Case Study about the Capital Gains Tax

Question: Case study on capital gains tax. Answer: In the given case, Dave Solomon age 59 is planning to get retired at an age of 60. He has decided to plan out his assets in the best possible way so that he has enough money at the time he gets retired. With an intention to save maximum amount available with him at the time of retirement, he decides to collect $1,000,000. HE decides to rent a city apartment and withdraw the tax free amount that he has saved in the superannuation fund for the retirement purposes. He was living in St Lucia from the past 30 years. He in order to raise the money that he has decided he plans to sell out his home through an auction. He conducts and auction and sells the house for $850,000 which has cost him $70,000, 30 years back. During the auction process, Dave has forfeited $85,000 from one of the customer, who first agreed to buy the house but after he fails to meet out his commitment. In this process Dave has paid $15,000 to the agent who has helped in fetching the right customer for the process. Cons idering all these points, Dave has made profit of $850,000 for the sale transaction. A person is not required to pay any capital gain tax on the profit that the person has earned on the sale of his residence. The exemption that has been given in the Australian tax laws is applicable only on the property in which the person is living or residing into. Thus, a person is required to pay the capital gain tax only on the property that has been earned by the person only on the property that has been held by him as an investment. In the given case, Dave has been living in his house located at ST Lucia which he has sold for $850,000. Being this property is the only in which Dave is living from past 30 years. Thus, in light to the above provision, being a property which has been used by the person is his own residence does not attract capital gain tax. Thus in that case, the capital gain earned by Dace worth $850,000 is not eligible for capital gain tax. As per the Australian tax laws, a person is not eligible to pay any capital gain tax liability arising on the profit that he has earned on sale of personal and collectible assets. In case of personal and collectible assets we have a separate classification which would be used for such taxation and thus the same in no case should be mixed with the provision of normal capital gain tax laws. The collectable and personal asset in this case includes art work such as drawings, paintings, photographs etc., jewellery, antiques, coins etc. In the given case, the painting of pro hart that has been sold by Dave would be covered in the definition of personal and collectible assets and thus the profit worth $110,000 that he has earned on such sale would be covered under the separate category other than capital gain. A person is not eligible to pay any tax liability on the gain that he has earned on sale of personal assets. The personal assets in this case includes car, resident property etc. In the given case, the assessee sold motor cruiser for $60,000 which he has purchased for $110,000. In light to the above provision, Dave is not likely to bear any capital gin tax from sale of his personal assets. Although, Dave has incurred loss on the above transaction, thus being the gin is not taxable, the loss so incurred by Dave would also not be carried forward or set of from any taxable capital gain. Dave during the year has taken a loan of $70,000. He has utilized the sales proceeds on purchase of shares which he has sold during the year for $80,000. On this sale, Dave is required to pay brokerage and stamp duty worth $750 and $250 respectively. In case of sale of shares, a person if carrying out the same a business, he would be eligible to bear the tax on ordinary income basis; else the income so earned would be taxable as capital gain. Dave in the above case has to bear interest cost worth $5,000 on the loan amount. While calculating the capital gain tax all the expenses that have been incurred in earning the profit on such sale would be allowed as deduction. However, the interest that the individual has paid on the loan amount that he has utilized for purchasing the shares, would not be allowed as deduction being the same does not have any direct link with generation of income. In this case, Dave made a profit of $9,000 on the transaction. The interest amount of $5,000 would not be allowed as deduction. Particular Amount Sale of shares $80,000 Purchase price -$70,000 Brokerage -$750 Stamp duty -$250 Net profit $9,000 Considering the above points, Dave during the period has earned the following as capital gain: Particular Amount Profit on sale of house No taxable capital gain Profit on sale of motor cruiser No taxable capital gain Profit on sale of painting $110,000 Profit on sale of shares $9,000 Total profit $119,000 Dave in the last year has a net capital loss of $10,000 that he has earned on sale of shares. The capital loss so incurred by Dave can be carried forward and will be reduced from the gain made in the current year. The amount that has been earned by Dave during the period would be used by him for meeting his retirement needs. References ATO. Gov, Statutory formula method for Car FBT taxation, viewed on 1st June 2016. ATO. Gov, FBT Tax rate 2016, viewed on 1st June 2016. ATO. Gov, Market Interest Rate 2016, viewed on 1st June 2016. ATO. Gov, Collectables and personal use assets, viewed on 1st June 2016.