58 THE TAX INSTITUTE APPLIED TAX Capital Gains Tax Fundamentals Activity 8 Kylie, a sole trader, began her business 10 years ago. She built up the business and sold it at the age of 60 for $2.8 million on 30 June of the current income year. At this date she had prior year capital losses of $300,000. Required: Outline to Kylie any CGT concessions that may be available, the CGT retirement exemption provisions and any other provisions that could be used to her benefit. The cost base of her net assets at 30 June of the current income year was $1.8 million. Ignore indexation. Activity 9 Andrew, aged 50, has operated a swimwear manufacturing business for 12 years. He is thinking of getting out of that business in the last quarter of the current income year, but is unsure what he will do next. His current business has assets with a net value of $1 million. If he sells the business assets, there will be capital gains on goodwill of $250,000 and a factory (which he acquired 11 months ago) of $100,000. A potential purchaser is also prepared to pay Andrew a further $50,000 in return for Andrew agreeing not to set up in competition with the swimwear business within 100 kilometres at any time in the next three years. Consider the following information. Andrew: n owns his own home with a current value of $800,000 (with a mortgage of $300,000). He also operates a partnership with his brother (see below) out of a separate office in this dwelling, though he does not claim any tax deductions in respect of this office space n owns an investment property worth $500,000 (loan of $200,000) n owns shares in BHP worth $100,000 n has superannuation fund interests of $500,000 n owns 30 per cent of Beaches Pty Ltd (Beaches) (net value of company is $1 million). His wife, Suzie, also owns 30 per cent, with the balance of shares held by an unrelated third party. This company operates as an advertising agency and is a 50 per cent equity partner in another (computer) business (net value of partnership assets $2 million). Andrew’s brother is the other 50 per cent partner. n is a beneficiary of the Beach Family Discretionary Trust. Andrew has not received any distributions of the capital or income of the trust, which currently has an asset value of $1.1 million. Suzie is a successful fashion consultant, and her business has a current value of $800,000. The business is operated by a unit trust, with Suzie owning 99 per cent of the units and Andrew owning the balance. Required: (a) Does Andrew satisfy the net asset value ($6 million) condition? If not, what could be done to ensure that Andrew does satisfy this test? (b) Are the assets that Andrew proposes to sell “active assets” for the purposes of the small business CGT concessions?

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58 THE TAX INSTITUTE

APPLIED TAX

Capital G

ains Tax Fundam

entals

Activity 8

Kylie, a sole trader, began her business 10 years ago. She built up the business and sold it at the age of 60 for $2.8 million on 30 June of the current income year. At this date she had prior year capital losses of $300,000.

Required:Outline to Kylie any CGT concessions that may be available, the CGT retirement exemption provisions and any other provisions that could be used to her benefit. The cost base of her net assets at 30 June of the current income year was $1.8 million. Ignore indexation.

Activity 9

Andrew, aged 50, has operated a swimwear manufacturing business for 12 years. He is thinking of getting out of that business in the last quarter of the current income year, but is unsure what he will do next. His current business has assets with a net value of $1 million. If he sells the business assets, there will be capital gains on goodwill of $250,000 and a factory (which he acquired 11 months ago) of $100,000. A potential purchaser is also prepared to pay Andrew a further $50,000 in return for Andrew agreeing not to set up in competition with the swimwear business within 100 kilometres at any time in the next three years. Consider the following information. Andrew:

n owns his own home with a current value of $800,000 (with a mortgage of $300,000). He also operates a partnership with his brother (see below) out of a separate office in this dwelling, though he does not claim any tax deductions in respect of this office space

n owns an investment property worth $500,000 (loan of $200,000)

n owns shares in BHP worth $100,000

n has superannuation fund interests of $500,000

n owns 30 per cent of Beaches Pty Ltd (Beaches) (net value of company is $1 million). His wife, Suzie, also owns 30 per cent, with the balance of shares held by an unrelated third party. This company operates as an advertising agency and is a 50 per cent equity partner in another (computer) business (net value of partnership assets $2 million). Andrews brother is the other 50 per cent partner.

n is a beneficiary of the Beach Family Discretionary Trust. Andrew has not received any distributions of the capital or income of the trust, which currently has an asset value of $1.1 million.

Suzie is a successful fashion consultant, and her business has a current value of $800,000. The business is operated by a unit trust, with Suzie owning 99 per cent of the units and Andrew owning the balance.

Required:

(a) Does Andrew satisfy the net asset value ($6 million) condition? If not, what could be done to ensure that Andrew does satisfy this test?

(b) Are the assets that Andrew proposes to sell active assets for the purposes of the small business CGT concessions?