Question

Question 1 Amber owned and operated a boutique chocolate shop in Sydney that she purchased for $240,000 in August 2010. The purchase price consisted of equipment and stock worth $110,000 and the balance being goodwill. Following the birth of her child, Amber decided to sell the shop in February 2018 for $440,000 of which $280,000 was attributed to goodwill. Amber was also required to sign a contract restricting her from opening another similar business within a 20km radius for the next 5 years. She received an additional sum of $50,000 for this contract. Due to their expanding family, Amber and her husband purchased a four bedroom home in the outer suburbs of Sydney in June 2018. The purchase was partly funded by the sale of the business but also by the sale of Amber’s one bedroom inner-city apartment. Amber had lived in the apartment since she inherited it from her Uncle in October 2013. He had purchased it in September 1992 for $180,000 and lived in it until he died. At the time of his death the apartment was valued at $390,000. Amber signed a contract for the sale of the apartment in May 2018 for $550,000 and settlement took place in July 2018. Required Advise Amber of the taxation consequences of these transactions. You are not required to calculate any capital gains or losses.

Answer 1

Hey,

Here there are two sale transactions that are subject to Tax.

1. Sale of business

2. Sale of Inherited House

Capital Gain or Losses are calculated as under :

Particulars	Amount
Amount Realized
Less: Basis of Asset Sold
Capital Gain or Loss Realised

We Have amount realized, and we have to calculate Basis of Assets Sold,

1. Basis of Purchased Asset = Cost of Purchase(Increase of Improvements, Reduce for Accumulated Depreciation)

2. Basis of Inherited Asset = FMV(Fair Market Value) at Date of Death OR Elected Alternative Valuation date

Where, Alternative Valuation date = Earlier of 1) 6 Months after Death OR 2) Date of Distribution/sale of Asset.

Also for Inherited Assets, the holding period is always considered long-term irrespective of the actual holding period.

Asset held for more than 1 year is considered as long-term. Here shop is held for more than 1 year so it is also a long-term asset.

Also, Homeowners exclusion is available for the individual of $ 250000 if that home is owned and used as a principal residence for at least 2 years out of 5 years, which in this case is available the home is owned and used from 2013 to 2018.