Question:
Discuss about the Capital Analysis of Dave Solomon for Gain in Financial System.
The definition of capital gain is the difference between cost of acquisition and capital in process is mainly known as capital gain in financial system. To analyses the gain or loss in a system. There are mainly three theory available. 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 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)
The exemptions are given by Australian government in gain on sale of capital.
The property acquired before 20th September 1985 which are
Waiving of carry forward of losses arising from capital gain in Assets
Capital loss in long term: this is normal rule for asset capitalization 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
It is also a normal rule in asset capitalization 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.
Analysis (i) As given in assignement, 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
So, Long term capital gain Nil
Analysis (ii) the sale of 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: Cost of acquisition (indexed)
15000*123.4/71.3 $ 25,961
Capital gain (long Term) $ 150,961
Analysis (iii) Sale of 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
(Capital loss) long term $ 50, 000
Analysis (iv) as given in assignment, 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).
Gain of capital can be calculated as
Sale done at $ 80,000
Less: Brokerage $ 750
Less: cost of acquisition $75,000
Less: stamp duty $250
………………………………………………………………………………………
Short term loss in capital $ 4,000
Sale of residential property (Long term) $ 0
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
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. Dave 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).
As per given assignment and 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)
As given in assignment The periwinkle private limited is selling bathtub directly to public. This company is transferred to Emma on 1st May 2015. Emma is doing lot of travelling for business purpose, for travelling, the company has given a car to Emma, and this car can be sued for personal purpose also. The purchase cost of the car to the company is 33000 on 1st of May 2015.
The journey of Emma completed about 10,000 kilometers by this supplied car, and this journey was completed starting from 1st May 2015 to 31st mar 2016. During this journey Emma has also done some expenses which is $550 for repair of the cars. These expenses can be recovered from the company. One upon a time car was not used and parked at the airport another stoppage of car was for 5 days for the scheduled maintenance.
Company provided loan to Emma on 1st of September for amount of 5, 00,000 to Emma with interest rate of 4.45%. By this money Emma purchased a holiday home at the cost of $ 4, 50,000 with the loan amount and the balance amount was given to her husband for the purpose of share in Telstra.
During the same year Emma purchased a bathtub which is manufactured by Periwinkle for $13,00. But the cost of manufacturing the bathtub is $700 for the company, and this bathtub can be sold to $2600 for another customers.
It is a tax which is being paid by the employers for some benefits given to employee by the employer, and this tax is applicable to non tax benefits also which is being paid by the company to their employees.
But out of the aforesaid benefit, there are some exemptions in the fringe benefit tax which is given below.
These are the details of fringe benefit tax.
This Tax is liable on Car parking, Property and Residual, Car, Loan, Payment of Expense, Housing, Airline, transport, The definition of Fringe benefit tax includes car as a wagon of station or any vehicle used to carry goods on net weight of less than one tons or any vehicle used to carry less than nine passengers. But when the car is used for personal purpose i.e. and such benefit given by the employer to the employee fill comes under fringe benefit and hence tax will be calculated on such benefit. If the car by the company is provided for the period of less than three month then it will not be considered as that employee is holding car and fringe benefit tax is not be computed. As per the condition given is case study the car which used by Emma comes under the definition of fringe benefit tax. Therefore, car provided by the company comes under the law of fringe benefit tax. Another thing is that car is also used for private purpose, and there is a rule that if the car is not at the premises of the employer and is given to employee for private use and the car is parked at the premises of the employee. The car for the purpose of maintenance is being considered as out of the rule of fringe benefit act.
The calculation can be done on the following two methods
A given in question
Cost of the car =$33,000
No of days for fringe benefit tax = 335-5 =3
The car kept idle during maintenance of the car, and this will be not used as tax calculation for fringe benefit act. Whereas car parked at airport will be included in total days used by Emma for private use. Has the keys of the car been given to the employer the same would not have been included in Total Days. The car runs for less than 15000km during fringe benefit period. As a result the rate would be 20%
Tax Calculation
$33000×20%x330/365 $5,967
Subtracting the expense occurred by the employee $550
Amount of fringe benefit tax to be calculated on $5417
Case of loan provided by the Periwinkle to employee at a low rate of interest
Whenever and employer provides the load to the employee at the lower interest rate, then fringe benefit tax can be calculated. The normal rate of interest in the market is 5.95% while periwinkle given load at 4.45%.
Therefore, tax for the loan taken at lower interest rate
5, 00,000* 1.50% = $7,500
But Emma used $450000 for the purpose of buying a holiday homes and rest of the amount was transferred to her husband for purchase of share. Since Emma incurred $ 4, 50,000 for house work, hence the taxable value will remain same i.e. $7,500.
At a condition when Emma use the entire amount of loan by herself i.e. for buying property worth $ 4,50,000 and buying shares worth $ 50,000. Fringe benefit tax would be computed as follows
Taxable value of the loan fringe benefit without the otherwise deductible value = 5, 00,000*1.50% = $7,500
Ignore any interest charged and assume that the loan was interest free =$5, 00,000*5.95%= $29,750
Now suppose that the employee had paid interest equal to the amount of taxable value 29,750*10/100 $2,975
Now look at the real situation if employee is being charged interest on loan =$5, 00,000*4.45%*10% = $2,225
Subtract iii-iv = $ 2,975- $2,225 = & 750
Taxable value (i-v) 7500-750 = $ 6750
Relaxation in Debt in fringe benefit
As per given in question, the bathtub purchased by Emma at a cost of $1300, which was sold in the market at a cost of $ 2,600, Therefore, the difference in i.e. $2600 – $1300 comes and then liability of fringe benefit.
References
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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].
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