BFA714Topic 4, CGTTutorial questions solution PDF

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Tutorial questions – Topic 4 - CAPITAL GAINS TAX

Question 1 Jill is a client of yours. To fund her career as an artist Jill sold some of her art collection by other artists. It consisted of: (a)

An antique ceramic bowl purchased in February 1985 for $4,000. She sold the bowl on 1 December of the current tax year for $12,000. Pre-CGT asset – purchased before 20 September 1985. Tax-free

(b)

A sculpture purchased in December 1993 for $5,500. She sold the sculpture on 1 January of the current tax year for $6,000. Collectable asset – purchased for more than $500. Taxable gain of $500 under CGT event A1.

(c)

A bronze figure purchased in October 1987 for $14,000. She sold the bronze figure on 20 March of the current tax year for $13,000. Collectable asset – purchased for more than $500. Taxable loss of $1,000 to be used against gains from collectables only (s 108-10 ITAA97) (Reduced cost base - Capital proceeds)

(d)

A painting purchased in March 1987 for $470. She sold the painting on 1 July of the current tax year for $5,000. Collectable asset – purchased for less than $500. Gain disregarded under s 11810 ITAA97

Consider the CGT consequences of the above transactions.

Question 2 Are the following: CGT assets, collectables or personal use assets. Are any exempt? (a)

An engagement ring which cost $5,000? Collectable 108-10(2) ITAA97

(b)

A second-hand car purchased for $2,000? Exempt under s 118-5 ITAA97

(c)

Shares in BHP? CGT asset under s 108-5 ITAA97

(d)

Your home? Exempt main residence under s 118-110 ITAA97

(e)

A painting hung in the foyer of your accounting firm?

Collectable s 108-10(2) ITAA97 (f)

A holiday house at Byron Bay?

CGT asset under s 108-5 (note not a personal use asset – see s 108-20(3) ITAA97) (g)

Your motor home?

Discuss – car or dwelling? (h)

Your stamp collection which cost $4,000? Collectable – not exempt cost more than $500

(i)

A horse that you paid $9,000 for? Depends – could be livestock, breeding stock or a personal use asset

(j)

A watch that cost you $490? Collectable (jewelry) – exempt as cost less than $500

Question 3 Bruce Lee is 59 years of age and is planning for his retirement. Following a visit to his financial adviser in March of the current tax year, Bruce wants to contribute funds to his self managed superannuation fund before 30 June of the current tax year. He has decided to sell the majority of his assets to raise $1,000,000. He then intends to rent a city apartment and he and his wife can withdraw tax-free amounts from their superannuation account once they turn 60 in August of the next year. Bruce has provided you with the following details of the assets he has sold: (a) A two-storey residence at St Lucia in which they have lived for the last 40 years. They paid $70,000 to purchase the property and received $850,000 on 27 June of the current tax year, after the real estate agent deducted commissions of $15,000. The residence was originally sold at auction and the buyer placed an $85,000 deposit on the property. Unfortunately, two weeks later the buyer indicated that he did not have sufficient funds to proceed with the purchase, thereby forfeiting his deposit to Bruce on 1 May of the current tax year. The real estate agents then negotiated the sale of the residence to another interested party. Pre-CGT Asset – so $850,000 exempt gain (also exempt under the main residence exemption in s 118-110). Forfeited deposit – CGT event H1 (s 104-150 ITAA97) Capital proceeds: Cost base: Capital gain

$85,000 (Forfeited deposit) 15,000 (Expenditure in connection with prospective sale) $70,000

(b) A painting by Pro Hart that they purchased on 18 September 1985 for $15,000. The painting was sold at auction on 31 May of the current tax year for $125,000. Pre-CGT asset – so exempt. (c) A luxury motor cruiser that they had moored at the Manly Yacht club. They purchased the boat in late 2004 for $110,000. They sold it on 1 June of the current tax year to a local boat broker for $60,000. Personal use asset – loss disregarded (d) On 5 June of the current tax year they sold for $80,000 a parcel of shares in a newly listed mining company. He purchased these shares on 10 January of the current tax year for $75,000. He borrowed $70,000 to fund the purchase of these shares and incurred $5,000 in interest on the loan. He also paid $750 in brokerage on the sale of the shares. Bruce has contacted the ATO and they have advised him that the interest on the loan will not be an allowable deduction because the shares are not generating any assessable income. CGT event A1 – s 104-10 ITAA97 Reduced cost base: First element (cost) Second element (brokers fees) Third element (interest) Capital proceeds: Capital gain/loss

$75,000 $ 750 $ 4,250*

$80,000 $80,000 $ 0

*Interest in the third element applies only up to the level of the capital proceeds, since above this level, it becomes a reduced cost base. A reduced cost base does not include interest as a third element cost. Bruce has also indicated that his taxation return for the year ended 30 June of the previous year shows a net capital loss of $10,000 from the sale of shares. These shares were the only assets he sold in that year. (a) Based on the information above, determine Bruce Lee’s net capital gain or net capital loss for the year ended 30 June of the current tax year. Net Capital Gain Gain from CGT event H1 Less capital loss B/F Net capital gain

$70,000 10,000 $60,000

Note: no CGT discount as neither asset had been held for more than 12 months (b)

If Bruce has a net capital gain, what does he do, with this amount?

The capital gain would be included in Bruce’s assessable income for the income year (c)

If Bruce has a net capital loss, what does he do with this amount?

Had Bruce made a capital loss, it would have been added to the loss carried forward from the previous year and carried forward to the next income year. Question 4 Your client is an investor and antique collector. You have ascertained that she is not carrying on a business. Your client provides the following information of sales of various assets during the current tax year. Based on this information, determine your client’s net capital gain or net capital loss for the year ended 30 June of the current tax year. (a) Block of vacant land. On 3 June of the current tax year your client signed a contract to sell a block of vacant land for $320,000. She acquired this land in January 2001 for $100,000 and incurred $20,000 in local council, water and sewerage rates and land taxes during her period of ownership of the land. The contract of sale stipulates that a deposit of $20,000 is payable to her when the contract of sale is signed and the balance is payable on 3 January of the next tax year, when the change of ownership will be registered. CGT event A1 – Time of the event is when the contract is signed. Capital proceeds Cost base: First element (cost) Third element (rates and taxes) Capital gain

$320,000 $100,000 20,000

$120,000 $200,000

(b) Antique bed. On 12 November of the current tax year your client had an antique four-poster Louis XIV bed stolen from her house. She recently had the bed valued for insurance purposes and the market value at 31 October of the current tax year was $25,000. She purchased the bed for $3,500 on 21 July 1986. Although the furniture was in very good condition, the bed needed alterations to allow for the installation of an innerspring mattress. These alterations significantly increased the value of the bed, and cost $1,500. She paid for the alterations on 29 October 1986. On 13 November of the current tax year she lodged a claim with her insurance company seeking to recover her loss. On 16 January of the current tax year her insurance company advised her that the antique bed had not been a specified item on her insurance policy. Therefore, the maximum amount she would be paid under her household contents policy was $11,000. This amount was paid to her on 21 January of the current tax year. CGT event C1 – Time of the event is when compensation received (21 January 2019) Capital proceeds: Cost base: First element (cost) Fourth element (alterations) Capital gain

$11,000 $3,500 1,500

5,000 $ 6,000

(c) Painting. Your client acquired a painting by a well-known Australian artist on 2 May 1985 for $2,000. The painting had significantly risen in value due to the death of the artist. She sold the painting for $125,000 at an art auction on 3 April of the current tax year.

Pre-CGT asset – Gain exempt (d) Shares. Your client has a substantial share portfolio which she has acquired over many years. She sold the following shares in the relevant year of income: (i) 1,000 Common Bank Ltd shares acquired in 2001 for $15 per share and sold on 4 July of the current tax year for $47 per share. She incurred $550 in brokerage fees on the sale. Capital proceeds: Cost base: First element (cost) $15,000 Second element (brokerage) 550 Capital gain

$47,000

15,550 $31,450

(ii) 2,500 shares in PHB Iron Ore Ltd. These shares were also acquired in 2001 for $12 per share and sold on 14 February of the current tax year for $25 per share. She incurred $1,000 in brokerage fees on the sale. Capital proceeds: Cost base: First element (cost) $30,000 Second element (brokerage) 1,000 Capital gain

$62,500

31,000 $31,500

(iii) 1,200 shares in Young Kids Learning Ltd. These shares were acquired in 2005 for $5 per share and sold on 14 February of the current tax year for $0.50 per share. She incurred $100 in brokerage fees on the sale. Reduced cost base: First element (cost) Second element Capital proceeds: Capital loss

$6,000 100

$6,100 600 ($5,500)

(iv) 10,000 shares in Share Build Ltd. These shares were acquired on 5 July of the current tax year for $1 per share and sold on 22 January of the current tax year for $2.50 per share. She incurred $900 in brokerage fees on the sale. Capital proceeds Cost base: First element (cost) $10,000 Second element (brokerage) 900 Capital gain

$25,000

10,900 $14,100

(e) Violin. Your client also has an interest in collecting musical instruments. She plays the violin very well and has several violins in her collection, all of which she plays on a regular basis. On 1 May of the current tax year she sold one of these violins for $12,000 to

neighbour who is in the Queensland Symphony Orchestra. The violin cost her $5,500 when she acquired it on 1 June 1999. Personal use asset costing less than $10,000 - gain exempt. Note that even though she collects musical instruments, they are not “collectables” (defined in s 108-10(2) as: “(a) artwork, jewellery, an antique, or a coin or medallion; (b) a rare folio, manuscript or book; (c) a postage stamp or first day cover.” Your client also has a total of $8,500 in capital losses carried forward from the previous tax year, $1,500 of which are attributable to a loss on the sale of a piece of sculpture which she sold in April of the previous year. Calculation of capital gain: Note that where you have capital gains/losses from different CGT assets and/or discount and non-discount capital gains, you need to keep your gains and losses together. Discount Capital Gains: (a) (c) (d)(i) (d)(ii) Gain Less CGT discount Net capital gain

$200,000 Land: other asset: discountable capital gain Pre-CGT painting exempt 31,450 Shares: other asset: discountable capital gain 32,500 Shares: other asset: discountable capital gain $263,950 131,975 $131,975

Non-discountable Capital Gains: (allocate as much as possible of the loss to these gains) (d)(iv) 14,100 (d)(iii) (5,500) current year capital loss Less capital loss (7,000) prior year capital loss Net capital gain $ 1,600 Collectables: (b) Less capital loss Gain Less CGT discount Net capital gain

6,000 1,500 deduct from “collectables” before CGT discount $ 4,500 2,250 $ 2,250

Net capital gain for the year: $131,975 + $1,600 + $2,250 = $135,825

Alternative calculation (assuming losses allocated to Discount Capital Gain) Discount Capital Gains: (a) (c) (d)(i) (d)(ii) Gain (d)(iii) Less capital loss Gain Less CGT discount Net capital gain

$200,000 Land: other asset: discountable capital gain Pre-CGT painting exempt 31,450 Shares: other asset: discountable capital gain 32,500 Shares: other asset: discountable capital gain $263,950 (5,500) current year capital loss (7,000) prior year capital loss $251,250 125,725 $125,725

Non-discountable Capital Gains: (d)(iv) 14,100 Net capital gain $ 14,100 Collectables: (b) Less capital loss Gain Less CGT discount Net capital gain

6,000 1,500 deduct from “collectables” before CGT discount $ 4,500 2,250 $ 2,250

Net capital gain for the year: $125,725 + $14,100 + $2,250 = $142,075 (an additional $6,250 of assessable income)....