Tax refers to a contribution made by an individual or anybody out of its income to the government for the national welfare. Income tax is the most important type of taxation in Australia, which is imposed by the central government via Australian Taxation Office. Taxable income represents the part of income of an individual or a corporation that is used to compute the amount of tax payable. In addition to this, the concept of taxation is also vital to the economic development of the country as the governments can utilize this money back into the economy in the form of loans or other support forms so as to make the country’s financial situation strong as well as stable. Taxes help raise the standard of living in a country. Many a times in Australia, the amount of tax required by the Australian Taxation Office from employers to take out of their pay can go beyond the total tax invoice, as a result the tax payer can get a tax refund in such situations at the end of fiscal year. However, under certain circumstances you might unfortunately have to pay additional tax. In this context, the following report is designed into 2 parts. The first part provides the understanding of net capital gain or loss while another part evaluates on the fringe benefit taxation policy of Australia.
Law: According to Australian Taxation Office, capital assets refer to those assets which are purchased by an enterprise for the purpose of generating income and not for sale in the usual course of business. Such assets include motor vehicle, land and building, and any office equipment (Australian Taxation Office, 2018). A capital gain or loss refers to the difference between the price at which a capital asset was brought and the price at which it was disposed off or transferred. When the received amount is greater than the paid amount on which the asset was acquired, it is called capital gain. On the other hand, if the received amount is less than paid, it is called capital loss.
The Australian Taxation Laws also state that if a company sells a capital asset, like shares or real estate, it leads to generation of either capital gain or a capital loss. The company then legally requires to report capital gains and losses in the income tax return and pay tax on such capital profits, but not on capital losses. Although the profit earned is known as capital gains tax (CGT), it is in fact a part of the income tax, not a different tax. When a company makes a capital gain, it is included to the calculable income for income tax purpose, which may significantly add to the tax the company requires to pay.
Moreover, the Australian taxation law requires that the time at which an enterprise makes a capital gain or loss is when it enters into the agreement for sale (White, and Townsend, 2018). Thus, if a contract of sale is signed in a particular month, and settled in another month, the enterprise must report the capital gain or loss in the tax return of that current tax year (Australian Taxation Office, 2018).
Capital gain or loss on Vacant land for the year ended 30th June:
In the presented case, Mayfield has sold a piece of land on 3 June, for $320000. The land was purchased in 2001 for $100000, which shows that the company has been earning revenue from its use since that period. Thus, the land would be treated as a capital asset. Also, the company spent $20000 in local council, land taxes, sewerage, and water.
Thus, the computation for the net capital gain or loss on the sale of this block of land would be:
Capital gain/capital loss on sale of land = [sale price – (purchased price + expenses incurred during the year)]
= [$320000 – $(100000+ 20000)]
Capital gain = $200000
Therefore, the company has made net capital gain of $200000 that would be taxable in the current period of entering contract of sale. However, the company has got only $20000 in the current taxation year, the remaining amount of $180000 would be imposed to tax in the next year of registration.
Capital gain or loss on Antique bed
In the stated case, Mayfield has brought an antique four-poster Louis XIV bed for $3500. The market value of the bed was $25000 but the insurance company accepted the claim only for $11000 for the stolen antique bed. The client had also spent an expense of $1500 on its alterations.
Thus, the computation for the capital gain or loss would be:
Capital gain/capital loss = Insurance claim received – (purchased value of bed + costs incurred on its alteration)
= $11000 – ($3500 – $1500)
Capital gain= $6000
Capital gain or loss on Painting
From the given scenario, the company has spent $2000 on purchasing a painting whose value rose to $125000 due to the death of the artist. In the current tax year, that painting was auctioned for $125000.
Thus, Capital gain/loss = selling price less purchase price
= 125000 – $2000
Capital gain = $123000
Number of shares acquired = 1000 shares @ $15 each share
Total Purchase price= 1000 x $15 = $15000
Sale price of 1000 shares = $47 each share
Total Selling price = 1000 x $47 = $47000
Net Capital loss or gain:
Sale price – (Purchase price + brokerage + stamp duty)
= $47000 – $(550 + 750)
= $47000 – $(15000 +750 + 550)
Net capital gain = $30700
Number of shares purchased = 2500 @$12 each
Purchasing price = 2500 x 12 = $30000
Sale of shares = @25 each
Selling price= 2500 x 25 = $62500
Capital gain or loss = Selling price – (purchase price + additional cost)
= $62500 – $[30000 +1000 (brokerage) +1500 (Stamp duty)]
= $62500 – ($30000 + $1000 +$1500)
Capital gain = $30000
Shares purchased = 1200 shares @$5 each
Total purchase price of shares= 1200 x $5 + $500 (stamp cost) + $100 (brokerage)
= $6600
Selling price = 1200 x $0.50
= $600
Capital gain or loss = $(600 – 6600) = $6000
Share build limited
Purchasing price of shares = 10000 x $1 = $10000
Additional cost = $1100 (stamp duty) + $900 (brokerage)
= $12000
Selling price = $2.50
Capital gain or loss = $25000 – $12000
Capital gain = $13000
Treatment of Violin
Purchasing price of violin = $5500
Selling price of violin = $12000
Capital Gain/loss = Selling price – purchasing price
= $12000 -$5500
Capital gain = $6500
Calculation of capital gain or loss: year ending 30th June
|
Particulars |
Amount ($) |
Amount ($) |
|
capital loss carried forward |
|
-8500 |
|
capital gain on sale of block of land |
20000 |
|
|
capital gain on antique bed |
6000 |
|
|
capital gain on sale of painting |
123000 |
|
|
capital gain/loss on sale of shares: |
67700 |
|
|
Common bank Ltd |
30700 |
|
|
PHB Iron Ore Ltd |
30000 |
|
|
Young Kids Learning Ltd |
-6000 |
|
|
Share build limited |
13000 |
|
|
Capital gain on sale of violin |
6500 |
|
|
Proceeds from capital gain |
|
214700 |
Law: According to the Australian Taxation Office, Fringe benefits are those additional facilities or disbursements provided by an employer to the employees aside from their regular pay, remuneration or salary in order to make them happy and retain them in the company for a long period of time (Australian Taxation Office, 2018). The various kinds of fringe benefits offered by an employer to its employees are or life insurance facility, employee stock options, car for employment use, medical insurance, educational assistance program, and facility of housing and so on. The taxation laws also state that the fringe benefits are normally subject to some specific concessions and exemptions from the tax. However, the taxes on fringe benefits are compulsory borne by the employer.
Fringe benefits tax (FBT) refers to a type of tax that employers pay on the benefits provided to the employees together with the family members or other associates of the employees. Such benefits are either or part of or over and above employees’ salary or wages. When an individual acts as a director of a company or a beneficiary of a trust, and he or she receives benefits in relation to the employment are also exposed to FBT (Braverman et al., 2015). Thus, FBT is not a part of income tax and is computed on the assessable value of the offered fringe benefits.
In addition to this the Australian Taxation guidelines also state that if an international organization offers benefits to employees then such FBT must be applied on such benefits as well. This is mainly because Australia has entered in double taxation agreement with England and New Zealand. Therefore, the employer needs to make a payment of FBT despite the kind of organizational structure adopted by an enterprise such as corporation, partnership, sole trader, government authority or trust (Australian Taxation Office, 2018). Also, the tax is paid by the employer even if he or she is not liable to pay other taxes.
However, according to Australian Taxation Office, The following benefits are not included in the fringe benefits and thus no tax is applicable on these:
Furthermore, the law allows the employers the benefit of a deduction of the cost of provision made for the fringe benefits, in the current tax year. It is also observed that there exist many fringe benefits provided by the employer to its employees, which are exempt from the fringe benefit tax (McGillivray, 2018). The employer is also allowed to plan to minimize its fringe benefit tax obligations such as substituting the fringe benefits with provision of tax deductible benefits, cash salary, provision of FBT exempted benefits and creation of employee contributions. On such costs incurred by the employers, FBT is not applicable.
FBT Applicability on provision of car to employee:
From the presented scenario, it has been observed that Rapid-Heat company has provided a car to Jasmine for the purpose of travelling for professional work. However, the car is also allowed to be used for the private purposes. Thus, it must be treated as fringe benefit to Jasmine under the Australian Taxation Laws (Australian Taxation Office, 2018). The rate of tax applicable on fringe benefit would be 47% on the year ending 31st March 2018 for a type 1 gross up rate of 2.0802. The overall taxable figure for the company would be computed using the below formula:
(Type 1 * 2.0802) plus Non-exempt amount.
The estimation of the overall assessable amount received by Jasmine during the current tax year is:
|
Particulars |
Amount (in $) |
|
Car provided to Jasmine for personal purpose |
33000 |
|
Settlement of the expenditures incurred on repair and maintenance of the car by Jasmine |
550 |
|
Use of the loan amount for acquiring holiday home |
450000 |
|
Allowance amount received on the purchase of a electric heater |
1300 |
|
Overall Fringe benefits received by Jasmine |
484850 |
From the above tale, it is estimated that the overall fringe benefits received by Jasmine is $484850. The total chargeable amount under income tax:
= $484850 x 2.0802 =
= $1008584.97
Thus, The fringe benefit tax to be paid by Rapid-Heat Pty Ltd would be: =1008584.97 x 0.47 = $474034.9359
Computation of the fringe benefit tax when Jasmine used $50000 to purchase shares herself instead of lending it to her husband:
|
Particulars |
Amount (in $) |
|
Car provided to Jasmine for personal use |
33000 |
|
Recompense of the costs spent on car for repair and maintenance by Jasmine |
550 |
|
Use of loan amount to invest in the shares |
50000 |
|
Use of the loan amount for purchasing holiday home |
450000 |
|
Concession received on the acquisition of a electric heater |
1300 |
|
Total Fringe benefits |
534850 |
It is observed that the total fringe benefits received by Jasmine = $534850. Therefore, the taxable amount is 534850 x 2.0802 = $1112594.97, and the amount of fringe benefit tax owed by the company = 1112594.97 x 0.47 = $522919.6359.
Conclusion
On the basis of above discussions and calculations, it can be concluded that capital gain is amount generated by an individual or a corporation on the sale or transfer of a capital asset. It has been analyzed that out that the net capital gain received by the company is $214700 in the current tax year. However, the company has suffered a capital loss of $8500 in the last tax year. Moreover, the client has also earned the capital gain on the sale of a piece of vacant land, shares, antique bed, violin as well as on the painting. The capital gain earned on a block of vacant land is $20000. The capital gain earned on antique bed is $6000. The capital gain earned on shares is $67700. The capital gain received on sale of violin is $6500 while on sale of the painting is $123000. Furthermore, it can also be concluded that the employer offers fringe benefits to employees where the tax or FBT must be paid by the employer. The value of total fringe benefit availed by Jasmine from Rapid-Heat is $484850 on which the type 1 gross rate up of 2.0802 is pertinent whereas fringe benefit tax rate of 47% is valid on the assessable amount. Therefore, it can be summarized that the FBT to be paid by Rapid-Heat is $474034.9359.
References
Australian Taxation Office (2018) Capital Gains Tax. Available at: https://www.ato.gov.au/general/capital-gains-tax/ (Accessed: 25 September 2018).
Australian Taxation Office (2018) Capital Gains Tax. Available at: https://www.ato.gov.au/general/fringe-benefits-tax-(fbt)/ (Accessed: 25 September 2018).
Australian Taxation Office (2018) A Guide for Employers. Available at: https://www.ato.gov.au/general/fringe-benefits-tax-(fbt)/in-detail/fbt—a-guide-for-employers/ (Accessed: 25 September 2018).
McGillivray, A. (2018) VAT: The perfect solution to the taxation of consumption?, Taxation in Australia, 52(10), p.555.
Braverman, D., Marsden, S. and Sadiq, K. (2015) Assessing Taxpayer Response to Legislative Changes: A Case Study of In-House Fringe Benefits Rules, J. Austl. Tax’n, 17(1), p.1.
White, J. and Townsend, A. (2018) Deductibility of employee travel expenses: The ATO’s guidance, Taxation in Australia, 52(11), p.608.
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