Capital Gains Or Losses Tax – Calculation And Exemptions

Calculating Capital Gains or Losses Tax for Property, Artwork, and Shares

Discuss about the Capital Gains or Losses Tax.

There are certain sales made by Dave in the financial year 2015 and the task at hand is to calculate the capital gains or losses arising from it. He received 850,000 from the sale of his two storeyed house in St. Lucia which was purchased for 70,000. This means that he made a gain of 780,000 in this sale if we don’t account for the expenses incurred in the commission expenses. However, the proceeds received by Dave from sale of his residence at St Lucia is fully exempted from capital gains tax because as per ATO proceeds from a sale of personal home are fully exempted if the individual has been living it for the duration for which he/she has owned the property and the property hasn’t been generating any assessable income. The proceeds received from the forfeiture by a buyer is also application for exemption under capital gains as it as part the capital proceeds from the disposal of that asset which was exempted due it being a main residence of the taxpayer. Hence even the forfeited amount wont attract any capital gains tax liability.

The painting is not eligible for exemption as neither was it purchased under $500 nor was it acquired before 16^th September,1995 hence the net capital gains are taxable. So the net gains of 110,000 are to be taxed under capital gains tax. The figure of 110,000 dollars is the selling price less the acquiring price which are 15,000 and 125,000 respectively. The taxable amount arisen due to the benefit provided can be calculated using either of the two methods prescribed by the ATO i.e. indexing method or the discount method whichever yields the lowest value subject to the constraint that it satisfies the conditions laid down to use a particular method for discounting. Since the asset has been held for more than a year and since the asset was acquired before September,1999 he can apply the indexation method to calculate the discount. The indexation factor is given by CPI (Consumer Price Index) in which the sale was made divided by the CPI for the quarter in which the initial investment was made. CPI values were obtained from the website of ATO and the indexation factor calculated to the fourth decimal point is obtained as 2.6952. Since the sale was made in 3^rd quarter 1985 the indexation factor for this was 39.7 and that for the sale was 2^nd quarter 2015 for which the indexation factor was 107.Hence the cost of the painting would be increased by that factor to get the capital gain. Hence now capital gain would be 84,572 as the cost for calculating capital gain would be 40,428 dollars which is 15,000 multiplied by the indexing factor.

Exemptions for Capital Gains Tax

But the discount factor gives a better result as under the discount method the capital gains are discounted by 50% hence under this method capital gains would be 55,000 dollars which is the net gains of 110,000 discounted by 50%. Since the discount method gives the better result which in this case is the lower value we would use this method to calculate the capital gain at 55,000 dollars.  The capital gain can be reduced only after all the capital losses for the income year have been applied. It is imperative to mention here that net losses from collectables can only be deducted from capital gains made from collectables, not from other capital gains.

The capital loss on the boat boat which was purchased in 2004 would be calculated using the other method which would give the highest possible result of 50,000 dollars. The amount is obtained by subtracting the sale price of 60,000 dollars from the acquisition cost of 110,000 dollars.

For the capital gain tax on the shares, the other method will be used. The cost base would include the cost price of shares and also the brokerage paid on the shares and the stamp duty. Hence total cost would be 71,000 dollars and since the shares were sold for 80,000 dollars the total capital gain is 9000 dollars. It’s explicitly mentioned that the interest charges are not to be included in the cost base.

The net capital gain or loss is given by total capital gains for the year less the capital losses for the year further brought down by any discounts allowed.

Hence, the net capital gain from sale of painting and shares is 64,000 dollars or 93,372 dollars depending on the method used for the painting.

Net capital loss from sale of boat is 50,000 dollars

Hence net capital gain of 14,000 dollars or 43,372 for Dave for the current year.

Since Dave has had a net capital gain of 14,000 dollars he can use this to deduct the net capital loss carried forward from the previous year which amounts to 50,000 dollars. His net capital loss would now stand at 36,000 dollars as the capital gain this year would be deducted from the carried forward capital gain loss.

If Dave has a net capital loss it would be added to the capital gain loss carried forward from last year. Hence now his total capital loss would stand at 50,000 dollars and the additional capital loss incurred this year Capital loss cannot be used to offset the tax liability and would be carried forward and can be used to deduct it against capital gains in the coming years.

Calculating Tax Liabilities on Car Fringe Benefits

To calculate a car fringe benefit, an employer must work out the taxable value of the benefit using either of the below mentioned methods as per ATO.

• The statutory formula method which uses the price spent in acquiring the car for evaluation purposes
• the operating cost method which takes stock of the operating use of the car to arrive at the tax liability

Even if a different method was used in the previous taxable year, the method to be used this year would be determined by the method which gives the lowest value. However, if the required documentation for the operating cost method (for example, log books) have not been kept then the statutory formula method must be used. The operating cost method requires the company to maintain a log book which specifics the usage of car in terms of business and non-business use. Since this has not been maintained the statutory method of valuation would be used to evaluate the taxable value of the fringe benefit arising from the use of the car.

Under the statutory formula method, the steps involved are estimating the cost of the car, estimating the statutory rate and determining the number of days the car was used for private purpose. The taxable value is then given by A*B*C/365 where A is the base value of the car, B is the statutory rate and C is the number of days in use of the car in a given assessment year.

The base value of a car is:

• the cost price of the car which includes charges incurred on registration and duty
• expenses incurred on standard accessories
• expenses incurred on delivery

The statutory rate for calculating the fringe benefits tax would be 20% since ATO prescribes a flat tax rate of 20% for calculating the benefit provided if kilometres travelled are less than 15,000 kilometres. In fact, for any benefits provided after 2011 the tax structure is a flat rate of 20%.

The car held by Emma for a 11 month period which constituted 336 days. During the 11-month period or the 336-day period from 1^st may to 31^st March no days would be deducted in determining the number of days of usage of car as ATO clearly lists that annual maintenances are to be listed as days when it is available for use and whenever it is garaged at the employee’s house would also be not deducted, in this case when Emma was interstate would not be deducted,

Keeping the above factors in consideration the tax liability would be calculated at 20% of the cost price of the car which is 33,000 and it would be factored by 336/365. Hence 6075 is the taxable value.

A company is said to provide a loan fringe benefit if it extends to its employee a loan and charges no interest or a low rate of interest. Any interest rate lower than the prescribed or the benchmark interest rate qualifies as a loan fringe benefit. The benchmark interest rate for the Fringe Benefit Tax for the assessment year ending March 31,2015 is given as 5.95% by ATO. Hence for the given scenario since the loan is provided by Periwinkle to Emma at 4.5% it qualifies as a loan fringe benefit.

Loan Fringe Benefits – Taxable Value Calculation

The taxable value of a loan fringe benefit is the difference between:

• the interest that would have arisen on the amount extended as loan during the Fringe Benefit Taxable year had the benchmark rate been applicable, and
• the interest which the company charges the employee on the reduced rate of interest

Since Emma uses the loan for purchase of a holiday home and for lending it to her husband the entire amount is to be taken into consideration.

For the given scenario the taxable value of the loan fringe benefit is the difference between the two amounts 29,750 dollars and 22,500 dollars which is 7,250 dollars. While the former is the rate of interest charged by the company to Emma, the latter is the interest to be paid in accordance with the statutory rate in 2015.

There is no specific information regarding cheap sale of its own products to its employees and neither is it under any exempt category but since the price Emma paid for it is anyways more than the manufacturing cost we exclude it from our scope of taking out the fringe benefits provided to Emma.

Hence the total taxable value of the fringe benefits is the loan fringe befit of 7,250 dollars and the car fringe benefit of 6,075 dollars which is a total of 13,325 dollars. Hence the total fringe tax liability would be 6262.75 dollars as the fringe benefit tax is 47%.

Had the 50,000 been used by Emma herself instead of being lent to the husband to buy the shares it would be eligible for deduction. ATO prescribes that the taxable value of a loan fringe benefit may be reduced in accordance with the ‘otherwise deductible’ rule, subject to the constraint hat the investment is made by the employee himself or herself rather than an associate which was the case in first place. Putting it simply it implies that the taxable value would be reduced to the extent to which interest payable on the loan is, or would be, allowable as an income tax deduction to the employee. We look at an example to understand the implications better. Supposing an employee uses a loan from his/her company wholly to invest in interest bearing financial instruments, then the interest that he would have to pay the company is deductible fully for tax purposes. Hence what the mentioned scenario implied is that under this rule the taxable value of the fringe benefit provided would be zero, irrespective of the rate of interest charged by the company on the loan. Therefore, where the otherwise deductible rule applies, the taxable value of a loan fringe benefit is:

• The interest accrued on the principal during the fringe benefit taxable year at the benchmark rate of interest, less by
• The interest arising at the lowered rate of interest, less
• The otherwise deductible amount.

Hence for the given scenario the taxable amount under loan fringe benefit would be reduced by the differential interest paid on 50,000 dollars since this would now be deductibe for tax purposes. This would mean that the loan fringe benefit would now be 6525 dollars instead of 7250 dollars and the total taxable amount under fringe benefit tax would be 12,600 dollars.

References

ATO, 2016. Capital Gains Tax. [Online]
Available at: https://www.ato.gov.au/General/Capital-gains-tax/

ATO, 2016. Fringe benefits tax. [Online]
Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/