Understanding Capital Gain And Loss In Taxation – Case Study

Methods of Calculating Capital Gains

Questions:

Case Study 1: Capital Gains Tax.

Case Study 2: Fringe Benefits Tax.
 

Capital gain is defined as capital in process and acquisition cost given by the capital holder. We can calculate the capital by the well known method, in which number one is known as Discount method. Discount method is applicable when history of transaction is at least twelve month old. The second method is Indexation method which is applicable when assets acquisition done before 21^st September and held for more than twelve month. The last one is residual method in which, we are calculating the capital gain when transaction history of less than 12 month. Therefore, at any condition we will apply the for calculation will come under this three tools. 

The property bought before 20^th September 1985 which is further stated as 

• Any kind of assets which cost is less than $500.
• If we are selling family residential house, then this gain will have exempted.
• If we are reimbursing some amount by selling our asset particularly for remedy for illness, then this kind of asset will come under exemption
• Selling of our own vehicle will be exempted under this tax. 

Capital loss (Long term): The is thumb rule for asset capitalization that, if there is any loss in long term capital then it can be waived against only by long term capital, if there is no gain for adjustment in the current year it can be carried forward to next year of assessment and can be settled only against Long term capital loss. 

The is thumb rule for asset capitalization that, short term capital loss can be settled against long term capital gain of assets, if there is no gain for adjustment in the current year it can be carried forward to subsequent next year Assessment years and set off against both short term Gain and long term gain.

Condition (a) It is very clear that Mr. Dave Solomon, who residing in his two story building for last 30 years going for sale now, the cost of purchasing this asset was $ 70,000, the sale happened for $ 8,50,000 on date of 27^th June of the present tax year. The residential building sale was organized through auction. The buyer paid him $ 8,50,00 as an advance for buying the house, but due to some unavoidable circumstances he is not able to pay rest of the money. In such condition there is rule of money forfeiting for i.e. advance money cannot be returned, therefore, finally there is profit of $85000 for Dave Solomon. 

Condition (b) There was a painting which date of purchase was 20^th September, 1985 for $ 15,000 was and finally it was sold for 1,25,000              

Condition (c) The Sale of luxurious motor cruiser which was happened 1^st June for $ 60,000 and this was purchased in 2004 for $ 1,10, 000. This was sold to local boat broker on that area   

Condition (d)) As mentioned in the case study the selling of parcel of equity occurred which was of newly listed mining company on 10^th of January of the current year at the cost of $75,000. He sold these shares on 05^th of June of the current year for $80,000. During purchase these shares he borrowed a loan of $ 70,000 and paid interest on the loan of $5,000. In addition of these he has also given money for brokerage of share as $750 and also stamp duty paid by Dave Solomon for $ 250. There is a rule for income tax is that interest of loan is not included in the tax. Therefore, he is not liable to pay tax for interest part (Seidman, 2003). 

Rules for Offsetting Capital Losses

Overall calculation for asset                                 

As per given the detail calculated above, tax return of Mr. Dave shows that capital loss of $ 10,000 from the sale of shares, therefore, this can be adjusted with current year long term capital gain

Therefore, Net Capital gain in long term = $ 1, 04,961 – $10,000 = $ 94,961 

Solution (1b)

Net Capital gain is the sum of all gain arrived from sale from sale of capital asset subtracting loss in sale of capital assets, in this all losses of the capital assets is subtracted which also included loss on sale of capital from previous years as well. In other meaning of this ‘the tax on capital gain is tax which similar to gain occurred due to sale of asset and therefore, tax should be given for gain happened on sale of capital asset in the same year in which income has happened in which sale happened. Looking forward with given condition, Mr. Dave have gain on sale of assets in the same income year in which sale happened. Therefore, Mr. Dove has earned profit on sale of asset. So finally we can say that he can contribute to his superannuation fund. For doing this Mr. Dave al already maintained records of respective transaction which was happened during all the above stated process, for example, interest on loan, purchase receipts, fees for legal work, cost occurred in mitigation of fees, and also record of brokerage paid on shares. (Peter 2016). 

Solution (1c)

As per the above capital analysis, Net loss in capital is sum of all loss arises from sale of capital asset which includes loss from previous year, as per rule stated in condition (a) Mr. Dave cannot normalize his capital loss from other source of income but it can be carried forward for next years and deduct it from capital gain arrived in next years. Capital loss can be carry forward for indefinite periods if necessary. Mr. Dave does not able to choose not to normalize the losses against any capital gain however they can deduct such loss as per their choice with gain of capital. If Mr. Dave is not having profit in gain of capital, then he has to sell more of his assets or acquire loan so that he can contribute to his personal superannuation fund and then buy a rented city apartment and withdraw tax free amount from his personal superannuation fund once he attains the age of 60 in august of next year. (learn.nab.com, 2016). 

First of all, I have to summarize all the things which is given in second part of assignment

Section (i)

There was a manufacturer of bathtub its name is Periwinkle Pty ltd. This company provided a car to the Emma who is employee of this company and usually in regular journey for company purpose, but use of car is not limited to company purpose, this car is given by company and used for personal purpose also. The car was purchased by company at the cost of $ 33000 on 1^st of May 2015.

Implications on Tax Returns

The journey of Emma taken place about 10,000 km, during the period 1^st May 2015 to 31^st March 2016. There was maintenance cost incurred in car which is $ 550 and this was later given by company. AT one point of time the car was kept at airport. The duration of car parking was about 10 days at airport. Further, the car was given for maintenance and not used for about 5 days.

A loan of $ 500000 was given to Emma by the company on the date of 1^st September 2015 at a lower interest rate of 4.45%. By using this amount Emma procured a holiday home at the cost of $ 4, 50,000 and the balance amount was given to her husband for the purpose of buying share in Telstra.

One more thing happened in 2015 is that she has taken a bathtub from company Periwinkle Pty ltd. At the cost of $1300. The cost incurred for manufacturing this bathtub was around $ 700 and this company selling this bathtub at the cost of $2600. 

Fringe Benefit Tax

The employer is liable to pay fringe benefit tax for their employee, if they have given facility either at no coast or at the lower cost from the market rate at it should be non-cash benefit given by the employer. If employee used this facility for personal purpose in this condition employee is also liable to pay fringe benefit tax

• If the benefit given by the company costs less than $300
• Employees is being transferred to some new place
• If house allowance provided and this house is situated at far from people place.
• Loans given by the company which is not considered for FBT
• Cost incurred in relation to company’s work
• If the car used by employee for work purpose and this car is provided by the company.

This Tax is liable on Car parking, Property and Residual, Car, Loan, Payment of Expense, Housing, Airline, transport, The definition of Fringe benefit tax includes car as a wagon of station or any vehicle used to carry goods on net weight of less than one tons or any vehicle used to carry less than nine passengers. But when the car is used for personal purpose i.e. and such benefit given by the employer to the employee fill comes under fringe benefit and hence tax will be calculated on such benefit. If the car by the company is provided for the period of less than three month then it will not be considered as that employee is holding car and fringe benefit tax is not be computed. As per the condition given is case study the car which used by Emma comes under the definition of fringe benefit tax. Therefore, car provided by the company comes under the law of fringe benefit tax. Another thing is that car is also used for private purpose, and there is a rule that if the car is not at the premises of the employer and is given to employee for private use and the car is parked at the premises of the employee. The car for the purpose of maintenance is being considered as out of the rule of fringe benefit act. (Roger T, 2013) 

• Cost Basis method
• By Applying Statutory formula (Fredrick, 2008)

In this scenario we have to note that car was not used for 5 days when it was given for repairing but car parking to the airport will be considered as car used by Emma for that 10 days. If car key is submitted by Emma to the employer, then these days are not considered as total days for fringe benefit tax. The total running of car is about 15000 km. 

It is a general rule that whenever, loan is given to the employee at a lower interest rate, then it will attract fringe benefit tax. As the given condition load is given at the rate of 4.45% which lower than the market rate which 5.95%. 

Fringe benefit tax for loan is

5,00,000* 1.50%   = $7,500

But as given in case study, $450000 were used for buying a house and balance amount is transferred for purchase of equity to her husband. But amount used by Emma for house purchase is $450000, in this condition tax will remain same as $7500 

Section (ii)

If the total amount is being used by Emma, then fringe benefit tax will be calculated by this method

AS given in case study, the purchase of company’s product (bathtub) was taken place at $ 1300, usually this was sold at $ 2600.  Therefore, the difference in i.e. $2600 – $1300 comes and then Emma is liable for fringe benefit tax. 

References 

Ault, H. and Arnold, B, 1997, Comparative income taxation. The Hague: Kluwer Law International.

Daily, F, 2003, Tax Savvy for Small Business. Berkeley: Nolo. 

j, P, 2016, Calculating Capital Gains Tax – the basics for Australian investors | delisted Australia. [online] Delisted.com.au

Koulizos, P, 2013, Property vs shares. Milton, Queensland: Wrightbooks. 

Preve, L. and Sarria-Allende, V, 2010, Working capital management. New York: Oxford University Press. 

Ross, S., Westerfield, R. and Jordan, B, 2007, Essentials of corporate finance. Boston: McGraw-Hill/Irwin.

Scott, R., Currie, G. and Tivendale, K, 2012, Company cars and fringe benefit tax. Wellington, N.Z.: NZ Transport Agency.

Seidman, J, 2003, Seidman’s legislative history of federal income and excess profits tax laws, 1953 – 1939. Clark, NJ: Lawbook Exchange. Taxation, 1995, Canberra: Australian Govt. Pub. Service. 

Wilkinson, M,1992, Taxation. Basingstoke: Macmillan. 

Vataliya, K. 2008. Management of working capital. Jaipur, India: Paradise Publishers. 

Global Property Guide. 2016. Australia capital gains tax rates, and property income tax.