Sadiq, K. et al., 2019. Principles of taxation law 2019, Thomson Reuters (Professional) Australia Ltd.QuestionsCHAPTER 11 – CAPITAL GAINS TAXQuestion 11.1Anita is a client of yours. To fund her career as an artist Anita sold some of her art collectionby other artists. It consisted of:(a) An antique ceramic bowl purchased in February 1985 for $4,000. She sold the bowlon 1 December of the current tax year for $12,000.(b) A sculpture purchased in December 1993 for $5,500. She sold the sculpture on1 January of the current tax year for $6,000.(c) A bronze figure purchased in October 1987 for $14,000. She sold the bronze figureon 20 March of the current tax year for $13,000.(d) A painting purchased in March 1987 for $470. She sold the painting on 1 July of thecurrent tax year for $5,000.Consider the CGT consequences of the above transactions.Question 11.2Other than the examples provided in this chapter, provide an example for each of CGTevents A1, B1, C1, C2, D1 and D2.Question 11.3Are the following CGT assets, collectables or personal use assets:(a) An engagement ring which cost $5,000?(b) A second‐hand car purchased for $2,000?(c) Shares in BHP?(d) Your home?(e) A painting hung in the foyer of your accounting firm?(f) A holiday house at Byron Bay?Question 11.4List five things that you own that are considered personal use assets. Can you think of anycollectables that you may own?Question 11.5What CGT events apply to the following transactions:(a) You sell shares in BHP for $5,000.(b) You receive $100,000 in return for signing a three‐year contract to play AFL with theBrisbane Lions.(c) You sell your holiday home at Byron Bay for $750,000.(d) You sell your hairdressing salon for $200,000 and receive an additional $20,000 foragreeing not to open another salon within a 10 km radius for the next three years.(e) You pay Shelby $50,000 for the option to purchase her hairdressing salon in threeyears’ time.2(f) In three years’ time you exercise the option to purchase Shelby’s salon for$300,000.(g) You sell a diamond ring for $20,000. You paid $12,000 for the ring in 1984.Question 11.6Dave Solomon is 59 years of age and is planning for his retirement. Following a visit to hisfinancial adviser in March of the current tax year, Dave wants to contribute funds to hispersonal superannuation fund before 30 June of the current tax year. He has decided to sellthe majority of his assets to raise the $1,000,000. He then intends to rent a city apartmentand withdraw tax‐free amounts from his personal superannuation account once he turns 60in August of the next year. Dave has provided you with the following details of the assets hehas sold:(a) A two‐storey residence at St Lucia in which he has lived for the last 30 years. Hepaid $70,000 to purchase the property and received $850,000 on 27 June of thecurrent tax year, after the real estate agent deducted commissions of $15,000. Theresidence was originally sold at auction and the buyer placed an $85,000 deposit onthe property. Unfortunately, two weeks later the buyer indicated that he did nothave sufficient funds to proceed with the purchase, thereby forfeiting his deposit toDave on 1 May of the current tax year. The real estate agents then negotiated thesale of the residence to another interested party.(b) A painting by Pro Hart that he purchased on 20 September 1985 for $15,000. Thepainting 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 purchasedthe boat in late 2004 for $110,000. He sold it on 1 June of the current tax year to alocal 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 newlylisted mining company. He purchased these shares on 10 January of the current taxyear for $75,000. He borrowed $70,000 to fund the purchase of these shares andincurred $5,000 in interest on the loan. He also paid $750 in brokerage on the saleof the shares and $250 in stamp duty on the purchase of these shares. Dave hascontacted the ATO and they have advised him that the interest on the loan will notbe an allowable deduction because the shares are not generating any assessableincome.Dave has also indicated that his taxation return for the year ended 30 June of theprevious year shows a net capital loss of $10,000 from the sale of shares. These shareswere the only assets he sold in that year.(a) Based on the information above, determine Dave Solomon’s net capital gain or netcapital 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?Question 11.7Your client is an investor and antique collector. You have ascertained that she is not carryingon a business. Your client provides the following information of sales of various assets duringthe current tax year. Based on this information, determine your client’s net capital gain ornet 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 contract3to sell a block of vacant land for $320,000. She acquired this land in January 2001for $100,000 and incurred $20,000 in local council, water and sewerage rates andland taxes during her period of ownership of the land. The contract of salestipulates that a deposit of $20,000 is payable to her when the contract of sale issigned and the balance is payable on 3 January of the next tax year, when thechange of ownership will be registered.(b) Antique bed. On 12 November of the current tax year your client had an antiquefour‐poster Louis XIV bed stolen from her house. She recently had the bed valuedfor insurance purposes and the market value at 31 October of the current tax yearwas $25,000. She purchased the bed for $3,500 on 21 July 1986. Although thefurniture was in very good condition, the bed needed alterations to allow for theinstallation of an innerspring mattress. These alterations significantly increased thevalue 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 insurancecompany seeking to recover her loss. On 16 January of the current tax year herinsurance company advised her that the antique bed had not been a specified itemon her insurance policy. Therefore, the maximum amount she would be paid underher household contents policy was $11,000. This amount was paid to her on 21January of the current tax year.(c) Painting. Your client acquired a painting by a well‐known Australian artist on 2 May1985 for $2,000. The painting had significantly risen in value due to the death of theartist. She sold the painting for $125,000 at an art auction on 3 April of the currenttax year.(d) Shares. Your client has a substantial share portfolio which she has acquired overmany 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 on4 July of the current tax year for $47 per share. She incurred $550 in brokeragefees on the sale and $750 in stamp duty costs on purchase.(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 pershare. She incurred $1,000 in brokerage fees on the sale and $1,500 in stampduty costs on purchase(iii) 1,200 shares in Young Kids Learning Ltd. These shares were acquired in 2005for $5 per share and sold on 14 February of the current tax year for $0.50 pershare. She incurred $100 in brokerage fees on the sale and $500 in stamp dutycosts on purchase.(iv) 10,000 shares in Share Build Ltd. These shares were acquired on 5 July of thecurrent tax year for $1 per share and sold on 22 January of the current tax yearfor $2.50 per share. She incurred $900 in brokerage fees on the sale and$1,100 in stamp duty costs on purchase.(e) Violin. Your client also has an interest in collecting musical instruments. She playsthe violin very well and has several violins in her collection, all of which she plays ona 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 violincost her $5,500 when she acquired it on 1 June 1999.Your client also has a total of $8,500 in capital losses carried forward from the previoustax year, $1,500 of which are attributable to a loss on the sale of a piece of sculpturewhich she sold in April of the previous year.4Question 11.8Scott is an accountant who purchased a vacant block of land in Brisbane on 1 October 1980.On 1 September 1986, Scott built a house on the land. At the time, the land was valued at$90,000 and the cost of construction was $60,000. The property has been rented out sinceconstruction was completed. On 1 March of the current tax year, Scott sold the property atauction for $800,000.(a) Based on the information above, determine Scott’s net capital gain or net capitalloss for the year ended 30 June of the current tax year.(b) How would your answer to (a) differ if Scott sold the property to his daughter for$200,000?(c) How would your answer to (a) differ if the owner of the property was a companyinstead of an individual?QuestionsCHAPTER 17 – TRADING STOCKQuestion 17.1Consider whether the following are trading stock: (a)(b)(c)(d)(e)(f)(g)Bees kept for use in a honey production business.Horses used in the city horse carriage tour business.Horses owned by a horse‐training business for racing in competitions.Horses owned by a race horse breeder.Undeveloped land owned by a land developer.Motherboards owned by a computer manufacturer for making computers.Partly finished computers of a computer manufacturer. Question 17.2Rumpole is a share trader who owns shares as trading stock because they are held for sale inthe ordinary course of his business. He decided to purchase shares in various blue‐chipcompanies as a long‐term investment to provide for his children’s education in the future.The children are currently three and five years old.Are the shares in the blue‐chip companies trading stock for Rumpole?Question 17.3Emily runs her own business selling jewellery. She purchases the jewellery directly fromjewellery makers in various African countries and sells the jewellery in various upscalemarkets in Victoria. The following transactions took place during the year:5(a) Emily purchased $5,000 worth of jewellery on 1 June from a jewellery maker inEthiopia. The jewellery was loaded on to a ship the next day and under the terms ofEmily’s agreement, she takes ownership, control and risk of the jewellery once it isloaded on to the ship in Ethiopia. Half of the jewellery was delivered to Emily on 3July. The rest of the jewellery was not delivered to Emily, but was delivered directlyto a customer in New Zealand on 5 July. The customer had purchased the jewelleryfrom Emily on 20 June.(b) At 30 June, Emily had 20 pieces of jewellery in stock. The pieces had cost her $20each and she sold them for $75 each. She has determined that the same supplier isnow selling those pieces of jewellery for $50 each.(c) Emily took 12 pieces of jewellery out of her stockpile to give away as Christmas gifts.The jewellery pieces cost $300 and have a market selling value of $600.(d) Emily gave 10 pieces of jewellery to a creditor, Jewels R Us Pty Ltd, in satisfaction ofa $700 debt. The pieces cost Emily $500 and have a market selling value of $1,000.(e) The first half of the financial year has been very good for Emily and she decided tosell all of her remaining stock at a substantial discount at the end of January so thatshe could replenish her stock with new designs. In a three‐day sale, Emily sold all ofher existing stock for $15,000. The stock had cost her $5,000 and she wouldnormally have sold it for $24,000.(f) Following the sale, Emily replenished her stock with new designs from Sri Lanka.These pieces cost her $100 each and she would normally sell them to customers for$175 each. However, she sold 8 of these pieces to friends and family for only $100as she wanted the jewellery to be “seen”. She also kept two of the pieces for herselfas she really liked the new designs.(g) At the end of the financial year, Emily determined that she still had 40 of the SriLankan pieces in stock.Advise Emily of her income tax consequences arising from the above information. You mayassume that Emily wishes to minimise her income tax liability in the current year.Question 17.4Ryan designs and makes clocks. He sells the clocks through a website. His books of accountprovide the following information: 1 July30 JuneCompleted clocks ready for sale$15,000$27,000Partly completed clocks$10,000NilMaterial for body of clocks$24,000$800Clock mechanisms$1,500$2000 6 1 July30 JuneTotal purchases of material during the year = $3,000Total purchases of clock mechanisms during the year = $1,000Total sales of clocks during the year = $50,000Fees to accountant = $450Rental of premises = $10,000 Advise Ryan of his income tax consequences arising from the above information.
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