Posted: September 17th, 2023

Capital Gains Tax, Exemptions, and Loss Offsetting

LAW1028 Australian Taxation Law — Assignment 2: Capital Gains Tax Problem

Answer Summary: This RMIT University assignment requires you to calculate Dave Solomon’s net capital gain or loss for the current tax year from the disposal of five separate assets. You must apply the Capital Gains Tax provisions in the Income Tax Assessment Act 1997 (Cth), including the main residence exemption, collectables rules, personal use asset exclusions, and the 50% CGT discount. The assignment is worth 25% of the total course mark, has a 1,500-word limit, and is submitted in Week 10 of the semester. Harvard referencing is required, and all calculations must be shown in a clear table.

Context and Purpose of the Assessment

This individual assignment forms a core assessment component of LAW1028 Australian Taxation Law at RMIT University, Graduate School of Business and Law. The course aims to provide lawyers with a sound understanding of the principles of taxation in relation to income tax, and the assignment tests your ability to apply the CGT provisions to a practical scenario involving multiple asset disposals. The task assesses your capacity to identify the relevant CGT events, calculate the cost base and capital proceeds for each asset, apply the appropriate exemptions and discounts, and reach a net capital gain or loss figure.

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The assignment is worth 25% of the total course mark. It is due in Week 10 and requires a written response of approximately 1,500 words. The course uses assessment to measure your achievement of capabilities against learning outcomes, and the CGT problem directly tests your ability to interpret the Income Tax Assessment Acts of 1936 and 1997 and apply them to a set of facts. The skills you develop here mirror the work of tax lawyers and accountants advising clients on the tax consequences of asset disposals. The assignment also prepares you for the final examination, which covers the full breadth of the course content.

Task Description and Instructions

You are required to determine Dave Solomon’s net capital gain or net capital loss for the year ended 30 June of the current tax year. Dave has provided you with details of five assets he has recently sold, and you must analyse each disposal, calculate the capital gain or loss (if any), and apply the relevant CGT provisions.

Your response should follow a structured approach for each asset: identify the CGT event, calculate the cost base, determine the capital proceeds, apply any exemptions or discounts, and reach a conclusion on the net gain or loss. You must show all calculations clearly, either in the body of your response or in a summary table at the end. Cite the relevant sections of the Income Tax Assessment Act 1997 (Cth) and any applicable case law.

Case Study Scenario

Dave Solomon is planning for his retirement. He has provided you with the following details of the assets he has recently sold:

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• A two-storey residence at St Lucia in which he has lived since 1984. He paid $70,000 to purchase the property and received $850,000 on 27 June of the current tax year, after the real estate agent deducted commissions of $15,000.
• A painting by Pro Hart that he purchased on 20 September 1985 for $15,000. The painting was sold at auction on 31 May of the current tax year for $125,000.
• A luxury motor cruiser that he has moored at the Manly Yacht Club. He purchased the boat in late 2004 for $110,000. He sold it on 1 June of the current tax year to a local boat broker for $60,000.
• On 5 June of the current tax year he sold for $80,000 a parcel of shares in a newly listed mining company. He purchased these shares on 10 January of the current tax year for $75,000. He borrowed $70,000 to fund the purchase of these shares and incurred $5,000 in interest on the loan. He also paid $750 in brokerage on the sale of the shares and $250 in stamp duty on the purchase of the shares. Dave has contacted the ATO and they have advised him that the interest on the loan will not be an allowable deduction because the shares are not generating any assessable income.
• A painting he purchased in March 1987 for $470. He sold the painting on 20 June of the current tax year for $5,000.

Dave has also indicated that his taxation return for the year ended 30 June of the previous year shows a net capital loss of $10,000 from the sale of shares. These shares were the only assets he sold in that year.

Determine Dave Solomon’s net capital gain or net capital loss for the year ended 30 June of the current tax year. Show all workings and cite the relevant legislation.

Submission Requirements and Formatting

• Format: MS Word or PDF. 12-point Times New Roman or Arial, 1.5 line spacing, 2.5 cm margins.
• Length: 1,500 words. A 10% leeway applies.
• Referencing: Harvard style. In-text citations and a reference list are required.
• Structure: A structured written response with headings for each asset and a summary calculation table.
• Submission: Via Canvas. Turnitin similarity report will be generated.
• Late penalties: 10% of the maximum mark per day, up to five days. After five days, no marks awarded.

Marking Rubric and Grading Criteria

Criteria	High Distinction (80–100)	Distinction (70–79)	Credit (60–69)	Pass (50–59)
Identification of CGT events	All CGT events correctly identified for each asset with precise legislative references	Most CGT events correctly identified with appropriate references	Key CGT events identified with some references	Limited identification of CGT events
Calculation of cost base and proceeds	All calculations accurate with correct treatment of incidental costs and adjustments	Most calculations accurate with minor errors	Some calculation errors in cost base or proceeds	Major calculation errors
Application of exemptions and discounts	All exemptions and discounts correctly applied with clear reasoning	Most exemptions and discounts correctly applied	Some exemptions and discounts applied with limited reasoning	Limited or incorrect application of exemptions
Treatment of prior year capital losses	Correctly applied against current year gains with clear explanation of ordering rules	Correctly applied with minor explanation gaps	Applied with some errors in ordering	Incorrect application or omission
Written communication and referencing	Clear, precise writing with accurate Harvard referencing throughout	Clear writing with minor referencing errors	Generally clear writing with some referencing errors	Writing lacks clarity with frequent referencing errors

Sample Answer: Applying the Main Residence Exemption to the St Lucia Property

Dave’s St Lucia residence is the first asset to consider, and the main residence exemption in Subdiv 118-B of the Income Tax Assessment Act 1997 (Cth) likely applies to the entire capital gain. Dave has lived in the property since 1984, which means he has used it as his main residence for the entire ownership period. Under s 118-110, a dwelling is exempt from CGT if it was the taxpayer’s main residence throughout the ownership period and was not used to produce income. The capital proceeds of $850,000 reflect the sale price after the real estate agent deducted $15,000 in commissions. Those commissions form part of the incidental costs of disposal and would ordinarily reduce the capital proceeds, but because the exemption applies, no calculation of the net gain is necessary. The ATO’s main residence guidance confirms that a dwelling is fully exempt if it was the taxpayer’s main residence for the entire ownership period. Students should note that the exemption is not automatic; the taxpayer must make the choice, though in practice the exemption applies unless the taxpayer elects otherwise. The absence of any rental or business use during Dave’s ownership strengthens the case for full exemption. This asset produces no net capital gain for the purposes of the calculation.

Collectables and the $500 Threshold

The two paintings in Dave’s portfolio require separate analysis because they fall under the collectables regime in Div 108 of the ITAA 1997. Collectables include artwork, jewellery, antiques, and coins, and special rules apply to their acquisition and disposal. The Pro Hart painting was purchased for $15,000 in September 1985, which is after the introduction of CGT on 20 September 1985. Because the acquisition date falls after the cut-off, the painting is subject to CGT. The cost base is $15,000 and the capital proceeds are $125,000, producing a gross capital gain of $110,000. The second painting, purchased in March 1987 for $470, is also a collectable, but the acquisition cost is below the $500 threshold. Under s 108-10(2), a collectable acquired for $500 or less is exempt from CGT. The $5,000 sale proceeds do not trigger a capital gain because the exemption applies. The ATO’s collectables page explains the $500 threshold and the special rules for losses on collectables. Students often overlook this threshold, which leads to incorrect calculations. The Pro Hart painting is also eligible for the 50% CGT discount because Dave held it for more than 12 months, which reduces the assessable gain to $55,000. The loss on a collectable, however, can only be offset against gains on other collectables, not against ordinary income or gains on other types of assets.

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 How Do I Treat a Capital Loss on a Luxury Boat?

A question students frequently search for is whether a loss on a personal use asset like a boat can be claimed. The luxury motor cruiser is a personal use asset under s 108-20 of the ITAA 1997, because Dave used it for personal enjoyment and it was not used to produce income. A capital loss on a personal use asset is disregarded and cannot be offset against capital gains or ordinary income. Dave purchased the boat for $110,000 and sold it for $60,000, producing a $50,000 loss. Because the boat is a personal use asset, that loss is ignored for CGT purposes. The ATO’s personal use assets page confirms that losses on personal use assets are disregarded. Students often confuse personal use assets with collectables, and the distinction matters because collectables have their own loss quarantine rules. The definition of a personal use asset excludes land, buildings, cars, and collectables, so the boat falls squarely within the personal use category. If Dave had used the boat to generate income, the loss treatment might differ, but the facts do not support that conclusion. This asset produces no net capital gain or loss for the calculation.

 Ordering of Capital Gains and Losses

The correct sequencing of capital gains and losses is a common source of error in CGT problems. Dave has a prior year net capital loss of $10,000 from shares, and the current year includes a capital gain on the mining company shares. The mining company shares were purchased on 10 January for $75,000 and sold on 5 June for $80,000, producing a gross capital gain of $5,000. The incidental costs of $750 in brokerage and $250 in stamp duty reduce the gain to $4,000. Dave held the shares for less than 12 months, so the 50% CGT discount does not apply. The $10,000 prior year capital loss must be applied against the current year capital gains before any discount is applied. Under s 102-5 and the ordering rules in Div 102, prior year losses are offset against current year gains in the order that produces the best tax outcome. The Pro Hart painting gain of $110,000 is reduced by the $10,000 loss to $100,000, and the discount then applies to the remaining gain, producing $50,000. The ATO’s CGT discount page explains that the discount applies after losses are offset. Students who apply the discount before deducting losses will overstate the net capital gain. The final net capital gain for Dave is $54,000, calculated as follows: Pro Hart painting gain of $110,000 minus prior year loss of $10,000 equals $100,000; applying the 50% discount gives $50,000; adding the mining shares gain of $4,000 gives a net capital gain of $54,000.

Frequently Asked Question

Does the main residence exemption apply automatically when I sell my home?

The main residence exemption applies automatically if the dwelling was your main residence throughout the ownership period and was not used to produce income. You do not need to make a formal election in most cases. However, if you used part of the dwelling for business or rented it out, the exemption may be partial, and you may need to apportion the gain. The ATO’s main residence page explains that if the dwelling was your main residence for only part of the ownership period, you may be entitled to a partial exemption. The exemption is not available for a dwelling that was never your main residence. Keep records of when you moved in and out, and any periods the property was rented or used for business.

Why This Matters in Practice

The issues in this assignment mirror the questions tax lawyers and accountants answer for clients every day. A retiree selling multiple assets needs to know which gains are exempt, which are discounted, and how prior year losses interact with current year gains. A client who has held a main residence for decades needs to understand whether the exemption applies fully or partially. A taxpayer who has sold a personal use asset needs to know that losses are disregarded. Getting these questions wrong has financial consequences for clients and professional consequences for advisers. The skills you develop here, reading legislation, applying exemptions, and sequencing gains and losses correctly, are the same skills you will use in practice. The ATO’s compliance focus on CGT means that accurate reporting is essential.

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References and Learning Materials

Australian Taxation Office. (2024). CGT discount. https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/cgt-discount

Australian Taxation Office. (2024). Collectables. https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/collectables

Australian Taxation Office. (2024). Personal use assets. https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/personal-use-assets

Australian Taxation Office. (2024). Your main residence. https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/property-and-capital-gains-tax/your-main-residence

Income Tax Assessment Act 1997 (Cth).

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Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2023). Australian taxation law (33rd ed.). Oxford University Press.

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Next Assessment: Week 12 Take-Home Examination

Week 12 Take-Home Examination — LAW1028 Australian Taxation Law

The final assessment for LAW1028 is a take-home examination released in Week 12. The exam consists of two problem questions covering the full breadth of the course, including assessable income, deductions, CGT, GST, and fringe benefits tax. You will have 48 hours to complete the exam and submit your answers via Canvas.

Each question requires a structured answer with legislation and case law references, similar to the assignment but under time pressure. You must answer both questions, and each is worth 50% of the exam mark. The exam assesses your ability to apply tax law principles to unfamiliar scenarios and to communicate your analysis clearly and concisely. Prepare by reviewing the tutorial problems, the assignment feedback, and the prescribed text. The exam is open-book, but time is limited, so effective note-taking and a clear structure are essential.

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