Taxation Law For Capital Gains And Losses: Calculation Of Net Capital Gain For Fred

Part 1 of the Task

Discuss about the Taxation Law for Capital Gains and Losses.

Calculation of Fred’s net capital gain for the current year, assuming that he has got net capital loss from the previous year of $ 10, 000 arising from sale of shares

This paper is about one Fred who is mentioned as a resident who made ascent to a contract in order to sell his home that was built in Blue Mountains at around the month of August the previous year. The sale of the home was completed early this year and the mentioned individual received a total cash of $ 800,000 from the purchaser (Chen 2012). It is also mentioned that a legal fees of $ 1100 that is inclusive of GST was incurred as well as the commission of real estate agent that was equally inclusive of GST at $9,900 in relation to the sale. It is also captured that, at around March 1987, Fred purchased the home that he sold the previous year for $ 100,000 and also offered an additional amount of $ 2,000 in stamp duty on the transfer.

Other than the mentioned transactions in the month in context in 1987, there was also $ 1000 that was paid as legal fees to ascertain the homes security from the government. Towards 1990, a builder was engaged by Fred to build a garage within the same home vicinity at $ 20,000. Calculation of Fred’s net capital gain for the current year, and also assuming that he also incurred a net capital loss from the previous year of $ 10,000 that arose from both sales and shares (Faris 2003)

Net capital gain is derived from capital gain, this particular area, is mainly concerned with increase in the value of capital for example, like in the question in context, there is a capital asset of a house of Fred (Kang et al 2010).  For us to clearly understand the concept of capital gain, then the value of the capital asset must be of a higher value than the price of purchase.

Since the question in context is pegged to net capital loss as well, it is vital for the concept of net capital loss or generally capital loss to be brought on board before any calculation. A capital loss is the sum of money that is incurred when there is depreciation in terms of the value of the capital asset in comparison to an asset’s purchase value (Karinga 2015). What this means is that, at the time of sale of a particular capital asset, the value to which it is sold or offered in the market is less than the value that was used when the asset in context was being purchased.

Net Capital Gain Calculation

On the same note, capital gains can be discussed to generally have an association with both funds and stock mainly because of inherent price volatility, just as mentioned previously; its occurrence can be on security that is sold for an amount of money that is higher than the purchase price that was given at the time of purchase (Kierulff et al 2015)

 Nevertheless, with reference to the lecture notes that we took in class, it is clearly mentioned under the provisions of the Income Tax Assessment Act of 1936, section 24 AX, it is clearly mentioned that there are a number of guidelines and procedures to be followed or given considerations when in discussion of the subject (Kubátová 2009). The provision in context goes further to mention that through the concept of net capital gain, there is also the capital gain tax that is supposed to be made on the capital gain that is made on disposal of any asset or capital asset, except in some cases that are also provided for in the provisions under the Income Tax Assessment Act of 1936.

The widely discussed exception that can be made with regards to the CGT is mainly in that of family home but more details will be explained in the calculation part of the question in discussion. In the occurrence of calculating net capital gain, it is important to put into consideration a number of key points.

The first point is on first confirming that the capital asset’s value is higher than the initial purchase value. For example, the case study in context outlines the value of the capital asset as $ 800,000 which is considered high based on the grounds that the initial purchase of the home of the home was $ 100,000 by March 1987. Another important key point that has to be brought on board is the total capital losses that also include net capital losses from the previous year. The final key consideration that should not be left out is on the CGT discount and any CGT concessions that one is entitled to (Kneeland 2005).

 Therefore, the total capital gains with regards to the year in context is $ 800,000, this is based on the capital asset. The capital gains of the current year will include subtraction of the legal fees that captured the GST and also the commission that was paid to the real estate agent. The final capital gain for the current year is will be $ 800, 000- ($ 1100+ $ 9,900) = $ 789,000.

Part B of Question 1

In the calculation of net capital gain for the current year, we will have to include all the expenses that were incurred and also bringing on board the capital loss. According to the case study in context, all the capital losses will include all the transactions that were done previously. They include the amount at which the capital asset was bought which was $ 100,000 and additional amounts of $ 2,000 which was paid for stamp duty on the transfer and $ 1, 000 legal fees. The mentioned subject also brings on board the expense that was incurred when building the garage (McElhany 2014). The expense estimate is estimated to be $ 20,000. Without the capital loss that was mentioned in the case study, first the deductions that will have to be included are as calculated, $ (100,000 + 2000 + 1000 + 20,000) = $ 123,000.

When net capital loss is brought into picture, it can either be added to the previous sum results or we can apply either the CGT discount method or the indexation method to come up with the results (Mundstock 2013). In this case we will apply the CGT discount method which is as explained;

Capital proceeds = $ 789,000

Less cost base=       $123,000

Capital gain=           $666,000

Less capital loss=    $ 10,000

Net capital gain=    $ 656,000

Part B of Question 1

If the answer provided in the detailed part of the task above was from antique vase, there would be no difference because this was not going to terminate or affect figures and the provisions that provide for the capital gain and capital loss under ITAA of 1936 (Neumer 2005). Everything will remain constant, it is only the concept that will show slight difference but this cannot affect the overall meaning of the subject and the factual detailed information that has been offered above.

This part is about a case study on Fringe Benefit Tax which is abbreviated as FBT. A propriety Limited Company by the name Periwinkle is described as a bathtub manufacturer which offer sales on bathtubs directly to the public. On early May, the date being 1^st 2015 to 31^st March, the company in question provided a car to one of his employees. The person who was provided for the car is one Emma. This provision was made to her because she travels often and this was going to offer a relief to her (Ordower 2014).

Advice to Periwinkle on FBT Consequences

The case goes further to mention that the frequency to which Emma uses the car is not limited and this drives a point of unlimited use of the car. The car was purchased on the same date that was mentioned previously and the purchase price is estimated to be $ 33,000. This also includes the GST value. This second part goes further to outline that for the time period of 1^st May 2015 to 31^st March 2016, Emma had travelled a distance estimation of 10,000 kilometers with the car and have incurred total expenses of around $ 550 (Ordower 2013). This total also includes the GST just like the amount of money that was spent by the propriety company in purchasing the car. The amount of money mentioned was mainly used to cater for minor repair services that have been reimbursed by the company.

A period of 10 days has also been mentioned when Emma was interstate and therefore allowing no use of the car at that time. At that time, the car was parked at the airport for annual repairs and this lasted for a five day period (Schwartz 2010). The case goes further to mention that, on 1^st September 2015, Emma was provided with a loan of $ 500,000 by Periwinkle at an interest rate of about 4.4%. A break down on how the loan was spent was, Emma using $ 450,000 to purchase a holiday home and lending the remaining amount to her husband at an interest free rate to also purchase shares in Telstra (Široký and Maková 2007).

During the same year, there was purchase that was made by Emma where she purchased bathtub manufactured by the company in discussion at $ 1,300 (Smith 2015). Additional information is that the bathtub that was sold to Emma usually cost the company in context $ 700 to manufacture and then they sell it to the general public for $ 2,600.

Advice to Periwinkle of its FBT consequences that are arising out of the information mentioned, covering calculations of any FBT liability for the year ending 31^st March 2016

FBT is an abbreviation for Fringe Benefit Tax, it is an amount of money that is paid to an employee but not categorized as either salary or wages. The FBT legislations provide that that, this benefit is only provided with respect to employment. The same concept is also supported with the lecture notes offered in class, as some parts are in line with the question and applies directly. Just like the provisions of capital gains and capital loss, FBT is also found in the Income Tax Assessment Act of 1986, and this also captures the provisions of the FBT rate. In consideration that when a company offers an FBT to an employee, it is like a sacrifice on their part, I would offer the following advice.

The first advice that I would offer is on the company to consider relieving some of the benefits offered to Emma or adopting certain provisions that will limit how these particular benefits are to be used (Stewart 2000). For example, the car provided to Emma, should majorly be put into use for purposes of duty and nothing else. This will reduce the many expenses that would come out as a result of repair to the propriety company in context.

The other advice that I would offer is that, the company should consider selling its product at an equal measure of price. This is because; the bathtub that she purchased from the company was going for a regular price of $ 2,600 after being made by Periwinkle at $ 700. Emma who is an employee of the company ends up buying the bathtub at half the price that it is sold to the general public. The company should exercise equality and not offer certain products at an amount that may make them being categorized under FBT.

The final advice in line with the context that I would offer to the company is for the company to consider relieving itself from incurring extra costs. For example, after buying the car to Emma, the company still went ahead to incur expenses of repair. An additional calculation of FBT liability is also added to offer support to the mentioned advices. FBT liability= Amount used for purchasing the car + the amount of repair), the loan offered is also to be included because Emma is entitled to repaying it. Therefore, FBT liability = $ (33,000 + 550) = $ 33550 + $ 500,000. The total amount of FBT liability= $ 533,550

How my answer would differ to (a) if Emma used $ 50, 000 to purchase shares herself instead of lending it to her husband

My answer would differ at a great extent because the money lent to Emma to her husband is interest free. Should she use it to purchase shares then there are chances that she is going to earn interest from those particular shares. This will also have an automatic influence on the overall returns of the loan. This will cause the extra amount of money to undergo taxation and thereby increasing FBT liability.

References

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Faris Jr, E.M., 2003. Capital Gains and Losses Subsequent to Corporate Liquidation. Wash. & Lee L. Rev., 10, p.179.

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