Question:
Discuss about the Capital analysis of Dave Solomon.
General Analysis
The difference between capital proceeding and cost of acquisition is mainly known as capital gain in financial system. There are three methods available for the calculating of capital gain. First one is Discount method which is only applicable where there is time of more that twelve months available for capital gain tax system. The second method is known as Indexation method which is applicable when assets acquisition done before 21st September and held for more than twelve month. The third and last one is residual method, this applicable for when assets are held for less than 12 month. Therefore, capital gain or loss will be calculated by applying these three methods. (Ato.gov.au, 2016)
These are the list of exemption from Capital gain on sale of assets.
The property acquired before 20th September 1985 which are
Selling of family house which is residential
Reimbursement of amount due to particular illness or injury
Motor Vehicle
Any assents which is cost is less than $ 500
Waiving of carry forward of losses arising from capital gain in Assets
Capital loss in long term: It is very peculiar method is that the long term capital loss can be settled only against long term capital gain, in this regards no other set off is possible. It can be carried forward to subsequent assessment year and can be settled only against Long term capital loss.
Capita loss in short term
Short term capital loss can be settled against long term capital gain of assets. It can be carried forward to subsequent indefinite Assessment Years and set off against both short term Gain and long term gain.
Anslysis (i) As given in case study, Mr. Dave Solomon use to live his two story building for last 30 years in now on sale, He purchased this assets for $ 70,000, and selling it for $ 8,50,000 on the stated date of 27th June of the present Tax year. The resident was originally sold through auction and buyer of this building paid $ 85,000 as advance money against purchase. But after advance money the buyer did not have enough money to pay the rest of the amount, therefore, advance money was forfeited. Hence, this $ 85000 received is assigned to the head of “Income from other sources”.
Capital gain calculation
The capital gain can be calculated as follows
Sale payment $8, 65,000
It is exempted under the definition of CST I.E Family home exemption
………………………………………………………………………………………………..
Therefore, long term capital gain Nil
Analysis (ii) A painting of pro hart, the date of purchase was 20th September, 1985 for $ 15,000 was finally sold for $ 1, 25, 000
The capital gain in this transaction
Payment of Sale $ 1, 25,000
Less: indexed cost of acquisition
15000*123.4/71.3 $ 25,961
………………………………………………………………………………………
Therefore, long term capital gain $ 150,961
Analysis (iii) a luxury motor cruiser which was purchased in late 2004 for $ 1, 10,000 was sold on 1st June of the current year to local boat broker for $ 60, 000
Therefore, capital gain of this item
Sales proceeds $ 60,000
Less: Indexed cost of acquisition $ 1, 10,000
………………………………………………………………………………………………..
So long term capital loss $ 50, 000
Analysis (iv) as given in question, the sale of parcel of share occurred which is newly listed mining company on 5th of June of the current year for $ 80,000. He purchased these shares on 10th January of the current year for $ 75,000. To purchase these shares he borrowed a loan of $ 70,000 and paid interest on the loan of $5,000. He also paid $750 as brokerage for sale of the shares and $250 in stamp duty for purchase of share. As per income tax law, interest on loan is not a part of cost of acquisition. Hence interest on loan has not been included (Jin, 2016).
Solution (1a)
Therefore, capital gain can be calculated as:
Sale proceed $ 80,000
Less: Brokerage $ 750
Less: cost of acquisition $75,000
Less: stamp duty $250
………………………………………………………………………………………
Short term loss in capital $ 4,000
Calculation of Capital gain can be done as
Sale of residential property (Long term) $ Nil
Sale of painting (Long term) $ 1, 50,961
Loss in sale of boat (Long term) $ 50, 000
Sale of share (Short term) $ 4, 000
…………………………………………………………………………………………..
Long term capital gain $ 1, 04,961
As per given detail, tax return of Mr. Dave for shows that capital loss of $ 10,000 from the sale of shares, therefore, this can be adjusted with current year long term capital gain
Therefore, Net Capital gain in long term = $ 1, 04,961 – $10,000 = $ 94,961
Solution (1b)
As we all know that, the net Capital gain is the sum of all grain arrived from sale from sale of capital asset, in this all losses of the capital assets is subtracted which also included loss on sale of capita from previous year as well. In other words the tax on capital gain is same tax. The formation of capital gain assets is a type of assessable income of an assessed and therefor, tax should be paid on gain arising on sale of capital asset in the relevant income year in which sale took place. So, it is clear that, Mr. Dave gain on sale of assets in the same income year in which sale took place. Therefore, Mr. Dove has earned gain on sale of asset. As a result he can contribute fund to his personal superannuation fund. Mr. Dove has to maintain relevant records when some important and major transaction took place which includes, Interest on loans, Purchase receipts, Expense paid in regards to litigation fees, legal fees etc. Records regarding repairs and maintenance of assets and records of brokerage paid on shares (delisted 2016).
Solution (1c)
As per the above capital analysis, Net loss in capital is summation of all loss arrived from sale of capital asset which includes loss from previous year, as per rule stated in part 1 Assesse cannot set off his capital loss from other source of income but should carry forward for subsequent years and deduct it from capital gain arrived in subsequent years. Capital loss can be carry forward for indefinite periods. A assesse does not have the right to choose not to set off capital losses against any capital gain however they can deduct such loss as per their choice with capital gain. If Dave does not have a positive capital gain, he shall sell more of his assets or acquire loan so that he can contribute to his personal superannuation fund and then buy a rented city apartment and withdraw tax free amount from his personal superannuation fund once he attains the age of 60 in august of next year. (learn.nab.com, 2016)
References
Costantini, P. 2006, Cash return on capital invested. Amsterdam: Butterworth-Heinemann.
Reid, G. 1998. Venture capital investment. London: Routledge.
Vataliya, K. 2008. Management of working capital. Jaipur, India: Paradise Publishers.
Global Property Guide. 2016. Australia capital gains tax rates, and property income tax. [ONLINE] Available at: https://www.globalpropertyguide.com/Pacific/Australia/Taxes-and-Costs. [Accessed 19 May 2016].
Jin, L., n.d. Capital Gain Tax Overhang and Price Pressure. SSRN Electronic Journal.
T., J., 1959. Capital Gain. Science, 129(3363), pp.1583-1583.
The taxation of capital gains. 2016. The taxation of capital gains. [ONLINE] Available at:https://www.taxpayer.com.au/KnowledgeBase/10080/Individuals-Tax-Super/Capital_gains. [Accessed 19 May 2016]
J., 2011. Tax for Australians for dummies. Richmond, Vic.: John Wiley & Sons Australia.
Capital gains tax | Australian Taxation Office. [online] Ato.gov.au. Available at: <https://www.ato.gov.au/General/Capital-gains-tax/> [Accessed 19 May 2016].
Capital gains tax. [Canberra]: Australian Taxation Office.
Calculating Capital Gains Tax – the basics for Australian investors | deListed Australia. [online] Delisted.com.au. Available at: <https://www.delisted.com.au/capital-gains-tax/basics> [Accessed 19 May 2016].
Calculating and paying capital gains tax. [online] Help and guidance. Available at: <https://learn.nab.com.au/calculating-and-paying-capital-gains-tax/> [Accessed 19 May 2016].
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