Accg924 Taxation Law: Capital Gains Assessment Answers

Gringo Ltd (known as Gringo) is a resident Australian company that supplies office equipment to businesses and private individuals in Sydney. Gringo has two equal shareholders – Amy and her husband Ben who hold 50 issued shares each in the company. Amy and Ben acquired their shares for an issue price of $300 per share on 1 January 2008 when Gringo was incorporated.

The business of Gringo was initially carried on from leased premises. On 1 January 2012 Gringo purchased the leased premises which included an administration office, a warehouse and an adjoining car park for customers. Initially Gringo considered the purchase of only the warehouse for $800,000, but then decided to purchase the administration office, the warehouse and the car park for $2 million.

Gringo was required to borrow $950,000 on 1 January 2012 to purchase the business premises. Interest on the 12-year loan was 10% and there was an upfront establishment fee of $3,000.

In March 2012, Gringo found out that the plumbing and electrical systems in the administration office needed repairing and spent $30,000 to rectify the problems. In January 2013, Gringo paid a builder $80,000 to add two rooms to the administration office. The driveway leading to the car park had to be repaired in 2014 at a cost of $18,000 because tree roots were damaging it.

In December 2015, a violent hail storm caused damage to some parts of the warehouse roof. Gringo decided to replace the entire roof at a cost of $45,000 and added insulation and air conditioning at a cost of $30,000. The storm also damaged a large sign advertising the business and it cost Gringo $2,000 to get it working again.

Gringo purchased some equipment on 1 July 2013 that would be used solely to move goods around the warehouse. The equipment cost $44,000 (GST inclusive) and Gringo is entitled to claim an input tax credit for the GST included in the purchase price. Gringo claimed a capital allowance for the vehicle for 2013/14, 2014/15 and 2015/16, using the prime cost method and basing the calculation on an effective life of five years. On 1 July 2016, Gringo sold the equipment for $12,000 to the brother of Amy, one of the Gringo shareholders. The market value of the equipment at the time was $28,000.

Gringo decided to relocate its business to New Zealand from 30 June 2017 and, as a result, on 1 May 2017 entered into a contract to sell the business premises for $3.8 million. Legal fees associated with the sale were $12,000 and other selling costs amounted to $8,000.

1. Based on the information provided and assuming Gringo had a carry forward capital loss of $30,000 at 30 June 2016, explain and calculate the net capital gain or capital loss to be included in Gringo's assessable income for 2016/17 as a result of the sale of the business premises

Amy and Ben moved to New Zealand on 1 July 2017 when the Gringo business was relocated and their intention was to stay there indefinitely. The assets that they still owned when they moved on 1 July 2017 were their shares in Gringo, 2,000 Commonwealth Bank shares, their family home in Sydney and two cars.

The plan was that they would primarily be based in New Zealand and would each be paid a salary as employees of Gringo. Amy would, however, work for Gringo for four months each year in Sydney because of the need to maintain close links with customers and to make new business contacts.

1. Explain the capital gains tax consequences for Amy and Ben when they move to New Zealand. Include in your explanation any choices Amy and Ben can make that would change the CGT consequences of their move.

2. Explain how the salaries earned by Amy and Ben would be taxed after they move to New Zealand.

You must support your answers with legal sources (legislation, rulings or cases). If you have insufficient information and need to make assumptions, those assumptions must be reasonable and must be stated.

Part A.

As on 21^st July 2013, the equipment cost included Good and Service Tax (GST) worth $44,000. The GST is calculated as 10% of the purchase amount of the equipment. (i.e. $44,000/110*100 = $40,000). Therefore, the GST amounted to $44,000 - $40,000 = $4,000. This implies that $4,000 input tax credit is claimable in this case (Australian Taxation Office, 2015). Hereunder, is a detailed working of the capital allowance on the equipment for Gringo (Australian Taxation Office, 2015a).Under the prime cost method, a fixed amount of allowance can be claimed based on the formula below.

The cost of asset * days held / total days in the year or 365 * 1 / 5

= $40,000 * (365*3)/365 * 1/5

= $40,000 * 3 * 1/5

= $24,000

Hence, for 2015-16 the fixed amount of allowance will be $24,000.

Contextually, the exact value of the equipment for Gringo as on 2016-17 is $40,000 - $24,000 = $16,000.

Therefore, loss on sale of equipment will amount to $16,000 - $12,000 = $ 4,000.

Based on these facts, the interest on loan is calculated below. Loan = $950,000

Date of loan = 1^st Jan. 2012

Rate of interest =10% per annum

Interest on loan for one year = $950,000*10% = $95,000

Interest on loan for 5 years = $95,000*5 = $475,000

Therefore, the total expenditure till date for Gringo is as follows.

As can be observed from the table, the total expenditure of Gringo is $2,272,000. This implies that the total income for the year 2016-17 for Gringo is:

After the calculation and taking in assumption the forwarded loss of $30,000, the amount of capital gain calculated = Total Income- total expenditure - Forwarded loss

= $3,812,000 – $2,272,000 – $30,000

= $1,510,000 (Australian Taxation Office, 2016a)

Correspondingly, the Gringo is qualified for a small business concession because the total assets value of the company is less than $ 6 million (Australian Taxation Office, 2016). In addition, a discount will be applicable in this case @ 50% of the total capital gain of the year as per Subdivision 152-E – Small business rollover (CCH, 2011). Thus,

= $1,510,000 – (50% of $1,510,000) = $755,000

Therefore, the total assessable income for Gringo in the year 2016/17, after selling the business premises, will be $755,000 (Australian Taxation Office, 2016a).

Part B

1.

In New Zealand, the income from foreign investments and capital gains is completely exempted temporarily for the first four years. After four years of living, tax will be applied. If capital gains occur, the tax paid will remain the same as the company income, which is 28% on the total amount of capital gains. However, Amy and her husband Ben have to qualify as a resident of New Zealand to get complete tax concession over capital gains, living in New Zealand with a ‘Transitional Resident Status’ (New Zealand Immigration, 2017).

2.

When Amy and Ben will move to New Zealand, the tax on their income will be charged @ 33% on their income, which it is recorded $70,000 and above and 30% given that their income is between $48,001 and $70,000. A slab rate of 17.5% on income will be charged if their income is between $14,001 and $48,000 and at last 10.5% on their income ranging from $0 to $14,000 (New Zealand Immigration, 2017).

References

Australian Taxation Office 2015, GST Credits and Income Tax Deductions, Australian Government, viewed 26 April 2017, <https://www.ato.gov.au/business/gst/claiming-gst-credits/gst-credits-and-income-tax-deductions/>.

Australian Taxation Office 2015a, Prime Cost (Straight Line) and Diminishing Value Methods, Australian Government, viewed 26 April 2017, <https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/general-depreciation-rules---capital-allowances/prime-cost-(straight-line)-and-diminishing-value-methods/>.

Australian Taxation Office 2016, Small Business CGT Concessions, Australian Government, viewed 26 April 2017, <https://www.ato.gov.au/General/capital-gains-tax/cgt-exemptions,-rollovers-and-concessions/small-business-cgt-concessions/>.

Australian Taxation Office 2016a, Working Out Your Net Capital Gain or Loss, Australian Government, viewed 26 April 2017, <https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-net-capital-gain-or-loss>.

CCH 2011, Australian Income Tax Legislation 2011: Income Tax Assessment Act 1997 (sections 1-1 - 717-710), CCH Australia Limited, Sydney.

New Zealand Immigration 2017, Taxes, New Zealand Now, viewed 26 April 2017, <https://www.newzealandnow.govt.nz/living-in-nz/money-tax/nz-tax-system>.