finds some of the walls need replacing because of white ants: cost $46,000.

In December 2012, the outside walls of the factory are repainted because the paint is peeling: cost $38,000 (Herman claims this as a tax deduction in his tax return for the 2012/13 year). In January 2013, Herman pays a landscape gardener $84,000 to beautify the grounds around the factory (trees, paths, etc).

During his ownership, Herman also pays rates ($22,000), insurance premiums ($25,000) and interest on the loan taken out to finance the purchase of the factory ($33,000).

In March 2016, Herman is accused of forging title deeds and of fraudulently asserting ownership of the factory that he sold to Herman. In danger of losing the factory, Herman incurs $80,000 court costs to successfully defend his ownership.

In June 2016 Herman sells the factory for $2.5 million. To arrange the sale, he incurs advertising costs of $10,000 and legal fees of $50,000.

PREPARE A REPORT advising Herman on the CGT consequences arising from the transactions outlined above. In your report, particular attention should be given to explaining whether a capital gain or a capital loss was realised when the factory is sold? If a capital gain was realised, how much would be taxable?