Event A1 happens when Party Time sale the factory under s 104-10. In order to calculate the net capital gain or loss, we should follow the steps under s 100-50. 1. Calculate Party Time current year capital gains
2. Less current year capital losses of Party Time if there is 3. Less unapplied net capital losses for previous year of Party
Capital gain=capital proceeds- cost of base
Under s 116-20, the capital proceeds are the money or the market value of any property received in relation to a CGT event, or which the taxpayer is entitled to receive. Under s110-25, cost base include several elements such as purchase price, incidental costs, the costs of ownership (for assets acquired after 20/08/1991), capital expenditure. More specifically, under s110-25(3), the incidental costs incurred to acquire the CGT asset or that relate to CGT event (for example, the disposal of a CGT asset).
In this case, Party Time entered into a contract to sell the factory for $2.35 million on 1 May 2014, so the capital proceeds is $2.35 million. The purchase price of factory is $700000. Incidental costs include legal fees ($12000) which incurred to acquire factory and agent’s fee ($50000) which incurred to dispose factory. As a result, the total cost base equal to $700000 + $12000 + $50000 = $762000.
Net capital gain or loss for the year ended 30 June 2014
notional capital gain
less: capital loss for previous year
net capital gain
The issue here is whether the trading stock costing ($25000) which is still delivered until 30 June 2014 should be included in the balance of stock on hand as at 30 June 2014. We should consider whether 1) this trading stock is ‘on hand’ on 30 June 2014. 2)
The Party Time should add the trading stock costing $25000 in the balance sheet. Firstly, by the end of financial year the trading stock was on hand because the trading stock is been delivering and Party Time hold the bill of lading as at 30 June 2014 (all states Frozen Food Pty Ltd v FC of T90 ATC 4175). What’s more, goods are considered to be “trading stock on hand” because the company is in a position to dispose of the goods even though title may not have passed or the trader does not have physical possession of the stock (taxation Ruling IT 2670). Lastly, in the year 2013/2014, the cost of trading stock is deductible because it becomes trading stock on hand in the same year (Under s 70-15). As a result, the $25000 cost of trading stock should be included in the balance sheet which is $80000+$25000=$105000. (c)
The deductibility of interest expenditure is considered under ITAA97 s 8-1. Interest expense can deduct that it is incurred or necessarily in gaining or producing assessable income and must not be of a capital, private or domestic nature
Taxation ruling IT 2606, interest is deductible where the relevant borrowing are used to finance the acquisition of an income- producing capital asset.
In this case, whether the interesting expense is deductible depends on the “use test”(FC of T v Munor; FC of T v RobertsεSmith). Obviously, the company borrowed money to purchase the office, warehouse and factory so they put money into gaining or producing assessable income. So the $2500 interest expense of this loan should be deductible under s8-1.
$2500 establishment fees:
In this case, Party Time paid $2500 upfront establishment fee which is the cost of borrowing expense. Establishment fee is regarded as capital in nature and not deductible under s 8-1. However, the $2500 of cost of borrowing money can be deductible because the borrowing money is used to purchase the office, warehouse and factory in order to produce assessable income (s25-25(1) ITAA97).
Assume that in the year 2013/2014, the borrowing money is solely used for producing assessable income. The $2500 is traded as borrowing expense and deduct over 5...
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