Question

Ken entered into a contract to purchase two retail store premises in June 2003. The cost of each was $300,000, with stamp duty of $20,000 each. Settlement was during August 2003.He used these retail premises (which had been previously unoccupied) to commence a business that sold furniture to the public.

During the time that Ken owned the store, they each had an annual aggregated turnover of approximately $3 million.

During November 2019, Ken, who was 53 at the time, wanted to have more spare time and not carry on a business anymore.He had found that although his turnover was high, after costs his profits were very modest.As a result, he entered into the following contract withJane:•

(a) The first of the two furniture premises was to be sold to Jane for $1,200,000 and the goodwill attached to it sold to Jane for $400,000.

(b) The second store was to be rented to Jane for a two year lease (with an option to renew for another two year period). Rent was set at $2,000 a month, with an upfront lease premium of $25,000 payable.

(c) Jane was to pay Ken $200,000 to not compete with her for the following 3 years.

At the time of the November 2019 contract, Ken owned the following assets:

• Full ownership of a main residence in Hawthorn, worth $3 million.

• 42% ownership of a company called PI Pty Ltd, which invests in rural properties. The total market value of PI Pty Ltd was $300,000

• 80% share on an investment property (Ken’s cousin owns the other 20%). The total value of the property was $500,000.It had a $300,000 mortgage over it.

• Superannuation worth $1.5 million

• Shares in BHP worth $200,000.

• An apartment in Kew (see below)

On 1December2015 Ken had bought an apartment in Kew to live in. This cost him $400,000. After living in it for 2 years ,on 1 December 2017,Ken bought and moved into his Hawthorn house (mentioned above),which he from that point on claimed as his main residence. At the time, his apartment in Kew was worth $500,000, which he immediately rented out. The Kew apartment was sold for $510,000 in December 2019.

Advise Ken as to the CGT consequences regarding the 2019-20 tax year. In doing so please discuss Ken’s ability to utilise the CGT Small Business Concessions.

Please also include a discussion of the Net Capital Gain made by Ken for the2019-20 tax year.

Answer 1

	Alternate 1: Without Cost Inflation Index
		Income Under the Head Capital Gain
	S.No	Particulars	Cost of Acquisition	Full Value of Consideration	Capital Gain
	1	First retail outlet	3,20,000.00	16,00,000.00	12,80,000.00
	2	Selling Right for not to do an act i.e., Non Compete Agreement	-	2,00,000.00	2,00,000.00
	3	Apartment in Kew	40,000.00	5,10,000.00	4,70,000.00
		Total	3,60,000.00	23,10,000.00	19,50,000.00
	Notes:
	1	Cost of Acquisition of First retail store includes stamp duty of $20000.
	General Assumptions
	Note 1	Indexation is not considered since it vary country to country, and question does not give Capital Gain Inflation Index.
	Alternate 2: With Cost inflation Index
		Income Under the Head Capital Gain
	S.No	Particulars	Cost of Acquisition	Indexed Cost of Acquisition	Full Value of Consideration	Capital Gain
	1	First retail outlet	3,20,000.00	8,48,440.00	16,00,000.00	7,51,560.00
	( 320000*289/109)
	2	Selling Right for not to do an act i.e., Non Compete Agreement	-	-	2,00,000.00	2,00,000.00
	3	Apartment in Kew	40,000.00	45,512.00	5,10,000.00	4,64,488.00
	(40000*289/254)
		Total	3,60,000.00	8,93,952.00	23,10,000.00	14,16,048.00
	Notes:
	1	Cost of Acquisition of First retail store includes stamp duty of $20000
	General Assumptions
	Note 1	Cost Inflation Index Table:
		Financial Year	Cost Inflation Index (CII)
		2001-02 (Base year)	100
		2002-03	105
		2003-04	109
		2004-05	113
		2005-06	117
		2006-07	122
		2007-08	129
		2008-09	137
		2009-10	148
		2010-11	167
		2011-12	184
		2012-13	200
		2013-14	220
		2014-15	240
		2015-16	254
		2016-17	264
		2017-18	272
		2018-19	280
		2019-20	289