Reference no: EM13340898

Case Study

Question 1:

Susanne signed a contract 14 October 2013 to purchase a residential rental property from her mother Gertrude and settlement took place on 14 December 2013. The market value of the property at the time of the contract was $400,000 but Susanne only paid $300,000 to her mother for the property. In addition Susanne paid legal fees of $2,500 to her lawyer to prepare the contract and transfer the property and $8,100 in stamp duty to the State Government at the time of purchase. The property needed to be repainted prior to being leased to tenants and Susanne paid $11,000 to have the property full painted, inside and outside. The property was rented to tenants on 1 March 2014 when the repainting had been completed.

Required:

Based on this information what is the cost base of the property to Susanne? Support your answer with reference to appropriate authority.

Question 2:

Damien, a resident purchased a vacant block of land in Adelaide in March 2005 for $500,000 and paid stamp duty on acquisition of $17,000. The land was valued by a professional valuer in June 2013 to be worth $1m and Damien entered into a contract in September 2013 to sell the land for $1m with the purchaser paying a non-refundable deposit of $50,000. Settlement of the contract was to be in December 2013 but by that time the market value of the land had dropped substantially and the purchaser cancelled the contract and Damien retained the forfeited deposit. Damien continued to market the property through his real estate agent and signed a contract to sell the property by contract entered into in May 2014. Damien received cash of $525,000 and a property worth $200,000 upon the sale of the vacant block of land. Damien incurred real estate agent fees of $15,000 to sell the property.

Required:

Provide advice to Damien in relation to the application of capital gains tax to the sale of his vacant land including the receipt of the forfeited deposit. Calculate his net capital gain on the assumption that this is Damien's only CGT event in the current year but Damien did have a capital loss from the sale of shares in Telstra in 2012 of $130,000. Support your answer with reference to appropriate authority.

Question 3:

Nash, a resident purchased a residential property on 1st August 2012 for $520,000 paying stamp duty of $20,000 and legal fees of $2,200 on the purchase. The dwelling on the property was in a very poor state of repair and Nash decided that it would be best to have the property demolished and tried to sell parts of the house to scrap merchants but was unable to receive any offers. Accordingly, he proceeded to engage a demolition firm, Demolish U Pty Ltd (Demolish) to remove the existing building on the property. Nash paid Demolish $35,000 to have the house removed which included substantial costs to have the asbestos professionally removed. The property was 1,000 square metres in size and after the demolition and land clearing Nash proceeded to engage engineers to draw up plans to subdivide the block into two blocks of 400 and 600 square metre in size. The engineers charged Nash $15,000 in professional fees and the local council charged Nash $22,000 in fees to subdivide the block. Nash engaged his real estate agent Donna to sell the 400 square metre block and a contract was signed on 23rd March 2014 to sell the 400 square metre block for $475,000 incurring real estate agent fees of $8,800 to sell the block. Donna indicated that the market value of the remaining 600 square metre block was $600,000. Nash has his own main residence and at no time did he reside in the property being sold. Nash expects that in the future he will build a new home for himself on the 600 square metre block that he has retained.

Required:

Provide advice to Nash as to the application of capital gains tax to the acquisition of the property, the demolition and removal of the building, the subdivision and subsequent sale of the 400 square metre block. Calculate the relevant capital gain/loss on the sale of the 400 square metre block. Assume that the purpose of removing the existing property was to enable the subdivision to take place and effectively make the property more valuable. Assume also that the land is not trading stock and is kept as a capital gains tax asset. Support your answer with reference to appropriate authority.

Question 4:

Tom and his family purchased a small home on South Street, in Toowoomba for $135,000 on 9 November 1999 incurring $3,500 in stamp duty and $700 in legal fees at the time of the purchase. They used the property as their main residence at all times until 20 January 2008 and at which time Tom and his family moved to Sydney to allow Tom to commence a three year contract for the Urban Bank. The market value of the Toowoomba property was $230,000 at that time. They did not purchase a new home in Sydney but stayed in a property provided by Urban Bank. While they were away from Toowoomba they rented the Toowoomba property to tenants who paid $450 per week in rent. On their return to Toowoomba on 5 January 2011 then recommenced to live in the property but soon felt that the property was too small for their requirements so they purchased a new home on East Street on 10 October 2011 for $560,000 and moved into that property on that date and rented out the South Street property. Tom felt that the property market had peaked in Toowoomba in the 2014 income year and he sold the South Street property for $350,000 on 15 March 2014 incurring real estate agent fees of $6,700 on the sale. Tom and his family expect to live for many years in East Street property and do not expect to sell it.

Required:

Provide advice to Tom as to the application of capital gains tax to the disposal of the South Street property. Consider any exemptions and concessions that may be applicable to the calculation of the gain/loss on disposal. Support your answer with reference to appropriate authority.