Capital Gains Tax (CGT)

 

Question 1

I have the following query I would appreciate some assistance on.

• Client A purchased a property in 2001 with the intention of renting it out and holding it long-term. Client A has never moved into the property and to this day it remains a rental property.
• In 2009 the client was granted town planning approval for the construction of 3 units.
• Original dwelling to be demolished.
• Client A has no principal place of residence.
• Client A is not registered for GST.
• Upon completion of the units – Client A will occupy one of the units (PPR).
• The other two units will be rented out.
• The intention is to hold all three long-term.

Query:

Are there any GST implications if any of the properties are sold?  Pre and post 5 years.

What are the CGT implications if any of these properties are sold including the Principal Place of Residence?

Answer

As you are a Practitioner:

We would point you to the following ATO rulings:

MT 2006/1 The New Tax System: the meaning of an entity carrying on an enterprise for the purposes of entitlement to an ABN.

GSTR 2001/7 Meaning of GST turnover: meaning the effect of section 188.25 on projected GST turnover.

GSTR 2003/3 What constitutes new residential property.

We mention this as there are a number of ways this can play out.

The ATO takes the view that if you buy property with the intention to sell at a profit or develop property to sell, you may be considered to be conducting an enterprise.

If your client’s intention is holding all three long-term and his contention is that he is not conducting an enterprise, then this will be evidenced by him not claiming Input Tax Credits on any of the building costs.

The 5-year threshold as to what new residential property should be taken as a guide only and we suggest a more thorough examination of GSTR 2003/3 is advisable.

Regarding the CGT implications, land can form part of the cost base for the CGT principal place of residence (PPR) exemption if you build within a few years.

However, if there is no change of title, there should be CGT on the portion of land the client retains for the unit they intend to live in.

Regarding the sale of PPR, it is considered that some CGT will be payable due to the initial house being income-producing.

Regarding the other two dwellings, a cost base can easily be established regarding land and building costs and CGT may apply on the sale.

Question 2

If I sell my business on vendor finance so it will be a purchase lease that they pay a lump sum on and payback so much every year, would I have to pay capital gains tax if I am under 55 years as I would still own the property till it is paid in full?

Answer

The capital gains would crystallise when the sale occurs.  Vendor Finance is secured over the title of the business property the purchaser owns.

Yes, legal title passes.  The extent of the capital gains tax shelters depends on the ownership entity and whether the business asset sold is an active asset.  We would refer you to page 65 of our annual publication.

Question 3

My daughter purchased a townhouse in June 2006 and lived in it till January 2010. She then moved in with her fiancé and rented the townhouse out. She now proposes to sell the townhouse and I am wondering whether she can claim it as her main residence (she does not own any other property)?

She will this financial year declare the income from the rental. The sale of the property will occur in the financial year 2011-2012.

Answer

Yes, she can claim it as her main residence in these circumstances.

Question 4

I have two rental properties that are positively geared, thus, increasing my taxable income. My question is, can I run these properties through a discretionary trust, thus, distributing the income amongst beneficiaries? If so, are there any tax implications that I have to take into consideration such as:

Will CGT arise when the properties are transferred to the trust?

If I dissolve the trust, will CGT arise?

When the trust is dissolved will the properties be still mine or do they have to be distributed amongst the beneficiaries?

Answer

Yes, transferring the properties into a trust is possible. CGT and stamp duty would be payable on the transfers into the trust. If the trust is dissolved, CGT would normally apply as the assets would be liquidated.

Question 5

A friend was recently told by her accountant that she can rent out part of her home for six years and not pay capital gains tax.

I thought the six-year exemption was if you HAD TO MOVE AWAY from your primary residence for WORK.  I did not think it applied if you willingly rented out your home or part of your home. Please advise.

Answer

If the property is used for part income earning, then CGT will apply.

To qualify for a full CGT exemption, the property must have been your main residence from when you acquired it. If you move out of the property and rent it out, you can continue to claim an exemption from CGT for up to six years after you move out. If you do not rent it out, you can claim a CGT exemption for it for an indefinite period after you move out.

Remember you can only have one principal place of residence at a time. If you own more than one property that could qualify, you can elect the one that gives you the most favourable outcome.

The exemption is not limited to having to move away for work.

Question 6

I am going to purchase a block of land for investment, my question is related to purchase costs such as interest & legal costs & city council rates on the land. Are they tax deductible?

If a few years later I build my residence, what happens then?

Answer

None of the costs are tax-deductible, if the land ended up being sold down the track for a profit, these costs can increase the cost base of the land for CGT purposes.

If in a few years you build your own home on it and it becomes your principal place of residence, again no costs could be claimed.

Question 7

A client inherited the family home which by purchased by his parents in the 1950s. One-third of an acre is used for business purposes and is assessed as such by the local council for rating purposes.

He wants to place a mobile home on the property, and then rent out the main house. What are the issues involved with CGT, main residence exemption, GST, and apportionment of outgoings?

Answer

The key areas here are as follows:

• The beneficiary is deemed to acquire the residence at market value at the time of death.
• Rental income would be assessable.
• CGT would apply to the area that is turned into a rental property.
• Apportionment of expenses would be ideally done based on the area occupied by each user.

Question 8

I would like to find out some information on how an inheritance is taxed when it is passed on to a beneficiary – property, and money?

Answer

A very broad question…. There are no death duties as such.  Income tax depends on whether:

• Pre or post CGT asset
• If a payment from a super fund, whether we are dealing with a dependent or non-dependent.

If you have a specific issue, we would be glad to assist.

Question 9

My father has a family trust and wishes to nominate a nephew and a niece who are non-resident in Australia as beneficiaries.  When he disposes of assets in the trust and distributes income to them, are the nephew and niece exempt from CGT?

Answer

No, they are not exempt, and the trustee must ensure the CGT is paid.

Question 10

Tax Research Department – The client lived in his house as the main residence then rented it out for 5 years.  Meanwhile, he started to live in his wife’s principal residence for 3 years but now they are looking at a divorce and the effect on CGT main residence exemption on both houses.

What part of the 6-year exemption will he lose on his house by the marriage?  What period must he live in his house prior to the first 6 years and start another 6-year exemption period?

Answer

We take it your client is married and the house owned by the wife became the principal place of residents for the couple – the facts certainly point to this.

The part of the 6-year exemption lost starts at the date your client moved in with his wife.  He is returning to his former home and there is not a set period, however, refer to CGT Determination 51 as outlined.

Question 11

I appreciate it if you could look at our situation and advise:

1. We brought our first property in 1997 and lived there for 12 years till 2009 when we sold it.
2. We brought our second property in 2002 and rented it out as an investment property till 2009 when we moved in till one month ago. This second property has been left for our children to stay every now and then (not rent from them) since it is very close to their universities.
3. We brought our third property in January 2012 and moved in for a month now.
4. Due to a large amount of interest payment, traveling time, lifestyle difference, we are considering moving back to the second property then rent out the third property as soon as we could.

 What we are not sure about is the following:

1. To be eligible for 6 years CGT exemption for the third property, how long do we need to stay in it?
2. To be eligible for 6 years CGT exemption for the third property, what evidence do we need to provide to the ATO to show that we did use it as the main residence for the above required period?
3. Say, if we sold the second property during the 6 years, will CGT apply to the second property for the time during the 6 years, because we will get CGT exemption from the third property?

Answer

Contrary to popular belief, the CGT provisions do not specify a particular period that a dwelling must be occupied in order to be the taxpayer’s main residence.

Whether a dwelling is a taxpayer’s sole or principal residence is an issue that depends on the facts in each case and the ATO’s view is contained in CGT Determination No. 51.

Some relevant factors may include, but are not limited to:

• the length of time the taxpayer has lived in the dwelling
• the place of residence of the taxpayer’s family
• whether the taxpayer has moved his or her personal belongings into the dwelling
• the address to which the taxpayer has his or her mail delivered
• the taxpayer’s address on the Electoral Roll
• the connection of services such as telephone, gas, and electricity
• the taxpayer’s intention in occupying the dwelling
• the relevance and weight to be given to each of these or other factors will depend on the circumstances of each particular case.

The evidence required for you living in a PPR would include but not be limited to electricity, telephone bills and registration on the electoral roll.

Only one PPR per family:  On occasion, a taxpayer may elect which of two or more dwellings is his main residence.  When changing main residences, it is possible to have two main residences for a maximum period of six months.

Question 12

Section 152-40(4) outlines CGT assets that cannot be “Active Assets” and includes an asset whose main use is to derive rent. I have a client who has owned a butcher shop for 20 years which he operated from for 5 years and then rented out. There is a substantial capital gain involved and he is approaching retirement. Could he go back into that shop and work for another 2 1/2 years so that the asset becomes an active asset under S 152-35(1)?

Answer

To be entitled to a small business capital gains tax concession a taxpayer must first satisfy the “basic conditions” (section 152-10 of the Income Tax Assessment Act 1997).

One of the conditions is that the CGT asset (which is the subject of the CGT event) must satisfy the “active asset test”.

Broadly an asset satisfies the “active asset test” if:

1. the taxpayer owned the asset for 15 years or less and the asset was an active asset of the taxpayer for at least half of the period it was owned by the taxpayer, or
2. if the taxpayer owned the asset for more than 15 years the asset was an active asset for at least 7.5 years.

If your client is still willing and able to operate a Butchery, then your suggested course of action could be effective.

Question 13

I have a family Company client which was formed in 1982 (prior to CGT).  This Company has various rental properties, one of which is pre-CGT. The pre-CGT commercial property was destroyed by a fire in early June 2012 and was not insured due to it having a lot of asbestos in the structure.

The ATO has advised that the large clean-up cost is not Revenue in nature but is a capital cost that will increase the base cost for any profit on the sale. The remaining property, land, and original footprint have been sold at a profit against the original pre-CGT cost and additional clean-up costs.

The seven (7) shareholders wish to distribute these funds tax-free to themselves. The Company still owns two other properties, which will be sold at a later stage, and then the Company will be wound up / liquidated. There are no actual employees within the Company. The 7 Shareholders wish to retire ASAP. Is there any way the sale proceeds can be paid to the shareholders tax-free prior to the wind up of the company?

Answer

It sounds as if you are familiar with the Archer Brothers Principle, refer to Taxation Determination TD95/10:

In a joint judgment, the Full High Court of Australia in Archer Bros Pty Ltd (In Vol Liq) v. FCT (1952-53) 90 CLR 140 at 155; 10 ATD 192 at 201 observed by way of obiter dicta:

‘By a proper system of bookkeeping the liquidator, in the same way as the accountant of a private company which is a going concern, could so keep his accounts that…distributions could be made wholly and exclusively out of…particular profits…or income…’

These observations have given rise to what is known as the Archer Brothers’ principle. The principle is that if a liquidator appropriates (or ‘sources’) a particular fund of profit or income in making a distribution (or part of a distribution), that appropriation ordinarily determines the character of the distributed amount for the purposes of section 47 and other provisions of the Income Tax Assessment Act 1936 (the Act). Generally, we accept that a liquidator may rely on the Archer Brothers principle, except where a specific provision in the Act produces a different result (e.g., the rules in section 160ZLA that specify the order in which different types of funds are distributed).

This means a tax-exempt capital gain for the building purchased prior to September 1985 can be passed down tax-free to the shareholder upon liquidation of the Company.

The only short-term solution would be loan funds being very careful to meet all requirements of Division 7A.  Whether this is viable would depend on the time frame for the liquidation of the Company.  Dividends could be paid on liquidation to square off the loan accounts.

Question 14

We brought a property and have been renting it out for more than 5 years, now we intend to move in as our main residence, what CGT implications are there?

Answer

The good news is, no CGT implications until it is sold. The market value of the property when it becomes your main residence is used and given the soft property market at the moment – it could be good timing to make such a move.

Question 15

I was a beneficiary of coastal property from a deceased family member.  The property is under 2 hectares, but the residence is old and in need of redevelopment.

I have occupied the premise since the estate was settled, but after about 14 months have decided to demolish and subdivide.

Approval has been given for 3 sites to be developed on the block with home units on each block – one I plan to live in and the other two to sell.  The development will take approximately 9 months.

What are the CGT implications given that the proceeds from the sales will exceed existing valuation?

What is the affect if the deceased purchased the property pre-September 1985?

Will the block I occupy be subject to GST?

Answer

We made the following general comments.

MT 2006/1 Key Factor indicating a profit-making purpose is the erection of buildings on the land.

We suggest that if you just sell the land this will be viewed as a “mere realization” of an asset as opposed to a “profit-making undertaking or scheme.”  This means any surplus on disposal will be taxed under the capital gains tax provisions.

We assume that this is a “one-off” and you have no prior history as a property developer.

So, if you do not construct dwellings, we suggest CGT and no GST. If you build, then there is the likelihood of income according to normal concepts (Revenue) and GST applying.

A CGT event does not occur on the mere subdivision of land, because ownership of the land has not changed.  Here, the owner of the land is still treated as having acquired each subdivided lot at the time the original land was acquired.  The acquisition date of these subdivided lots will not be “freshened up” to the date of subdivision for CGT discount purposes.

When calculating the cost base of the subdivided land, the cost base will include a reasonable proportion of the cost base of the original property, at the time of subdivision.

We refer to TD97/3, the ATO will accept any apportionment approach that is appropriate in the particular circumstances.

The amount of capital gains tax payable when an inherited asset is sold depends on when the original owner purchased it and when the seller inherited it.  When an asset was purchased by the deceased before 20 September 1985 the cost of the asset for tax purposes is the value at the date of death.  For assets purchased after September 1985, the cost is that paid by the deceased.

Assets inherited before September 1985 will not be assessed for capital gains tax when sold.  For assets inherited after that date capital gains tax is payable on the excess of the selling proceeds over the cost.

The exception to this is where a principal place of residence is inherited.  If the house meets all the exemption conditions the former principal place of residence can be sold and no tax is payable on the gain if the settlement takes place within two years of the deceased’s death.

When a principal place of residence is sub-divided a taxpayer is left with two assets.  The first is the land and the home on it that retains the CGT exemption.  The second is the new price of land created by the sub-division.  If you sold a piece of your backyard, the tax would be payable on the excess of the cost of that piece of land and the proceeds you receive.

Question 16

If a private PTY LTD company buys back shares from one of its shareholders and then cancels the shares, how are the proceeds of the sale in the hands of the ex-shareholder treated for tax purposes?

Common sense would say it is a capital gain, and that is my understanding if the company was public.  Is that also the case if the company is private?

If that is not the case, why the different treatment?

Answer

All the conditions for a Capital Gains Tax event are there – if the disposal was the fair market value then CGT will be payable.

Certain conditions for a share buyback must exist under Division 2 of Part 2J.1 of the Corporations Act 2001 – see ASIC regulatory guide 110.  But these go beyond the scope of the publication.

Question 17

I purchased land in 1984 before CGT came in.  During this time, the zoning has been changed from Special Rural to Rural Residential.  It was a 7.5-acre block and now has a development in place for 11/half acres blocks.  I know I will have the advantage of CGT free if I sell it outright.  I need to know if I were to sub-divide it as a developer, even though this was not foreseen and will be a once-off, would I be subject to CGT or would I be able to have a tax ruling to be CGT free on this project?

Answer

If you read our bonus issue Property and Shares you will see that these cases can fall on either side of the line.  Where there is a low-scale orderly realisation of an asset (which may involve a subdivision) by a person who merely held a residence (or form) on acreage then there should not be an issue.

However, if you originally bought the land with a profit-making intention or purpose then there could be revenue issues.

We obviously do not have all the facts, but this is a typical case for a private ruling.

Question 18

I am considering closing my business and retiring.  The business sells building materials mainly direct to the builders.

The business has been operating for 20 years and operates under a trust.  In closing the business, I will sell the real estate where the business operates from.   There will probably be a loss of around $500,000 in costs to close the business.  This is due mainly because of redundancy payments, long service leave, and holiday pay.  We have 20 full-time employees.  All fixed assets i.e., plant and machinery, motor vehicles, office furniture, and equipment are owned by a third family trust.  All debts will be paid.

The real estate is owned by a separate entity which is a family trust.  If I sell the real estate, there will be a capital gain of approximately $2,500,000.  I am over 65 years of age.

How much can I put into superannuation as a lump sum on retirement and how much Capital Gains Taxes are payable?

To make it clearer:

1. The operating company is a family trust. After paying out all employee benefits there will be an estimated $500,000 loss.
2. Real Estate is owned by a second family trust. The sale of real estate should realise $4,250,000 which will give a capital gain of $2,582,354.00.  The real estate was purchased in 1993.  Capital cost was $1,668,646.00.
3. Fixed assets are owned by a third family trust. When the fixed assets are sold there will be a capital loss of approximately $150,000.00.

Answer

From the limited information available, it is likely the business is eligible for the CGT Small Business Concessions.  There is a $6 million threshold asset test if you are not a Small Business Entity (SBE).

As a guide, to be eligible as a SBE your turnover should be less than $2 million.  We would also have to establish how many “significant individuals” there are in the trust – see our annual publication.

If all the conditions are met, we do not believe any tax will be payable.  The CGT cap amount for Superannuation is $1,315,000 per significant individual.

Question 19

We are planning to sell our private limited Company to another Company.  What are the tax implications if we sell all of our shares to the buyer?  If the buyer purchases only the machinery and other trading assets and liabilities will it make any difference in tax liability?

Answer

Usually, the paid-up capital on shares in a Small Company is only a nominal amount, say $1 – $100,000.

Let us assume you are eligible for the Capital Gains Tax Small Business Concessions.  Here the best outcome by far is usually that you sell the shares, assuming you individually own the shares.  This is because subject to certain conditions being met, you get:

• The Active Asset Discount (50%)
• The Individual Discount (50% of the above balance)

However, the usual professional advice a purchaser will receive is that they should NOT purchase the shares in a Company but the assets i.e., stock, plant and equipment, and goodwill.  This is because the Vendor Company may have skeletons in the closet i.e., unknown liabilities.

In the event, you end up selling the assets the Small Business Retirement Concession ($500,000 per “Significant Individual”) may be worth considering.

Question 20

I am just wondering if you can advise me what are, or could be, any possible tax issues if a Managing Director sells his house for the appropriate market value, to the Company that he controls?

Answer

The main taxation issue is that the Director is leasing a tax-exempt situation (CGT Principal Place of Residence) to place an asset in an environment with no CGT concessions at a flat rate of 30%.  It gets worse, if the business engages in activities that entail commercial risk it obviously gets worse.

If concerned about any asset protection issues considered could be given to transferring the house to an asset protection trust.

Question 21

I have a client who has two investment properties under their Family Trust.  They acquired these properties for more than five years and every year they incur losses because expenses are far more than the income.  These are the only assets of the Trust.  If they sell the two properties, they will incur a capital loss as the market value is lesser than their purchase price.  They could not offset their capital loss as there are no other assets to be able to generate a capital gain.  Yearly losses cannot also be offset against their personal income as Trust could not distribute losses.  The Corporate Trustee of the discretionary trust is trading as a takeaway and a restaurant, making a small yearly profit after paying the directors and some members of the family who all work in the business.

The downside of this setup is that the family members as employees pay tax for the wages and could not offset against the huge losses from the family trust account.  Can you please advise the best legal way to transfer the business from the Corporate Trustee to the Family Trust?  What is the process of the transfer?  What are the tax implications and other issues of the transfer?

Answer

This Company has legal title to all the assets (including the business) you mention.  However, the shareholders of the Company own the business in its own right.

The investment properties, although owned by the Company are held on Trusts for the beneficiaries as defined in the trust deed.

In practice, one would usually just commence business trading in the Trust’s name.  However, it is quite possible that there may be a CGT event in view of the change in beneficial ownership i.e., the Company shareholders versus the Trust beneficiaries as per the Trust Deed.

Given this, it may be prudent to address any CGT issues through either legal advice or a private ruling.

A possible alternative would be to have the Trust manage the business through a legitimate management agreement.  The Company would pay fees to absorb the losses.

However, the Trust loss rules would have to be carefully pursued and considered.

Question 22

We have a client who is a 72-year-old retired individual with an investment property he is looking to sell in the near future.

The property is an apartment that was part of a complex he constructed in the early 1990s.  Hence this was one of the apartments he did not sell-off.

What are the CGT implications for him upon the sale of this apartment?

Answer

What cost base can be established from the original conveyance i.e., from the development company to him personally?

In the event, all apartments were constructed in his name and he simply kept one, then the cost base may be very low.

Question 23

If a holiday house is sold with furniture, can the cost of that furniture increase the cost base value? If so, how i.e., value at the date of sale, original cost, etc?

Answer

You will need to have kept a record of expenditure or have it on your capital gains tax register signed off by your tax agents – yes it can be added.

Question 24

The taxpayer and his wife purchased residential 10-acre block of land in Jurien Bay for $339,000 in July 2006 for the purpose of selling it later on for a higher price.  They did not sell it until the present; the current market value is $160,000.  They have Capital Gain from selling another property for the year ended 30 June 2014.

What is your advice regarding…?

1. Capital loss if sold after 1 July 2014; and
2. Interest has been paid as the whole amount of $339,000 been borrowed.

Answer

The capital loss if sold after 1 July 2014 does not help your client for the CGT for the year ended 30 June 2014.

This is a capital loss that may be carried forward indefinitely to offset against future capital gains.

If there has been no interest expense claimed, then this may be added to the cost base to increase the capital loss.  This applies equally to other outgoings including rates and taxes, insurance etc.

Question 25

When buying property for renovation and resale, is it better to buy in your own name or in a partnership or business?

Answer

Here we have the old capital v income argument.  Whether or not this is a business undertaking (income) or the passive or orderly realisation of an asset (capital) can be a fine line and it is clear that the intention of the parties at outset is a crucial factor.

In practice, some people buy a dwelling, live in it for a period, while doing renovations, and sell at a profit – this is arguably tax exempt.

If you however regularly do renovations to acquired properties, selling the dwellings for a profit then this is income according to normal concepts.  Depending on your family circumstances an appropriate vehicle for this could be a corporate trustee with an underlying discretionary trust.

Question 26

My husband is retiring from his practice of 20 years and he qualifies for the 15-year exemption on the capital gain.  The business is sold for $500,000 (goodwill) and the cost of the goodwill is $20,000.  Capital gain from the sale of the business will be $480,000 which will be exempt under the 15-year exemption.

My question is, can my husband contribute the wholesale proceeds of $500,000 or only the capital gain of $480,000 to super when the 15-year exemption applies?

We have sought advice from a tax lawyer and were advised that we could only contribute the exempt capital gain of $480,000 to super following the sale of the business pursuant to Division 152-B and section 292-100(2).  The balance of $20,000 being the return of the initial cost of the business could only be contributed to super by way of non-concessional contribution.  I disagree with this.  From my reading of section 292-100(2) of the Act, we can contribute the total Capital Proceeds from the disposal of assets that qualify for the CGT small business 15-year exemption.  Capital Proceeds are “the money or other consideration you received, or are entitled to receive, because of the act, transaction or event” (section 116.20).  In other words, we can contribute $500,000 as part of the CGT Cap.

Answer

Your lawyer is correct – the construction is that to be eligible for the CGT Small Business Concessions there must be an otherwise taxable capital gain.

It may not be an issue if you have not exceeded non-concessional contribution caps in any case.

These are $300,000 for three years (meaning no further contributions in the subsequent 2 financial years) or otherwise $100,000 in a single year.

Question 27

A client has recently disposed of a pre-CGT property, however, as a condition of the sale the purchaser and vendor entered into a confidential deed poll for a substantial sum, the vendor’s tax invoice for which was paid at completion (settlement) of the property sale.  In essence, the negotiated sale price of the property was split into the price noted on the contract of sale and the value attributed to the deed of confidentiality.  It would appear that consideration for the deed is a taxable gain with no cost base (or at best the legal fees associated with the drafting) without access to discount, whereas the proceeds allocated to the property sale is CGT free (given the pre-1985 acquisition).

Answer

Yes, you are correct.

Question 28

I have a client that has had a capital loss, do I:

1. Claim the expenses associated with this in the profit or loss, or do I
2. Add the expenses to the capital loss amount?

Answer

Here we assume you are referring to book entries – we suggest you do not include the capital loss in the operating profit and loss statement (or “statement of financial performance”) but separately post it to the capital loss account in the P & L appropriation statement.

In respect of the classification of the expenses, there are five elements of cost that you incurred:

1. Acquisition cost.
2. Incidental costs.
3. The cost of owning the CGT asset.
4. Capital expenditure for the purpose of increasing the value.
5. Capital expenditure incurred to establish, preserve, or defend the title to the asset.

To help you to classify the expenses we would need more information.

Question 29

Our client is over 70 years old, closed his business two years ago (2012 year).  He sold his investment property recently in August 2014 year.

Is he entitled to get a full CGT exemption up to $500,000?  The investment property was jointly owned with this wife who is over 60 years old and CGT for 2014 is $700,000.

Answer

Unless this property was an “Active Asset” – such as business premises used in the client’s business then the CGT Small Business Concessions cannot apply.

Question 30

A property was bought pre-December 1985 and so not subject to CGT.  This was the primary residence.  Following that and after 1985 part of a neighbouring vacant block was added to the property title.  This property has since become a holiday home but not rented out at any time.  What is the effect on CGT of the addition of land and change to the title?

Answer

Capital Gains Tax was introduced on 19 September 1985.  However, we take your point regarding the principal place of residence (PPR) exemption.

Regarding the portion of the neighbouring block consolidated into the PPR title, first of all, the PPR exemption only applies to the dwelling plus 2 hectares.

When the title was consolidated, consideration would have been given as per the transfer and this now becomes relevant for calculation purposes.

As it is clear that land in itself cannot be a PPR, we would regard this as a separate asset, but you may wish to apply for a private ruling.

If you are now using the dwelling as a holiday home, we must assume that at some date you purchased another PPR.  This becomes relevant in calculating any capital gain.  This would be the relevant date for apportionment of the capital gains – from that day until the date of sale.

In the event you commenced renting it, section 119-192 of ITAA 1997 applies.  This means that for the purpose of calculating the capital gain or loss on the disposal of the dwelling, the taxpayer is taken to have acquired it for its market value when they commenced renting it.  See also Interpretative Decision ATO ID 2003/12.

Question 31

I have a client who at the time of his divorce and under the terms of the settlement acquired from his ex-wife the main residence that they shared and an investment property that they owned jointly.

The client has now sold the investment property.

The question is, can any of the legal costs associated with the divorce be allocated to the cost base of the investment property as an incidental cost of ownership.

Answer

I think you have summed it up with the word incidental…

The legal costs of the 50% conveyance of the investment property into your client’s name can be added to the cost base of the asset and if this was not separately identified a proper and reasonable estimate should be made.

However, this figure will probably be in the hundreds, not the thousands.

Otherwise, the legal costs are properly referable to achieving a binding financial agreement under the Family Law Act 1975 and not acquiring the interest in the investment property.

Question 32

Purchase of farming property in May 2013 for $1,600,000 in the family trust. The family trust is a business of primary production. This 160-acre property has since been rezoned to residential R1 and approximately 800 lots will be available for sale at 550 sq. metre minimum lot sizes.

We plan to sell the 160-acre property prior to development with the Development Control Plan approval by the council in approximately 12 months’ time.

My question is, will this property sale be taxed as an active asset being able to access the small business concession. Our income is gross $400,000pa. well below the threshold to qualify.

Answer

Given the turnover, the capital gains tax small business concessions can be accessed if we are dealing with active assets. In the event, you have genuinely conducted a business of primary production and the land has not been mixed-use… i.e., partly used for agistment, then the property would appear to be an active asset. Note that in your case the land must have been an active asset (i.e., used in a business) for at least half the period of ownership. Also “passive income” such as agistment does not meet this test. Of course, if you did the subdivision yourself, there could be problems, but we note the plan is to sell the land before then.

We stress however that specialist advice should be sought as we do not have the full facts and circumstances.

Question 33

I refer to October 2020, bO2 Newsletter, issue number 0107, example 1, on page 38.

This is where Susan purchased a property in Melbourne for $300,000 and occupied it as her main residence for 5 years.

She moved to Sydney for work in 2000 and rented out her Melbourne house. A qualified valuer valued the MV of her house at $650,000 at that time.

In 2007 she stays in Sydney and sells her house for 1.35 mills. (i.e., 7 years it was rented out).

The cost base becomes $650,000 and she only pays capital gains tax on the difference.

Our query is this:

If Susan rented her house for less than 6 years, however also bought a new house in Sydney during this time, can she still claim her Melbourne house as her main residence or would she have to treat her new house in Sydney as her main residence from the time she bought it?

i.e., does rent versus buying a house in Sydney affect the Melbourne main residence status?

Answer

It is only one principal place of residence at one time. If you are in the process of buying/selling, then there can be an overlap of up to six months.

If Susan moves back in within 6 years, the 6 years gets “freshened up” again.

Susan can still effectively elect which house is her main residence for the relevant six-year temporary absence.

Question 34

I have a corporate client who is selling off part of a Client Base and I am unsure of the tax consequences, although it does appear to be a CGT Event.

The Sale Price is expected to be $175,000.

A Cost base is yet to be established, but it will probably be between $40,000 and $80,000.

It is all Goodwill.

The ATO has suggested that TR 1999/16 and TR 2005/16 may help me.

The Corporate Client has been operating for some 13 years.

Answer

Let us work on the basis that the capital gain is a notional $115k.

Example 2 in TR 1999/16 indicates we are dealing with goodwill, but this would have to be determined and confirmed from the terms and conditions of the sale.

We do not see how TR 2005/16 is relevant in any way as it deals with PAYG issues.

Given the business has operated for 13 years, we are clearly dealing with a post CGT (Sept ’85) asset and the 15-year retirement exemption does not apply.

Firstly, are there any capital losses in the company? If so, then these should be offset first.

So, to be clear we are now dealing with the CGT small business concessions.

Given all the SBE CGT conditions have been met, you could apply the active asset (AA) concession (50% reduction) but the application of this illustrates the shortcomings of a company in these instances.

A trust would be effectively able to apply the active asset concession (50%) and then the individual concession (50% of the remaining balance) if the distribution was made to an individual.

This effectively deals with 75% of the capital gain.

In a company you can only apply the AA concession at the company level – you then pay out this component of profit as an unfranked dividend then pay individual tax or deal with a Div7A issue.

For this reason, many people in this situation decide to apply the retirement exemption which is up to a lifetime limit of $500k per person.

If the significant individual is less than 55 years of age, then this must be paid into a complying super fund with no contributions tax.

If the individual is over 55 years of age, then there is no requirement that the capital gain is paid into a complying super fund – rather it can be accessed by the individual.

Question 35

My client owns all the shares in a private company and is the director also.  The business in the company has been making losses for a number of years, to fund these losses the client has contributed his own personal funds.  This has a created a substantial loan liability on the balance sheet to the client.  No interest has been charged on the loan ever.

The client is now ceasing the business, paying out all debts, and will then deregister the company.

Will the client be able to claim a capital loss for not being repaid the company loan?  Is there a process to follow in order to be able to claim this capital loss?

Answer

It can be a capital loss to the director. On the other hand, it may be a capital gain to the company.

The company minutes can be drafted up in relation to the debt forgiven.

The key here is whether your client has charged interest on the loan – if not then there is a problem. Refer to our Issue #0092 the answer is on Page 11 Question 15.

Question 36

Please help with the following query regarding a deceased estate.

When a Testator has died in the U.K. intestate, with relatives in Australia and the estate there is being distributed pursuant to a Court order, are there any duties payable in Australia? At this stage, the money is cash being the proceeds of a life policy. Inheritance tax has been paid in the UK.

Answer

There are no death duties payable in Australia. As this is a U.K. Estate, the issues here are very much beneficiary-based.

The character of the payments from the Estate needs to be reviewed.

If the beneficiary is merely receiving the monetary capital of the Estate, then there are no revenue implications here in Australia.

If the beneficiary is instead, receiving property or shares then capital gains cost base files need to be set up.

For instance, if the beneficiary is receiving post-Sept 1985 shares then these are deemed to have been acquired at the same cost as the deceased. So, some tax may well be payable on disposal.

In the event the beneficiary receives income of the Estate or an associated testamentary trust then this is assessable on the gross amount with a credit for any U.K. tax paid.

Question 37

Small Business CGT Replacement Asset Relief J&JH rural partnership sold a farming property in Dec 2015 and “claimed” active asset replacement relief. Dec 2017 about to enter into a contract for the purchase of new farming property, however for asset protection purposes they’re considering purchasing the replacement asset in a new (yet to be established) family discretionary trust with the J&JH rural partnership leasing the property from their family trust. The trustee of the family trust will be J&JH Company PL of which J&JH will be directors/shareholders. Would this structure qualify for the replacement asset relief or will J&JH have to purchase the replacement asset in their own name?

Answer

We assume you have applied the small business CGT concessions in the partners’ income tax returns as the partnership itself is not a separate legal entity.

You may also wish to consider whether you have maximised the:

• 15-year exemption
• Active asset test
• Individual 50% deduction
• Retirement concession

J&JH must purchase the replacement asset in their own name since the CGT event happened in relation to a CGT asset of their individual name in an income year.

Section 104-198 states that CGT event J5 happens if you choose a small business roll-over under Subdivision 152-E for a CGT event that happens in relation to a CGT asset in an income year and, by the end of the replacement asset period:

1. You have not acquired a replacement asset (the replacement asset), and have not incurred fourth element expenditure in relation to a CGT asset (also the replacement asset); or
2. The replacement asset does not satisfy the conditions.

The conditions are:

1. The replacement asset must be your active asset; and
2. If the replacement asset is a share in a company or an interest in a trust:

• You, or an entity connected with you, must be a CGT concession stakeholder in the company or trust; or
• CGT concession stakeholders in the company or trust must have a small business participation percentage in you of at least 90%

J&JH could use the discounted capital gain to purchase shares in the corporate trustee. However, this defeats the purpose of asset protection. A unit trust could be considered but again the units would need to be held in the individuals’ names with only limited asset protection benefits.

Question 38

I need help in answering these questions relating to “Capital Gain tax & Investment property?”

I just want to know whether capital gain tax only applies to investment property (your second house) with a rental?

If capital gain tax applies to property sold – where your children are living in it without paying any rent in the last 5 years? In other words, it is your second house (investment), and your children are living in it for 5 years already.

• What happens to investment property without rental for the last 2 years or “NO” rental at all since bought. Does it still attract capital gain tax if sold now?
• Similarly, say you bought the house 6 years ago, $600K. Rented it out for 3 years. In the last 3 years, the house was vacant (no rental) due to a previous house fire. The house now sold for $700K. How do I calculate capital gain tax? or does it apply due to no rental?
• How do you calculate capital gain tax if you bought the house 7 years ago say $500K, live in that house for 5 years, rent it out for 2 years, and now sold it for $700K? Do we get exempt for the 5 years? How?

Answer

1. Each individual or couple is only allowed one principal place of residence (PPR) exemption for capital gains tax (CGT) purposes.  There can be two but only for a transition of six months when buying /selling property.  The key question here is what name is the title in? If it is yours, then there can be no CGT exemption on this second property. We would alert you to the fact that expenses that have been incurred such as insurance, interest, rates and taxes, repairs et al for which no tax deduction has been claimed can be added to the cost base of the asset… this is often overlooked.  If an asset is held longer than 12 months by an individual, then the 50% CGT discount applies to the taxable capital gain. This can also apply to trust and/or partnership distributions.
2. If the title is in your name, not the children’s, then CGT may well apply.
3. Depending on the sale price, CGT may well apply and refer to comments in (one) above re the cost base.
4. If you received an insurance payout, then this must come off the cost base. The cost base includes purchase cost, stamp duties, legal and capital expenses incurred, also refer to (one) above. Calculate the net sale price after commissions, marketing, and advertising expenses. Get an Accountant to confirm the calculations.
5. Yes, the calculation is done on the days it was your PPR divided by the total days of ownership. There can be up to six years allowed for temporary absence – however, revert to prior comments about the only PPR at any one time. Typically, the six years is claimed by those who do not buy another PPR and go interstate or overseas for work purposes.

Question 39

I have a couple of questions on how income from the deceased estate is taxed. Unfortunately, one of our directors has passed away with a massive heart attack before Christmas so I need the below clarifications:

• Main Residence: Director has a house which is his main residence. He brought that house before 1985 (Pre CGT). As per his will, this house will be sold and distributed to his Wife, 3 Children’s and 2 Grand Kids.

So, my query is:

1. Because it is the Main Residence there is no Capital Gain Tax and
2. How the distribution of Sale Proceeds of this house to his Wife, 3 Children’s and 2 Grand Kids will be taxed? Will they be taxed or not? I am assuming that they will not pay because the main source is not taxed in the first place?

• Transfer of Shares Transfer in Unit Trust and Company: The deceased director has shares in Unit Trust and also holds shares in our company. As per his will, these shares are equally given equally to his children. Does CGT apply? I assume CGT does not apply as it is just a transfer, not a sale. Please clarify in each instance – Trust and Company

Answer

We are sorry for your loss. In broad terms, a deceased estate will be taxed on the same scales as a resident individual in the three years following the date of death.

In the event the executors are delayed by factors beyond their control, it is possible to apply to have the time extended and for the aforesaid rates of tax to continue.

It is confirmed there will be no CGT on the sale of the house as long as it sold within two years. In the event, it is not then its cost base is the market value at the date of death.

Subject to this, the distribution of the proceeds is not taxable to the children.

You are correct in stating there should be no CGT on the transfer of the shares to the children – assuming they are post-September 1985 assets, they are deemed to have acquired the shares at the same cost base as the deceased.

The same applies to both the shares and the units. Here we assume the shares are in the trustee company for the unit trust.

Question 40

Structure overview…but in summary:

The Hotel/Restaurant partnership disposed of its business, land, and buildings in June 2017.  The net capital gain on which has been distributed between the 2 (unrelated) partners which are family trusts.

The share of gain flowing through to Partner A’s family trust will be in turn distributed to Beneficiary A (Ben A) …an individual.  Ben A is also a 50% owner in another land/building partnership, a self-managed super fund of which both Ben A and Ben B are members owns the other 50%.  The land/buildings in the partnership are a restaurant…the restaurant business is run via a unit trust.  79% of this unit trust is owned by the Partner A Family Trust.

Some of the capital gain proceeds distributed to Ben A have been re-invested in the restaurant land and buildings as his share of the cost of a major upgrade.  Both the sale of the Hotel/Restaurant and restaurant upgrade have occurred during 2017. Although most of the upgrades occurred before the hotel sale.

It would appear on the surface the Partner A family trust would not meet the revenue test but may meet the $6m asset test.

The question:

Is Partner A Family Trust able to claim the small business rollover relief? e.g., 50% asset reduction in addition to the 50% discount and defer the balance or part thereof for 2 years to invest in another replacement asset. And then declare the gain in 2 years’ time if no replacement asset is acquired? OR

Is Ben A able to claim rollover relief for the portion of capital gains allocated from his family trust that was paid into the renovation costs? OR…is he able to defer the gain or part thereof on the basis of a potential investment in another asset within 2 years. And if no such investment occurs…including the gain in that year. OR

Is there any other option to defer or minimise the CGT exposure…? e.g., Ben A contributing $500k under the lifetime Ben A is 69 years of age…

Answer

The overview here is that the claim of these concessions is frequently subject to ATO audits due to the sums of money involved.

Where multiple entities are involved it is sometimes better to get a legal opinion as a safeguard.

The following comments should be taken as a guide only and should not be acted upon.

We doubt the renovations will be eligible because the Act talks about replacements.

The fact that the restaurant is no longer an active asset does not help either.

It is essential to establish beyond doubt that Ben A meets all the requirements to be a significant individual and that the $6 million threshold test is not offended.

It is suggested that Ben A should use the lifetime $500,000 superannuation concession after applying the active asset and individual discounts.

As Ben A is over 55 years of age there is no requirement for him/her to even make a super contribution in order to access the concession.

Question 41

Please see below the following tax queries:

1. Pre GST-principal residence on one and a half acres. House and half-acre subdivided and sold.  One-acre vacant land now ready for sale – any tax implications?
2. Pre GST-principal residence of parents passed onto daughter following their death. The daughter has rented out the property for the past 15 years approximately and is now wanting to sell – any tax implications?

Answer

We take references to “GST” to mean “CGT” i.e., capital gains tax.

• The land will retain its pre-CGT status and for a development of this scale, there will be no tax payable upon sale.
• For this pre-CGT dwelling, the daughter is deemed to have purchased the asset at market value at the date of the death of the last surviving parent. For the dwelling to have not been subject to CGT it would have needed to be disposed of within two years.

Question 42

Can you clarify the following?

If parents decide to gift a house to their daughter will there be any Capital Gains implications apart from the Stamp Duty payable to the OSR on the transfer?

Answer

If we are dealing with the main residence here, CGT is exempt.

If they are not entitled to the exemption, or partially entitled to the exemption, CGT will apply if they are taken to have received its market value at the time you disposed of it.

Question 43

I have a client with a company business. (e.g., XYZ Pty. Ltd. Trading as…ABC Hair Salon). Purchase Cost $17,000.00 on 30 January 1998. Possible sale by end of December 2018…Est Net Sale Proceeds…$115,000.00.

facts

• The Business is a small trading business.
• The 15 Year exemption does not apply.
• There is no retirement exemption.
• There is no small business rollover.

One of the current directors may continue to be employed by a new purchaser of the business. The other director is leaving the business and is transferring to a country location to live. The company is not being sold…only a transfer of the Trading Business name. I anticipate the sale will be subject to the 50% CGT exemption.

It would be appreciated if you could advise accordingly.

Answer

We assume that the 15-year exemption and retirement concession do not apply because of the absence of a significant individual?  

In order to access the 50% active asset concession, the company only needs to meet the basic conditions in Subdivision 152-A. One of the conditions is that the asset being disposed of is an active asset.

This can include the goodwill of a business.

An active asset is one that the entity owns and uses or holds ready for use in carrying on a business and includes intangible assets such as goodwill. Section 152-40(4) outlines some exclusions.

In the past, we have outlined the shortcomings of a company when dealing with the CGT Small Business Concessions. The Active Asset discount is effectively lost when the company has to eventually pay unfranked dividends. For this reason, every effort should be made to legitimately access the retirement concession which is a tax deduction to the company.

Question 44

Capital Gains Question.

Scenario…

2004 Capital Loss $(84,500)

2017 Trading Loss $(74,850). Figures Rounded for convenience.

2018 Trading Profit $ 8,500

2018 Capital Gain $ 660,000

1) Please advise if My Calculation is correct?

2) If yes? Can you see a better way of doing this?

2018 Trading Profit $ 8,500 Less 2017 Trading Loss $(74,850) = $(66,350) Loss *** Capital Gain $ 660,000

2004 Capital Loss (84,500) $ 575,500 Trading Loss *** (66,350) $ 509,150

50% CGT Discount (254,575) $ 254,575

50% Active asset Discount (127,287) $ 127,288

15 Year Business Exemption (127,288) $ Nil

Answer

It is very important to be careful when applying the CGT small business concessions.

As we have very limited information, we will also be cautious in our advice.

We do not even know what entity this is or the age of the “significant individuals.”

If the entity is a trust, individual, or partnership (with individual partners) then the best course of action may be to simply apply the 15-year retirement exemption if this is available.

Note that this must coincide with retirement and the individual must be over 55 years of age or permanently incapacitated.

Note where the 15-year concession applies, there is no need to apply the other three small business concessions.

As mentioned, the capital gain is disregarded. The capital losses do not need to be applied against a capital gain arising from the 15-year exemption concession. There is no need to use up the revenue (income) losses either.

Using your example there will still be revenue losses of $66,350 and capital losses of $84,500 available which will give rise to some tax planning opportunities.

Comment from member…. Thank You – Especially for getting back to me so quickly.

Yes – Trust Distribution to 4 Individuals all over 55 years of age & 100% retired for past 4 years. The only income now is from SMSF + Residential & Commercial Rentals in the hands of an agent.

I have now applied the 15-year exemption & will be free to use the Revenue Losses & Capital Losses at a future date.

Question 45

A company of which I am a director is entering voluntary liquidation. We have a staff member on a 489-visa issued in March 2018. He is a Malaysian citizen. Is he eligible for the Fair Entitlement Guarantee (FEG)?

Answer

He will only be entitled to the FEG if the 489 Visa allows him to stay in Australia upon cessation of employment which is imminent.

Question 46

I have a query regarding a client that has sold his business as a going concern (so No GST). But the question is, the buyer did not have the funds to complete payment of the full contract sale price.

So, the value of the stock at $45,000 has been agreed to be paid off over 30 months. How do I treat this stock value in my client’s books?

Should it be accounted for now as an income account “Sale of stock” and a debit loan account created in the Balance Sheet in the buyer’s name?

My concern is if I do it this way, if the new owner defaults on payment, my client has declared income that he never receives OR only declares the stock sale as it is paid over the 30-month period?

Answer

As you have described in the situation, it appears to be an instalment sales contract with vendor finance.

This is a sale of trading stock and the CGT Small Business Concessions are irrelevant. As such your client would declare the income in the periods as received over 30 months.

Question 47

A client purchased a block of land approx. ½ acre for his family home to be built on.

They were living in a rented home.

Marriage breakdown occurs and the block of land is sold.

The landowner/taxpayer is able to demonstrate that he intended to build on it with builders’ plans etc. Water, Gas, and electricity are ready for connection upon construction.

Does the capital gain qualify for the main residence exemption?

I view that the intention to live on the land and that had they have built the planned house they would have claimed main residence exemption from the date the property was purchased if the property had been constructed.

The fact that the marriage breakdown occurs further adds to the property being thought of as the family’s main residence, (not being built yet) rather than an investment.

The ATO website says no main residence exemption for a vacant block. However, I think this is taken out of context and should apply to a situation where a taxpayer has purchased a vacant block purely as a speculative investment and already has a main residence.

Your thoughts, please.

Answer

Sorry to advise the main residence exemption will definitely not apply in this instance.

Question 48

Relating to CGT and a Property.

If a client initially lives in a house as a principal place of residence and then moves out and it becomes a rental property, in determining the cost base for the property are the costs of owning the property  (e.g., rates, interest on the loan, etc.) taken onto account for the period up to the date it becomes income producing?

Answer

No… personal use assets cannot be eligible for third element cost base additions.

Land and buildings are excluded from the definition of personal use assets.

However, having overcome this we have another problem.

You are seeking third element cost base increases to an exempt asset which by definition (while it is exempt) does not have a cost base.

We refer you to ATO ID 2004/950 still technically valid but superseded by example 65 in the 2009 ATO publication “A guide to capital gains” with annual updates.

Effectively you can use the market value of the property as the cost base when it was first used to produce assessable income from:

• A qualified valuer
• Calculating a valuation based on reasonably objective and supportable data.

So, you may still get the uplift to the cost of the home by using market value.

Question 49

Carried Forward Capital Losses – I have a new client with Carried Forward Capital Losses. She is looking at selling some Collectibles and wants to know if Capital Losses from ordinary assets can be applied to Capital Gains from Collectibles. I know that only Capital Losses from Collectibles can be only applied against Collectible Gains but am not sure about other Capital Losses.

Answer

You are correct in that a capital loss from a CGT event relating to a collectible can only be offset against a gain from another collectible.

Question 50

Can the holding costs (rates, land tax, interest, light & power, etc.) for a holiday home be included as part of the cost base for capital gains purposes? Are light & power considered a holding cost?

Answer

Yes… these holding costs on a holiday home are eligible for the third element cost base.

Regarding light & power, we would not claim them as we are dealing with costs of owning an asset as opposed to a cost that relates to using up consumables while living there.

Question 51

Does the 6-year exemption still apply if an ex-pat has lived overseas then moves back to Australia, lives in the main residence, becomes a resident, and sells the house whilst resident?

Answer

The key will be whether the owner is a genuine Australian resident at the time of sale.

Although this is new legislation concerning non-residents losing the 6-year temporary absence CGT concession, there appears to be notion developing that if the owner has moved back in the house then all could be well.

It will be a question as to whether the taxpayer has genuinely returned to Australia and taken up permanent residence here.

This would usually involve some evidence of severing ties with the last country of residence including residence and employment.

I am concerned that there may be some people returning to Australia to briefly move back into the dwelling just prior to sale and spend say 3-4 months here.

Of course, this is not a change of residence and the ATO will come in later with the helicopter view and knock this on the head.

Question 52

I understand that if an individual makes a capital gain on a stock that was held for more than one year, the gain is discounted by 50% and the tax is worked out on the discounted amount.

What if the entity is a family trust? Does the trust enjoy a 50% discount as well or is it treated as a company and receives no discount?

Answer

Income retains its character as it flows through a trust down to the beneficiaries.

As long as a valid income distribution is made, it is the individual beneficiary who will access the CGT 50% discount.

Question 53

A Small Business Family Trust (FT) client on 1/7/18 sold 34% of its shares in a small business (SB) private trading company (A Pty Ltd), reducing its 50% interest in the company to 33%. The shares in the company qualified as an active asset & both the FT & the company satisfied the SB CGT Concession eligibility requirements.  The FT made a $400k CG (Capital Gain) on the sale of the shares, which was equally distributed to the husband & wife beneficiaries. The husband & wife did not qualify for the SB 15yr exemption, but they did satisfy the other SB CGT Concession requirements.

Kindly note, I have determined that the basic conditions of the SB CGT Concessions have been satisfied, including the Maximum Net Asset Value test & other additional conditions.

The FT had no capital losses at 1/7/18 & had held the shares in the trading company for 4 years. Therefore, according to my calculations, mum & dad’s taxable CG, after applying the 50% CGT discount & 50% active asset reduction, was $50k each. They both intend to disregard the taxable CG by having the FT apply $50k to a SB roll-over via the FT purchasing shares in another SB private trading company (B Pty Ltd), which qualified as an active asset & utilising the SB retirement exemption & applying $25k each to their respective super funds. I understand that they have until 1/7/2020 (2 years after the CGT event) for all transactions to be finalised.

My questions are:

1. From the information provided above, do you agree that the SB CGT concessions would apply & if not, why not?
2. If the FT purchased the shares in B Pty Ltd on 1/4/18, 3 months prior to the CGT event, would the $50k still qualify for the SB roll-over?
3. Are there any other important conditions/requirements that I may have overlooked?

Answer

Given the amount of revenue involved, and the level of ATO Audit activity concerning these transactions, many Practitioners now have their interpretations and calculations checked by lawyers and/or specialist firms.

1. On the face of it, you have dealt with matters in an organised and workmanlike fashion, but we have not reviewed your source data. Subject to this, it would appear the CGT small business concessions may apply in this instance.
2. The answer is yes, and the rollover can also apply up to one year prior to the CGT event.
3. You need to ensure that both the husband and wife are significant individuals.

Question 54

A client of mine was a beneficiary in a will of two blocks of land in which his share 50%. Prior ownership was for a considerable time and there was no reliable value put on the land until disposal by my client.

He received $50,000 on disposal.

Are there any capital gain implications?

Answer

Yes, there is potential capital gains tax (CGT) implications.

If the land was purchased by the deceased prior to 19.9.1985, then your client is deemed to have acquired it at market value at the date of death.

If the land was disposed of shortly thereafter then there should not be a problem.

If not, then a reasonable attempt needs to be made to calculate the capital gain – reference could be made to local real estate agents or registered valuers.

If the land was acquired after September 1985 then your client is deemed to have acquired the asset at the amount paid by the deceased on purchase.

This is readily ascertainable from the relevant State Titles Office.

Of course, purchase costs including stamp duty and legal need to be considered when calculating the cost base. Also selling costs.

Question 55

Am trying to find out for my client about the latest on the above-mentioned, (X Ltd) – all I can find is that it seems that someone is trying to sue the Estate of the founder.

A client wants to cement a capital loss for use against a potential capital gain this year.

It is my understanding that they need a final letter from the Liquidator before they can do this.

Any advice/direction on finding out the latest on this would be most appreciated.

Answer

The Responsible Entity, X Limited is still under external administration.

The status of your client’s investment may depend upon the year the client invested.

PWC are the administrators and if you are able to get a letter from them declaring the shares or financial instruments are worthless or have negligible value, you may be able to claim the capital loss in 2020-21.

Refer to the PWC website.

Question 56

My question relates to a compensation payment for land resumed by the government.

We own a holiday unit (not the main residence) in a residential building. The government resumed a portion of the common land of the body corporate to widen the main road. The land resumed was part of the swimming pool/recreation area. All owners received payment as compensation with the statement “for loss of amenities”.

My query is – is the compensation amount taxable to us? If so, is capital gains- declared in the year received?

Answer

You are correct.  It is a taxable capital gain assessable in the year of receipt.

Given there can be no replacement asset, there is no prospect of a rollover to defer the liability.

As there may be other issues at play, I would check this with Body Corporate as they would have received advice on this.

Question 57

I have a client (substantial rural enterprise) that derived a capital gain from the sale of one of his properties on 1 Jan 2018.

He chose to defer the assessable gain of around $470,000 under the small business CGT deferral provisions with the intention of acquiring another active asset within that period.

Unfortunately, as of today, this has not occurred although he is currently in the process of arranging funding for the purchase of this active asset in the immediate future.

I do not believe that he is able to request an extension of time to offset this gain against the new property assuming purchased prior to June.

Alternatively, he does have around $700,000 in carry forward PP losses…is he able to offset the deferred gain against the C/F PP losses?

Noting that he does meet the turnover and real estate value test and does not have any other non-pp income exceeding $200,000 other than the deferred gains.

Answer

We assume we are dealing with an individual.

The two-year period is from contract to contract – not settlement. It still looks like the period has been exceeded.

Also, we assume that the active asset concession and individual concession were properly applied to the gain.

It is not too late to revisit this.

As the two years have expired, we are dealing with CGT event J5.

Note it is still possible to apply the CGT Small Business Retirement Concession to this gain.

This assumes the individual’s lifetime limit of $500k is still completely or partially intact.

We advise that any remaining capital gain can be offset against the losses carried forward.

Question 58

A “person” has 2 businesses with 1 ABN.

This “person” owns a cane farm and has an NBN tower that was built on their property about 7 years ago.  There is a lease in place which has 13 years remaining with rent paid in August for each year.

The “person” has been approached by a “company” that purchases the rights and interest in these leases.  The “person” would still be the main Lessee, and will always own the land, but the “company” would take over the rental payments and pay them out a purchase amount. So, this is not property as land sale it is the lease.

The “person” also owns a nightclub, being in the Hospitality Industry has been shut down by the government with this Covid 19 and will be one of the last businesses to be allowed to re-open, officials are saying maybe the middle of July.  They have been impacted severely with no income at all and are now collecting JobKeeper.

Reading the  JobKeeper rules the understanding is that you only had to show that your business was down 30% for one month compared to last year in the same month and you were eligible to claim JobKeeper, and if your business picks up the following months and keeps doing very well your JobKeeper is not affected.  The “person” is down over 100% so definitely eligible.

The issue is… they would like to commence with the sale of the Lease immediately, but their accountant has told them that if they do the sale now it would be classed as income and they would have to declare this in the next months estimated turnover and would lose the JobKeeper payments.

The rent each year was classed as income so will the sale be classed the same?

So, in saying this do they have to declare the sale as income, or can it be classed as a sale of an asset. And if the “person” had to declare it as income would they have to add this amount into next month’s estimated reporting and then lose the JobKeeper as the accountant is telling them?

Would appreciate some clarity to proceed with the sale or is there any way around this.

Answer

This is not business income but a capital receipt.

Depending on what the contract says, it is either a capital gains tax event D1 or F1.

In either case, there is no prospect of the 50% CGT individual discount applying because the asset is effectively created at the time of disposal.

As a capital receipt, it does not have to be disclosed on the JobKeeper form – they are receiving passive, non-business income on the rent of the site as a NBN Tower and this is irrelevant to their nightclub operation.

Furthermore, you are correct in your comments regarding the eligibility of JobKeeper – you only have to qualify once to continue to receive the benefit.

Question 59

The questions follow but first some background…

The sole executor of a deceased estate (daughter of the deceased) is also the sole beneficiary.

One of the assets is the deceased’s PPR.

The executor wants to sell when the market has recovered somewhat from the effects of the pandemic.

She has the option to go on title now by Transmission Application in the capacity of the executor or as the beneficiary which would convey legal ownership.

She is aware of the 2-year rule as to CGT if the PPR is sold within two years of DOD. It may take the market a while to recover which could put a sale close to the end of the 2-year period.

1. Does it make any difference in terms of tax consequences if she is on the title in the capacity of the executor or beneficiary:
2. If the PPR is sold within 2 years of DOD; or
3. If the PPR is sold after two years of DOD?
4. The executor will never live in the property so if she goes on title as a beneficiary and assumes legal ownership now the deceased’s PPR will become an investment property from that date, and I am wondering if the 2-year rule then applies at all.

Would CGT be payable on any gain achieved between the value of the property as at the date the TA (Transmission Application) was registered to put her on title as the beneficiary (which would need a valuation to be undertaken I assume to establish that) and the sale price regardless of when the sale was achieved (i.e., within two years of DOD or thereafter)?

I hope you follow where I am coming from and look forward to hearing from you.

Answer

There may some flexibility in the two-year rule given Covid 19.

The Commissioner does have a discretion to extend this period and has done so on a number of occasions when there are difficulties causing delays in dealing with the Estate.

As the Estate appears to be uncomplicated, it is suggested that this would only occur if it could be shown the property was on the market – all be it for the price being sought.

So, if the Executrix is genuine in her desire to sell the dwelling as soon as practicable, she may wish to show the property is being marketed.

Depending on the timing there is a reasonable chance that the Commissioner may exercise discretion.

This compares with the beneficiary taking ownership now – any gain in market value from now until the date of sale contract will be assessable to her with the individual 50% discount being assessable after 12 months.

If this is a short period of time then there should not really be a problem, but a valuation at the time of transfer would be prudent.

Question 60

I have a client who is married to a lady from the Philippines and has been for some years. She is his dependent. Due to some Visa problems yet to be sorted she returns to the Philippines for short periods during the year but otherwise is resident in Australia.

Can this lady be classed as a dependent for reasons of the surcharge?

Answer

The client’s spouse meets the definition of dependent.

As long as the spouse meets the tests to be a tax resident of Australia this should not be a problem.