Part A
1. Gringo’s Net Capital Gain for 2016/17 is as follows:
Capital Proceeds
$ 3,800,000
Cost base
Acquisition cost (s110-25(2)) (1st element)
$ 2,000,000
2 rooms added (2.5%dep) (s110-25(5)) (4th element)
$ 80,000
Selling costs (s110-25(3)) (2nd element)
$ 8,000
AC and insulation (4th element)
$ 30,000
Replace damage roof (2.5% dep)
$ 45,000
Legal Fees (associated with sale) (2nd element)
$ 12,000
TOTAL COST BASE
$ (2,175,000)
Capital Gain
$ 1,625,000
Less: Carry forward capital loss from 2016
$ (30,000)
NET CAPITAL GAIN
$ 1,595,000
Section 110-25 includes general rules under cost base, under section 110-25(1) cost base of a CGT asset consists of five elements:
Section 110-25(2): The first element: –
The amount paid to acquire the premises was $2,000,000 on 1st July 2012.
Section 110-25(3): The second element: –
The incidental cost incurred to acquire or dispose a CGT asset. In this case, costs include Legal Fees (associated with sale of assets) $12000 and other selling costs $8000, were added to the cost base.
Section 110-25(5): The fourth element: –
The capital expenditure which is incurred to increase or preserve the asset’s value. In this case $80,000 spent to add two new rooms in January 2013 and $30,000 for adding insulation and air-conditioning are capital improvements (s108-70), which increases the value of the property.
The decision made by Gringo to replace entire roof instead of just the damaged area is also a capital improvement, as it improves the functionality of the asset. It is in relation to The Western Suburbs Cinemas case, the expense under s25-10, does not qualify as a “repair” and thus, needs to be added to the cost base.
The sale of the business premises on the 30th of June 2017 for $3,800,000 has caused a CGT event, A1-Disposal of a CGT asset as per section 104-10. According to S104-10(4), capital proceeds $3,800,000 exceed the cost base of $2,175,000, thus, there is a capital gain of $1,625,000. Net capital gain of $1,595,000 is also calculated after carrying forward previous years (2016) capital loss of $30,000 under s100-50.
The cost base does not include the following:
Repairs:
S25-10 includes deductions for repairs.TR97/23 describes three essential attributes of repair. Advertising sign, car park repairs and plumbing and electrical expense, are costs which are incurred to restore them to previous condition without changing character (W Thomas & Co Pty Ltd 1965), thus are deductible under this section.
Interest:
Under S8-1(General Deductions), interest is deductible, thus not included in cost base.
Depreciation:
Under Division 40 depreciation, under Division 43 air-conditioner costs and capital works on rooms and roof, are deductibles and thus not included in cost base.
2. Interest is deductible for Gringo, as the liability is incurred to finance the acquisition of an income-producing asset. Interest on loan is deductible for purchasing business premises if it satisfies the use test or “nexus” under s8-1.
Costs of borrowing money is deductible under s25-25 of ITAA97 if the money generated is used towards producing assessable income. Gringo took the loan for a business activity and thus a deduction can be claimed as per s11-565. In case of establishment fees $3000, is not deductible, but can be amortised over a period of 5 years.
3. The sale of equipment has caused a CGT event A1.
First Step: The input tax credit can be claimed by Gringo; the cost base of the asset needs to be adjusted such that it does not include GST (s103-30).
Second Step: Application of prime cost method (s40-75) to calculate depreciation for precious three financial years. The cost base is at $16,000 on the date of sale (1st July 2016), as shown in the table below.
Gringo has sold the equipment to Amy’s brother (Gringo shareholder) for $12,000 which was lower than the market value at the time and the parties are not dealing at arm’s length, thus, market value of $28,000 replaces actual proceeds $12,000 which are received, under s116-30(2). It is registered as a capital gain of $12,000.
GST inclusive cost
$ 44,000
Cost (excluding GST) = $44000/ (1+10%)
$ 40,000
Prime cost method:
Base value × (days held/365) × (100%/asset’s effective life)
2013/14 dep = $40000 x (365/365) x (100%/5)
$ (8,000)
2014/15 dep = $40000 x (365/365) x (100%/5)
$ (8,000)
2015/16 dep = $40000 x (365/365) x (100%/5)
$ (8,000)
Cost base on 1 July 2016
$ 16,000
Sale proceeds (Market Value replaces actual proceeds of $12000)
$ 28,000
Gain
$ 12,000
The capital gain arisen from a depreciating asset when there is a CGT event, the capital gain would be disregarded under s40-295 and s118-24. In accordance with the previous statement, the capital gain of $12,000 will have no CGT consequences and will be shown in Gringo’s taxable income instead (s40-280 to s40-370).
Part B
1. Not deductible.
Gringo’s business is based in Sydney and has local customers mostly and Amy learning Indonesian has no link with Gringo’s current business expansion structure, TR98/9 and s82A of ITAA36 allows deduction on self-education only if there is a nexus between the course which is being studied and the employment, like the case of V132, thus, deduction will not be allowed
2. Not deductible.
Section 25-5(2) of ITAA97 specifically disallows deductions for actual income tax paid.
3. Not deductible.
Section 25-5(2) of ITAA97 specifically disallows borrowing expense(interest) to pay income tax.
4. Not deductible.
Under s8-1(2), expense of “private or domestic” nature is not deductible. Expense on apparel which are not related to employment are not deductible, in Mansfield v T Hill J, some articles were allowed as it was related to the employment. A briefcase of $280 does not have nexus to Gringo’s activities.
5. Deductible.
Sub-division 30-DA of ITAA97, s30-242 and 30-243 allow Amy to claim a deduction of $800 to Labor Party as the maximum limit is set at $1500.
Assumption: Amy has made the donation in her personal capacity and is not in any way related to Gringo’s.
6. Partial deduction.
No full deduction for $698 expense for setting up home-office. TR93/30 distinguishes between ‘occupancy expenses’ (rent) and ‘running expenses’ (electricity, depreciation etc.). The home-office is not the main place for Gringo to conduct its business activity it is partially used as one in connection to its activities, thus only a partial deduction be allowed on electricity, the depreciation of furniture and equipment, none on interest deduction. This is consistent with FC of T vs Faichney and FC of T vs Handley.
7. No deduction.
TR98/9 allows no deduction under section 8-1 (24b) for expenditure on meals while attending a University classes in the evening, with the exemption of her staying overnight.
Part C
1. Amy and Ben moved to New Zealand indefinitely on July 1st of 2017 and relocated Gringo’s business as well. This has led to a CGT event I1 under s104-160 of ITAA97. They will be deemed to have disposed their assets (except Taxable Australian property) for CGT purposes at the market value on the day residency ends.
Under s104-165(2), Amy and Ben can choose to disregard any capital gains arising out of event I1. In making the following choice, under s855-25 each of the assets owned are taken to the Taxable Australian Property, until the assets are disposed or they become residents again.
The Gringo shares owned by Amy and Ben qualify under section 855-25 to be indirect Australian real property interests. They own 10% or more (section 960-195) membership interest in Gringo and 50% or more of underlying market value of business.
Applying the same section 855-25, the Commonwealth Bank shares do not qualify to be Taxable Australian Property as Amy and Ben do not own more than 10% membership interest.
CGT exemptions: The family home is exempt from CGT as it comes under “dwelling” as per section 118-115. If they have not rented out their family home, they can treat it as their “main residence” and be exempted. The cars left behind are also exempted under section 118-5(a) of ITAA97, if each car is designed to carry less than one tone or nine passengers.
2. Residency requirements for individuals and company is covered under S6-5 of ITAA97. If the incorporation of the company has happened in Australia, the company will be a resident of Australia for tax purposes. Gringo has relocated its business to New Zealand, even so it’s hard to argue that it was completely unincorporated from Australia. Gringo’s customers are also based in Sydney and there is no evidence of Gringo selling its products outside Australia even after relocation. Thus, Gringo is resident company of Australia and as such salaries received by Ben and Amy should be taxed in Australia