Question

On 1st March 2016 Max bought a house in Ettalong Beach which cost $550,000. In addition, he paid stamp duty of $25,000 and legal fees of $3,000 in that same month. The property was not his main residence. It was used for rental to produce income throughout the ownership period. He used a loan of $450,000 to help him acquire the property and paid $950 stamp duty on the loan. He paid annual council rates of $3,000 each year. He also paid interest on the loan over the ownership period. The average interest payment per year amounted to $24,500. He also spent $150,000 installing a new swimming pool and $35,000 on replacement of a new roof. As he was commencing building the swimming pool, he had a run in with his neighbour complaining about certain illegal building work concerning a pergola adjacent to the pool that had not been approved by the Council. He was prosecuted by the council and required to pay $85,000 in legal cost to defend the matter concerning his property. The property was contracted for sale on 30 April 2023 for $1.2 million and final settlement occurred on 30 June 2023. Costs associated with the sale included commission of $28,000 paid to the real estate agent who sold the property, legal fees of $4,500 and advertising of $4,000. Required: (a) Calculate the COST BASE of the property (4 marks) (b) Calculate his NET ASSESSABLE CAPITAL GAIN (4 marks) (c) He wants to know how his Net Capital Gain will be taxed. Explain the tax consequences and refer to relevant laws. (2 marks)

Answer 1

(a) **Calculate the COST BASE of the property:**
- Purchase Price: $550,000
- Stamp Duty on Purchase: $25,000
- Legal Fees on Purchase: $3,000
- Loan Amount: $450,000
- Stamp Duty on Loan: $950
- Installation of Swimming Pool: $150,000
- Replacement of Roof: $35,000
- Legal Costs for Council Prosecution: $85,000
- Total Cost Base = $550,000 + $25,000 + $3,000 + $450,000 + $950 + $150,000 + $35,000 + $85,000 = $1,299,950

(b) **Calculate his NET ASSESSABLE CAPITAL GAIN:**
- Selling Price: $1,200,000
- Minus Costs associated with the Sale:
- Real Estate Agent Commission: $28,000
- Legal Fees on Sale: $4,500
- Advertising Costs: $4,000
- Net Sale Proceeds = $1,200,000 - ($28,000 + $4,500 + $4,000) = $1,163,500
- Net Assessable Capital Gain = Net Sale Proceeds - Cost Base
= $1,163,500 - $1,299,950 = -$136,450 (Capital Loss)

(c) **Tax Consequences and Relevant Laws:**
- Since there is a capital loss of -$136,450, Max can use this loss to offset any capital gains he may have incurred in the same income year or carry it forward to offset future capital gains.
- The taxation of capital gains is governed by the relevant tax laws of the jurisdiction. In many cases, capital gains are included in the taxpayer's assessable income, but specific rules and rates may vary. Max should consult with a tax professional or refer to the tax regulations applicable in his location for precise details.