Capital Gains Tax - Essay Example

Capital gains tax Introduction The capital gains tax can be defined as a tax on the profits after one has sold or disposed of an asset after it has gained value. In other words, it is the gain that an individual makes which is taxed but not all the amount of money one receives (Grubel & Fraser Institute 2001). For example, when an individual buys a painting at 5000 USD and sells it later for 25000 USD. This means that this individual has made a gain of 20000 USD. The seller of this painting should pay tax for the 20000 USD gains which he or she has acquired as profit. It is worth noting that some assets are tax free and if one’s gains in a year become less than his or her tax-free allowance, the person is not required to pay the capital gains tax. The paper analyzes aspects of the capital gains tax based on Susan’s case. Discussion Question one Susan’s mode of shares’ disposal will determine whether she will pay the capital gains tax or not. If she can manage to evade the tax, it will be for the good of the company. There are instances that one can dispose of assets in a tax free way. Disposing assets can be done through selling it, giving the asset away as a gift, swapping the asset for another one and getting compensation for the asset may be when it gets destroyed or lost. It is well recorded that it could not be possible for transferring the shares to her son. This is because there were strains between her son and her. Similarly, the son did not have material funds (Cordes 2005, p.5). These two instances make it difficult for Susan to dispose the shares with immediate effect. This is because she feels the ownership of the company should remain in the family. The only available way of disposing the shares immediately was selling the shares to an investor. It is well recorded that she had been approached by an investor. If she decides to sell the shares at this time she will have to pay capital gains tax (Thomas 2004, p.10).  This is because sale of shares is in the docket of disposal way that is liable of being paid the capital gains tax. The best time for Susan to dispose the shares is not yet and the best person to dispose to is her son since the company will remain fully owned by the family and the disposal will take place tax free. Question two Sale of assets like shares and real estate is the most common manner in which an individual capital loss or capital gain. The capital gains tax is also applicable to the intangible assets like business goodwill. Disposal of shares at a later date can be advantageous than selling them now. According to the 2014 capital-gains tax rates, there is a variation in the rates depending on type of gain as well as income gained (Grubel & Fraser Institute 2001). However, it is evident that the long term capital gains tend to pay less tax than the short term capital gains. The short term capital gains are attributed to a tax rate of as high as 39.6% (Williams et al 2001, p.14). On the other hand, the long term capital the tax payable is at the highest level of 15% unless when the assets are classified in a special bracket where tax amounts to 20%. This is a clear indication that the best time for Susan to dispose her shares is at a later date. This is because she will pay less tax than if she sells them right now. In terms of either selling the shares to a local investor or dispose them to the son, it will be better for Susan to dispose them to the son rather than selling them to a local investor. From the tax point of view, disposing the shares to her son will be the best idea. This is because by so doing the shares will be transferred at a tax free (Thomas 2004, p.16). This means that the transferability of the shares will not demand any coin from Susan if she transfers them to her son. All the profit earned will remain to be the company’s asset without any deduction in the name of capital gains tax. If she decides to sell the shares to a local investor, on the other hand, Susan will have to pay the capital gains tax. This is because sale of any form of assets shares inclusive the capital gains tax is liable to be paid. This means that some of the company’s profit will go to the capital gains tax (Simontacchi 2007, p.5). This will be like a loss to the company. This is because the tax paid is not an investment and hence not of any economic advantage to the company. From this point of view, Susan’s better option of disposing the shares will be transferring them to her son rather than selling them to a local investment. Similarly, sales of shares and other assets are linked to either gaining or losing (Lal & Lal 2001, p.10). It is therefore, a risky business. It has been indicated the investor would have bought the shares at the market price. There is a possibility of the sales not acquiring the warranted price. According to the capital gains tax, in case one sells an asset at a loss, he or she will have to pay the capital gains tax in future with the profit he or she will make. To avoid this misconception it is advisable for Susan to dispose the shares to her son rather than selling them to the local investors. Question three Part a The sale of assets can become a liability to the owner. This is dependent of the nature of the asset being sold. If Susan will decide to sell her personal house, this will not become a liability to her. This is because the personal assets can be sold at a tax free rate (Thomas 2004). If Susan will sell her private house, he will receive all the cash the profit inclusive without being required to pay any cash in the name of the capital gains tax. It will, therefore, to the advantage of Susan to sell her personal house. The fact that all the cash that her personal house will be sold will be solely hers brings about the fact that the transaction will be an asset to Susan but not a liability to her. The discussion above shows how a commodity can be termed as either an asset or a liability. Sale of her personal house will not be a liability to Susan. Part b The sale of an apartment by Susan, on the other hand will become a liability to her. Unlike a personal house, the apartment is classified as an asset (Lal & Lal 2001, p.17). The capital gains tax is applicable to the sale of all forms of assets. The apartment fall in the cluster of business oriented houses rather than a private house even though it is owned by a particular person hence an asset. This is a clear indication that if Susan will sell the apartment, she will be required to pay the tax of the profit she will gain. From this point of view, the sale of this apartment will cost Susan a certain amount of cash in form of the capital gains tax. This tax will not be of any economic advantage to Susan and hence a liability to her (Organisation 2006). The sale of this will hence be classified as a liability to Susan. References List Cordes, J. J. (2005). The encyclopedia of taxation & tax policy. Washington, D.C, Urban Institute Press. Grubel, H. G., & Fraser Institute. (2001). International evidence on the effects of having no capital gains taxes. Vancouver, British Columbia, Fraser Inst. Lal, B. B., & Lal, B. B. (2010). Income tax. Delhi, Pearson. Organisation, . E. C.-D. (2006). No. 14: Taxation of Capital Gains of Individuals. Paris, Organisation for Economic Co-operation and Development. Simontacchi, S. (2007). Taxation of capital gains under the OECD model convention: With special regard to immovable property. S.l, s.n.. Thomas, K. A. (2004). Capital gains, minimal taxes: The essential guide for investors and traders. Lisle, Ill, Fairmark Press. Williams, R. C., Louw, C., & Williams, R. C. (2001). Income tax and capital gains tax in South Africa: Law & practice. Durban, Butterworths. Read More