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Sample Exam Questions. Taxation Institute of Australia ... He also carries on a soft toy internet business using one of the rooms at his residence (which is his.
ConTax Student e-Newsletter: November 2008

Sample Exam Questions

Mahmood Fadjiar FTIA Lecturer and Unit Co-Ordinator Edith Cowan University Mahmood Fadjiar obtained his Bachelor of Laws degree in 1971 and his Master of Laws degree in 1977 both from the University of Singapore. He is currently enrolled at the University of Western Australia for the degree of Doctor of Juridical Sciences (SJD). He is an advocate and solicitor of the Supreme Court of Singapore and a barrister and solicitor of the Supreme Court of Western Australia and the High Court in Australia.

Sample Exam Questions Dr. Cook is employed as a doctor by Quantum Medical Practice Pty. Ltd. in Perth. He also carries on a soft toy internet business using one of the rooms at his residence (which is his family home) at Churchlands for this purpose. As his friends, Karen and Tom had moved to Sydney, Dr. Cook wanted to be close to them, so he decided to move to Sydney too. Prior to leaving Perth to move to Sydney on 30 June 2008, he sold the following assets: (1)

His residence (which is his family home) at Churchlands for $492,000 on 1 April 2008 ( stamp duty and legal costs on disposal were $2,000 ). The home was bought on 31 January 1986 for $197,000 ( stamp duty, transfer fees, borrowing expenses and legal fees were $3,000 ) and renovations to the home totalling $85,000 were carried out in June 1995. He had claimed tax deductions ( for rates, taxes, insurance, interest etc.) in respect of 10% of this property for each year of his ownership as home office expenses based on floor space of the room set aside to carry on his soft toy internet business.

(2)

Shares in Quack Medical Supplies Ltd. on 10 November 2007 for $50,000. He bought these shares in January 1995 for $55,000.

(3)

A vacant block of land in Morley for $45,000 on 1 June 2008. He bought the land for $35,000 on 28 September 2007. Stamp duty on purchase was $682 and commission paid on sale was $1,350. Interest of $3,000 was paid in respect of a bank loan which had been obtained to finance the purchase.

He had carried forward losses of $5,900 (for ordinary assets) and $1,000 (for collectables) from the last financial year. Advise Dr. Cook on the net capital gain or loss ,arising from the above transactions, for the year ended 30 June 2008 (assuming that he wishes to legally minimise his tax liability). Please ensure that you provide full explanations and cite relevant statutory and cases (if any) to support your answers.

Suggested Answers (1)

Family Home (a)

Under Section 118-110(1), personal main residence is exempt from CGT.

Taxation Institute of Australia

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ConTax Student e-Newsletter: November 2008

Sample Exam Questions

(b)

However, under Section 118-190(1), if any part of the main residence is used for producing assessable income, that part of the main residence is not exempt from CGT.

(c)

The residence is a CGT asset – Section 108-5

(d)

The sale of the residence is a CGT Event A1 – Section 104-(10)

(e)

As the residence was acquired before and the CGT Event happened after 21 September 1999 and was held for more than 12 months, Dr. Cook has the choice of applying the indexed cost base method or the 50% discount method in this case.

(f)

Indexation Method (i)

Capital proceeds (s.116-20(1)(a))

=

492,000

326,823

Less:

(g)

(ii)

Cost (s.110-25(2)

197,000 x 123.4/74.4 =

(iii)

Acquisition costs (s.110-25(3)(a))

3,000 x 123.4/74.4

(iv)

=

4,977

Disposal costs (no indexation) (s.110-25(3)(b))

=

2,000

(v)

Renovations 85,000 x 123.4/116.2 (s.110-25(5))

=

90,270

(vi)

Capital Gain

=

67,930

(vii)

Business usage – 10% (s.118-190(1))

=

6,793

(viii)

Net Capital Gain

=

6,793

Discount Method (i)

Capital proceeds (s.116-20(1)(a))

=

492,000

(ii)

Less: Cost (s.110-25(2)

=

197,000

(iii)

Acquisition costs (s.110-25(3)(a))

=

3,000

(iv)

Disposal costs (s.110-25(3)(b))

=

2,000

(v)

Renovations (s.110-25(5))

=

85,000

(vi)

Capital Gain

=

205,000

(vii)

Business usage – 10% (s.118-190(1))

=

20,500

Taxation Institute of Australia

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ConTax Student e-Newsletter: November 2008

Sample Exam Questions

(viii)

Less: 50% discount (s.115-100(a)(i))

=

10,250

(ix)

Net Capital Gain

=

10,250

The Indexation Method produces the lowest gain ( 6,793 ) (2)

(3)

Shares (a) (b) (c)

Shares are CGT assets (s.108-5) Sale of shares is CGT Event A1 (s.104-10) Sale Price

=

50,000

(d)

Cost

=

55,000

Capital Loss

=

(5,000)

Land in Morley (a)

Land is a CGT asset (s.108-5)

(b)

Sale of Land is CGT Event A1 (s.104-10)

(c)

As the Land was held for less than 12 months, no discount is applicable - (s.115-25(1)

(d)

Sale Price

=

45,000

(e)

Cost (s.110-25(2))

=

35,000

(f)

Stamp Duty (s.110-25(3)(a))

=

682

(g)

Sale commissions (s.110-25(3)(b))

=

1,350

(h)

Interest (s.110-25(4))

=

3,000

Capital Gain

=

4,968

Less:

(4)

Net Capital Gain – Section 102-5(1) (a)

Step 1 =

6,793 – 5,000/L

=

1,793

(b)

Step 2 =

1,793 – 5,900/L

=

4,107/L

(c)

Step 3 50% Discount not applicable

(d)

Step 4 Not applicable

(e)

Step 5 =

4,107L + 4968

=

861

Net Capital Gain

=

861

Taxation Institute of Australia

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ConTax Student e-Newsletter: November 2008

(f)

Sample Exam Questions

Carried forward losses of 1,000 (for collectables) can only be offset against gains from collectables ( s. 108-10(1)

Taxation Institute of Australia

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