Question:
Discuss about the Capital Gains Tax for Foundation of Taxation.
1. The objective of the case study presented is to ascertain Dave’s capital gains or losses in FY2016 based on the various asset sales that he has indulged in with the intention of having enough corpus for retirement. The discussion of the capital gains tax on various transactions is discussed below.
Sale – Residence at St. Lucia
As per the relevant case details, Dave is liquidating his house so that he could get enough money for retirement and further plans to live in a rented place. Since Dave has been residing in the current residence for 30 years, hence it would be fair to assume that the residence would have been bought in 1986. As a result, for any capital gains made on its sale, capital gains tax would be levied as the acquisition of the asset has taken place post September 20, 1985 (Sadiq et. al., 2015).
Besides, using the main residence exemption, it may be possible that no capital gains are levied on the sale of house in line with Division 118 ITAA, 1997. However, for a residence to be treated as main residence, it is imperative that the following two conditions are met (Barkoczy, 2015).
The given residence satisfies the conditions shown above as Dave has only this residence which is apparent from the fact that he wishes to now move to a rented apartment once it is sold. Additionally, no information is available with regards to house being used for income realisation. Thus, the given residence is the main residence of Dave and thus no capital gains tax would be levied on the house sale (Gilders et. al., 2015).
Sale-Painting
The acquisition of the painting has been done in the post CGT era i.e. on or after September 20, 1985 and thus CGT would be applicable on any potential capital gains that the painting may lead to. This has been carried out below.
Painting’s cost at purchase = $ 15,000
Painting’s value at selling = $ 125,000
Thus, painting’s capital gains = 125000 – 15000 = $ 110,000
Taking into cognizance the painting’s holding period of more than a year, the capital gains made on the asset are classified as long term (Sadiq et. al., 2015).
Sale- Luxury Boat
The acquisition of the luxury boat has been done in the post CGT era i.e. on or after September 20, 1985 and thus CGT would be applicable on any potential capital gains that the painting may lead to. This has been carried out below.
Boat’s cost at purchase = $ 110,000
Boat’s value at selling = $ 60,000
Thus, boat’s capital losses = 110000-60000 = $ 50,000
Taking into cognizance the painting’s holding period of more than a year, the capital losses made on the asset are classified as long term (Sadiq et. al., 2015).
Sale – Shares
The acquisition of the shares has been done in the post CGT era i.e. on or after September 20, 1985 and thus CGT would be applicable on any potential capital gains that the painting may lead to. This has been carried out below.
Share’s cost at purchase = $ 75,000
Share’s price at selling = $ 80,000
There is a need to determine the cost base of the asset with the help of Section 110-25 which advocates that various incidental costs associated with buying and selling of the asset along with the financing costs must be added to the cost base. Due to this, the brokerage charges ($ 750) and the stamp duty ($250) along with the interest cost ($ 5,000) would make contributions to the overall cost base. The interest on the loan taken for asset acquisition would be added to the cost base only if it is otherwise non-deductible. The ATO opinion makes it evident that the interest is not deductible and thus contributes to the cost base of the shares (Barkoczy, 2015).
Cumulative cost base of shares as per Section 110-25 = 75000 + 5000 +750+250 = $ 81,000
Sales proceeds on shares = $ 80,000
The capital losses made on the sale of shares – Cumulative cost base – Sales proceeds = 81000 – 80000 = $ 1,000
Net capital gains calculation for FY2016
The cumulative capital gains that Dave makes in FY2016 would be the sum total of the gains or losses derived on various transactions in the ongoing year = 110000 – 50000 -1000 = $ 59,000
However, the question states that Solomon has made a capital loss to the extent of $ 10,000 in the last year as he disposed off certain shares and hence this capital loss would automatically be carried forward and hence adjusted against the gains realised in FY2016 (Gilders et. al., 2015).
Hence, capital gains realised after bringing forward accumulated losses and dealing with these in the current year = 59000 – 10000 = $ 49,000
From the computations above, it is apparent that the net gains are long term and further Solomon’s individual taxpayer status implies that a rebate could be availed to the tune of 50% of the net capital gains.
Thus, taxable capital gains for the year FY2016 = 0.5*49000 = $ 24,500
It is evident from the computation of the above part that Solomon has realised a net capital gains for the FY2016 and thereby tax will be levied at the rate of 30%.
Hence, CGT levied on the capital gains = 0.3*24,500 = $ 7,350
However, if instead of capital gains, Solomon now makes capital losses, then the current year losses would be added to the losses from the previous year and the cumulative capital losses are carried ahead to be adjusted in future year. Further, these losses will automatically be carried forward till they are adjusted against the gains (Sadiq et. al., 2015).
2. In accordance with the case information rendered in the question, it is evident that Periwinkle (the employer) has extended some fringe benefits to their employee (Emma) and the implications with regards to tax for these transactions need to be discussed keeping in mind the applicable act Fringe Benefit Tax Assessment Act 1986 (FBTAA86).
Car Related Fringe benefit
The fringe benefits regarding car are explained as per Section 8 of the relevant act. It advocates that car fringe benefit would arise when the employer is given a car owned by the employer for personal usage. The resulting tax on the benefit that arises in the form of car fringe benefit would be levied on the employer as per Section 23L ITAA 1936. In the given case, Periwinkle has extended car fringe benefits to Emma, the employee since the car is employer owned and used by Emma for personal usage (Sadiq et. al., 2014). For ascertaining the value of the fringe benefit associated, the key consideration is to ascertain whether the product or service extended has GST levied or not since the gross up factor is driven by this information (McCouat, 2012). Since the car has GST levied on itself, hence the corresponding gross up factor to be carried forward for computation is 2.1463 (ATO, 2016). The FBT liability determination with regards to fringe benefits on car can be computed in the following manner (Wilmot, 2012).
Step 1: Taxable value determination
The relevant formula for determination of taxable value of the FBT is given below.
The input values required for taxable value determination can be computed in the manner displayed below.
The statutory percentage required above can be taken by considering the total distance Emma had used the car for personal usage during the given assessment period. The case study indicates that the relevant distance covered by the car amounts to 10,000 km during the assessment period. Therefore, in accordance with rule prescribed by ATO, the statutory percentage would be 20% as the distance travelled by the car does not exceed 15,000 km (ATO, 2015).
Period in days for which the car is with Emma = March 31, 2016 – May 1, 2015 = 365-30 = 335
Additionally, adjustment needs to be made with respect to those five days when car was in repair and hence Emma did not possess it. No adjustment would be made for the period of 10 days for which the car was parked at the airport as Emma had the possession but decided against using it.
Cumulative days of usage of car by Emma = 335-5 = 330
FBT Taxable Value = $ 32450 × 20% × (330/365) = $ 5,867.7
Step 2:FBT liability
FBT liable to be paid by the employer = 5,867.7 × 2.1463 × 49% = $ 6,170.95
Fringe benefit on loan
Fringe benefit on loan arises when financial assistance is extended to any employee from the employer at rate of interest lower than the RBA benchmark rate. This particular fringe benefit would be taxed at the end of the employer only. In accordance with the TD 2015/8, the RBA benchmark rate prevailing for the year ending on March 31, 2016 is 5.65% pa. As a result, fringe benefit on loan would result since the employer is offering the interest is 4.45% pa. The fringe benefit associated with loan would be equivalent of the interest differential of the total loan amount borrowed at the RBA benchmark rate and that on offer by Periwinkle (Barkoczy, 2015). The value of the fringe benefit derived from loan can be computed as follows.
Interest cost of the loan given to Emma at the rate prescribed by RBA = $ 500,000 × 5.65% = $ 28.250
Interest cost of the loan given to Emma at the rate offered by employer Periwinkle = $ 500,000 × 4.45% = $ 22,250
Savings achieved on account of lower interest rate that is asked by the employer = $ 28,250 – $ 22,250 = $6,000
The loan fringe benefit to the tune of $ 6,000 is given to Emma that would pave way to FBT liability, Besides, it is known that the loan extended by Periwinkle has been used by Emma for buying holiday day i.e. for realising gains of personal nature. As a result, deduction would be available for the employer to the extent of interest payment which Emma makes on the amount of $ 450,000. This would lead to the lowering of the employer’s total tax liability (Gilders et. al., 2015). In relation to bathtub, there is fringe benefit that has been extended from the employer to Emma since the bathtub is provided at a lower price as compared to the retail price. The fringe benefit extended is equal to the difference in the two prices (Sadiq et. al., 2015).
In the given question, now an alteration has been made as 10% of the financial assistance extended to Emma has been forwarded to her husband, which would be utilised for making investments in shares. However, since the previous 450,000 would again be utilised by Emma for buying a holiday home, hence the interest deduction on this would remain the same. But, there would a decrease in the FBT liability arising on account of the loan taken by Emma which is explained as shown below (Deutsch, et. al., 2015).
Interest cost of the 10% loan given to Emma at the rate prescribed by RBA = $ 28,250 × 10% = $ 2,825
Interest cost of the 10% loan given to Emma at the rate offered by employer Periwinkle = $22,250 × 10% = $ 2,225
The above would lead to a decline in loan fringe benefit to the extent of 2825-2225 = $ 600
Hence, taxable fringe benefit arising from loan in this case = 6000-600 = $ 5,400
References
ATO 2015, How to calculate your FBT, Australian Taxation Office, Available online from https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT/ (Accessed on May 25, 2016)
Barkoczy, S 2015. Foundation of Taxation Law 2015, 7th edn, CCH Publications, North Ryde
Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2015. Australian tax handbook, 8th edn, Thomson Reuters, Pymont
Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2015. Understanding taxation law 2015, 8th edn, LexisNexis/Butterworths.
McCouat, P 2012, Australian GST legislation. 17th edn, CCH Australia Limited, North Ryde
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2015, Principles of Taxation Law 2015, 8th edn, Thomson Reuters, Pymont
Wilmot, C 2012, FBT Compliance guide, 6th edn, CCH Australia Limited, North Ryde
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