Finance and Accounting
Taxation
Brief
Bella is a new client. She has come to see you to discuss any tax consequences of the sale of her family home. Bella inherited the house in Manning (a suburb of Perth) in 1995 following the death of her father. In 1984 he had purchased the house, which is on a 1,000 m2 block of land, for $34,000, and lived in it until his death, when it was valued at $350,000.
Bella had not lived in the property since her father purchased it, but she kept the property and rented it to tenants. In 2010, when the property was valued at $620,000, Bella left Australia and moved to Dubai to work. While in Dubai she lived in accommodation provided by her employer.
In 2013 Bella moved back to Australia. The last tenants had a final party and the house was severely damaged. At this stage the property was valued at $800,000, and the insurance company paid $80,000 in respect of the damage. Bella decided not to repair the house but to demolish the house and develop the site. She subdivided the site into two lots and built a house on each site. The larger site, 600 m2, had building costs of $350,000. The house on the smaller lot, 400m2, cost $300,000. Site works to demolish the house and prepare the land for rebuilding cost another $80,000.
Construction was completed in the current income year. Bella put both properties on the market. She sold the larger house soon after construction was completed for $700,000, paying marketing costs of $10,000. The smaller property did not sell straight away. The best offer was a lease for one year, with rent of $1,800 pm. At the end of the year the lessee has an option to buy the property at the current market value of $550,000. Bella paid legal expenses of $600 for the lease contract, and marketing expenses of $7,500.
When she moved to Dubai she had placed some furniture and household goods in storage here in Perth. When she returned she disposed of these goods. Most items were disposed of at the local markets for a total of $3,000, an overall loss of $4,000 but several antiques were sold to dealers. A dining setting that cost $3,000 in 1996 was sold for $8,200; and a wardrobe that had cost $360 in 1998 was sold for $4,200. An antique dresser that had cost $4,000 in 2002 was damaged by the tenants and the insurance company reimbursed $2,500.
During the year she also sold shares that had cost $34,000 in 2009 for $50,000, and shares that had cost $15,000 in 1984 for $72,000. Both companies are trading listed on the Australian Stock Exchange. She advises you that she has a capital loss of $10,000 carried forward from 2010.
Required
Prepare a letter of advice to Bella explaining the CGT implications of the above transactions for the year ended 30 June 2015. Where necessary, discuss how previous transactions have affected the advice in relation to the current year.
Show all calculations including Bella’s net capital gain for the year ended 30 June 2015.
Provide legislative references to justify your answer.
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