LAWS7012: Legal Hypothetical Assignment

Unfortunately for Rina and other shareholders, Booktopia entered voluntary administration in July 2024 due to mounting debts and financial difficulties. The company was subsequently delisted from the ASX on 28 August 2024.

Following the sale of the business to a private buyer, the appointed liquidator made a formal declaration regarding the status of the shares on 21 November 2024 (see excerpt on the following page). As a result of this declaration, Rina still holds 20,000 shares in Booktopia, but they are now worthless and cannot be sold or traded.

(2) Sale of a Residential Property in Shepparton

Rina’s grandfather Clyde, who passed away on 26 September 2021, left Rina his home in the city of Shepparton in regional Victoria. Clyde purchased the house for $174,000 under a contract dated 14 May 2010 (with the settlement date being 18 June 2010) after his late wife passed away. The land size of the property is 814m². Clyde also paid $5,070 in stamp duty and $770 (including GST) in legal fees at the time of purchase. Clyde moved into the house on the settlement date and remained living there until his death. Clyde did not use the property for any income-producing purposes during his ownership period. At the date of Clyde’s death, the house was valued at $360,000. Note that Rina paid a professional valuer $330 (including GST) to attain this valuation.

When Rina inherited the property, she was living and working in Sydney. At the time, the property market was showing strong signs of growth, and Rina believed that holding onto the property for a while longer might yield a better return. So, she decided to retain the property, intending to make minor improvements and wait for further capital growth before selling.

Thus, it was not until 2024 that Rina made the decision to sell the property. After spending $59,400 (including GST) in October 2024 to renovate the kitchen and bathroom to make them more modern and appealing, she placed the property on the market to sell it. She sold the property under a contract dated 16 December 2024 for $585,000, with the date of transfer being 24 January 2025. Rina incurred the following costs in relation to selling the property:

Legal costs $ 2,980 (including GST)

Advertising costs $ 3,850 (including GST)

Real estate agent’s sales commission $ 15,450 (including GST)

During Rina’s period of ownership of the property, she also incurred the following expenses:

Council rates $12,210

Insurance $7,260 (including GST)

Property maintenance $3,520 (including GST)

Questions 

1. Has a CGT EVENT happened to Rina?
2. Is the asset a CGT ASSET?
3. Does an exception or EXEMPTION apply? 
4. Can there be a ROLLOVER PROVISION?

Assessment Brief Capital Gains Tax (CGT) Case: Rina Watson

Objective:
Evaluate whether CGT events have occurred for two items in the 2024/25 income year (Booktopia shares declared worthless; inherited Shepparton residential property sold), determine whether each item is a CGT asset, identify any applicable exemptions or rollovers, and justify conclusions with reference to relevant CGT concepts, evidence and calculation steps.

Deliverables / Key pointers to cover:

1. Identify CGT event(s) that may apply to each item (shares; inherited property). State the relevant event code(s) and the trigger date(s).
2. Determine CGT asset status for each item (was it a CGT asset at the relevant time?); state acquisition date and original cost/market value on acquisition (for inherited property).
3. Assess exemptions or exceptions (e.g., main residence exemption, pre-CGT asset rules, exemption for certain deceased estate transfers, small business concessions if relevant).
4. Consider rollover provisions that might defer or alter the timing of a capital gain or loss (e.g., rollovers on death, certain involuntary disposals, company insolvency treatments).
5. Compute capital gain or loss framework (outline how cost base and capital proceeds would be calculated and where capital losses may arise).
6. Document evidence (contract dates, liquidation/administrator declaration, valuation, renovation and selling costs, rates/insurance records).
7. Conclude and justify: state whether a taxable capital gain/loss arises and any recommended next steps (e.g., claim capital loss, check concession availability, seek formal ATO guidance).

Mentor-Guided Step-by-Step Process (how the student was coached)

The mentor structured the guidance into logical steps to ensure the student followed tax law reasoning, used evidence, and produced a defensible answer.

Step 1 Clarify the factual timeline & gather evidence

• Action: Create a timeline table listing contract/settlement dates, liquidation declaration date (for shares), date of death and value at date of death (for property), renovation dates, sale contract/transfer dates, and all monetary figures (purchase prices, stamp duty, legal and selling costs, rates, insurance).
• Why: CGT outcomes depend on exact dates (which determine event occurrence, ownership period, and whether exemptions apply).

Step 2 Identify potential CGT events for each asset

• Shares: Mentor asked the student to consider events such as a disposal, a formal declaration by a liquidator that shares are worthless, or other statutory CGT events that equate to loss of asset value. Student was instructed to note the date of the liquidator’s declaration (21 Nov 2024) as the critical event date to evaluate.
• Inherited property: Mentor guided the student to treat the inheritance as an acquisition by Rina (with valuation on date of death being the starting value for Rina’s cost base in many cases) and then to identify the CGT event when Rina disposed of the property (contract date 16 Dec 2024 or transfer date 24 Jan 2025 follow the relevant rule on when disposal occurs).

Step 3 Confirm whether each item is a CGT asset

• Approach: Apply the simple testwas the item property or a right that can produce a capital gain or loss? Shares and real property are primary examples of CGT assets.
• Mentor prompt: Document whether any exclusion applies (e.g., personal use assets under statutory caps) neither shares nor residential real property used for capital purposes are excluded by default.

Step 4 Assess exemptions or special rules

• Inherited property: Mentor had the student review concepts around acquisition by inheritance: identify whether the cost base for Rina is the market value at the deceased’s date of death or the deceased’s original cost (this can affect whether CGT is payable). The student was advised to include the professional valuation ($330) and the property’s date-of-death valuation ($360,000) in the analysis.
• Main residence exemption check: Mentor asked the student to confirm whether the property was ever Rina’s main residence (it was not; Clyde lived there and it was inherited). So the full main residence exemption is unlikely to applydocument this and explain why.
• Shares: Consider whether a capital loss can be recognised when shares become worthless; the mentor guided the student to treat the worthless holding as producing a capital loss if a CGT event is triggered and no other relief applies.

Step 5 Consider rollover provisions or special CGT treatments

• Death rollovers: Mentor explained that certain rollovers apply on death between deceased estate and beneficiary, and told the student to note whether the asset’s cost base for Rina is the value at date of death (commonly the case for assets acquired by inheritance).
• Worthless shares / company administration: Mentor asked the student to explore whether specific provisions treat shares declared worthless as a CGT disposal or allow a capital loss recognition on the date of the declaration and to identify if there are alternative tax treatments (e.g., specific bankruptcy/liquidator rules) then to document assumptions and recommend confirming with tax rulings/ATO guidance.

Step 6 Cost base, capital proceeds and calculation framework

• Guidance: Mentor walked the student through how to compute a capital gain/loss:
  • Determine cost base (for shares: sum of purchase prices plus brokerage; for property: value on acquisition for Rina plus renovation costs, plus incidental acquisition costs if applicable).
  • Determine capital proceeds (for property: sale price less selling costs; for shares: often zero if worthless but show how a capital loss would be calculated).
  • Note holding period for discount eligibility (12-month rule) mentor reminded student to check whether Rina held assets long enough for any CGT discount to apply.

• Example checks: Ensure renovation and selling expenses are accounted for in cost base or reduced capital proceeds as appropriate.

Step 7 Draft reasoned answers to the four questions

• Mentor required the student to write concise answers to:

  1. Has a CGT event occurred? identify the event(s) and date(s).
  2. Is the asset a CGT asset? yes/no with supporting rationale.
  3. Does an exemption apply? test main residence, pre-CGT assets, or other exemptions and state outcome.
  4. Is a rollover available? discuss death rollovers, involuntary disposals, and whether any apply; document uncertainties.

Step 8: Caveats, evidence checklist & recommendation to verify

• Mentor insisted on adding a short caveats section recommending the student confirm findings against current ATO guidance or obtain professional tax advice before finalising tax returns because specific tax rulings or amendments can change outcomes.

• Prepare a supporting annex listing documentary evidence used (contracts, valuations, liquidation declaration, receipts for renovations and selling costs).

How the Outcome Was Achieved (summary)

• Work product: The student produced a structured report that:
  • Presented a clear timeline and evidence table.
  • Identified the likely CGT events and their dates.
  • Classified each asset as a CGT asset and explained acquisition cost basis.
  • Discussed exemptions (main residence was considered and rejected for Rina) and possible rollovers (death-related rollover issues were examined).
  • Outlined how to compute capital gain/loss for each item and flagged critical uncertainties requiring ATO reference.
• Student actions: Calculated provisional capital loss on the worthless share parcel (showing purchase cost and brokerage) and prepared the capital gain computation for the property using the valuation at date of death as the starting figure, adding renovation and selling costs to the cost base where applicable.
• Quality control: Mentor reviewed draft answers for clarity, correct process logic, properly referenced assumptions and a short list of “next steps” (e.g., obtain ATO ID or private ruling if material doubt, confirm timing of disposal for property for tax year allocation).

Learning Objectives Covered

1. Apply CGT concepts to facts: Identifying CGT events, determining acquisition dates and cost bases, and classifying assets.
2. Evidence-based reasoning: Using documentary evidence (contracts, valuations, liquidation notices) to justify tax positions.
3. Assess reliefs & exceptions: Testing applicability of main residence exemption, death rollovers, and involuntary disposal rules.
4. Technical calculation readiness: Preparing the framework for computing capital gain/loss, including allowable adjustments and costs.
5. Professional caution: Documenting assumptions, uncertainties and the need to verify with authoritative tax guidance or a tax professional.
6. Communication skills: Presenting concise, policy-style answers that a tax advisor or examiner can follow.

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