The request for advice relates only to the sale of the home and the gift shop. This limits the matters to be conversed to the capital gains tax (CGT) issues. The idea behind CGT is to tax as part of income, gains made on the disposal of capital assets. What follows is the advice structured in a number of key headings.
Under section 108-5 of the Income Tax Assessment Act 1997(Cth), CGT applies only to those assets designated as CGT assets. The section defines a CGT asset in two ways. In the first part, it defines such assets as any kind of property. This approach leads to a wide coverage of what should amount to property. In McCaughey v Commissioner of Stamp Duties (1945), it was held that property encompasses even part interest in such property.
It follows from this first approach to the definition of a CGT asset that the family home and the various components of the business may qualify as CGT assets. Goodwill, trading stock, fittings, shop and land would all appear to come under this definition.
For the sake of clarification, the second part of the section includes any legal or right that is not property within CGT assets. This position was emphasized in FC of T v Orica Ltd 2001 in which a right against an assumption party in a debenture agreement constituted a CGT asset. This may seem to suggest that the debt taken over can also qualify as a CGT asset. With specific respect to goodwill, Taxation Ruling 1999/16 held that it is the legal as opposed the accounting characterization of goodwill that counts. The import of that ruling is that goodwill can only be disposed of together with the business and not on its own.
Capital Gains Tax does not, however, apply to all CGT assets. There are a considerable number of exemptions. For instance, subdivision 118-B of the ITAA exempts capital gains arising from the disposal of main residence. Thus, it follows from this that no capital gains tax will be assessed with respect to the family home. In addition, the subdivision also exempts trading stock from the liability of capital gains tax.
The general rule is for such receipts to be considered as capital receipts subject to capital gains tax as opposed to being treated as ordinary income. Under this rule, the $ 20,000 received by Brian would be part of his capital gains from the transaction. This general rule is, however, limited as both the Australian Taxation Office (ATA) and the courts have tended to look at the particular circumstance before classifying the receipt as either ordinary income or capital gain. In Beak v Robson (1942), a lump-sum payment to the taxpayer in consideration of him not opening a competing business was considered as a capital receipt. It follows from this that the ATA is likely to consider the $ 20,000 as a capital receipt as opposed to an ordinary income.
Even where the assets in question are characterized as CGT assets, CGT does not take effect without a CGT event. Under section 100-20, one can only recognize a capital gain or loss in the presence of a CGT event. Section 104-10 discusses the disposal of a CGT asset as one of the CGT events. Under that provision and taking considering the exemptions, one can only disregard a capital gain or loss if the asset in question was acquired prior to 20 September 1985. In addition, the provision construes disposal in its ordinary sense. Brian acquired his land only 10 years ago, thereby, bringing the sale within the purview of a CGT event.
Section 104-10 also lists the creation of contractual or other rights as a CGT Event D1. Brian entering into a contract to receive $ 20,000 in consideration of him not operating a competing business can be seen as falling within this category of a CGT event. It follows from that that he has to recognize a capital gain of $ 20,000 in respect of that arrangement.
That both Brian and his wife own shares in the property development company appears to be immaterial as there is no evidence of a CGT event having taking place with respect to those shares.
The foregoing discussion raises a number of issues for Brian. First, there was the issue as to whether the sale related to a CGT asset. The answer to this issue is partly in the affirmative and partly in the negative. Some of the assets disposed of like the family home are exempted from capital gains tax. The rest would be considered as capital gains assets. The second issue on whether there was a CGT event necessitating a capital gain or loss was also answered partly in the affirmative and partly in the negative. With respect to the shares held in the property development company, no CGT even could be identified. The other disposals met the test for a CFT event.
Beak v Robson (1942) 25 TC 33
FC of T v Orica Ltd 2001 ATC 4039
Income Tax Assessment Act 1997(Cth)
McCaughey v Commissioner of Stamp Duties (1945) 46 SR (NSW) 192
Taxation Ruling 1999/16
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