Submitted by: Boby Shrestha

Date: 19/09/2021
Subject: Taxation law

Taxation Law
In 1982, Billy Jones purchased eight hectares of land for a strawberry farm at the cost of
$320,000. By 1989, another two hectares of land was brought for $40,000. Cost
included a stamp duty of $800 and legal fees of $1600. However, due to crop failure,
Billy decided to sell his land. Since he could not find a buyer who would buy his whole
property, he decided to sell the land by sub-division. He had to spend an additional
amount of $160,000 on sub-division. He finally sold the land in July 2011 for $700,000.
The contract provided that half of the money would be payable after settlement and the
remaining on March 31, 2012. The outstanding balance would accrue at the interest of

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 10 percent per annum. The agent’s commission would be $12,000 and legal fees would
be $2,400. Give Billy’s tax advice for the financial year of 2011-12.

Cost of land: $40,000

Stamp Duty: $800

Legal Fees: $1600

Sub-division expenses and cost of disposal: $160,000

Agent’s commission: $12,000

Legal fee: $2400.

Total: $174,400.

Out of these 20 percent is applicable to the taxable area of land, so a total of $77,280 is
calculated as cost base.

Next we need to determine capital gains. Capital gains refer to the excess of the sale
value over cost base.

Sale value: (20 percent of $700,000) = $140,000

Cost base: $77,280

Capital gains: Sale value – cost base = $62,720

However, since Billy has held the new block of land for more than a year, he can
discount 50 percent of the capital gains. So the actual capital gains would be 50 percent
of $62,720 = $31,360.

Besides capital gains, there is another source of income that is taxable. Billy had
entered into a sale agreement on the condition that the settlement of the money would
be made on October 12, 2011, the date on which the sale deed would become effective.
The outstanding balance would attract an interest of 10 percent p.a. The interest
amount received on such a transaction must be shown under the other income of Billy.

Total amount of sale = $700,000

1st installment = $350,000 dollars

2nd installment = $350,000 dollars which attracts an interest of 10 percent p.a. for a
period of 5 months 19 days.

Amount taxable = $16,440

Total number of days which accrues interest = $171

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 Total number of days in a year = $365

So taxable interest = 35,000/365 x 171 = $16,400.

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