PART A
a)
(1) CGT event A1 arises when Party Time sell the factory, CGT event A1 occurs when there is a disposal of a CGT asset (sec104-10).
(2) Since on 1 May 2014 Party Time entered into a contract to sell the factory for $2.35 million, In accordance with sec116-20, the capital proceeds are $2.35 million.
(3) Under sec110-25(1), cost base is calculated as follows:
Purchase price is $700000(sec110-25(2)).
An incidental cost on disposal is $50000, which is the settlement on the sale of the factory (s110-25(3)).The $50000 amount is one-off lump sum amount in order to disposal of the factory. It’s capital and not deductible under s8-1. So this amount goes into the second element.
Legal fees $12000 incurred to obtain separate title to the factory constitute the cost base (s110-25(6)).
Therefore, total cost base: $700000+$50000+$12000=$762000.
(4) Because the factory was acquired on 1 June 2009, so indexation method does not apply here (Div114). However because the Party Time is a company, it cannot use the discount method (Div115). So net capital gain in current year is $2350000-$762000=$1588000.
(5) Offset $60000 capital loss carried forward from previous year, therefore the net capital gain is $1588000-$60000=$1528000, this amount will be included in assessable income for the year ended 30 June 2014.
b) The correct balance should be $105000. Although the $25000 trading stock is yet to be delivered and not actually owned by Party Time, your company hold the bill of landing which means that you has the power to dispose of this part of trading stock so the trading stock is on hand of Party Time (Taxation Ruling IT 2670). So the $25000 trading stock should be included in the balance of stock on hand.
In the case of FC of T v Suttons Motors Wholesale Pty Ltd 1985, the High Court considered if the entity has the power to dispose of the goods, the trading stock is “on hand” of the entity even if the entity doesn’t have physical possession of the stock or title may not have passed to the entity.
Details of property and contract law can help to decide whether the entity has the power to dispose of the trading stock. The contract law rules considering a bill of lading is the decisive factor to prove the power to dispose of trading stock (All States case).
c) Whether Interest paid on loan is deductible under s8-1 depends on what Party Time borrows the money for which is the “use” test. If a person borrows and uses the money for income producing purpose, then the interest is deductible under s8-1. Party Time borrowed the money to purchase office, warehouse and factory, so the money is totally used to finance the acquisition of an income-producing capital asset such as office premises, then the interest on loan is deductible (Taxation Ruling IT 2606). And also we can interpret Party Time simply use the money for income producing purpose, so the interest on loan is deductible under s8-1.
2) The $2500 loan establishment fee is borrowing expense and can be deductible under sec25-25 because the money Party Time borrows is used for assessable income producing purpose. This borrowing expense cannot be deductible under s8-1 because it has a capital nature.
In this case the period of the loan is 5 years that is the shorter of actual period of loan in this case is 15 years and 5 years from the date on which the money was borrowed (s25-25(5)).
The potential income tax deduction is calculated under s25-25(4):
Step1: the remaining expenditure is $2500
Step2: the remaining loan period is 5 years (1826 days).
Step3: $2500/1826=$1.37
Step4: $1.37x30 days (days from 1 June 2009 to 30 June 2009) =$41.1 (deduction amount)
The amount deducted in2009/10: $1.37 x 365 days=$500.05
The amount deducted in2010/11: $1.37 x 365 days=$500.05
The amount deducted in2011/12: $1.37 x 366 days=$501.42
The amount deducted in2012/13: $1.37 x 365 days=$500.05
The amount deducted in2013/14: $1.37 x 335 days=$457.33
PART B