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HI6028 Taxation sample assignment

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Taxation, Theory, Practice and Law

All references to sections are sections of the ITAA 1997 unless indicated otherwise.

Introduction

The current assignment is a part of the tax implications and liabilities connected to a client who has requested or applied for professional services in the field of taxation, and capital gains & losses. Therefore, the below case situations refer to the different investments of the client – in terms of their net capital gain and the corresponding tax implications arousing from the same.

(A)   Occupation of vacant land

The case situation mentions that the client has transacted a legal deal of a total amount of $100,000 in order to purchase a vacant land; which she is now willing to sell off. The selling price which is attached to the piece of land is $320,000. In addition to the base cost as mentioned above; there were other costs as well such as taxes, water connection, sewerage etc. which came around $20,000. The deal has been processed in such a way that the sale amount would be payable to her once the contract is agreed and signed by both the parties; and ownership of the land shifts.

Now, the sale of the vacant land is an example of a CGT event which would be triggered on sale of the land as soon as both the parties signed and agrees to the contract. So, the total cost of the vacant house is calculated as –

  • Base cost of the land being $100,000
  • Additional component of $20,000 which is expended on taxes related to land, water supplies and so on (as applicable as per the laws posted in the year 1991)

Hence, the total cost comes to be $120,000. As mentioned, the overall sale price is pegged at $320,000. Hence, the net capital gain in the entire transaction is $320,000 – $120,000 which comes to $200,000.

(B)   Antique bed

In addition to the change in ownership of the vacant land; the client also owned an antique bed which she bought for a base price of $3500. Now, the client has lost the bed in November – leading to insurance implications and evaluations. It has been mentioned in the case that due to insurance purpose; the antique bed was valuated in the month of October; which came around $25,000. The increase in price of the bed was majorly attributed to certain altercations which was required to the condition of the bed. However, since the client has lost the bed which was stolen from her house; she has requested for recovery of the valued amount from the insurance company. Now, as per the terms, conditions and the declarations of the insurance policy; there was no specific mention of the antique bed which is why the entire valued amount cannot be recovered from the insurance company. The total recoverable amount from the policy came around $11,000 which would be payable to the client in the month of January.

Analyzing the series of events following the recovery request, there are two important factors of focus – first being whether the loss of the bed would trigger a C1 event; and secondly; whether the entire transaction would categorize under the bracket of a collectible.

As soon as the insurance company would transfer the recoverable amount to the client; a C1 event would be triggered. Now, the antique bed which is stolen – whether it would come under a collectible or not depends largely on the motive of objective with which the client had purchased the bed – whether it was for personal usage or for other investment purpose. As per the information provided in the case situation; the antique bed was purchased by the client for personal usage; hence it would feature under the category of a collectible. Therefore, since it is a collectible and the overall cost of the asset being stolen is more than $500 – therefore, there is a concept of capital gain or less in the forefront.

As mentioned; the overall cost of the asset can be calculated using the below pointers –

  • The base cost of the antique bed which comes around $3,500 (in lieu of section 110)
  • There is also a reduction of $1500 to the overall asset value due to depreciation of the asset

Therefore, the total cost of the asset which would be considered for capital gain/loss calculation is $5,000. Coming to revenues; the total valuation which the insurance company would be paying to the client is $11,000. So, there is an overall capital gain of $6000. Apart from that; there is another factor of indexation which comes into place. Given the fact that the antique bed was purchased before September; hence the concept of indexation need to be focused –

  • The index weightage or point in the year 1986 (i.e. when the antique bed was purchased) is 77.6
  • The same holds true for altercations as well – owing to the altercations done in the same year; the index percentage comes around 79.8
  • The third factor comes into play when the antique bed was stolen; at that point in time, the overall index number is found to be 123.4

Taking into account the above mentioned factors; the index weightage is calculated as 1.59 (at the time of purchase) and 1.55 (at the time of altercations. Hence taking into consideration all of these factors; the total cost of the asset is calculated as –

(1.59 * $3,500) + (1.55 * $1,500) à which comes around $5565 + $2319.

So, the overall cost is calculated as $7884. And, it is already mentioned that the overall capital receivable is $11,000. Hence, there is a net capital gain of $3,116.

(C)   Painting

This case situation deals with an artistic painting which the client has purchased a few years ago. The cost of the painting when bought by the client was approximately $2000. However, the painter of the painting died due to which the valuation of the painting inflated to a certain extent; and was sold at a price of $125,000. Therefore, with this backdrop; the first question to ponder is to understand if the painting is a collectible or not. As mentioned in the case situation; it is pretty clear that the client has purchased the painting for investment purpose (i.e. to sell it at a higher price); and for personal consumption and usages. Hence, going by this logic, the painting would not be categorized as a collectible. Therefore, the sale agreement or deal of the painting would fall under the head of ‘disposals’; hence would trigger an A1 event.

Now, coming to the cost implications; the overall cost structure is mentioned below for reference –

  • The base cost of the painting is pegged as $2,000

And, the overall selling price of the painting is $125,000. Therefore, the net gain from the transaction is calculated as $123,000. The second factor to focus here is the purchase date of the item (since it is before September 1985; hence the capital gain won’t come under CGT considerations.

(D)   Shares

This refers to shares purchase wherein the client has purchased shares and invested a certain amount in purchasing stocks of some companies. The particulars and capital & tax implications of the same are mentioned below for reference –

  • 1000 stocks of the company ‘Common Bank Ltd’ was purchased by the client in the year 2001. The cost of each share was $15; which makes the overall cost of the stocks to be $15,000. The client has decided to sell off the stocks and the market rate of the same is $47; making the overall amount as $47,000. In addition to the base cost of the shares; there is additional cost of brokerage and duty cost which combines to $1300. Now, stocks and trading on shares is a pure investment activity; therefore the transactions would fall under CGT consideration. Also, selling or disposing of stocks would lead to a change in ownership as well.

Therefore, taking all into account – the cost implications of this deal would include the base cost of the share which is pegged at $15,000 and a combined amount of $1300 in brokerage and duty impact. And, the overall amount received on selling of the share comes around $47,000. Therefore, the capital gain here is $30,700.

  • In this situation, a total of 2500 shares of PHB Iron Ore Ltd. is considered with cost of one share as $12. Therefore, the total cost of shares come around $30000. In addition to the base cost; there are certain brokerage and duty cost involved as well which includes $1000 and $1500 respectively. As already stated in the section above; all stock dealings automatically qualifies under CGT dealings. The cost structure of the shares are mentioned below for reference –
    • Base cost of the shares equate to $30000
    • $1000 is spent in brokerage and another $1500 is spent in duties – therefore, an additional cost of $2500 is consumed as well

So, the overall cost of the shares is $32500. From a revenue perspective; it is mentioned that the selling price of each share is $25 which makes the overall selling price of the shares to be $62,500. Now, given the dates of purchase and selling of shares; there would not be any indexation cost implications applied to the same. So, the capital gain which is applicable in this case is $62,500 – $32,500 which comes around $30,000.

  • There is another dealing with shares wherein 1200 shares of Young Kids has been purchased by the client at a price of $4 per share. The shares are then sold at a rate of $0.5 per share. From the cost perspective; the overall cost of the transaction is $4,800 in addition to other charges in brokerage and other duties (amounting to $600). Therefore, the total cost of the dealing is $4800 + $600 = $5400. Now, it is mentioned that the shares are sold at $0.5 per share – which culminates to $600. Hence, here there is a capital loss in the overall transaction which comes around $4,800.
  • Another share case context wherein the client purchases a total of 10000 shares at a unit price of $1 – which implies that the total base cost of shares stands at $10000. In addition, there is additional cost of $2000 which is consumed in duties and other brokerage charges. Therefore, the overall cost of transaction here is $12000. All the 10000 shares purchased are then sold at a rate of $2.5 – which implies the overall revenue of $25,000. Hence, the capital gain in this transaction is $13000. Now, a fix here is that the capital gain as mentioned here would not qualify as a discount; as the purchase and sale of the shares have been effected in the same financial year.

(E)    Violin

The case mentions of the client having certain degree of inclination towards musical instruments and she has a rich collection of musical instruments. Amongst them, she has decided to sell one of her violin which is priced at $12,000. The violin was priced in the year 1999 and was priced at $5,500. Since, the client had purchased the violin for personal usage; and moreover the sale of the asset would lead to change in ownership; hence a CGT event would be triggered.

The net capital gain from the transaction is $6,500. Now, since the asset is priced at less than $10,000; hence the gain in capital out of this transaction would not be regarded.

Calculation of capital gain (or loss)

With the above factors in the backdrop; this section would track a step-wise execution of the calculation of the net capital gain or loss.

Step 1 – In order to calculate the net capital gain; the gain components need to be deducted with the loss component. Now, from a tax perspective, the difference needs to be minimized and adjusted in a way that the client needs to pay the minimum tax. As mentioned, the loss of $600o in one share transaction is balanced by a gain of $13000 – leaving a net balance of $7,000.

Step 2 – So, once the above calculations are done in step 1; the next step is to identify any losses which were not reported in previous years so that the same can be referred in the current tax year and neutralize a few gains for the clients. In the case scenario; the loss of $8,500 is used in this tax cycle and is balanced with the gain made in the antique asset (considering a discount component of 1500)

Step 3 – Once the discounting is done; it is adjusted based on the statutory rates as mentioned below –

  • Land has a rate of 50%
  • Antique bed would also have a discounting rate of 50%
  • Shares and stocks too attracts a discounting rate of 50%

Step 4 – The next step is to check if the client is a businessman or not; if not, then no additional discount is provided

Step 5 – Therefore, the culmination of all the five steps would help come to the net capital gain which is $131,966 (as per the current case description)

References

Office, A. T. (n.d.). Fringe benefits tax (FBT). Retrieved from https://www.ato.gov.au/: https://www.ato.gov.au/General/Fringe-benefits-tax-(fbt)/

Office, A. T. (n.d.). Guide to capital gains tax 2018. Retrieved from https://www.ato.gov.au/: https://www.ato.gov.au/Forms/Guide-to-capital-gains-tax-2018/

Office, A. T. (n.d.). How to calculate a capital loss. Retrieved from https://www.ato.gov.au/: https://www.ato.gov.au/forms/guide-to-capital-gains-tax-2017/?page=24

Office, A. T. (n.d.). How to calculate your FBT. Retrieved from https://www.ato.gov.au/: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT/

Office, A. T. (n.d.). The discount method of calculating your capital gain. Retrieved from https://www.ato.gov.au/: https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-capital-gain/The-discount-method-of-calculating-your-capital-gain/

Office, A. T. (n.d.). Working out your capital gain or loss. Retrieved from https://www.ato.gov.au/: https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/

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