Australian Tax Laws Capital Gain Tax

Question: Discuss about theAustralian Tax Lawsfor Capital Gain Tax. Answer: Introduction As per the provision of Australian tax laws, if person is resident in the country, he would be eligible to claim all the benefits that are related and applicable on a resident as provided in the law. In the given case, Fred has entered into a contact where he has agreed to ale out his holiday home at Blue Mountains. In agreement of sale he has received $800,000 in February In relation to ensure that the sale took place, he has incurred legal fees of $1100 (Inclusive of GST) and real estate agents commission of $9,900 (Inclusive of GST). The holiday home that has been sold by him above was purchased in the year 1987 for $100,000. Fred in addition to the purchase consideration paid $2,000 as stamp duty on the transfer and $1000 as legal fees. In the 1990, he further incurred $20,000 on building of a garage on the property. For an individual there are majorly two sources of income one is the ordinary income and the one is the income from sale of capital asset. The income from ordinary sources refers to the income that has been earned by the person form the normal course of operations. For example: The income that an individual has earned from carrying out the normal day to day business operations are covered under the definition of ordinary income. On the other hand, the capital gain refers to the income that the person has earned from the sale of capital assets. The definition of capital asset whose income earned is defined in the income tax law. Any loss that has been booked by the person in the prior years from sale of capital asset can be carried forward and could be set off from the capital gain income that has been earned by the person in the coming years. Further being time is money, the sale of capital assets enjoys the benefit of indexation, the indexation bases has been determined by the incom e tax act and based on the same the purchase price of the asset is inflated and thus accordingly the capital gain or loss is determined. Further, any cost that has been incurred by the person in bringing the asset into a saleable form will form part of the purchase consideration and would be deducted will calculating the capital gain or loss from the asset. For a person who has been covered in the definition of resident, any capital gain that has been earned by him in anywhere in the world would be covered in the definition of capital gain as per Australian tax laws and would be taxed in the hands of the assessee. In the given case, Fred has received $800,000 has sales proceeds in return for the holiday home. He has incurred legal fees of $1100 (Inclusive of GST) and real estate agents commission of $9,900 (Inclusive of GST). Thus, in total $11,000 will be considered as cost and will be reduced from the sales proceeds at times of computing the capital gain on the property. No credit will be allowed for the GST portion being Fred is an individual who would not be eligible to claim any benefit for input GST credit. As per the provision of Australian tax laws, if any capital gain has been earned by a person from his main residence, the same would be exempt from the tax law. In the given case, it has been provided that the house at the Blue Mountains is a holiday home for Fred, thus the same would not be regarded as main residence, and hence the same would be taxable in the hands of Fred. Particular Amount Sales Proceeds of Holiday Home $ 800,000 Less: Legal fees paid $ (1,100) Less: Agent commission $ (9,000) Purchase consideration (After indexation) $ (186,536) Capital Gain $ 603,364 Particular Amount Purchase consideration (before indexation) $ 100,000 Stamp duty $ 2,000 Legal Fees $ 1,000 Building of Garage $ 20,000 Total cost $ 123,000 CPI for quarter ending 30 September 1999 68.7 CPI for quarter in which expenditure was incurred 45.3 Purchase consideration (After indexation) $ 186,536 Fred has some $10,000 worth of capital loss from sale of shares that he has booked in the last year. In that case, as per the provision of Australian tax laws, an individual can carry forward the capital loss that he/she has incurred in the prior years and can offset the same in the year in which they have made capital gain. However, there are some exemptions which need to be considered prior to offsetting the capital loss of the prior years. These exemptions are discussed below: Any capital loss that has arisen from sale of personal assets. Any capital loss arising from sale of exempt assets like s car and motor cycles, Any capital loss arising from sale of antiques, paintings and other collectibles. Now, in the given case, Fred has incurred losses from sale of shares in the last year, being sale of shares does not form part of the above list, thus, Fred can set off the losses from the capital gain made in the current year. Further, if the loss would have incurred on sale of some antique vase, then in that case no loss would be set off being the same fall under the definition of exemption discussed above. References ATO, Exemption to Capital gain tax, viewed on 25th Sept 2016, https://www.ato.gov.au/General/capital-gains-tax/cgt-exemptions,-rollovers-and-concessions/exemptions/ ATO, Indexation to Capital gain tax, viewed on 25th Sept 2016, https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/The-indexation-method-of-calculating-your-capital-gain/ ATO, Exemption to Capital loss carry forward, viewed on 25th Sept 2016, https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-net-capital-gain-or-loss/#capital_losses_you_must_disregard