Understanding Capital And Tax Losses: Recording And Offset Guidelines

Laws:

The current issue here outlines that whether the loss incurred by the taxpayer during the relevant accounting year will be recorded under the revenue account or under the capital account.

Laws:

A capital loss can be defined on the loss that is not deductible from the taxable income rather it should be offset against the capital gains during the year when the gains are incurred or for the future years to ascertain the net amount of capital gains (Barkoczy 2018). The capital loss or gains is ascertained by subtracting the correct cost base associated to the asset or other event from the sale of the asset or supplementary events. If the reduced amount of cost base is found to be greater than the capital proceeds, then the differences that arises is referred as the capital loss. A capital loss would originate if the capital proceeds is less than the reduced cost base of the assets.

A taxpayer usually realises the capital loss when the sale of fixed asset is made or when the company issues any kind of shares at the discounted price (Douglas et al. 2014). The revenue loss is generally realised upon the sale of the goods and services that are sold at the price that is lower than the cost.

A taxpayer usually makes the tax loss when the total deduction claimed during the income year exceeds the income for the year (Grange, Jover-Ledesma and Maydew 2015). If an individual makes the tax loss during the income year, the taxpayer can carry forward the loss and deduct the same in the future year against the income for the taxation purpose. On the other hand, a taxpayer reports capital loss from the disposal of the investments. Under “subdivision 110 B of the ITAA 1997”, a capital loss is generally realised when the capital proceeds from the capital gains tax event is less than the reduced cost base of the asset.

According to the “section 262A of the ITAA 1936” the general rules states regarding the keeping of records. A person that is carrying on the business is under obligation of keeping records relating to all the transaction and acts that are relevant for the taxation purpose. According to the “part 3-1 of the ITAA 1997” a special is applicable in regard to the taxation of the capital gains and losses (James 2016). “Sub-section 121-25 (2) of the ITAA 1997” requires the recording of transactions, events or any circumstances that can reasonably anticipated to be relevant in working out whether the person has made any amount of capital gains or loss from the CGT event must be kept under for the period of five years.

Application:

As evident in the current situation it is noticed that Anthony Mcleod is the project manager of a company that was located in Western Sydney. After rending 20 years of service with the company Anthony undertook the decision of reducing his working hour and pursue a venture of property flipping.

Later events unfolded suggest that Anthony was successful in purchasing and reselling the property for profit however he reported a loss of $120,000 when the property bought by him resulted in loss. With reference to the applicable laws stated in the ATO an individual that realises loss from the disposal of the investment then such loss will be subjected a capital loss (Jover-Ledesma 2014). As understood Anthony carried on the business of property investment and the losses that are generated from the venture should be recorded as the capital loss. 

Application:

With reference to “section 262A of the ITAA 1936” and by referring to the general rules regarding the keeping of records, the records of loss should be kept by Anthony for a period of five years and can only be offset against the capital gains (Kenny, Blissenden and Villios 2018). Anthony can also carry forward the loss to set off against the future capital gains.  

Conclusion:

On arriving at the conclusion, it can be stated that the loss of $120,000 that is suffered by Anthony from the disposal of flipping house has given rise to capital loss. Therefore, Anthony should keep the records of the capital loss based on the capital account for the taxation purpose.

Answer to question 2:

Issues:

The current issue is based on understanding the car fringe benefit tax under “section 7 of the FBTAA 1986”. The issue would further outline the loan fringe benefit under “section 16 of the FBTAA 1986”.  

Laws:

A car fringe benefit tax under “section 7 of the FBTAA 1986” arises when the car benefit is provided to the employee during any time of the day in relation to the employment of the employee or the car is held by the provider (Kenny 2014). The car fringe benefit arises under “section 7 of the FBTAA 1986” when the car is available for the private use of the employee by the employee or the associate of the employee. In other words, the car is taken to be available for the employees for private use under “section 7 of the FBTAA 1986” when the car is provided by the employer or by the associate of the employer.

Under the “section 16 of the FBTAA 1986” loan fringe benefits arises where an employer provides loans to an employee (McCouat 2018). The making of loan would be would be treated as loan fringe benefit provided that the loan is provided to the recipient and the benefit would be considered to have provided in relation of the employment for the whole or portion of which the recipient is under the requirement of repaying the entire or any part of loan.

“Section 18 of the FBTAA 1986” provides that the taxable value of the loan fringe benefit arises during the fringe benefit year in respect to the year of taxation relating to the loan fringe benefit that is provided in relation of the employment during the FBT year (McCouat 2018).   

Applications:

As understood in the current situation of Estelle who worked as the advertisement manager for the ALS. As the part of his employment with ALS the company provided Estelle with the car that valued $55,000. Furthermore, the company provided Estelle with the loan of $10,000 at an interest rate of 1.5%. Estelle used the car for travelling both work and private purpose. The use of car resulted gave rise expenditure on maintenance, insurance and fuel for which Estelle maintained invoice.

The use of car by Estelle gives rise to the fringe benefit tax under “section 7 of the FBTAA 1986” (Sadiq et al., 2018). The car was provided to Estelle as the part of his employment and he used the car for both private and work purpose. In other words, the car is taken to be available for the Estelle private use under “section 7 of the FBTAA 1986” when the car was provided by ALS in the current case to Estelle.

Later events suggest that Estelle was provided with loan at the interest rate of 1.5%. The statutory interest rate is however greater than the actual interest rate at which the loan is provided to Estelle (Taylor et al. 2018). Therefore, making of such loan to Estelle has given rise to loan fringe benefit under “section 16 of the FBTAA 1986” for ALS since the benefit is considered to have been provided in relation of the employment with ALS.

With respect to “section 18 of the FBTAA 1986”, the taxable value of the loan fringe benefit represents the fringe benefit year in relation to the year of taxation associated to the loan fringe benefit that is provided in relation of the employment during the FBT year (Woellner et al. 2014). ALS would be held taxable under “FBTAA 1986” for the taxable value of the car and loan fringe benefits provided to Estelle.

The computation of taxable value of the fringe benefit is given below;

Operating cost method:
Taxable value of fringe benefits
Particular	Amount ($)	Amount ($)
Petrol and Fuel	1500
Deemed Depreciation	13750
Deemed Interest	3108
Repairs & maintenance	4000
Registration & Insurance	3500
Total operating cost		24357.5
Proportion of use for private purpose:
Total kilometre run	21000
Work related	4960
Private purpose related	16040
Percentage of private use	76%
Taxable value of fringe benefits		18604.49048

Calculation of Loan Fringe benefit
Particulars	Amount
Amount of loan	10000
Statutory Interest Rate	5.65%
Actual Interest Rate	1.50%
Taxable Value of Loan Fringe Benefit	415

Calculation of Deemed Depreciation
Particulars	Amount
Base value of car	$55,000.00
Depreciation rate	25%
Deemed Depreciation	$13,750.00

Calculation of Deemed Interest
Particulars	Amount
Base value of car	$55,000.00
Statutory Interest rate	5.65%
Deemed Interest	$3,107.50

Calculation of FBT
Particular	Amount	Amount
Taxable value of fringe benefits of car	$18,604.49
Pallet Load Pavers	$2,000.00
Ornament Pot	$250.00
Taxable Value of Loan Fringe Benefit	$450.00
.		$21,304.49
FBT rate	49%
Fringe Benefit Taxable Amount	$41,773.51
Fringe Benefit Tax		$20,469.02

Conclusion:

On a conclusive note, ALS would be held liable for the taxable value of the car fringe benefit and the loan fringe benefit that was made to Estelle during the fringe benefit year under the legislation of FBTAA 1986. 

References:

Barkoczy, S. 2018. Australian Tax Casebook 2018 14e ebook. Melbourne: OUPANZ.

Douglas, H., Bartlett, F., Luker, T. and Hunter, R. 2014. Australian feminist judgments.

Grange, J., Jover-Ledesma, G. and Maydew, G. 2015. Principles of business taxation.

James, S. 2016. The economics of taxation.

Jover-Ledesma, G. 2014. Principles of business taxation 2015: Cch Incorporated.

Kenny, P. 2014. Australian tax.

Kenny, P., Blissenden, M. and Villios, S. 2018. Australian Tax 2018.

McCouat, P. 2018. Australian master GST guide.

Morgan, A., Mortimer, C. and Pinto, D. 2017. A practical introduction to Australian taxation law.

Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., Teoh, J. and Ting, A. 2018. Principles of taxation law.

Taylor, C., Walpole, M., Burton, M., Ciro, T. and Murray, I. 2018. Understanding taxation law.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2014. Australian taxation law select.