Janet (taxpayer) residing in Australia is named as the sole beneficiary of a property (1. 85 hectares) with a large homestead as a result of the death of a relative on 7/10/2010. The property is not used for commercial purposes and at the date of death, the property was valued at $1. 45million. Settlement took place on 21/12/2010. After moving into the homestead shortly after taking ownership, she planned to take a one-year trip which she had been planning for some time in late 2011.
The taxpayer felt that the homestead was far too large for her (she is single), applied to the ATO for an exemption for ABN registration and some fourteen months later (16/2/2012), she obtained council approval to subdivide the property into three, with the intention of building three units, one she will take up as her own residence, the other two will be sold. Work commenced some weeks after approval and on 12th December that same year, the taxpayer returned and moved into one of the apartments. The other two were sold in March/April in 2013, one selling for $1. 35m (24/3/2013), the other for $1. 45m (9/4/2013).
You are to consider the CGT implications both from the relevant sections (ITAA), rulings, etc. and from the values (if/where applicable). Assume that the blocks are subdivided equally. For each determination that you make, you should clarify. You should also clarify what Capital Gains and CGT is in your answer RELEVANT RULE/LAW: Various facts of the case have to be taken into consideration in order to clarify the capital gains and CGT that have implied. A person who gets the advantage, benefits or profits from a will, trust and life insurance policy is known as a beneficiary.
In this case, Janet is a beneficiary as she is entitled to a property as a result of the death of her relative. However, if a relative died without making any will, then Janet would be named as a beneficiary as per the laws of intestacy. As per Australian Taxation, special capital gain tax (CGT) rules apply on transfer of any asset to the beneficiary if the owner of the assets dies. However, if a beneficiary sells the property that she has inherited then normal capital Gain tax Rules would be applicable. However, if the property was acquired by the beneficiary before 20 September 1985, then the beneficiary would.
NGUYEN NGOC AI HUYEN AAC3063 PAGE 3 HI5028 ASSIGNMENT 1 have been exempted from Capital Gain Tax (CGT). But in this case, the relative of Janet died on 7th October 2010 and the property is deemed to be transferred on that same day that is after 20th September 1985, so Janet is liable for Capital Gain Tax (CGT). As per the case study given, we do not know when the relative of Janet had actually bought the property. So here we assume that, the property was bought on or after 20th September 1985.
However, if the relative of Janet has made some major improvement in the assets before he/she dies then that improvement would not be taken as separate assets by the beneficiary. So in the given case as the relative of Janet died on 7th October 2010 so indexation method would not be applicable as the provision states that if the deceased person dies on or after 21st September 1999, then indexation method would not be available. So Janet has to apply to CGT Discount Method. Since the property was acquired by the relative after 20th September 1985, so beneficiary (Janet) has all the right to know the full details about the relevant cost incurred by the relative.
If this property was not been transferred to the beneficiary and has been sold by the executors, then the cost incurred by the executor on that day would be included by the beneficiary in the cost base. In the given case, Janet a beneficiary got a residential property from her relative as a result of the death of her relative on 7th October 2010. On that day the market value of the property was supposed to be $1. 45 million.
She was alone and the property was much big enough for her and so she thought of dividing this property into three units. In one unit she would reside and the other two she would sell it. She built the three units on 12th December 2012 and sold two of them at that date. So here we can see that, Janet has held this property for more than 12 months. As per the relevant provision of Capital Gain Tax, discount method would be applicable to the beneficiary only if she has acquired the asset for more than 12 months before selling it. Since the cost of the property as a whole is given and in the given case it is said that all the three units are sub divided equally. We assume that the cost of the property should also be divided equally so that we can get individual units cost of acquisition.
So Cost of acquisition for each unit comes to: $1. 45/3 = $0. 4833 million. CGT Discount Rate = 50% of Gross capital Gain in case of an individual. Computation of Capital Gain and Capital Gain Taxes for the year 2012-13 NGUYEN NGOC AI HUYEN AAC3063 PAGE 4 HI5028 ASSIGNMENT 1 First unit of the property was sold on 24th March 2013, so the capital gain tax would be added to the taxable income for the previous year 2012-13. Unit – 1: Capital Proceeds or Sale Value $ 1. 35 million (-) Cost Base or Cost of Acquisitions $ 0. 48 million.
Gross Capital Gain $0. 87 million Net Capital Gain = Gross Capital Gain * CGT Discount = 0. 87 * 50% = $ 0. 435 million Computation of Capital Gain and Capital Gain Taxes for the year 2013-14 As the other property was sold on 9th April 2013, that is after 31st March 2013 so the financial year changes from 2012-13 to 2013-14. Unit – 2: Capital Proceeds or Sale Value $ 1. 45 million (-) Cost Base or Cost of Acquisitions $ 0. 48 million Gross Capital Gain $0. 97 million Net Capital Gain = Gross Capital Gain * CGT Discount = 0. 97 * 50% = $ 0. 485 million NGUYEN NGOC AI HUYEN AAC3063 PAGE 5.
HI5028 ASSIGNMENT 1 So the following net capital gain would be added to the Janet taxable income for the year 2013- 14 under the head Capital Gains and then it would be determined that how much of tax would be paid on taxable income. However, it is worth to be noted that if the relative of Janet had any unapplied capital losses then those capital losses cannot be passed to the beneficiary to offset against her net capital gains.
As there was no information given, regarding the capital losses incurred by the relative it is irrelevant whether the same would have been offset by Janet against her Capital Gains. However, the residential property own by Janet for her own use would be exempted from capital gains as the provision of Capital gains states that if the tax payer main residence in which he resides is up to 2 hectares of nearby land used for domestic purpose then exemption would be granted to the taxpayer. So in the given case the residential property owned by Janet happened to be a residential property used for domestic purpose and the plot of land in which she resides is less than 2 hectares (1. 85 hectares) as well.
So Janet would be exempted from Capital Gain regarding the unit in which she resides. So, Capital Gain taxes for the: Year 2012-13 = $ 0. 435 million Year 2013-14 = $ 0. 485 million QUESTION 2 Explain using examples and relevant sections of the act, what the differences between Ordinary Income and Statutory income are. Use your own examples (not from MTG or Barkoczy text) NGUYEN NGOC AI HUYEN AAC3063 PAGE 6 HI5028 ASSIGNMENT 1 RELEVANT RULE/ LAW: Section 6-25 of the 1997 ITAA expressly seeks to clarify the order in which income is to be assessed if it is assessable under more than one provision.
Therefore if this provision is to apply, it will be important to know whether the amount in question is “ordinary income” or “statutory income”. Whilst exempt bodies are exempt from income tax on both ordinary and statutory income, for other taxpayers statutory income will be only exempt if it is made expressly exempt. Ordinary income At common law, what constitutes ordinary income has been determined by a series of cases (Australian and otherwise), from which certain assumptions may be made.
These guidelines include the following: ?Income is a “flow”, ie. a return on the provision of personal services, a return on an investment, or a return on business activities. In purely economic terms, an increase in the value of an asset does not constitute ordinary income. Such amounts would ordinarily be subject to tax under the capital gains tax provisions. ?Income is a receipt that comes home to the taxpayer (in considering this, it is necessary to recall the difference between the accruals and the cash basis of accounting for income). ?
The amount of income that is received is either money or able to be converted into money. In some circumstances this might include a reference to benefits received, and these are now dealt with in the fringe benefits regime. ?The receipt must be in the nature of income. This means that the court will look at the nature of the receipt and enquire whether it ought properly be classified as income or whether, for example, it is merely a gift. Therefore, the nature and circumstances of the payment are relevant. ?Capital gains are not income at common law, although as noted above they are taxed now as statutory income.
NGUYEN NGOC AI HUYEN AAC3063 PAGE 7 HI5028 ASSIGNMENT 1 For example Ashlee earns $1,630 per week working at the St. Brendan kindergarten in Flemington.
The $1,630 she receives is ordinary income because it is paid to her for performing the works. + Ordinary income $1,630 – Deductions nil Taxable income $1,630 Statutory income As discussed, income which is assessable under the ITAA 1997 extends beyond ordinary income to amounts which are specifically treated as assessable under the Act, ie. statutory income. Statutory income are amounts outside the ordinary concepts of income that have been specifically included in assessable income.
Section 10-5 of ITAA 1997 (accessible from the ATO website) includes a list which specifies the sections which include statutory income in assessable income. ?Net capital gains ?Certain lump sum payments on termination of employment ?Royalties ?Insurance bonuses ?Imputation credit ?Bad debts recovered ?Barter transactions Statutory income is referred to in the explanatory memorandum in the following terms: If an amount is not ordinary income, it may be statutory income. Statutory income is an amount the law specifically includes in assessable income (for example, section 160ZO of the Income Tax NGUYEN NGOC AI HUYEN AAC3063 PAGE 8 HI5028 ASSIGNMENT 1 Assessment Act 1936 includes net capital gains in assessable income).
If an amount is included by such a provision, and is not ordinary income, the amount is statutory income [sub clause 6-10(2)]. Conclusion To make it easier for readers to work out if a particular amount is statutory income, the new law will list the specific provisions that include an amount in assessable income [clause 10-5]. Initially, the items in the list will refer mainly to provisions in the Income Tax Assessment Act 1936. The references will change progressively to references to the new Act as the existing Act is rewritten.
The list will also contain provisions that vary: ?when an amount of ordinary or statutory income is assessable; ?to whom an amount of ordinary or statutory income is assessable; and ?how much of an amount of ordinary or statutory income is assessable. If an amount is neither ordinary income nor statutory income, it cannot be assessable income or exempt income. REFERENCES 1. Deceased estate and CGT | Australian Taxation Office. 2014. Deceased estate and CGT | Australian Taxation Office .
[ONLINE] Available NGUYEN NGOC AI HUYEN AAC3063 PAGE 9 HI5028 ASSIGNMENT 1 at:https://www.ato. gov. au/General/Capital-gains-tax/In-detail/Gifts,-inheritances-and- deceased-estates/Deceased-estate-and-CGT/. [Accessed 21 August 2014]. 2. Whitelaw McDonald | Newcastle Solicitor. 2014. Whitelaw McDonald | Newcastle Solicitor. [ONLINE] Available at:http://www. whitelawmcdonald. com. au/. [Accessed 21 August 2014]. 3. Capital gains tax (CGT) implications | Australian Taxation Office . 2014. Capital gains tax (CGT) implications | Australian Taxation Office . [ONLINE] Available at: https://www. ato. gov. au/Individuals/Deceased-estates/Capital-gains-tax-(CGT)- implications/.
[Accessed 23 August 2014]. 4. Capital gains tax | Australian Taxation Office . 2014. Capital gains tax | Australian Taxation Office . [ONLINE] Available at:https://www. ato. gov. au/General/Capital-gains- tax/. [Accessed 23 August 2014]. 5. Stephen Barkoczy 2014, Foundations of Taxation Law, 6th ed. , CCH Australia 6. Taxation Ruling No. IT 2186; http://law. ato. gov. au/atolaw/view. htm? docid=ITR/IT2186/NAT/ATO/00001 7. Income Tax Assessment Act, 1997 8. Taxation Ruling No. IT 2186; http://law. ato. gov. au/atolaw/view. htm? docid=ITR/IT2186/NAT/ATO/00001 NGUYEN NGOC AI HUYEN AAC3063 PAGE 10.