Joan and Darby (“the taxpayers”) have not filed tax returns in five years since 2005. The taxpayers sold their home in 2005 and their concerns are whether the sale has had any tax consequences for them. CGT Event
The first issue is whether the sale of the taxpayers Hunter’s Hill home on 15th May 2005 has triggered a Capital Gains Tax (“CGT”) event. The applicable statute relevant to this issue is s104-10 of the ITAA97. Since the taxpayers’ home was disposed of with a change of ownership it has therefore triggered an A1 CGT event. s104-10 also states that the event occurs when the contract was entered into; in the taxpayers’ case that is 15th May 2005 and not the 30th June 2005. CGT Asset
Another issue is whether the home is classified as a CGT asset. S100-25(2) classifies land and buildings as CGT assets, therefore making the Hunter’s Hill home one. It should be noted that CGT is only applicable to assets acquired on or after 20th September 1985. The taxpayers originally signed a contract with Oz Constructions (“Oz”) to purchase a block of land and build a house on it on 1 July 1985, making it a pre-CGT asset under s149-10. However, the taxpayers entered into novations with Big Build Ltd (“Big Build”) on 21st September 1985. The issue is whether a new contract was made in these novations and therefore should be regarded as the date of acquisition of the asset. In order for the contract with Big Build to be classified as new from that with Oz, the terms of the contract need to have been altered. In this case they have been; the price to build the home was reduced from $300,000 to $250,000. Therefore, the contract to build the house with Oz is to be disregarded and the date of acquisition is to be considered as 21st September 1985. Calculating Capital Gain/Loss
The next issue is calculating whether this event has resulted in a capital gain or capital loss and by how much. s100-45 sets out the steps needed to perform the calculation. Once these steps are performed the capital gain/loss is calculated as the capital proceeds less the cost base.
S116-20 states that the money received by the taxpayers in relation to the sale of their home is to be considered capital proceeds. Therefore, the sale price of $1,350,000 is to be used.
s110-25 classifies cost bases into five elements. The first element relates to any money the taxpayers have paid in respect to acquiring the asset; in this case it would be $200,000 for land and $250,000 for the house.
The second element relates to any incidental costs incurred when acquiring the asset. The taxpayers incurred incidental costs amounting to $4800 in relation to the acquisition of the land.
The third element relates to the costs of owning the asset but is only to be included if the asset was acquired after 20th August 1991. Since the taxpayers’ land and home was purchased in 1985, the interest they paid for the loan will not be included in calculating the cost base. However, if the asset was acquired after 20th August 1991 the interest would be $481,319.20.
The fourth element incorporates expenditure incurred in order to preserve the asset’s value. This would relate to the electrical work Darby did on the house. The cost is to be calculated as $1800. However, the Oram case along with TD 60 needs to be taken into consideration when determining if this amount should be included in the cost base. In the Oram case, Walton J held that work done by the taxpayer should not be included in the cost base and TD 60 reiterates this. Therefore, the $1800 will not be included in the cost base as it represents Darby’s own work.
The fifth element of s110-25 discusses expenditure incurred to defend the title to the asset. This does not apply in this case.
Adjusting the calculation
When calculating the capital gain of a CGT asset the time value of money needs to be taken into consideration. The money the...