Taxation of Australia

Questions: Dave Solomon 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, Dave wants to contribute funds to his personal superannuation fund before 30 June of the current tax year. He has decided to sell the majority of his assets to raise the $1,000,000. He then intends to rent a city apartment and withdraw tax-free amounts from his personal superannuation account once he turns 60 in August of the next year. Dave has provided you with the following details of the assets he has sold: (a) A two-storey residence at St Lucia in which he has lived for the last 30 years. He 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 Dave on 1 May of the current tax year. The real estate agents then negotiated the sale of the residence to another interested party. (b) A painting by Pro Hart that he purchased on 20 September 1985 for $15,000. The painting was sold at auction on 31 May of the current tax year for $125,000. (c) A luxury motor cruiser that he has moored at the Manly Yacht club. He purchased the boat in late 2004 for $110,000. He sold it on 1 June of the current tax year to a local boat broker for $60,000. (d) On 5 June of the current tax year he 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 and $250 in stamp duty on the purchase of these shares. Dave 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. Dave 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 Dave Solomons net capital gain or net capital loss for the year ended 30 June of the current tax year. (b) If Dave has a net capital gain, what does he do with this amount? (c) If Dave has a net capital loss, what does he do with this amount? (10 marks, max. 1000 words). Case study 2: Fringe Benefits Tax.. Answers: Capital gain is explained as the difference between the capital proceeds and the cost of acquirement of the capital gain tax property. Capital gain can be calculated by implementing three procedures. The first method is known as Discount method that applies more than 12 months before the capital gain tax event (Apps, P., 2008). The next method involves the indexation method that is applied in case the asset is taken over before 21st September and is kept under possession for an excess of 12 months before the related capital gain tax event. The final method is known as a residual method. The residual method is applicable when the assets are possessed for less than 12 months. Therefore, calculation of the capital gain tax is calculated by the application of the above-mentioned three procedures (Cerexhe, P., 2008). Following are exemptions from the gain of sale or capital asset- A property that is acquired before 20th September 1985 which consist of- Motor vehicles Value reimbursed for specific injuries Selling of Residential house Any collectable that is acquired and costs less than $500 Set off and carry forward of losses that have arisen from capital gain Long term capital loss- Long term loss can be set off against long-term capital gain. No alternate set off is feasible. It is possible to carry forward the succeeding indefinite assessment years and can be set off against in an isolated long-term capital loss (Double taxation, 2003). Short term capital loss- Short-term capital loss can be set-off against similar source or from long-term capital gain. It is possible to carry forward to succeeding indefinite assessment years, as well as, set off against long term and short term gains a) In the provided question, Mr. Dave Solomon residing in a double storey building for the last 30 years that was bought for $70000 was sold for a value of $850000 on the date of 27th June of the present taxable year. The house as sold at an auction and the buyer had to pay $85000 as an advance payment against the purchase. Therefore, the money was continued later on. Therefore, the amount of $ 85000 received can be charged as income from other sources (Fringe benefits tax, 2000). Calculation of the capital gain Sale proceeds $ 865000 is exempted from the definition of the CST I.E family home exemption Therefore, the long term capital gain can be calculated as 0 b) An art of pro hart was bought on 20th September 1985 for a price of $15000 and was sold for 125000. Therefore, the capital gain is described as follows Sale proceeds $ 125000 Less indexed cost of acquisition 15000x123.4/71.3= $25961 The long-term capital gain is $150961 c) A luxury motor car was bought in the later part 2004 for $110000 was sold on 1st June of the present year to a local boat broker for $60000. Therefore, the capital gain will be calculated as sales proceed $ 60000 Less indexed cost of acquisition $110000 Long term capital loss= $ 50000 d) He sold a parcel share in a freshly listed mining company on the date of 5th June of the same year at a price of $ 80000. He purchased the shares on 10th of January of the present year for $ 75000. In the attempt to buy the shares, he had to take a loan of $ 70000 and had to pay an interest of loan of $5000. Dave Solomon had to pay the $ 750 regarding brokerage for the sales of share and $ 250 in stamp duty for the purchase of the share. According to the income tax law, interest on the loan is not a part of cost acquisition (Hewson, , 2014). Therefore, the loan on interest does not need to be included. Part a Therefore, capital gain can be described as follows- Sale proceeds $ 80000 Less: Brokerage= $750 Less cost of acquisition= $ 75000 Less: stamp duty $ 250 Therefore, the short-term capital loss is $ 4000 Hence, the capital gain of the year is as follows Long term capital gain on sale of residential property= $ Nil Long term capital gain on sale of painting= $ 150961 Long term capital loss on sale of boat= $ 50000 Short term gain on sale of share= $ 4000 Therefore, long-term capital gain can be calculated as $ 104961 Therefore the tax return of Mr. Dave Solomon for the year end of 30th June of the previous year displays a net capital loss of $ 10000 from the sales of share. So, it can be adjusted ith present year long term capital gain. Therefore, the net long-term capital for the present year is calculated to be $ 104961- $ 10000= $ 94961 Part b NetCapital gain is a summary of entire gain come from selling of the capital asset subtracted by the entire loss incurred on selling of capital asset that inclusive of the loss from the selling of the capital asset from the earlier years also. It can be said that the capital gain tax is not a distinct tax (Yoon Oh, 2012). From the capital gain assets the assessable income use to be generated as well as the income from the capital gain tax should be assessable and paid within the financial year, in which the asset has been sold, and the tax is assessed for the respective financial year (KimSungKyun, 2007). Therefore, Mr. Dove has to pay capital gain tax on the income he earned from the sale of assets. As an outcome of his contribution, the fund to transferred to his personal superannuation finance (Toward tax reform, 2009). Mr. Dove should maintain relevant records at the time little significant as well as the vital transaction has taken place, which adds interest on loans, receipt of the purchase, expenditure payment regarding litigation fees, legislation fees, etc. (Lee Jae Ho, 2009). The records in respect of the mending as well as maintenance of assets along with the brokerage payment on share have been paid. Part c Net capital loss can be explained as the sum of all the losses that have incurred from the sale of a capital asset that includes loss from the earlier year. The assessee is not capable of setting off his capital loss from other sources of income but needs to carry forward for following years. A capital loss can be carried forward for an indefinite duration (Meagher and Agrawal, N., 2008). The assessee does not have the authority to select not to set off capital losses against any capital gain. However they have the authority to deduct such losses according to the choice with the capital gain, he will have to sell more of his asset or be under debts in order to contribute for his persona; superannuation fund and then buy a rented apartment in the city and at the same time draw tax-free amount from his personal superannuation fund once he arrives the age of 60 in the following year (Prince, 2011). References Apps, P. (2008). Comment:Taxation Reform and Income Distribution in Australia'.Australian Economic Review, 19(3), pp.57-59. Cerexhe, P. (2008).Smarter property investment. Crows Nest, N.S.W.: Allen Unwin. Double taxation. (2003). [Washington, D.C.]: U.S. Dept. of State. Fringe benefits tax. (2000). [Wellington, N.Z.]: Inland Revenue. Hewson, J. (2014). The Politics of Tax Reform in Australia.Asia the Pacific Policy Studies, 1(3), pp.590-599. KimSungKyun, (2007). Review of Inheritance Tax Systemfocused on unrealized capital gain.Seoul Tax Law Review, 13(2), pp.375-413. 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