Taxation Assignment

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Question 2

Issue

Calculate the amount that must be returned as assessable income from the receipt of the $25,000 from BAN Ltd. Show all calculations and references to applicable section of the ITAA 1997 and/or rulings or other relevant materials from the Australian Taxation Office.

Facts

- Client #2 is a resident of Australian for income tax purpose;

- Client #2 is classed as a retail shareholder;

- BAN Ltd grants rights (Entitlements) to its existing shareholders (subject to their eligibility) that allow them to subscribe for an allotment of new shares in the company at $20;

- If the client does not exercise his entitlement to take up all or some of the entitlements, arrangements are then made to sell this entitlement;

- Client #2 does not exercise their entitlements to the BAN Ltd shares;

- $25,000 retail premium payment from not exercising the option.

Solution

- When the retail premium is paid to the non-participating shareholder, CGT Event C2 happens | section 104.25

- CGT event C2 happens if your ownership of an intangible CGT ends by the asset:

- Being redeemed or cancelled;

- Being released, discharged or satisfied;

- Expiring;

- Being abandoned, surrendered or forfeited;

- If the asset is an option, being exercised;

- If the asset is a convertible interest, being converted.

- The timing of a C2 event is when an option is exercised or when it is abandoned.

- TR 2012/1 of the ATO states that a retail premium is a payment that may come about when a company offers entitlements or rights to its existing shareholders to subscribe for additional shares, but shareholder do not participate.

- The client #2 chose not to take up all his entitlements;

- The nature of the retail premium is determined from its character in shareholder’s hands, rather than its character to the company paying it. A retail premium payment receive is:

- Ordinary assessable income if you are an Australian resident;

- An unfranked dividend (and) if you are a non-resident, they are non-assessable non -exempt income or subject to withholding tax.

- Capital gains tax will not apply, then cannot claim the CGT discount.

- Since the behaviors of the company and Client #2’s in this case constitute the components of TR 2012/1, the payment of $25,000 as the retail premium payment should be treated as the ordinary income of client #2 in his income tax year.

Conclusion

The amount of $25,000 paid to the client #2 as a retail premium payment from BAN Ltd must be returned as assessable income in the income tax year.

References

ITAA (1997) 104.25

Related Rulings

TR 2012/1

Question 3

Issue

Work out the amount must be included as assessable income on client #3’s 2017 income tax return. Show all calculations and references to applicable section of the ITAA 1997 and/or rulings or other relevant materials from the Australian Taxation Office.

Solution

- The sold property is a CGT asset | section 108.5 of the ITAA 1997

- The main residence exemption will not apply as the West End property is not client #3’s principal place of residence; the house was purchased as an investment and the client maintained a main place of residence at St Lucia during the period he owned to West End property.

- The sale of the West End property is a CGT Event A1

- Section 104.10(3). The time of an A1 Event is:

- When you enter into the contract for the disposal; or

- If there is no contract, then when the change of ownership occurs.

- As there is a contract for the sale, dated 1 October 2016 , then this is the date of the A1 event. Final settlement on 30 November 2016 is irrelevant to the date of the CGT event.

- For CGT event A1:

- Make a capital gain if the capital proceeds from the disposal are more than the asset’s cost base

- Make a capital loss if those capital proceeds are less than the asset’s reduced cost base.

- Client #3 will have to consider the CGT consequences of him selling the property as follows:

- Cost base of property | $900,000

- Element 1-Acquisition Cost | section 110.25(2)

- $700,000

- Element 2-Incidental Cost | section 110.25

- $50,000

- 150,000(Paid to Mr Jones for contract damages)

- Capital Proceeds | $2,000,000

Agreed transaction price of $2,000,000

- Cost base of property cannot be indexed as it was acquired after 21 September 1999 | Section 104-10(5)

- Therefore, client #3 capital gain= $2,000,000-$900,000=110,000

- Capital gain that is eligible for the 50% General Discount | Sub-Division 115A

- Property held for > 12 months

- Net capital gain if there are no other capital losses=$550,000

Conclusion

The amount of $550,000