Dave Solomon is 59 years of age and is planning for his retirement. Following a visit to his ﬁnancial adviser in March of the current tax year, Dave wants to contribute funds to his personal superannuation fund before 30 June of the current tax year. He has decided to sell the majority of his assets to raise the $1,000,000. He then intends to rent a city apartment and withdraw tax-free amounts from his personal superannuation account once he turns 60 in August of the next year. Dave has provided you with the following details of the assets he has sold:
(a) A two-storey residence at St Lucia in which he has lived for the last 30 years. He paid
$70,000 to purchase the property and received $850,000 on 27 June of the current tax
year, after the real estate agent deducted commissions of $15,000. The residence was
originally sold at auction and the buyer placed an $85,000 deposit on the property.
Unfortunately, two weeks later the buyer indicated that he did not have sufﬁcient
funds to proceed with the purchase, thereby forfeiting his deposit to Dave on 1 May of
the current tax year. The real estate agents then negotiated the sale of the residence to
another interested party.
(b) A painting by Pro Hart that he purchased on 20 September 1985 for $15,000. The
painting was sold at auction on 31 May of the current tax year for $125,000.
(c) A luxury motor cruiser that he has moored at the Manly Yacht club. He purchased the
boat in late 2004 for $110,000. He sold it on 1 June of the current tax year to a local
boat broker for $60,000.
(d) On 5 June of the current tax year he sold for $80,000 a parcel of shares in a newly listed
mining company. He purchased these shares on 10 January of the current tax year for
$75,000. He borrowed $70,000 to fund the purchase of these shares and incurred
$5,000 in interest on the loan. He also paid $750 in brokerage on the sale of the shares
and $250 in stamp duty on the purchase of these shares. Dave has contacted the ATO
and they have advised him that the interest on the loan will not be an allowable
deduction because the shares are not generating any assessable income.
Dave has also indicated that his taxation return for the year ended 30 June of the previous
year shows a net capital loss of $10,000 from the sale of shares. These shares were the only
assets he sold in that year.
(a) Based on the information above, determine Dave Solomon’s net capital gain or net
capital loss for the year ended 30 June of the current tax year.
(b) If Dave has a net capital gain, what does he do with this amount?
(c) If Dave has a net capital loss, what does he do with this amount?
(10 marks, max. 1000 words).
Case study 2: Fringe Benefits Tax
Periwinkle Pty Ltd (Periwinkle) is a bathtub manufacturer which sells bathtubs directly to the public. On 1 May 2015, Periwinkle provided one of its employees, Emma, with a car as Emma does a lot of travelling for work purposes. However, Emma's usage of the car is not restricted to work only. Periwinkle purchased the car on that date for $33,000 (including GST).
For the period 1 May 2015 to 31 March 2016, Emma travelled 10,000 kilometres in the car and incurred expenses of $550 (including GST) on minor repairs that have been reimbursed by Periwinkle. The car was not used for 10 days when Emma was interstate and the car was parked at the airport and for another five days when the car was scheduled for annual repairs.
On 1 September 2015, Periwinkle provided Emma with a loan of $500,000 at an interest rate of 4.45%. Emma used $450,000 of the loan to purchase a holiday home and lent the remaining $50,000 to her husband (interest free) to purchase shares in Telstra. Interest on a loan to purchase private assets is not deductible while interest on a loan to purchase income-producing assets is deductible. During the year, Emma purchased a bathtub manufactured by Periwinkle for $1,300. The bathtub only cost Periwinkle $700 to manufacture and is sold to the general public for $2,600.
(a) Advise Periwinkle of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2016. You may assume that Periwinkle would be entitled to input tax credits in relation to any GSTinclusive acquisitions.
(b) How would your answer to (a) differ if Emma used the $50,000 to purchase the shares herself, instead of lending it to her husband?