Calculation of Net Capital Gains: Taxation Sample Paper.

Calculation of Net Capital Gains

As per the information given in question, we have to calculate the net capital gains of a person named Fred for the current year who is the resident of Australia. He had sold his house for $ 800,000 which he had purchased in the year 1987 for $ 100,000. Also he had done some expenses at the time of sale as well as purchase of that house i.e, stamp duty, legal fees, agent’s commission etc. So the main issue is to determine the net capital gains derived by Fred by selling of this house.

There are two methods to calculate the net gains earned by Fred who is the resident of Australia and a taxpayer as per Australian Law. Moreover, he had purchased this property before 20th September 1999.

By Indexation Method
By Discount Method

These are the two methods through which we can calculate the net capital gains of Fred earned by him in the current year 2015-16.

By Indexation Method: In this method, the difference of inflation cost of property between the time of purchase & sale of property calculated. As Fred purchased this property in March 1987 and sold the same in August last year, thus the cost base of the property would be adjusted for inflation based on which the taxable capital gains would be determined (Barkoczy, 2015).

By Discount Method: In this method, 50% discount will be available on the long term capital gains if the property is held by the taxpayer for more than a year. In this case Fred has cleared this condition as he has purchased this property in 1987 & sold the same in last year. So 50% exemption on capital gains will be available for Fred and the rest 50% would be available for taxation (Woellner, 2014)

So, we will calculate the net capital gains by the Discount method as Fred would be entitled for 50% discount and result in lower taxable capital gains in comparison to indexation method (CCH, 2014).

Fred had incurred so many expenses such as legal fees; stamp duty, agent’s commission etc at the time of purchase & sale of property. All these expenses would be adjusted at the time of calculation of net capital cost of property available for taxation. . Further, any expense incurred, to maintain the title on the property as well as to increase the value of the asset, would also be considered at the time of calculation of net capital cost. All these expenses are reflected in determination of asset’s cost base as per Section 110-25 (Gilders et. al., 2016).

Taxpayer Fred purchased this property after 20th September 1985 so would be entitled to pay tax on the capital gains through the sale of property. As per the law, if any propertyia  purchased on or before 20th September 1985, it would be exempted from capital gains tax  and the taxpayer would not be entitled to pay any CGT on the quantum of capital gains earned from asset liquidation (Sadiq et. al., 2016).

Fred has signed the contract of sale in the last year and the payment for the same has been received by Fred in the same financial year. So there is no discrepancy between the date of signing of contract and receiving of payment and hence the capital gains would be assessable in the current tax year only (Deutsch et. al., 2015).

Calculation of Net Capital Gains received by Fred

Sale value of Property held in Blue Mountains = $800,000

Purchase value of the same Property in 1987= $ 100,000

Expenses incurred at the time of sale of property = legal fees + real estate agent’s commission = 1100+9900 = $11,000

Expenses incurred at the time of purchase of property = Stamp duty + legal fees = 2000+1000 =$ 3,000

Total incidental expenses incurred which would contribute to the overall cost base = 11000+3000 =$ 14,000

Cost undertaken for construction of garage which would enhance the property’s value = $20,000

Hence, cost base of the property located in Blue Mountains= 100000+14000+20000 =134,000

Capital Gains from property = Sale value of property – total cost base of property = 800000-134000 = 666,000

As given in the question, it is known that Fred has a net capital loss from sale of shares in the last year so this loss would be settled in the current year gains due to the similar nature of property and shares as capital assets. Value of net capital loss of $10000 would be deducted from the capital gains realised from sale of property (Nethercott, Richardson & Devos, 2016).

Thus, adjusted capital gains for Fred (FY2016) = 666000-10000 =$656,000

As per the discount method, Fred would be entitled for 50% discount as the property holding period was in excess of 1 year.

Thus, Net Taxable capital gains for Fred (FY2016) = 656,000 x 50% = $328,000

Accumulated Capital Loss arose from the sale of an antique vase: According to information provided, if the loss occurred due to sale of antique vase in the last year, then Fred could settle down that loss from the profits by the sale of antique category only in the coming years. But that loss could not be settled down with property gains as the nature of the two assets is different. So Fred can carry forward this loss in the future and adjust it by the gains of antique sale only (Hodgson, Mortimer & Butler, 2016). Hence, in this case taxable gains would be more and calculated as highlighted below.

Net taxable capital gains for Fred (FY2016) = 666000 x 50% = 333000

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