Taxation Of Dividend: Case Study 1 And 2

Computation of Net Capital Gain for Fred

Describe about the Taxation for Taxation of Divident.

Net capital gain of Fred for the current year:

Based on the provided information, it could be assumed that Fred is a citizen of Australia having no association with any kind of trading business. The holiday home of Fred could not considered as a trading stock. Therefore, Fred has earned revenue through the sale of his holiday home in February for $800,000 from the buyer.

The net capital gain of Fred could be computed with the help of the indexation method and discounted method. This is briefly demonstrated as follows:

Name of the Taxpayer: Fred

Category: Individual

Computation of Net Capital Gain/Loss

for the year ended on 30^th June 2016

	Discounted Method	Indexation Method
Particulars	Amount	Amount	Amount	Amount
	$	$	$	$
a) Sale of Holiday Home :
Sales Consideration		800000		800000
Less : Cost Base of the Property	100000		148043
Legal Fees on Sales (Exclusive of GST)	1000		1000
Commission of Real Estate Agent	9000		9000
Stamp Duty on Purchase	2000		2961
Legal Fees on Purchase	1000		1480
Construction Cost of Garage	20000	133000	23853	186338
Capital Gain on Sale		667000		613662
Less : 50% Exemption on Capital Gain		333500
Taxable Capital Gain (A)		333500		613662
Less : Capital Loss of Previous Year		10000		10000
Net Taxable Capital Gain		323500		603662

Table 1: Net taxable capital gain of Fred

(Source: As per the case study)

Necessary Notes:

The asset has been purchased on 20^th September 1985 and thus, it could be categorised as the CGT assets of the concern. Hence, it needs to be treated as the taxable capital giant or loss.

Both the discounted and indexation methods could be used to compute the net capital gain or loss. This is because the indexation method utilises CII of the first quarter of 1987 till the final quarter of September 1999 to compute the asset values bought in 1987. The computation also includes the expenses like legal fees and stamp duty (gov.au 2016).

The additional development related to the property is computed by talking into account CII of 55.2 from the first quarter of January 1990.

It has been assumed that Fred is an Australian citizen and the organisation does not have the property ownership. Therefore, Fred could use the application of both indexation and discounted methods to compute the minimum taxable amount to be paid on the capital gain.

Fred needs to use the discounted method, as it would help in minimising the taxable capital gain amount from $603,662 to $323,500. As a result, the decline in capital gain tax would help in increasing the overall value of retained income (Woellner et al. 2016).

The loss arising out of capital gain in the past year could be attuned in the existing year, as the shares are given equivalent treatment like property, while computing the net capital gain.

The company has suffered loss in the past accounting year due to share loss, which could be adjusted with the present capital gain in the year 2016. However, the capital gain could not be subtracted from the sale of the property, in case; loss arose from the antique vase (Harding 2013). Faccio and Xu (2015) agreed to this and further remarked that capital loss arising from antique items could only be adjusted from the sale of such items, which is realised as capital gain. Hence, it could be inferred that it is not possible to adjust the capital loss in the amount of capital gain, in case, loss has aroused from the sale of unique vase. Hence, the total amount of tax to be paid, as per the discounting method, is $333,500.

Variation in answer if the Loss has Aroused from the Sale of Antique Vase

a. Advise to Periwinkle of its FBT ramifications:

Computation of car fringe benefit:

Particulars		Details
Total Kilometres Travelled during the FBT year	A	10000
No. of Days in the FBT year	B	366
No. of Days of Travel	C	336
Annualised Kilometres	(A x B/C)	10892.86
Statutory Rate as per Annualised Km.	E	20.00%
Cost Base	F	$33,000
No. of Days available for Private Use	C	336
No. of days in FBT Year	B	366
Taxable Value	(FxExC)/B	$6,059.02

Table 2: Computation of fringe benefit from car for Periwinkle

(Source: As per the case study)

The above table illustrates the total fringe benefit associated with the car of Periwinkle to Emma. Moreover, the car has been utilised for 336 days for private use, since Emma did not avail the same for her trips. In this regard, Hodgson and Pearce (2015) cited that the implementation of fringe benefit tax is to compute the benefits for the staffs on the part of the organisation.

Computation of fringe benefit on loan:

Particulars		Details
Loan to Employee	A	$500,000
Benchmark Interest Rate	B	5.95%
Actual Interest Rate	C	4.45%
Taxable Value Interest on Loan	D = (AXC)	$22,250

Table 3: Computation of fringe benefit for interest on loan for Periwinkle

(Source: As per the case study)

According to the above table, the total taxable fringe benefit related to interest on loan has been obtained as $22,250. Moreover, it has been observed that the interest rate charged is smaller in contrast to the benchmarked rate of interest. Hence, the interest has been computed at the rate of 5.95% to obtain the FBT ramifications of Periwinkle. As commented by Tang and Wan (2015), the loan interest is computed on the greater rate of interest, which could be either the benchmark rate or the company rate of interest. 

Computation of fringe benefit on special discount:

Particulars		Amount
		$
Market Price of the Bathtub	A	2600
Special Price for the Employee	B	1300
Taxable Value of the Bathtub	C=A x 75%	1950
Taxable Value of Benefit	C – B	650

Table 3: Computation of fringe benefit on special discount for Periwinkle

(Source: As per the case study)

The above table depicts a description of the total taxable fringe benefit on special discount to Emma through Periwinkle. The taxable amount related to the bathtub has been subtracted from the money paid on the part of Emma. Therefore, the leftover amount is the fringe benefit, which is taxable generated on the part of Periwinkle. Hence, the rate of taxable amount is 75% of the actual price of sale of the bathtub (Brody et al. 2014).

Computation of overall fringe benefit including GST tax:

	GST Inclusive	GST Free
Particulars	Amount	Amount
	$	$
Car Benefit	6059.02
Interest on Loan		22250
Sale at Special Rate		650
Total of GST Inclusive/Free Benefits	6059.02	22900
	A	B
Gross-up Rate	2.1463	1.9608
	C	D
Gross-up Value	13004.47	44902.32
	E = A x C	F=B X D
Total Taxable Fringe Benefit	57906.79
	G = E + F
Fringe Benefit Tax Rate	49%
	J
Fringe Benefit Tax Liability	28374.33
	K = G x J

Table 4: Computation of overall fringe benefit including GST tax

(Source: As per the case study)

The above table recommends the total fringe benefit of Emma generated through Periwinkle, which takes into account the GST inclusive ad GST free tax. The overall “fringe benefit tax liability” has been obtained as $28,374.33. The calculation has been made by considering both GST and GST-free to ascertain the accurate liability related to fringe tax. Periwinkle is liable to pay this tax liability. In this context, Hemmings and Tuske (2015) advocated that computation of actual “fringe tax liability” minimises the additional payments, which could hamper the profitability of the organisation.

With relevance to the above discussion, the “fringe benefit tax liability” of Periwinkle stood at $28,374.33, since the husband of Emma has bought the shares. However, if Emma had bought the shares herself, Periwinkle might experience a decline in its FBT. Moreover, the income earned from the shares is subtracted from the “fringe benefit tax liability” of Periwinkle. Therefore, the income earned from the shares could not be adjudged as “fringe benefit tax liability” in the context of Periwinkle Private Limited (Ato.gov.au, 2016). As cited by Jacob and Jacob (2013), the income generated from shares is taxable under Australian taxation law and falls under capital gain.

References:

Ato.gov.au. (2016). Capital gains tax | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/Capital-gains-tax/ [Accessed 15 Sep. 2016].

Ato.gov.au. (2016). Fringe benefits tax (FBT) | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/ [Accessed 15 Sep. 2016].

Brody, E., Breen, O.B., McGregor-Lowndes, M. and Turnour, M., 2014. 5 An Unrelated Income Tax for Australia?. Performance Management in Nonprofit Organizations: Global Perspectives, 17, p.87.

Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(3), pp.277-300.

Harding, M., 2013. Taxation of Dividend, Interest, and Capital Gain Income.

Hemmings, P. and Tuske, A., 2015. Improving Taxes and Transfers in Australia.

Hodgson, H. and Pearce, P., 2015. Travel Smart or travel tax free breaks: Is the fringe benefits tax a barrier to active commuting in Australia?.

Jacob, M. and Jacob, M., 2013. Taxation, dividends, and share repurchases: Taking evidence global. Journal of Financial and Quantitative Analysis, 48(4), pp.1241-1269.

Tang, R. and Wan, J., 2015. Fringe benefits tax and fly-in fly-out arrangements: John Holland Group Pty Ltd v Commissioner of Taxation. Australian Resources and Energy Law Journal, 34(1), p.17.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law. Oxford University Press.