Rainsmart Pty Ltd (‘Rainsmart’) is an Australian resident company that manufactures and sells
weatherproof clothing to the Australian and international market. Rainsmart purchases raw
materials from Indonesia and New Zealand and manufactures at their production facility and
head office in Sydney. An administration office is located in each of the Australian capital
cities, to support sales and customer service. Rainsmart’s turnover is just over $20 million,
net assets $12 million and permanent staff total 150 Australia wide as at 30 June 2017.
On 2 February 2017, Rainsmart entered a contact for the sale of its administration office in
Melbourne for $4.5 million, as the office staff had moved to leased premises 2 months earlier.
Rainsmart acquired the Melbourne office in January 2000 for $1.8 million (GST exclusive), and
spent $430,000 (GST exclusive) in replacing the external windows and doors as well as
painting the building, prior to the first use of the premises for its operations.
Rainsmart also acquired a strip of land adjacent to the Melbourne office for $360,000 (GST
exclusive) in March 2010, with a view to constructing an access road and a parking lot for staff
at the back of the premises. There had been some dispute with the neighbours as to the
ownership of the relevant strip of land however after legal negotiations Rainsmart’s
ownership was upheld in June 2013. Legal costs incurred with respect to the ownership
dispute totalled $25,000 (GST exclusive). The incidental costs of acquisition and disposal of
the Melbourne office that was paid to the relevant real estate agent totalled $34,000 (GST
exclusive). Rainsmart claimed an interest deduction of $22,000 in the relevant years in respect
of a loan it had obtained to purchase the Melbourne office.
On 20 June 2017 Rainsmart also sold its shares in Hailsafe Pty Ltd (‘Hailsafe’) for $800,000.
The decision to sell the shareholding in Hailsafe was made because Hailsafe had produced an
income tax loss of $150,000 in 2016. The management of Rainsmart were of the view that
without a substantial injection of additional capital, something they were not prepared to do,
Hailsafe would continue to make losses. Rainsmart had acquired 100% of the shares in
Hailsafe in 2012 for $2.2 million and incurred legal fees of $38,000 (GST exclusive) on
acquisition and $18,000 (GST exclusive) on the disposal of the shares. Rainsmart also received
a payment from Hailsafe (after the sale of the shares) of $280,000 (GST exclusive) for agreeing
not to set up a similar business to Hailsafe for the next 6 years.
Also in June 2017 two paintings that hung in the foyer of the head office of Rainsmart were
stolen. Although the stolen paintings were never recovered Rainsmart received a
compensation payment from its insurers of $110,000 for one painting, originally acquired by
Rainsmart for $100,000 in 2001 and $50,000 for the second painting, originally acquired by
Rainsmart for $70,000 in 2006.
a) Based on the information provided calculate the net capital gain or loss derived by
Rainsmart for the year ended 30 June 2017. Please show all workings and cite
relevant legislation. You must cite relevant legislation and cases where relevant and
explain your answers. (15 marks)
b) Rainsmart is considering the possibility of using the proceeds of the sale of shares in
Hailsafe to purchase vacant land. The land would be subdivided into 20 individual
lots and premises constructed on each lot. Rainsmart seeks your advice on whether
the sale of each of the constructed premises would be assessable as ordinary income
or as a capital transaction subject to the capital gains tax provisions in the ITAA 1997.
You are required to explain why the sale would or would not be ordinary income or
a capital gain and reach a conclusion, making assumptions if required. (5 marks)