Understanding Capital Gains Tax

Definition of Capital Gains Tax

Questions:

Case study 1: Capital Gains Tax 

Case study 2: Fringe Benefits Tax
 

Capital gains tax is referred to a tax wherein there is a sale or transfer of an asset of capital nature. On the sale of the asset there can be a capital gain or capital loss. Where the sale value of the asset is more than the cost of purchase, cost of associated purchases and the cost of improvement the same is referred to as capital gains. On the other hand where the value of the sale of the asset is lower than the cost of purchases and other above mentioned costs the same is referred to as capital loss.

According to the provisions of the tax act of Australia, an individual can claim an exemption of the main residence. For an individual to claim the tax exemption in regards to the same the individual must have stayed on it and there must be a dwelling on the same. From the provision above it can be asserted that the exemption cannot be claimed on a vacant piece of land (Kenny, n.d.). A dwelling takes the form of a main residence of the below mentioned conditions are satisfied:     

• The individual and the family lives in it
• The personal belongings of the individual are in the same
• The mail of an individual is delivered to the same address
• The address is on the electoral roll (Lloyd, 2015).
• The address of the residence is connected with the essential services such as gas, electricity are linked with the same address.

In addition to the main residence factor there are other factors as well. Other factors are also considered for the same wherein weights are assigned to such factors based on the individual circumstances. The length of time an individual stays in the same and the intention of occupying the same is also of certain relevance (Protocol amending convention with Australia regarding double taxation and prevention of fiscal evasion, 2002).

In this case the individual had contracted for the sale of the house which was his main residence but the same could not be concluded. The deposit the seller that made in regards to the purchase was forfeited by the seller. Later the house was sold to a different seller for the agreed sum. According to the ruling TR 1999/19 where a seller receives and forfeits the deposit in connection with the sale of the house the same is eligible to be taxed under the heading capital gains. The same ruling also is applicable in the case of forfeiture of the purchase payment instalment (Australian income tax legislation 2013, 2013).  Hence in the current scenario considering the exemption of the main residence the CGT on the same would be exempt however, considering the ruling TR 1999/19 the deposit forfeited by the seller would be taxable as capital gain. 

The assets in regards to Capital Gains Tax can be classified into three broad categories such as personal use assets, collectables and other assets. The articles like jewellery, paintings, stamps, rare coins etc are classified as collectables. The assets that are of personal nature such as clothes, boat, household item, furniture etc are classified as personal use assets. “Also included can be a debt arising from an activity other than one made to produce assessable income, such as a loan made to help out a family member or friend”. According to the tax laws in Australia certain assets are exempted from the levy of Capital Gains Tax. The most common amongst the same are the house of an individual used as his main residence and his personal motor car (Australian income tax legislation 2013, 2013). Whether if the person had a lodger or rented the home are also considered in allowing the exemption. The other assets which are exempted from the capital   gains tax have been described below:

• The assets which have been acquired by the individual before 10th of September 1985
• Collectables such as paintings, coins, and stamps
• Prizes from gambling
• Awards which have been given for brave conduct or valour
• The share of an individual in pooled development funds
• The compensation received by an individual on the account
• Inheritances of certain types

Main Residence Exemption

Generally a collectible is disregarded for the purpose of capital gains if the same was purchased for less than $500 or the same was acquired before the 16th of December 1995 (Goerke, 2014). Hence since the same is more than $500, it would be classified as a capital gains asset. Hence the capital gains of $110000 would be taxable.

Generally a gain made on the transfer of a capital asset is taxable under the head capital gains however in certain circumstances the capital gains are disregarded for the purpose of taxation:

• Where the asset transferred was acquired before the 20th of September 1985
• Motorcycles, cars and other like/similar vehicles (DZHUMASHEV and GAHRAMANOV, 2010).
• Compensation that has been received on account of personal injury
• Where the main residence is sold
• Where the item sold is a collectible such as jewellery or antique and the same was acquired for less than $500.
• Personal asset which has been used by the individual personally for instance motor cars, boats etc.

Dave in this case sold the asset for $60000, the in ordinary course of business would have been categorized as a capital loss but since the same is exempt from tax on account of being a personal effect the capital loss would be ignored. However as per (subsection 118-10(3) of the ITAA 1997 act the purchase value of the asset should be less than or equal to $10000 to be classified for the same (Pope, 2005). Since the purchase value is more than $10000 the same is a capital asset and the consequent gains or loss would be accounted for.

Particulars	Amount	Amount
Deposit Forfeited	85000
Sale of painting	125000	0
	-15000	110000
Loss of sale of boat	60000
	-110000	-50000
Sales of Shares	80000
Cost of Purchase	-75000
Cost of Borrowings (Third elements of cost base)	-5000
Stamp Duty	-500	-500
Exchange of shares or units (Subdivision 124-E)	-10000
		134500

Dave has a capital gains liability of $134500 for the current year but since he has attained the age of 55 and has paid the amount to super funds he is entitled to a lifetime exemption of $500000. Hence the capital gains of $134500 would be exempt. He does not have capital gains loss.

Starting the 1^st of April 2014, regardless of the distance covered by the car (Division 10A of the FBTAA) a flat rate of 20% would be applied to determine the value of the fringe benefit.  As a consequence the FBT in this scenario would be $6600 ($33000*20%). However since the asset was not used for the entire period of 365 days the same would be reduced proportionately for the period the car was not held and the period the car was not available for private use (Stokes and Wright, 2013). In this case the car was not held for the month of April and the same was not available for private use for 10 days in the year. Hence the FBT calculation would be as follows:

Particulars	Amount
Value of Car	33000
Rate of FBT	20%
Total number of days in year	365
Days Car not held	30
Days car not available for private use	15
Total days car used for private purpose	320
FBT	5786.301

An employer can provide loan to an employee which is known as the loan fringe benefit. The same can be provided at no rate of interest or at a rate of interest which is lower than the benchmark rate. For the year ended 31dt March 2015, the benchmark rate for interest for FBT is 5.95%. In the current scenario a loan of $500000 was advanced to Emma by Periwinkle on the 1^st of September 2015. The employer charged an interest rate of 4.45% from the employee (FRINGE BENEFITS TAX ASSESSMENT ACT 1986 – SECT 136). However since the same is lower than the benchmark rate the difference would be chargeable as FBT (Herault and Azpitarte, 2014). In the current case the value of the FBT would be as below:

Particulars	Amount
Amount of Loan	5,00,000.00
Interest at 5.95% for seven months	17,354.17
Less: Interest at 4.45% for seven months	12,979.17
Value of FBT	4,375.00

According to QC 17815 which was last modified on the 2nd of June 2014, the value of the property fringe benefits is dependent upon the rule applicable in that case (How can I benefit from the 2004 tax laws?, 2005). Regardless of the valuation rule used the contribution received or receivable from the employee is reduced from the taxable value of the fringe benefit (ATO, 2016). The rules applicable in this context have been summarised below:

• Whether the benefit provided is an external property fringe benefit or an in-house property fringe benefit.
• In the scenario of the same being an in-house property fringe benefit if the property was manufactured or was purchased for resale (THORNTON, 1992).
• If the same is similar or identical to the property sold by the employer in the ordinary course of business
• The same is sold to customers who sell it to public or the same is directly sold to the public

If the above mentioned conditions are satisfied than the value of the fringe benefit would be the amount that the employee can reasonably be expected to pay less any amount which has been recovered or is expected to be recovered. In the current scenario the value of the FBT would be $2600-$700= $1900 since the employee under question is not a whole seller or a distributor hence, the value of the FBT would be the retail price of the property (Ingles, 2001).

Asset Categories for Capital Gains Tax

For the year ended 31^st March 2016 the FBT rate is 49% which is inclusive of the medical ivy. Hence the employer would have to pay the same on the value of the FBT calculated in each individual case.

Particulars	Amount
FBT Loan	4,375.00
FBT CAR	5786.30137
FBT Goods	1900
Total FBT	12,061.30
Tax on FBT @ 49%	5,910.04

The tax treatment would change if the shares are purchased by Emma instead of her husband as she would be able to get the exemption on that part of the loan which is used for the purpose of generating income. Investment in shares qualifies for the same. According the previous rules the investment could have been made by the employee or an associate but the new rules allow for the investment to be made by the employee only (Herault and Azpitarte, n.d.). In that case the Loan FBT would be as:

Particulars	Amount
Amount of Loan	4,50,000.00
Interest at 5.95% for seven months	15,618.75
Less: Interest at 4.45% for seven months	11,681.25
Value of FBT	3,937.50

And the total tax liability in case of FBT would be as:

Particulars	Amount
FBT Loan	3,937.50
FBT CAR	5786.30137
FBT Goods	1900
Total FBT	11,623.80
Tax on FBT @ 49%	5,695.66

Conclusion

The employer needs to register for FBT once it has been determined that the employer is paying fringe benefits and the tax on the same needs to be paid. In regards to the same the FBT return need to be submitted for the financial assessment year i.e. from the 1^st of April to the 31st of March. In case there is no liability in regards to FBT the employer on the other hand needs to complete the Fringe Benefits Tax-notice on non-lodgement (Herault and Azpitarte, n.d.). 

References

ATO, (2016). Loan and debt waiver fringe benefits | Australian Taxation Office. 

Australian income tax legislation 2013. (2013). North Ryde, N.S.W.: CCH Australia.

DZHUMASHEV, R. and GAHRAMANOV, E. (2010). A Growth Model with Income Tax Evasion: Some Implications for Australia*. Economic Record, 86(275), pp.620-636.

Goerke, L. (2014). Income tax buyouts and income tax evasion. International Tax and Public Finance, 22(1), pp.120-143.

Herault, N. and Azpitarte, F. (2014). Recent Trends in Income Redistribution in Australia: Can Changes in the Tax-Benefit System Account for the Decline in Redistribution?. Economic Record, 91(292), pp.38-53.

Herault, N. and Azpitarte, F. (n.d.). Recent Trends in Income Redistribution in Australia: Can Changes in the Tax-Transfer System Account for the Decline in Redistribution?. SSRN Electronic Journal.

How can I benefit from the 2004 tax laws?. (2005). Nursing, 35, p.3.

Ingles, D. (2001). Earned Income Tax Credits: Do They Have Any Role to Play in Australia?. The Australian Economic Review, 34(1), pp.14-32.

Kenny, P. (n.d.). Capital Gains Tax Exemptions in Australia and New Zealand: Rationale and Reality.SSRN Electronic Journal.

Lloyd, P. (2015). Excise Tax Harmonisation in Australia at Federation. Aust Econ Hist Rev, p.n/a-n/a.

MACNAUGHTON, A. (1992). Fringe benefits and employee expenses: Tax planning and neutral tax policy. Contemporary Accounting Research, 9(1), pp.113-137.

Passant, J. (n.d.). John Passant (ATTA) Australasian Tax Teachers Conference 20 Minute Talk – Income Tax in Australia: From Appearance to Reality. SSRN Electronic Journal.

Pope, J. (2005). REFORM OF THE PERSONAL INCOME TAX SYSTEM IN AUSTRALIA.Economic Papers: A journal of applied economics and policy, 24(4), pp.316-331.

Protocol amending convention with Australia regarding double taxation and prevention of fiscal evasion. (2002). Washington: U.S. G.P.O.

Stokes, A. and Wright, S. (2013). Does Australia Have A Good Income Tax System?. International Business & Economics Research Journal (IBER), 12(5), p.533.

THORNTON, D. (1992). Discussion of “Fringe benefits and employee expenses: Tax planning and neutral tax policy”. Contemporary Accounting Research, 9(1), pp.138-141.