Taxation, Theory, Practice and Law - Capital Gains Tax - Assignment Example

Name: Subject & Code: Instructor Date: Taxation, Theory, Practice and Law Case Study 1: Capital Gains Tax a) Dave Solomon’s net capital gain or net capital loss for the year ended 30 June of the current tax year. A capital gain or capital loss is made whenever a Capital Gains Tax (CGT) ‘event’ happens, which is the tax paid on any profit is made whenever an asset is sold, such as an investment asset or shares (Kenny 38). In Australia, assets obtained before September 20, 1985 are exempted from CGT. On the other hand, a CGT discount is acquired when an asset has been owned for over 12 months. The discount warranted to any capital gain made is 50 percent, when the gain is made by an individual (Australian Taxation Office 1d). For this particular review, a discount method is used, as indicated below: Net capital gain for the two-storey residence Dave has owned a two-storey residence at St Lucia for 30 years, which he bought at $70,000 and sold at $850,000, after the real estate agent deducted commissions of $15,000. The residential home is not subject to capital gains tax. As required by the 'main residence' exemption, an individual does not have to pay CGT while selling his main residence, unless it was rented out, used to generate income or is occupying more than two hectares. Capital proceeds = $850,000 Less cost base = $70,000 + $15,000 0% discount Using CGT discount method Capital proceeds $850,000 Less cost base $70,000 + $15,000 Capital gain $765,000 0% discount $765,000 Net capital gain $765,000 The net capital gain for the two-storey residence is $765,000 Net capital gain for the painting by Pro Hart He purchased a painting by Pro Hart on 20 September 1985 for $15,000, and auctioned it for $125,000, on 31 May of the current tax year. The painting is a collectible and is subject to different rules when it comes to taxation. Collectables consist of personal items kept or used for purposes of the owner’s enjoyment alongside his associates. The capital gain or loss made from a collectable is disregarded from taxation when the collectable is acquired for $500 or less, and the interest from the collectable is also acquired for at most $500, although before 16 December 1995. The rule also applies when the interest obtained from the collectable has a market value of at most $500. In this case, when an individual collectables is disposed of as a set, an individual would be exempted from paying CGT, although strictly in case when he obtained the item for at most $500 after 16 December 1995. On the other hand, capital losses obtained from a collectable may be applied strictly in cases where it reduces capital gains from the collectable. Still, in the case of a capital loss, no time limit exists as regard the length of time one has to carry forward a net capital loss obtained from an item (Evans et al 2-4). In the present case study, Dave bought his Pro Hart painting before 16 December 1995, which was on 20 September 1985. This implies that he cannot be exempted from paying the CGT, as the exemption applies for collectibles obtained after 16 December 1995. Additionally, Dave obtained the painting at $15,000, which means it cannot be exempted from CGT. The CGT law requires that the capital gain or loss made from a collectable is disregarded from taxation when the collectable is acquired for at most $500. The painting’s market value is $125,000, which is more than $500. Using CGT discount method Capital proceeds $125,000 Less cost base $15,000 Capital gain $110,000 50% discount $55,000 Net capital gain $55,000 The net capital gain for the two-storey residence is $55,000. Net capital gain for the luxury motor cruiser Dave also bought a luxury motor cruiser that he has moored at the Manly Yacht club in late 2004 for $110,000, and sold it at $60,000. A boat is a personal use asset and may be subject to exemption from CGT. Personal use assets consists of CGT assets that the purchaser use or keep principally for the personal utility or pleasures with their associated associates (Burman 1). They also consist of assets used for doing something save for gaining or generating assessable income. The CGT law requires that any personal use asset purchases for at most $10,000 is exempted from CGT. The personal use assets usually sold as a set are treated collectively for the $10,000 limit. In the case study, the boat/ luxury motor cruiser would not be exempted from CGT, as it was bought at $110,000, which is more than the $10,000 limit. It was later sold at $60,000, which is also more than the $10,000 limit. Hence:- Using CGT discount method Capital proceeds $60,000 Less cost base $110,000 Capital loss $50,000 50% discount $25,000 Net capital gain $25,000 The net capital gain for the luxury motor cruiser is $25,000 Net capital gain for a parcel of shares He sold a parcel of shares for $80,000 in a newly listed mining company, which he had purchased for $75,000 in the same year. He had borrowed $70,000 loan for use in buying the shares at an interest of $5,000. Costs include $750 in brokerage fee and $250 for stamp fee. However, Section 115-40 of the Income Tax Assessment Act 1997 stipulates that where CGT happens in an agreement made within 12 months, then the CGT discount would not apply. Shares in a company are not considered as assets that are of personal use, and are therefore CGT assets. If Dave applies the discount method, his capital gain would be determined as: Cost base Loan $70,000 Interest $5,000 Brokerage fee $750 Stamp Duty $250 Total cost base 76,000 Figure 1: Cost base Using CGT discount method Capital proceeds $80,000 (sold shares at $80,000 after buying them for %75,000) Less cost base $76,000 Capital gain $4,000 0% discount $0 (as the transaction is less than 12 months) Net capital gain $4,000 Figure 2: Net capital gain Net capital gain for a parcel of shares is $4,000 Dave’s net capital gain for the current year Net capital gain Two-storey residence $$765,000 Painting by Pro Hart $55,000 Luxury motor cruiser $25,000 Parcel of shares $4,000 $849,000 In conclusion, Dave’s net capital gain for the current year is $464,500 b) If Dave has a net capital gain, what he would do with the amount As Dave has a net capital gain, he may contribute funds to his personal superannuation fund before 30 June of the current tax year. Additionally, he can rent a city apartment and withdraw tax-free amounts from his personal superannuation account once he turns 60. C) If Dave has a net capital loss, what he would do with the amount If Dave makes a net capital loss, he cannot claim it against income. Instead, he can use it to reduce a capital gain during the same financial year. When his capital losses go beyond your capital gains in the same year, he has an option of carrying the loss forward and deducting it against capital gains in any of the preceding 3 years. Case Study 2: Fringe Benefits Tax (a) FBT consequences arising from the case, inclusive of calculations of any FBT liability, for the year ending 31 March 2016. The fringe benefits tax (FBT) refers to a tax levied on non-cash benefits entitled to employees by employers. It is imposed on the employers rather than employee, regardless of whether the employer provided the benefit is directly to employees (Australian Taxation Office b). In the case study, a fringe benefit is provided as Emma is an employee of the Periwinkle. It allows Emma to use a company car for private purposes. It also provides Emma cheap loan. Emma’s company reimburses her for the expenses on the car, yet only because of the provisions of the fringe benefits award. If she was not an employee, the reimbursement would not be made (Kaleb 1). In determining the FBT liability, the taxable values of benefits are grossed up. Two different gross-up rates can be used to determine the fringe benefits taxable amounts. The higher gross-up rate (which is type 1) is applicable to scenarios where a company is entitled to a GST credit for GST paid on the benefits its grants employee. Such benefits are called GST-creditable benefits. Currently, its gross-up rate is 2.1463 On the other hand, lower gross-up rate (which is type 2) is applied to scenarios where a company is not entitled to GST credit. Currently, its gross-up rate is 1.9608. Facts provided by the case study show that Periwinkle is entitled to input tax credits in respect to any GST inclusive acquisitions (Australian Taxation Office 1b). Ultimately, payable tax is refers to the fringe benefits taxable amount multiplied by the tax rate. Currently, the FBT rate is 49 percent 9( Kaleb 1). In respect to Emma’s situation, the FBT liability is calculated below. Car In the case study, Periwinkle Pty Ltd is the employer while Emma is the employer. Periwinkle provided Emma with a car on 1 May 2015. Periwinkle bought the car for $33,000 (including GST). Between 1 May 2015 and 31 March 2016, Emma has covered some 10,000 kilometres with the car. Her expenses on repairs amounted to $550 (including GST), which Periwinkle reimbursed (Kaleb 1). In calculating the FBT payable on the car using the Statutory Method, the formula below, as suggested by the Australian Taxation Office, can be used: FBT Payable = Purchase Price X Statutory Rate X Gross Up Factor X FBT Rate Purchase Price = $33,000 (refers to the cost price of the car plus GST). Statutory rate = 26% (see appendix) Gross Up Factor = 2.1463 (refers to the gross-up rate plus GST) FBT Rate = 49% From the above data, the payable FBT is: FBT Payable =$33,000 x 26% x 2.1463 x 49% FBT Payable (rounded) = $9023.47 Loan Fringe benefits are also granted on low interest loans that employees use for private purposes. The loan fringe benefit comes about when an employer provides an employee with a loan at low interest rate within a specific fringe benefit year (Australian Taxation Office 1c). The low interest rate is usually less than when compared to the statutory rate of interest. The facts provided by the case study show that Periwinkle granted Emma with a loan of $500,000 at an interest rate of 4.45% on 1 September 2015. She spent $450,000 on procuring a holiday home and gave the rest of $50,000 to her husband (interest free) to buy shares in Telstra. FBT Payable = Purchase Price X Statutory Rate X Gross Up Factor X FBT Rate Purchase Price = $500,000 (refers to the cost price of the car plus GST). Interest rate = 4.45% Gross Up Factor = 2.1463 (refers to the gross-up rate plus GST) FBT Rate = 49% From the above data, the payable FBT is: FBT Payable =$500,000 x 4.45% x 2.1463 x 49% FBT Payable (rounded) = $23,400 Bathtub In the same FBT year, Emma bought bathtub made by Periwinkle for $1,300, although it costs $700 to make and is sold to the public for $2,600. However, a bathtub for personal use is not included under a taxable fringe benefit. It is an excluded benefit under the Fringe Benefits Tax Assessment Act 1986 (FBTAA). Hence, Periwinkle will not be liable to pay fringe benefit tax for the bathtub. In conclusion, the FBT consequences arising from the case, include the fact that the FTB payable for the car is $9023.47 while that of the loan is $23,400, which Periwinkle will need to pay. On the other hand, Periwinkle will not be liable to pay fringe benefit tax for the bathtub. Therefore, the total fringe benefit taxable to Periwinkle is $ 32,423.47. (b) Whether the answer to (a) would differ if Emma used the $50,000 to purchase the shares herself The answer to (a) would not differ if Emma used the $50,000 to purchase the shares in Telstra herself, rather than grant her husband loan to purchase them. The loan was already granted to Emma for her private use, on the virtue of being an employee of Periwinkle. Therefore, Emma is allowed to use the loan for her private purposes, including sharing the amount to her (Australian Taxation Office 1c). Hence, the loan fringe benefit would still come about, where Emma is provided the $500,000 loan at low interest rate of 4.45%. Hence, the FBT Payable (rounded) for the loan by Periwinkle would still be $23,400, for the entire loan $500,000. Works cited Australian Taxation Office. "How to calculate your FBT," 2015a. 20 May 2016, Australian Taxation Office. "Loan and debt waiver fringe benefits," 2012c. 20 May 2016, Australian Taxation Office. "What is fringe benefits tax?" 2015b. 20 May 2016, Australian Taxation Office."18 Capital gains 2015," 2015d. 20 May 2016, Burman, Leornad. "Taxing Capital Gains in Australia: Assessment and Recommendations." Tax Policy Centre, 2009. 20 May 2017, Evans, Chris, John Minas, Youngdeok Lim. "Taxing personal capital gains in Australia: An alternative way forward," 2015. 20 May 2016, Kaleb, Joe. "Understanding Fringe Benefits Tax 101." MYOB, 2015. 20 May 2016, Kenny, Paul. "Australia's Capital Gains Tax Discount: More Certain, Equitable and Durable?" Journal of the Australasian Tax Teachers Association, 1.2 (2005): 38-109 Remunerator. "How fringe benefits tax is calculated on motor vehicles for statutory method," 2014. 20 May 2016, Appendix Figure 3: Statutory rates for car fringe benefits (Remunerator 2) Read More