Understanding Capital Gains Tax In Australia

Introduction to Capital Gains Tax

Discuss about the Tax Case Study for Capital Gains Tax.

The 20th September, 1985 is a very important date in the life of entire Australian citizens living in Australia as well as anywhere in the world having Australian citizenship, particularly for those who are having any type of capital assets purchased by them, inherited by them directly or by way of will, or by way of partnership with someone else. On this date the Capital Gains Tax Act, 1985 was brought into Law and those who are owners of capital assets from this date or became so after this date is bound by this CGT is they sale any of these properties anytime. But those who have property ownerships before this date are exempted from this with certain exemptions to such exemptions (ATO, 2016). 

CGT is assessed under Income Tax Assessment Act, 1997 or ITAA, 97 and if any gain or loss arises out of any sales of capital assets are made and all such are treated under CGT which gives 50% relief in calculation. 

The Australian citizens are very unique in relation to CGT. If any citizen who stays away from Australia but have valid citizenship then such citizens will be liable to be treated in the purview of the CGT if any capital asset is sold and any capital loss or any capital gain is arisen out of this. 

Records keeping of all related transactions are very important for all citizens owning capital assets after 20th September, 1985 (Ato, 2016). 

The records are always to be very much helpful with the CGT calculations for making actual payments. The assets purchased before 29th September,1985 are 100% exempted from paying any CGT but those who owned assets after this date will be subject to CGT if they sale any assets and they require to pay any CGT, hence they will be assessed under ITAA 1997, and will be liable to present all documents related to such assets to the authorities. 

The complex rule of CGT is that it is compulsory for keeping 5 years record for presentation on demand and it will punishable by way of penalty for not giving the details so much required to calculate the cost base and produce all proof of such demand of exemption. 

A helping example of record keeping is that Peter Parker, a son have inherited huge mansion from his father by way of will but when he sold the mansion to use the money for some other purpose he needed all original documents to calculate the actual a CGT payable or else he may have to pay a huge CGT and will be at loss. Hence it was important for his father to have kept all related documents (Koulizos, 2016). 

Assessment and Calculation of CGT

Any type of assets whichever are used by any persons for their personal usage like furniture, car, etc are fully exempt from CGT. 

There are many assets which are used by a business for rental usage but are capital assets but are subject to depreciation then in such cases even a capital gain or loss is generated out of sale of such assets then these are fully exempt from CGT. 

When a loss is generated from the sale of any capital asset it is known as capital loss and if any profit is generated then it is known s capital gain. 

When a capital asset is sold and the loss is generated instead of profit then in such case the loss will have to be set off against any capital profit in the same year but it cannot be adjusted with any ordinary income assessment for general taxation purpose but can be set off at later date from any capital gain later. 

There is no practical time limit for carrying forward any capital loss for the purpose of making any adjustment hence it is imperative to keep all record regarding the assets for the purpose of getting the benefit of such capital losses in the future capital gains adjustments (Workingin-australia, 2016). 

There are two exceptions to the ownership date concept which are stated below for better understanding– 

1. In case a property is inherited by anybody by way of will but the ownership will be the date on which the will provider dies and the will receiver will get the ownership only on death taking place. 

1. In case of a contract is made the date of ownership will be the date on which the party to take possession but not the contract date. Thus the date on which the actual usage of the property started will become the ownership date and not the contract date. 

Fred CGT Tax Liability
Sale Proceeds	$800,000
Less:
Purchase Price	$100,000
Stamp Duty	$2,000
Legal Fees	$1,000
	$103,000
Improvement Cost	$20,000
Index
March, 1987	$45
August, 2015	$108
January, 1990	$56
Sale Proceeds	$800,000
Less: Index cost of acquisition	$245,563
Less: Indec cost of Improvement	$38,434
Taxable Capital Gain	$516,003
Less: Loss on capital gain	$10,000
Total taxable capital gain	$506,003
Tax on Capital gain
Tax on 180000	$54,547
After 180001 to 516002.92	$146,701
Tax Payable	$201,248

The major recordkeeping tips are as detailed below—

1. All receipts of purchase transfer.
2. Valuation of market price.
3. All details of borrowings and interest thereon for any property.
4. All information’s on accountant expenses, advertisement costs, and legal adviser.
5. All information’s on land tax, rates and taxes, and insurance expenses (Ato, 2016). 

Record keeping in CGT should provide the flowing—

• All types of transactions.
• Details of all transactions as well as party information’s.
• All information on transactions related to capital loss or capital gains.
• The details of the date of actual transactions are very important. 

CGT in Australia is used for many purposes related to assets but it is mostly centred with Capital Gain or loss related home selling (Ato, 2016). 

Income Tax Assessment Act, 1997 is the basic law under which CGT is working. An exemption of 50% of CGT is done in a broader sense and usage for many capital assets sales. 

Fringe Benefits are benefits received by the employee in various types and forms from the employer only basically which does not form the part of Salary or Wages but are given separately from time to time and on special occasions and on happening of special events only or for very specific purpose then in such case a Tax is required to be paid by the receiver of the benefits. But in this case the provider of the benefit is going to pay the tax which is called Fringe Benefit Tax or FBT. That means that FBT is a benefit for employees by the employer with a motive to make them happy and satisfied but the Tax part will be borne and paid by the employer only (Ato, 2016). 

Record Keeping Tips for CGT

Let’s see some examples of the Practical FBT provided by the employer to the employees—

• Loan of various types at a very cheap interest rate or even for interest free.
• Any employee is provided company’s car for personal usage for self or for family members.
• Agreement taken place between both the employer and employee to enjoy a salary sacrifice.
• An employee’s children’s school or any education related fees or any admission fees.
• Any employee using mobile phone, laptop with internet data card facility, etc.
• All employee or a part of the employee is providing with daily lunch and evening snacks or in some cases also breakfast and dinner or may be especial occasion treatment at big food joints with all employees and their families.
• The employers using swimming clubs, golf clubs, gyms, holiday clubs, etc but the related fees or costs are all borne by the employer only (Ato, 2016). 

FBT applicability special cases are as follows—

1. Sherlock was an employee in his grandfather’s business. He passed his graduate exams with flying colours and his grandparents gifted him a very expensive car. But in this case the car was presented because Sherlock being the grandchild and a family member hence this will not be treated under FBT. 

1. Roger was an employee with an employer under a special industrial award judgement. The award says that the employer shall have to pay his mobile and internet expenses. The employer was bound to pay these as per the award order provision which he was not if the award was not there in place as Roger was an employee by virtue of the award only and by no other manner. In this case it will be treated as FBT (Business, 2016).

Emma FBT Tax Liability
The taxable value of loan service	$        28,250
($5,00,000 x 5.65%)
Add: Bathtub benefit	$          1,300
Less: Interest paid on purchase of Shares as allowed as deduction	$          2,225
($50,000 x 4.45%)
Total Taxable fringe benefit	$        31,775
FBT Benchmark Interest Rate 5.65%

The major types of Fringe Benefits that are falling under the Tax ambit are as follows—

• For providing company car and for company car parking fees applicable.
• For providing cheap loan.
• Any entertainment benefit paid.
• For waiver of debt.
• For residual purpose.
• For property related.
• For housing for staying away from home.
• For providing house.
• For providing food and place to stay for more than one employee together.
• For providing tickets for airline or train or luxury bus.
• For tax exempt entertainment also.

The various ways that an employer can apply to avoid FBT can be discussed below—

1. Employer can ask all its employees to make a contribution to a general fund which will be used to pay FBT only when such occasion arises and this fund will be transparent and subject to internal as well as external audit also for maintaining its actual purpose. 

1. The employer can in each case make an addition to the Salary or wages as required to increase the amount by the amount of Fringe benefit he have thought for the respective employee so that he will not be liable to pay the FBT directly but through the employees and the employees will bear the Tax on this as a part of salary income (Ato, 2016). 

1. In many cases the employer will ask the employee to make the payment of the benefit thus provided in general and the employees will directly place the bill to employer for reimbursement. This will save lot of FBT in the hands of the employer. 

GST (Input Tax) Credits are applicable to all acquisitions for the purpose giving it to the employees the input is allowable but there exceptions to this also where GST is not eligible for input credit. If the purchase is GST free or it is tax paid already. In case an employee makes a contribution for the FBT benefit received from employer either in full or part then the employer is bound to pay the GST involved in it (Ato, 2016). 

But if the employee directly makes a purchase suppose buying fuel then the employer will not have to pay the GST for fuel. This means the payment to third party by the employee is exempted from GST payment by the employer.

There are certain areas where the employer makes payment to the employees but they should not be treated as the FBT at all by anyway whatsoever. These areas are as follows—

1. Salary or wages.
2. Employees share purchases.
3. Dividend payments.
4. Superannuation fund contribution by employer.
5. Employment termination payments.
6. Payments of capital nature like First Home Saver Account or FHSA account.
7. Payments to Associates. 

FBT will be treated along with income tax assessment for the employer and he will be getting benefit from the calculation of his income tax and can take credit of the payments he made for the same purpose.

GST credit will also give certain advantage to the employees (Ato, 2016).

References: 

Ato, 2016. ATO Interpretative Decision Sale of subdivided farm land – Income or capital gain? [Online] law.ato.gov.au Available at: https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2002273/00001 [Accessed 30 Augustus 2016].

Ato, 2016. Capital gains tax. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Capital-gains-tax/ [Accessed 13 September 2016].

Ato, 2016. Capital gains tax. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Capital-gains-tax/ [Accessed 30 Augustus 2016].

Ato, 2016. FBT exemptions and concessions. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/fbt-exemptions-and-concessions/ [Accessed 19 September 2016].

Ato, 2016. How to calculate your FBT. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT/ [Accessed 15 September 2016].

ATO, 2016. The indexation method of calculating your capital gain. [Online] www.ato.gov.au/General/Capital-gains-tax Available at: https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/The-indexation-method-of-calculating-your-capital-gain/ [Accessed 13 September 2016].

Ato, 2016. What is fringe benefits tax? [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/In-detail/Employers-guide/What-is-FBT-/ [Accessed 19 September 2016].

Ato, 2016. Work-related items exempt from FBT. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/do-you-need-to-pay-fbt-/work-related-items-exempt-from-fbt/ [Accessed 19 September 2016].

Business, 2016. Fringe Benefits Tax (FBT). [Online] www.business.gov.au Available at: https://www.business.gov.au/info/run/tax/fringe-benefits-tax [Accessed 13 September 2016].

Koulizos, P., 2016. What is Capital Gains Tax? [Online] www.realestate.com.au Available at: https://www.realestate.com.au/advice/what-is-capital-gains-tax/ [Accessed 19 September 2016].

Workingin-australia, 2016. Understanding Australian capital gains tax. [Online] www.workingin-australia.com Available at: https://www.workingin-australia.com/money-and-costs/tax/capital-gains#.V-KJ5fl97MU [Accessed 18 September 2016].