The Application of Taxation Law - Case Study Example

Taxation law case study Student name: Institutional affiliation: Date of submission: 1. Determination of Dave Solomon’s net capital gain or net capital loss for the year ended 30th June o the current year Analysis of the events a) David sells a two storey residence at St Lucia in which he has lived for the last 30 years Selling of one’s residence is CGT exempt. ATO (2016) states that one can generally claim the main residence exemption from CGT for his/her home. If the residence has been the family home for you for the period you owned it and has not been used to produce assessable income, then one can claim full CGT exemption. In this case, Dave has lived in the two Storey residence for the last 30 years. There is no evidence to suggest that he has been using it for business purposes. On the contrally, it seems that he has lived in it since he acquired it (Wallis, 2016). In this case therefore, Dave will be able to claim full CGT exemption from the sale of the residence. CGT calculation We use discount method since, i) The event happened to an asset acquired after 11.45 am on 21 September 1999 and ii) The asset was owned for more than 12 months The discount Since David is an individual, we use 50% Calculation of CGT Selling price = $865,000 Commission = ($15,000) Deposit forfeited = $85,000 Total proceeds = $935,000 Less: Buying price= ($70,000) Gain= $865,000 CGT amount = Gain * Discount = $865,000*50% =$432,500 CGT amount is $432,500. It is however worth noting that this being his resident, he will claim full CGT exemption on the amount. b) A painting by Pro Hart that he purchased on 20 September 1985 for $15,000. This is a CGT event involving individual collectables. ATO (2016) states that you are exempt from paying CGT only if you acquired the asset for $500 or less. In this case, the painting was acquired for $15,000 and hence is subject to CGT deduction (turbtax.intuit.com, 2016). Selling price = $125,000 Buying price = ($15,000) Gain = $110,000 CGT amount = Gain * Discount= $110,000*50% = $55,000 c) Luxury motor cruiser that he has moored at the Manly Yatch club This would be considered a personal use asset and hence its sale is a CGT event. ATO states that such an asset is a CGT asset and a disposal of a personal use asset; you get exemption only if you acquired it for $10,000 or less. In this case, the asset was acquired for $110,000 and is therefore subject to CGT deduction if a CGT gain is made on its disposal. Selling price = $60,000 Buying price = $110,000 Loss = $50,000 CGT amount = Gain * Discount = $50,000*50% = $25,000 NB// This is capital loss d) Sale of parcels of shares – This is a CGT event. Selling price = $80,000 Buying price = $75,000 Brokerage = $750 Stamp duty = $250 Gain = $4,000 e) Total capital gain/Loss for David The total capital gain amount = $55,000 -$25,000 +$4,000+ $432,500 -$432,500 =$34,000 Based on the information and analysis, Dave Solomon’s net capital gain is $34,000. It is worth noting that since David had made a net capital loss during the previous year, this will be offset with the capital gains made in the current year. b) If Dave has net capital gain, he will have to pay a capital gains tax on this amount. On the other hand, This amount will form part of David’s income tax. This capital gain can also be used in offsetting capital losses made in the past but within the same year thus reducing tax thereof. e) If David had made a capital loss, he will not have to pay any tax on it. However, he cannot claim the loss against income but he may use it in reducing a capital gain in the same income year (austlii.edu.au, 2016). However, if the capital loss exceeds the capital gains within the same income year, the loss can be carried forward and deducted against the capital gains made in future years. 2. Analysis of FBT Issues Car The car is provided to the employee (Emma) and is made available to her for both private and employment use. Thus, the car qualifies for fridge benefit tax since according to ATO (2016), a car is a fridge benefit that is not FBT exempt. Facts involving the car fridge benefit; i) The car is valued at $33,000 and this is the base value of the car ii) The car travels for 10,000km during the time it is made available to Emma. In this regard, we apply a statutory percentage of 20% on the distance in determining the taxable value in accordance to ATO (2016) annualized kilometers schedule. iii) The car is provided to Emma from May 1st 2015 to March 30th 2016. During the period, it is used for the entire period with exception of the five days during which it has been taken for annual repair and the 10 days when it is packed at the airport during which Emma is interstate. In determining the number of days the car is available to Emma for both private and employment use, it is important to note that during the five days the car is under annual repair, it is not available for Emma’s use since she cannot use it when it is undergoing the annual repair (Ato.gov, 2016). However, during the 10 days that Emma is interstate and hence it is packed at the airport, it is still at Emma’s disposal and she can still use it for private use unless the employer has been given the key to the car during this period. However, there is no evidence to suggest this. Thus, it is concluded that even during this ten days, the car is still available to Emma. Thus, the number of days the car is available for private use is given by 365 FBT year days, less the one month of the year or 30 days of the FBT year that the car has not been availed to Emma, less the five days the car has been taken for annual repair. Thus C (below) = 365-30-5 = 330 days. iv) Emma has not contributed any money towards the management of the car or towards its cost and hence her contribution towards reducing the FBT tax liable to her is nil. Thus, E (below) is zero. v) The company is entitled to claim an input tax credit when the GST item was initially purchased and hence we apply type 1 gross-up rate in calculating the fridge benefit tax to be paid (Latrobe.edu.au, 2016). Car fridge benefit is given by; Taxable value = (A*B*C)/D)-E Where: A = the base value of the car = $33,000 B = the statutory percentage = 20% C=the number of days in the year the car was available for private use= 330 D = the number of days in the FBT year = 365 E= the employee contribution = 0 Taxable value = (33,000*20%*330/365)-0 =$5,967 FBT = Taxable value *2.1463*49% =$6,275.55 Thus, the company is liable for FBT tax resulting from availing the car to Emma for private use amounting to $6,275.55. Loan Facts of the loan i) The loan is charged an interest rate of 4.45% by the company while the statutory rate is 5.65%. The difference in interest that would accrue because of applying an interest rate lower than the statutory rate is the fridge benefit interest on which FBT will apply. ii) The loan is used for purchasing a holiday home ($450,000) while Emma lends the rest ($50,000) to her husband (interest free) to buy shares in Telstra. It should be noted that interest on a loan to purchase income producing assets is deductible while loan to purchase private assets is not deductible. In this case, the loan is used for purchasing a private holiday home and hence this portion is not deductible. On the other hand, the other portion is lent to the husband to purchase shares in Telstra. Though shares are expected to generate income in future, this money is lent interest free to someone else to do it and it is not Emma who buys the shares. As such, she will have to pay FBT on this amount also since the income from shares does not accrue to her but to someone else. Calculation of FBT on the loan Taxable value = (Interest calculated at benchmark statutory rate – Actual interest charged) Taxable value = $500,000(5.65%- 4.45%) Taxable value = ($28,250 -22,250) Taxable value = $6,000 IFBT= Taxable value * 1.9608* 49% Where IFBT is the FBT applicable on the taxable value In this case, the FBT paid on the loan is; $6,000*1.9608*49% =$5,765 The bathtub The bathtub cost Periwinkle $700 to manufacture and is sold to Emma at $1,300 instead of the market price of $2,600. In this case, the difference between the bathtub’s market price and the price paid by Emma is a fridge benefit that ought to be taxed. Assuming that the company would be entitled to input tax credits in relation to the GST inclusive acquisitions, the type 1 gross –up rate will apply (Kaleb, 2013). In this case, FBT would be calculated as follows; Fridge benefit = $2,600- $1,300 = $1,300 FBT = $1,300*2.1463*49% = $1,367 a) Tax advice on the FBT consequences for Periwinkle company limited arising from the information above From the calculations above, the company will have to pay FBT for the benefits that it has given Emma in the course of employment during the FBT year. The benefits include the car, the loan interest savings and the saving in the bathtub purchase price. The total FBT tax to be paid is; FBT on car+ FBT on loan + FBT on bathtub = $6,276 +$5,765+$1,367 =$13,408 The company will have to pay this FBT to the tax authorities as part of its tax obligations before the due date lapses. b) My answer to (a) above would differ if Emma used the $50,000 to purchase the shares herself, instead of lending it to her husband. In this case, the shares would be considered an income generating activities to Emma since she would expect to make capital gains on them and this would be taxed. She would also be paid dividend on them in addition to helping the company from which she purchases shares make taxable income (uwa.edu.au, 2016). In this case, the portion of the loan used to purchase the shares would be deductible and hence only $450,000 would be liable to pay fridge benefit tax. In this case, the FBT on the loan would be; Taxable value = $450,000(5.65%-4.45%) =$25,425 -$20,025 = $5,400 FBT thereof = $5,400*1.9608*49% = $5,188 Thus, the company would pay less FBT on the loan by $5,765 -$5,188 =$577 The overall effect on the company’s FBT obligation would be $5,188+$6,276 +$1,367 =$12,831. Thus, the overall effect would be a reduction on the company’s obligation to pay fridge benefit tax arising from the benefits given to Emma by $577. References: Ato.gov.au, Capital gains tax, Retrieved on 22nd May 2016, from; https://www.ato.gov.au/General/Capital-gains-tax/ Wallis, V2016, How to calculate capital gains tax when selling a home you no longer live in, Retrieved on 22nd May 2016, from; http://www.theguardian.com/money/2014/feb/12/how-calculate-capital-gains-tax-sell- home turbtax.intuit.com, 2016, 5 Things you should know about capital gains tax, Retrieved on 22nd May 2016, from; https://turbotax.intuit.com/tax-tools/tax-tips/Investments-and-Taxes/5-Things-You- Should-Know-About-Capital-Gains-Tax/INF26154.html austlii.edu.au, 2016, Income Tax Assessment Act 1997- Sect 118.10, Retrieved on 22nd May 2016, from; http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.10.html Ato.gov, 2016, Car fridge benefits, Retrieved on 22nd May 2016, from; https://www.ato.gov.au/printfriendly.aspx?url=/general/fringe-benefits-tax- %28fbt%29/in-detail/employers-guide/car-fringe-benefits/ Latrobe.edu.au, 2016, FBT (Fringe Benefits Tax) Procedure, Retrieved on 22nd May 2016, from; https://www.latrobe.edu.au/policy/documents/fbt-procedure.pdf Kaleb, J2013, Giving tax deductible & FBT-free Christmas gifts, Retrieved on 22nd May 2016, from; http://myob.com.au/blog/giving-tax-deductible-fbt-free-christmas-gifts/ uwa.edu.au, 2016, Residual Fringe Benefits Tax (FBT), Retrieved on 22nd May 2016, from; http://www.finserv.uwa.edu.au/tax/fbt/policy/residual Read More