Understanding Capital Gain, Capital Asset And Capital Proceed In Australian Taxation

Definition of Capital Gain and Capital Asset

Question:

Discuss about the Taxation for National Bureau of Economic Research.

Capital gain means the gain from the transfer of capital asset. It means the difference between capital proceed and cost base. It is obtained from deducting cost base from capital proceed (Burkhauser, Hahn & Wilkins, 2015). It is not always that gain will arise on the sale of capital asset loss can also arise. Australian Tax Authority (ATO) has prescribed depending various tax treatment depending upon the gain or loss arising from sale of capital asset. It is taxable on accrual basis i.e. taxable in the year in which asset is sold (Faccio & Xu, 2015).

Capital asset means any asset, which is not held in the ordinary course of business for sale. It does not include personal affect i.e. property held for personal use like wearing apparel, furniture, personal use cars etc. However, personal affect does not include jewellery and archeological collection like Gold chain, gold bangles etc. Rural agricultural land is not included in the definition of capital asset (Alvaredo et. al., 2013 ).

Capital Proceed means the sales consideration for which the capital asset is sold. Any amount forfeited because of entering into any agreement for sale previously entered into but could not materialize shall be deducted from the capital proceed (Woellner et. al., 2012).

Cost base is the purchase price for which the asset is purchased. It also includes various incidental charges required for purchase of asset like brokerage charges, installation cost, stamp duty etc (McClure, Lanis & Govendir, 2016).

As per ATO, Capital gain is calculated using three methods:

• CGT Discount method- This method is applied if capital asset is held for more than 12 months and acquired after 21^st Sept 1999. In this method capital gain arrived is reduced by 50% for individuals and 33.33% for superannuation funds (Ehling et.al., 2013).
• Indexation method- This method is applied if capital asset is held for more than 12 months and acquired before 21^st Sept 1999.In this case indexation benefit is available up to the Sept 1999. This method increases the cost base (Vann, 2014).
• Residual method- This method is applied when capital asset is held for less than 12 months.

There are certain capital asset which are exempted from the purview of Capital gain tax (CGT) like Residential House, Items of personal use of value less than $10000, Motor car, Depreciable Asset held for trading purpose, collectable of value less than $500.

Capital gains/ Loss are of two types –

Short term-It arises when capital asset held for less than 12 months is sold.

Long Term- It arises when capital asset held for more than 12 months is sold.

Short term capital loss can be set off against the short term capital gain and also with long term capital gain. Whereas, Long term capital gain can be set off only against long term capital gain and not with short term capital gain. Capital loss not set off can be carry forward and set off only against capital gain and not from any other source for indefinite period.

In this given problem, Dave Solomon was living in his own two storied residential house for almost 30 years that was acquired by him for $70000 and was sold on 27^th June of current year for $ 850000. He has previously entered into an agreement for sale of his house, which, could not be materialized, and so the advance money was forfeited amounting to $ 85000.

Mr. Dave Solomon is not chargeable to CGT on sale of residential house as capital gain on sale of one residential house is exempted from the purview of CGT as per ATO.

Calculation of Capital Gain using Three Methods

A painting, which was acquired almost 30 years back for $15000, was sold for $125000 on 31^st may of the current tax year. Since it was purchased before 21^st September 1999 indexation method shall be allowed.

	Capital Proceed	125000
Less:	Indexed Cost Base (15000*123.4/71.3)	25961
	Long Term capital gain	150961

A Motor Cruiser, which was acquired in the late 2004 for $60000 from a local boat broker and sold in the current year for $110000. Since it was purchased after 21^st September 1999, discount method shall be applied.

	Capital Proceed	60000
Less:	Indexed Cost Base	110000
	Long Term capital Loss	50000

Shares that was purchased in 5^th june of the current year was sold on 10^th January of the current year. Since the shares were held for less than 12 months residual method will apply.

N-1) Computation of Cost base
Purchase Price	75000
Brokerage	750
Stamp duty	250
Total	76000

	Capital Proceed	80000
Less:	Indexed Cost Base(N-1)	76000
	Short Term capital gain	4000

Therefore Total capital Gain of  Dave Solomon is as follows:           $

Long-term capital gain on sale of Residential House                        Nil

Long-term capital gain on sale of paintings                                  150961

Long-term capital loss on sale of Cruiser                                    (50000)

Short term capital gain on sale of Shares                                       4000

Bought forward Capital Loss of previous year                               (10000)

Long term capital gain                                                                 94961 

Net Capital gain is obtained by adding all the capital gain from sale of capital asset during the year and deducting from it any capital loss during the year. Capital loss from previous year is also to be deducted i.e. set off with current year capital gain. After that Net capital gain is to assessable as income of the assess if he had no other income and he is required to pay tax on the same. Since, Mr. Dave has a net capital gains of $ 94961 he has pay tax during the current year. He can also contribute toward personal endowment fund. He is also required to maintain various important document when any significant transaction occurs like Sales and purchase receipt, litigation expenses, expenses relating to repairs, interest on loans, brokerage and stamp duty expenses etc.

Net capital loss is the aggregate of all capital loss derived from sale of capital asset during the year that includes capital loss of previous year also that could not be set of in the earlier year. Capital loss can only be set off only with capital gain and not from any other source and capital loss not set off can be carried forward indefinitely and set off only against income for capital gain and not from any other source.

FBT is paid by the employer of the company on non-monetary perquisite given by the employer to the employee. It is paid on those benefit provided by employer to the employee which is not taxable in the hands of employee (Braverman, Marsden, & Sadiq, 2015).

There are certain items which are exempted from the purview of FBT which are as follows:

• Work related expenses
• Benefits whose value is less than $300
• Housing allowances provided for houses located in remote areas.
• Car provided for the official purpose
• Relocation expenses of employees.
• Exempted loans (Hodgson & Pearce, 2015)

Employers are liable to pay FBT on the following items:

• Payment of expenses
• Residual and Property
• Car parking
• Airline
• Loan
• Housing
• Transport
• Car (Stanley & McCue, 2014)

Under the scope of  FBT, Car is defined as a vehicle or station cart used to carry net weight of not more than 1 ton or a vehicle which have of the capacity of carrying not more than 9 passenger (Gupta & Sawyer, 2015). On the other hand, If a car is provided by the employer to the employee which does not fall within the definition of car as per FBT and it is used by the employee for personal purpose then it will be liable for the payment of FBT by the employer. If a car is given to the employee for not more than 3 months then it cannot be presumed that the employee is holding the car and so such benefit is not liable to FBT (Woellner, 2012). If the car is not at the premises of the employer and is provided to the employee for personal use, which is garaged with the employee, then it will be treated as used for private purpose. As per FBT, if a car is at the repair station for repair purpose then it will excluded from the definition of car for personal use (Scott, Currie & Tivendale, 2012).

Exemptions from Capital Gain Tax

FBT can be calculated by using two methods , Cost basic method and applying statutory formulas.

Employer have to pay FBT on loans given to the employees if loan is provided at a rate of interest which is lower than the market rate (Murray & Martin, 2015).

In the given problem, Periwinkle Pty, a bathtub manufacturer company which directly sales bathtub to public has provided to Emma, its employee a car on 1^st May 2005 that is used by Emma for work purpose. However, Emma can use it for personal purpose also as per the policy of the company. The car was purchased by the company for $ 33000 on the above mentioned day.

Emma has travelled 10000 km by the Car within the period 1^st may 2015 to 31^st March 2016 and has also incurred expenditure of $ 550 on repairs which has been reimbursed by the company. The car was parked at airport for that reason it was not used for 10 days. The car was also not used for 5 days when it was programmed for repairs.

On 1st Sept 2015, Emma has been provided a loan of $ 500000 by the company at an interest rate of 4045%. Emma acquired a holiday home valued $ 450000 with the loan taken from the company and the balance was given to her husband for acquiring shares in Telstra.

Emma also purchased a bathtub made by Periwinkle for $ 1300. The cost of producing off which is $ 700 which is sold to the public at $ 2600.

Taxability of Car

Cost of the car = $ 33000

Number of days the car was used as per provisions of FBT = 335-5 = 330

(Number of days car was in repairing will not in included in the number of days. However, number of days the car was in airport will be included in the number of days as per the provisions of FBT. If the car would have at the employer’s premises then it would not have been for FBT. The car has travelled for less than 15000 km during the Fringe Benefit period so rate of tax will be 20%)                                                     

Value of taxable benefit    (33000*330/365*20%) = 5967

Less: Expenses incurred by the employer =      550

FBT         5417

Taxability of Loan

In this problem Benchmark i.e. market rate of interest is 5.95% but the company has given loan to its employee at an interest rate of 4.45%. Therefore, the company is liable to pay FBT on the difference of interest rate i.e. 1.5% (5.95% – 4.45%).

FBT payable = 500000*1.5% = $ 7500

Emma has used $ 450000 for purchase of residential house and has given $ 5000 to her husband for purchase of shares in Telstra. Therefore, FBT payable will remain same i.e. $ 7500.

If Emma uses the entire amount of loan for her own purpose i.e. for acquiring house property for $ 450000 and buying Shares for $ 50000 and no part is given to her husband then FBT will be calculated as follows:

Taxable value of fringe benefit loan without otherwise deductible value (500000*1.5%) = $ 7500

Assuming the loan was interest free and ignoring any interest charged (500000*5.95%) = $ 29750

Now say employee had paid interest equivalent to amount of taxable value (29750*10/100) = $ 2975

Now if employee is being charged interest on loan (500000*10%*4045%) = $ 2225

Subtracting d. from c. we get, $ 2975 – $ 2225 = $ 750

Now by deducting e. from a. we get, $ 7500 – $ 750 = $ 6750.

Therefore FBT payable = $ 6750

Fringe Benefit Waiver of Debt

In this given problem, Emma has bought a bathtub from Periwinkle at a price of $ 1300, which is sold by the company in the external market to the public for $ 2600. Therefore, the difference between the market price and purchase price i.e. $ 1300 ($ 2600 – $ 1300) is liability for Fringe Benefit.

References

Alvaredo, F., Atkinson, A. B., Piketty, T., & Saez, E. (2013). The top 1 percent in international and historical perspective (No. w19075). National Bureau of Economic Research.

Braverman, D., Marsden, S. J., & Sadiq, K. (2015). Assessing taxpayer response to legislative changes: A case study of ‘in-house’fringe benefits rules. Journal of Australian Taxation, 17(1), 1-52.

Burkhauser, R. V., Hahn, M. H., & Wilkins, R. (2015). Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), 181-205.

Ehling, P., Gallmeyer, M. F., Srivastava, S., Tompaidis, S., & Yang, C. (2013, December). Portfolio choice with capital gain taxation and the limited use of losses. In EFA 2008 Athens Meetings Paper.

Faccio, M., & Xu, J. (2015). Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(03), 277-300.

Gupta, R., & Sawyer, A. J. (2015, November). The costs of compliance and associated benefits for small and medium enterprises in New Zealand: some recent findings. In Australian Tax Forum (Vol. 30).

Hodgson, H., & Pearce, P. (2015). TravelSmart or travel tax breaks: is the fringe benefits tax a barrier to active commuting in Australia? 1. eJournal of Tax Research, 13(3), 819.

McClure, R., Lanis, R., & Govendir, B. (2016). Analysis of Tax Avoidance Strategies of Top Foreign Multinationals Operating in Australia: An Expose.

Murray, I., & Martin, F. (2015). The Blossoming of Public Benevolent Institutions–From’Direct’Providers to Global Networks.

Scott, R. A., Currie, G. V., & Tivendale, K. J. (2012). Company cars and fringe benefit tax–understanding the impacts on strategic transport targets February 2012.

Stanley, J., & McCue, P. (2014). Action area 11–Financial measures.Blueprint for an active Australia, 1, 72.

Vann, R. J. (2014). Hybrid Entities in Australia: Resource Capital Fund III LP Case. Tax Treaty Case Law.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2012).Australian taxation law. CCH Australia.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2012).Australian taxation law. CCH Australia.