Apply the law to the facts by using established authorities

Question

Case Study

Part A

Tom's grand aunt Eleanor died on 4 June 2012 leaving 1 000 shares in CSR Ltd to Tom in her will. Eleanor had purchased 400 of the shares in 1984 for $1.50 each incurring $250 in brokerage fees on the purchase. The other 600 shares were purchased by Eleanor on 3 March 2007 for $8.50 each incurring $100 in brokerage on the purchase. The shares were trading at $10.70 on the Australian Stock Market on 4 June 2012. Tom decided to hold on to the shares rather than selling them.

Required:

What is the cost base of the shares acquired by Tom as a result of the death of Aunt Eleanor? Support your answer with reference to appropriate authority.

Part B

Anthony, a non- resident, purchased a residential rental property in Brisbane, Queensland on 25 October 2007 at a cost of $560,000 and incurred $20,000 in stamp duty and legal expenses at the time of the purchase. On 12 July 2011 Anthony purchased a residential rental property in Miami, Florida in the USA for $340,000 and paid $5,000 to a property consultant in advising him in relation to the purchase. Anthony did not live in either of the properties but rented both of them out to tenants until 23 February 2012 when he sold the Brisbane property for $700,000 and the Florida property for $470,000.

Required:

Based on this information what amount of net capital gains in accordance with the ITAA 97 will Anthony derive from the sale of the properties? Support your answer with reference to appropriate authority.

Part C

Liam, a resident, purchased a residential premises on 1 January 2001 in Toowoomba at a cost of $450,000 incurring stamp duty and legal expenses of $23,000 on the purchase. Liam immediately moved into the property and commenced using it as his home. On 1 January 2006 Liam moved to Melbourne to enable Liam to commence a new job working with a large accounting firm and the house in Toowoomba was rented to tenants. He was provided with accommodation in Melbourne for a period of three years and on 1 January 2009 Liam moved back to Toowoomba and re-commenced living in his Toowoomba home. The market value of the Toowoomba property was $550,000 on 1 January 2006 and $580,000 on 1 January 2009. Liam sold the property on 1 January 2012 for $670,000 to enable him to move to Brisbane.

Required:

Based on this information what amount of net capital gain will Liam derive from the sale of the house? (Minimise the net capital gains wherever possible with available elections). Support your answer with reference to appropriate authority.

Part D

Nicholas, a resident, purchased a residential rental property in Brisbane on 13 June 2001 at a cost of $350,000 and incurred $9,000 in stamp duty and legal expenses at the time of purchase. Nicholas also paid $4,000 to a building consultant to check out the property to ensure that it was structurally sound at the time of purchase. He immediately rented the property out to tenants and has rented the property at all times while he has owned the property. On 14 September 2004 he put on an extension to the property building two extra bedrooms at a cost of $130,000. Nicholas sold the property for $670,000 on 10th October 2011. Nicholas incurred real estate agent fees of $13,940 and legal fees of $1,500 in selling the property. Nicholas had paid $88,000 of interest on borrowings to purchase the property over the period that he owned it.

Required:

Based on this information what is Nicholas's cost base of the property at the time of sale? Support your answer with reference to appropriate authority.

There are four recognised stages in completing a tax law problem:

1. Identify the tax law issues that are raised by the facts.

2. Identify the relevant authorities which will include legislation, decided cases and other materials including Commissioner's Rulings and Determinations.

3. Apply the law to the facts by using established authorities to determine the appropriate taxation treatment. Review the application of the law from every perspective.

4. Come to a conclusion on the issues that you have identified and discussed.

   Note this methodology is sometimes referred to as ILAC: I (Issue), L (Law), A(Application), C (Conclusion).

   Marks to be awarded 10	Major issue or part of question
   2	Identification of issue(s) from the facts - marks will be allocated based on the ability to clearly state the issue(s) and the relevance of the issue(s) in the current context. Where there is an unclear statement of the issues or omission of issues in an answer lesser marks will be awarded.
   2	Identification of the relevant law in the area including cases, legislation, rulings, determination or other authority - marks will be allocated based on your ability to clearly identify the legal framework in which the issue(s) resides. Where there is an incomplete identification of the relevant authorities lesser marks will be awarded.
   4	Apply the law to the facts providing discussion and analysis sufficient to demonstrate knowledge and understanding of the application of the law. Marks will be awarded based on your ability to apply the law to the facts and on the basis of your ability to develop logical argument and evaluate the strengths and weaknesses of alternative outcomes. Irrelevant and repetitive material will attract lesser marks.
   2	Conclusion logically flowing from the discussion and analysis. Marks will be awarded based on your ability to draw together the strands of your argument. Your conclusion should be clear and be derived from your application of the law. Little or no conclusion or a conclusion that is not based on the argument will attract lesser marks.

   Where the case study or question requires some mathematical calculations a separate amount of marks will be allocated for the calculations.