Capital Gain Tax: Calculation And Analysis

Rules and Regulations of Capital Gain Tax

The main issue is the identification of the capital gain or the loss which will take place in regard to the Bed, House, shares, painting and violin issue. The issue also lies to measure the loss of the previous year.

It is a rule that the particular gains which are not taxed or considered under any kind of subhead are subjected to be taxed under a Capital Gain Tax (CGT). These incomes are known as statutory incomes and the calculation of the capital gains are to be made by using a Capital Gain asset,  Capital gain event , Capital proceeds, the timings of the event, the Cost base and any other tax which has been added previously. The rules relating to the Capital Gain Tax are assessed under the Income Tax Assessment of 1997 (Cth).

The 108.5 ITAA97 provides the definition of Capital Gain asset and can be stated to be any form of a legal right, contractual right or a property in the form of a good will as well. The Section 108-10(2) ITAA97 states that  the different collectables which are made use of for personal purposes as the Capital Gains but needs to be noted that their value needs to be more than $500. The personal property is also often taken as the Capital gains in cases where their value is above $10000.

Under the ITAA97, many events are identified under the Capital gain as per the section 104-5. The common one of them is the event which is the A1. This event is relating to the disposal of the property and usually occurs in case the tax payer has created any contract adhering to the disposal. The different rules relating to the issue are mentioned under s 104-10ITAA97.

In case of a sale, the payer of the tax is given a considerable amount against the specific sale which has been made and this amount is generally known as the Cost Proceeds. The section 116-20 generally deals with the Cost proceeds. However, it needs to be understood that there exists only a few scenarios where the Cost proceeds can be modified. In case of these modifications, the amount to yet be received or the market value substitution takes place.

The cost base is generally known as the total funds which the payer of the tax will be incurring in order to make a purchase of a Capital gain asset along with the related costs of maintaining the given asset. Moreover, the cost base comprises of five different elements under the section 110-25(1)-(6). These elements can be stated to be the purchase price, ownership costs, incidental costs, the capital enhancement and the capital nature expenditure. The section 112.20 states that the cost base may be required to be substituted by the market value. Although having stated that, it needs to be noted that the rules for the Cost base are different under the different Capital Gain assets.  Moreover, under the section 108-30 in cases where the payer of the tax has made a Capital Loss then the Cost base is termed as the Reduced Cost base and will not comprise of the third element.

Cost Proceeds

Any individual who is the payer of a tax needs to ensure that the calculation of the Capital Gain or loss is done by reducing the Cost Base from the Cost Proceeds. When the result of this turns out to be positive then it can be understood that the result is a Capital Gain or if the resultant is in negative, then it can be understood that the resultant is a capital loss. In the current scenario, the loss which has taken place incurred in relation to the stated capital as of the previous year, can also be used to balance or to offset the Capital gain as made in the present year. Although, it is crucial to know that any loss which has been made on the collectables can be used against only the collectibles as of the section 118-10.

Under the division 114 of ITAA97, an individual who has made a purchase of a property post 21/9/1999 is allowed to get a discount of 50% on the Capital gains. However, this condition is applicable only when the asset on which the Capital Gain clause is present is under the ownership by the owner for at least 12 months. The section 102.5 also covers this allowance.

The case of the bed can be stated to be under the event A1. The Capital gain as present on the bed as it has a value of above $500, states that the Capital gain asset is the bed. In this scenario, the payer of the has received around $11000 against the bed which was stolen. Hence, in this scenario, the cost base of the bed could go under modification with respect to the market value as prescribed under section 112.20 which is around $25000. Hence, this can be taken to be the case of a loss and hence, it is important to calculate the Reduced Cost base in this case. The reduced cost base would be $1500 which the payer of the tax has incurred in order to enhance the overall value of the given asset. The calculations suggest that around $15500 will be the capital loss.

The given event needs to be classified as an A1 event and in the given case the Capital gain asset is the painting. When the painting was sold it resulted in an amount of $125000. This can be stated to be the Costs Proceeds. The price which was paid for the painting was around $2000 and hence, it forms the first element of a Cost Gain. As the painting was held by the owner for a period, which was more than one year, it can be adjusted with a 50% discount and hence, the total capital gain in the given scenario can be stated to be around $61500.

Cost Base

This event can be classified as an A1 event and the property of the house is considered to be the Capital Gain asset. The selling price of the asset can be taken to be around 320000 out of which the $2000 is to be paid at a post date. Although the particular condition is present, The Cost Proceeds modification would recommend that the entire sales price would be the Cost proceeds. In addition to this, the discount should be applicable in the given case as the client can be taken to be an individual who would be holding the house for a period of around 12 months as the date when the purchase has been made after 21/9/1999.  The element of cost base can be stated to be around $100000 for the element one and with respect to the element 2 it can be stated to be around 200000$. Hence, on the house, the Capital gain as per the calculation as shown in the following section can be stated to be around $200000.

The shares are also considered to be a property as well as a Capital Gain asset and its disposal can be considered to be relevant under the A1 event.  The Cost proceeds in this case can be stated to be the Common Bank Ltd which is around 47000`4 and in this the discount which will be applied will be around 50% thereby making it $15250. The PHB Common bank ltd is around $62500 and the Cost Base is $32500 which after discount becomes around $15000. In addition to this, Young Kids Learning Ltd will have a capital loss as the Cost proceed comes up to $600 and hence, the cost base is $6100. Hence, the loss sums up to $5500. Lastly, there are the shares of Share Build Ltd CP which is around 25000 with a cost base of 12000. However, in this case the capital base will be around $13000 as the discount of 50% cannot be offered as it has not been held for more than a year.

The use of the violin has been made for a personal use and hence, it can be termed under the personal use asset. In addition to this, the personal use asset which is valued more than $10000 cannot be exempted from the Capital Gain Tax. Hence, as the purchase price was around $5500 and this can be termed as the cost base.  As it was owned for a period more than 12 months, it is eligible for the discount which makes the total Capital Gain around $3250.

Calculation of Capital Gain for Different Assets

The loss incurred in the last year was around $8500 and out of this loss which was incurred, around $1500 could be collected on the collectables. This scenario s only relevant in case of the offset which is valid against the Capital Gains which can be collected on the collectibles. The rest of the loss of around $7000 can be then offset against the total Capital Gain as reflected and has been portrayed in the following section:

			The net Corporate Gain Tax for Year ended 30th June 2017/18
Particulars				$ Amount	$ Amount	Amount
Land
Cost Proceeds				$320000
Cost Base
Element  1			$100,000
Element 2				$20000
Total Cost Base						$120000
Capital Gain					200000
Discount (50%)				100000
Capital Gain							100000
Bed  (Collectible)				11000
Cost Proceeds
Reduced Cost Base
Element  1				25000
Element  2				1500	26500
Capital  Loss					15500
Painting(collectible)
Cost Proceeds				125000
Cost Base
Element 1				$2,000
Capital Gain					123000
Discount (50%)				61500
Capital Gain						61500
Collectibles Capital Gain
Capital Loss Bed				-14000
Capital Gain on painting				61500
Last year collectible loss as per the calculation			-1500
Collectible Capital Gain				46000	46000
Violin(personal use)
Cost Proceeds				12000
Cost Base
Element 1				5500
Capital Gain					6500
Discount (50%)				3250
Capital Gain						3250	3250
Shares(property)
Common Bank Ltd
Cost Proceeds					47000
Cost Base
Element 1				15000
Element 2				550
Element 3				750
Capital Gain					30700
Discount (50%)				15350
Capital Gain						15350
PHB Iron Ore Ltd
Cost Proceeds					62500
Cost Base
Element 1				30000
Element 2				1,000
Element 3				1,500
Capital Gain					30000
Discount (50%)				15000
Capital Gain						15000
Young Kids Learning Ltd
Cost Proceeds					600
Reduced Cost Base
Element 1				6000
Element 2				100
Capital Loss						-5500
Share Build Ltd
Cost Proceeds					25000
Cost Base
Element 1				10000
Element 2				900
Element 3				1100
Capital Gain						13000
Shares under Capital Gain						37850
The Capital Gain assets without collectable					141100
Last year loss				7000
Capital Gain							134100
Collectible Capital Gain					46000
Net Capital Gains					180100

Hence, from the calculation it can be understood that Net Capital Gain for the client can be stated to be $180100

The tax issue in this case is the Fringe Benefit Tax for the employer for the properties like the loan taken, the car and the electric heater to the employee under him with respect to the Part A of the answer. On the other hand, with respect to the part B, the effect of the FBT on the shares which the employee has purchased will be made.

The FBTAA (Fringe benefit Assessment Act 1986) can be stated to be a primary legislation which deals with the issues related to the Fringe benefit. The Fringe benefit can be described as any kind of benefit which may take place and be provided but the employer to the employee during the course of employment. This often includes the use of a car, property, loan and other which the employee uses for the private use. The Fringe benefits is basically of two types. These are the Type 1 and the Type 2. The choice of the fringe benefits is largely dependent on the input credits which can be claimed by the employer. For type 1, the gross rate is 2.0802 * 47 and for the type 2, it is 1.8868 * 47.

Under the section 7 of the Fringe Benfit Assessment Act of a car, when an employee is provided with a car for individual use of the employer, it comes under the tag of a Car Fringe Benfit. The car fringe benefit generally comes under the application of two different methods as per the FCTAA. This can be stated to be the Statutory Formula method and along with this, the operating cost method is used with respect to the section 9(1) and 100(2). With respect to the OCB log book, the use of the car needs to be segregated with respect to private and public use. This computation is done with the help of the given formula:

Example of Calculation for Bed, Painting and House

0.2 * Car Base Value * (NUMBER OF DAYS FOR WHICH CAR IS PROVIDED/ DAYS IN THE TAX YEAR) – Recipient Payment Amount.”

The section 16 of the FBTAA is concerned with the Loan Fringe Benfit and relates to the fact that when a loan is provided to the employee then it is given at an interest rate which is comparatively quite less. Moreover, the employee may use it for any purpose. This is categorized under Loan FB. This has two types of treatment because of the absence of the GST input as present. Under the section 18, relating to the Loan fringed Benfit, the formula is as follows:

Amount of Loan provided * [Statutory rate of interest- original interest rate].

The Statutory Rate of interest 2018, has stated that the rate is 5.25% by TD 2017/3. With respect to the section 19 FBTAA, the amount reduced can be claimed. Under the Section 40, the act assessment has discussed certain rules in regard to the Property FB and states that the employer is supposed to provide the employee a property at a discounted amount or for free. The formula to calculate the total value as a fringe benefit is determined under Section 43. In addition to this, the price at which the TV is given needs to be less. The TV price is calculated in the same way as the way of calculating the price of the TV.

The section 7 of the Fringe Benefit Act assessment stated down the different fringe benefits related to a car. Here, Jasmine was provided with a car which is used for both private and employment relations as well. In this case, the method Of Statutory Formula Method shall be used. Hence, by applying the formula in this method, will be calculated as follows:

=0.2* car base value* (Number of days for which the car is provided/ Days in the Tax year) – Recipient Payment Amount.

The total number of days for which the car was used was around 337 days from 1^st May to March 31^st but this needs to be reduced by 5 days as the car was in a repair mode. Hence, the total is 332 days. The total days in one year is 365 and hence, for the TV the final tax which has to be paid, 20*33000*332/335-550 which comes to 5453.2. As this is the fringe benefit, the final tax will come to around 5453.28*2.08*47/100 which is 5333.87.

Under the section 16 of the Fringe Benefit Act Assessment, an information on the Loan which has to be taken is given. In this case, Jasmine undertook a loan of around $500000 which means that the given formula can be used successfully.

=Amount of loan*[Statutory rate of interest-original interest rate%]. In this case, the rate of interest is 5.25% and therefore, the amount comes to around

500000 x [5.25- 4.25%] = 5000. As the given shares have been taken by the husband, Jasmine used the amount to provide a further loan to him, which tends to bring the gross rate between the two to the Type 2 of the Fringe Benefit. This is 1.8868 * 47. Hence, in this scenario, the final FBT is 5000 x 1.8868 x 47 which comes to $4333.98. In case, the scenario, would not have involved any purchase of shares or others then the formula under the section 19 would have reduced the amount and hence, the total value would have been 450000 * [5.25- 4.25%] which would come to 4500. Moreover, the tax in the given case would have been 4500 * 1.8868 * 47% which would be $3990.6.

The section 40 of the Fringe Benefits Act Assessment discusses that the Property benefit needs to be given at a discount or for free. Jasmine was allowed to buy the heater at a lower price and hence, as the market value was $2600, she was provided it at $1300. Under the Act section 43, the formula for calculating the total value is around $1300*2.0802 * 47 which makes it 1217.002$

Conclusion

Hence, the tax payable has been discussed in the above section.

References

Basu, S. (2016). Global perspectives on e-commerce taxation law. Routledge.

Graetz, M. J., & Warren, A. C. (2016). Integration of corporate and shareholder taxes.

Pasztor, J., & Valent, S. (2016). Fringe Benefit-still a Motivation?. In Proceedings of FIKUSZ Symposium for Young Researchers (p. 127). Óbuda University Keleti Károly Faculty of Economics.

Rowling, J. K. (2015). Very good lives: The fringe benefits of failure and the importance of imagination. Little, Brown.

Sadiq, K, Australian Taxation Law Cases 2018, Thomson Reuters.