HI6028 Taxation Theory and Law Assignment

HI6028 Taxation Theory and Law Assignment

HI6028 Taxation Theory and Law Assignment

Case Study 1: - Capital Gain Tax

Generally fixed assets also termed as capital assets because huge capital is required for the purpose of acquiring these assets. When these assets get sold out then capital amount get inflows and it may results into either capital loss or capital gain. Land is one of the fixed assets and as the time passes it cost get increased. By selling land there is high possibility of getting capital gain (Taylor, 2012). The amount of profit or loss attained with the sale of land is in huge amount due to which it is referred as capital loss or capital gain amount. In order to measure the capital gain or capital loss cost base is deducted from the selling amount. As the expenses made over the land there is effective increase in cost base (Taylor, 2012).

HI6028 Taxation Theory and Law AssignmentWith the sale of asset if individual attain capital loss then he is liable to set off with capital gain and if there is no capital gain then it get carry forward.

But it land was purchased after that date then he/she is not eligible to get the title. There is one condition is implied in order to retain the title of pre-CGT asset. If individual perform such activity then he/she lose title of pre-CGT asset and become liable to pay out the taxes over the capital gain amount if they sold out that piece of land (Bevacqua, 2015).

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On the basis of the information provided among the case study Fred is Australian resident and he sold out his holiday home in February 2016 which was brought in March 1987. As sales receipts he got $800,000. Along with this he also made an expenditure of $20,000 over the land for the purpose of constructing garage over it in the year 1990. For this purpose he contact builder and perform the activity (Bevacqua, 2015).

This amount is utilised for lowering the total taxable amount by deducting it from any capital gain amount except the capital gain of collectable items (Bevacqua, 2015).

But there is no information is provided related to the GST status of Fred as he is registered for GST or not. All calculations should be made by considering both conditions such as: -

I.

Particulars

Amount in $

Capital sale revenue

800,000

Deduct: Cost base

 

(-) Land's Purchase price

100,000

(-)Stamp Duty paid

2,000

(-) Legal fees paid (at the time of purchases)

1,000

(-) Garage cost

20,000

(-) Paid legal fees (at the time of sale)

1,000

(-) Commission (paid to real estate agent)

9,000

Capital gain

667,000

Deduct: Discount at the rate of 50%.

333,500

Net capital gain

333,500

Deduct: C/F capital loss

10,000

Net taxable capital gain

323,500

(Khoury, 2011)

II.

Particulars

Amount in $

Capital sale revenue

800,000

Deduct: Cost base

 

(-) Land's Purchase price

100,000

(-)Stamp Duty paid

2,000

(-) Legal fees paid (at the time of purchases)

1,000

(-) Garage cost

20,000

(-) Paid legal fees (at the time of sale)

1100

(-) Commission (paid to real estate agent)

9900

Capital gain

666,000

Deduct: Discount at the rate of 50%.

333,000

Net capital gain

333,000

Deduct: C/F capital loss

10,000

Net taxable capital gain

323,000

(Khoury, 2011)

Working notes in context  to above both statements such as: -

Note No.

Explanation

Note 1.

To get the capital gain or capital loss amount cost base amount get deducted from the revenues generated with the sale of land. The cost base amount is the total expenditure made over the land such as purchase price of land, legal fee payment (both time purchase as well as sale), stamp duty payment, commission paid and contraction over it. All these expenses get added together in order to get the cost base.

Note 2.

Fred is liable to get the deduction of 50% discount over the capital gain amount as the piece of land is hold by him for more than 28 years. And in order to get the deduction the holding time period is one year. With this effect he is liable to get the deduction facility.

Note 3.

He can set off loss in both cases.

(Khoury, 2011)

If loss is attained with the sale of antique vase: -

For purchasing these items there is need of investing huge funds and as a result they got termed as capital assets. So if their purchases require capital investment then its sale results into capital inflow. With this effect if individual get the profit over its sale then it got termed as capital gain and if loss then it got termed as capital loss (Doran, et. al., 2013).

As per the case study Fred sold out antique vase and got a capital loss of amount $10,000 so in this case he is eligible to set off the loss with capital gain amount. But there is no such capital gain amount is available in order to set off the loss because he didn't get any capital gain by selling collectable items (Doran, et. al., 2013). With the effect of it there are some adequate changes get realised in the amount of net taxable capital gain amount such as: -

Statement 1: - Fred is GST registered: - Net taxable capital gain amount = $333,500

Statement 2: - Fred is not GST registered: - Net taxable capital gain amount = $333,000 (Doran, et. al., 2013)

Case study 2: Fringe Benefit tax

(a)

When employer render different benefits other than salary and incentives to their employees is termed fringe benefits. In the given case study employer Periwinkle Ltd. render various benefits to their employee Emma in the form of car, personal loan and bathtub (Byrnes, et. al., 2013). All these facilities fall under fringe benefits and employer need to pay taxes over it. Among these benefits some of them having some additional feature of the GST payable as well as some of them didn't have additional feature of GST. When benefits attain GST payable then employer enjoy the FBT credit.

(Byrnes, et. al., 2013)

Given case study provide information that Emma as an employee get various benefits from their employer Periwinkle Ltd. and these benefits get discussed below effectively such as: -

I. Car taken by Emma from company and pay repair cost over it.

Employer provide car to Emma for office as well as personal purpose on 1st May 2015. The reason behind giving car is Emma has lot of travelling work and she is allowed to utilised it for personal use also. From 1st May 2015 to 31st March 2015 she travelled 10,000 Kilometres with car. Along with this she made a payment of $550 for car repair. That amount is also get reimburse from the company side and get considered for the additional obligations. This is also determined as fringe benefit provided by the employer to their employees (Byrnes, et. al., 2013).

In order to measure the liability of FBT distance travelled by car is utilised by using statutory formula method (Byrnes, et. al., 2013). While using this method a rate is utilised to calculate the FBT liability and that rate is classified below such as: -

Distance covered

Statutory rate (from 1st April)

Lesser than 15,000 km

20%

Between 15,000 - 24,999 km

20%

Between 25,000 - 40,000 km

20%

More than 40,000 km

20%

(Boccabella, 2012)

Calculating Car's fringe benefit amount such as: -

Cost of car and repairing expenses include GST amount in it and with this effect there is need to exclude them in order to calculate the fringe benefit tax liability. The GST amount is the 1/11th part of the cost incurred and in order to get the tax liability amount cost of car (excluding GST) get multiplied with the statutory rate (Boccabella, 2012). Calculation is as follows such as: -

Cost of car (Purchased by Periwinkle Ltd.) = $33,000

GST share in car cost = 1/11th part

Share of GST = $33,000 * 1/11 = $3000

So cost of car without GST = Total cost - Share of GST

= $33,000 - $3,000

Cost of car excluding GST = $30,000 (Boccabella, 2012)

FBT amount = Cost of car excluding GST * Statutory rate

Statutory rate = 20%

= $30,000 * 20% = $6,000

FBT amount = $6,000 (Boccabella, 2012)

Calculation for GST amount over repair expenses such as: -

Repair expenses = $550

Share of GST = 1/11th

GST amount = $550 * 1/11 = $50

Amount of repair excluding GST share = $550 - $50 = $500 (Boccabella, 2012)

II. Loan taken by Emma from company for personal use: - 

On 1st September 2015 Emma took loan from the bank amounting $500,000 and pay interest over it at the rate of 4.45%. After purchasing holiday home she has left with $50,000 out of loan amount. The benefit provided by the company is in the form of lower interest rate charged against the loan amount. It is given that she transferred $50,000 to her husband which is utilised further for buying shares. She pays interest at the rate of 4.45% over the whole loan amount but employer didn't utilise the whole interest amount for getting deduction. Periwinkle Ltd. utilise the 90% of interest amount for calculating FBT as remaining 10% is utilised for getting additional income with the purchase of shares (Chaplin, 2013).

III. Bathtub purchased by Emma from company

During the year (2015) she brought bathtub from the company and make a payment of $1,300 as purchase price. So with this fact it is realised that company provide benefit to Emma as she is their employee and this benefit fall under fringe benefits. And the amount ($1,300) which is not charged get considered for tax calculation purpose. Emma got benefits as she needs to pay only $1,300 as she get 50% discount over it and this 50% discount further utilised for calculating FBT taxable value (Chaplin, 2013).

Calculation of FBT liability made in below statement for year 2014-15: -

Particulars

Benefit of GST paid

Benefits of Non GST

Net Amount ($)

Fringe benefits

 

 

 

FBT over car

($6,000 * 2.0647)

0

12,388

FBT  over Reimbursement

($500 * 2.0647)

0

1,032

FBT over interest amount

-

($20,025 * 1.8692)

37,430

Total FBT Taxable value

 

 

53,280

Less: FBT @ 47%

 

 

25,041.60

Less: Credit  of GST

 

 

3,050

Net liability of  FBT

 

 

25,188.4

(Chaplin, 2013)

(b)

With the use of this amount she purchase shares that results into generating additional income in the form of dividends. This amount lost the virtue of getting utilised in calculating taxable value and with this effect it get excluded from the Fringe benefit taxation (Ergas & Robson, 2012).

Particulars

Amount ($)

Interest on loan

17,800

Taxable value of interest

33,270

Taxable value of fringe benefits

49,120

FBT

23,086

Less: GST credit

3,050

Net FB payable

20,036

(Ergas & Robson, 2012)

Working notes: -

1. Calculation of interest over loan: -

[$400,000 * 4.45%] = [$400,000 * (4.45/100)] = $17,800

2. Calculation of taxable value of interest amount: -

$17,800 * 1.8692 = $33,270 (Ergas & Robson, 2012)

References

Bevacqua, J. 2015, "ATO accountability and taxpayer fairness : an assessment of the proposal to split the Australian Taxation Office", University of New South Wales Law Journal, The, vol. 38, no. 3, pp. 995-1014.

Boccabella, D. 2012, "An ordered approach to the tax rules for problem solving in a first Australian income taxation law course can improve student performance", eJournal of Tax Research, vol. 10, no. 3, pp. 621.

Byrnes, J.M., Vandenberg, B., Doran, C.M., Vos, T. & Cobiac, L.J. 2013, "Estimated impacts of alternative Australian alcohol taxation structures on consumption, public health and government revenues", The Medical Journal of Australia, vol. 199, no. 9, pp. 819.

Chaplin, S. 2013, "Outsourcing income tax returns: Convenient and/or controversial", Journal of Australian Taxation, vol. 15, no. 2, pp. 279-312.

Doran, C.M., Byrnes, J.M., Cobiac, L.J., Vandenberg, B. & Vos, T. 2013, "Estimated impacts of alternative Australian alcohol taxation structures on consumption, public health and government revenues", The Medical journal of Australia, vol. 199, no. 9, pp. 619.

Ergas, H. & Robson, A. 2012, "Revenue allocation under the MRRT: Economic aspects",Journal of Australian Taxation, vol. 14, no. 2, pp. 183-206.

Khoury, D. 2011, "Widening the availability of deductions under Australian taxation law", Tax Specialist, vol. 14, no. 4, pp. 207-211.

Taylor, C. 2012, "Factors influencing Australian taxation treaty practice 1946-1976",Australian Tax Forum, vol. 27, no. 3, pp. 571-614.