HI6028 Taxation Theory Practice and Law

HI6028 Taxation Theory Practice and Law

HI6028 Taxation Theory Practice and Law

Case study 1: - Capital Gains Tax

Calculate Fred’s net capital gain for the current year. Assume he also has a net capital loss from last year of $10,000 arising from the sale of shares.

Tax amount over capital gain is that tax amount which get calculated over the sale of capital asset. Capital gain is the difference amount among capital proceedings with the capital asset sale and cost base related to the assets purchases. The capital proceeds amount received by the seller with the sale of capital asset (Brown, et. al., 2010). There are various elements get included under cost base in context to the costs incurred over the purchase of the capital asset like expenses made for purchases, direct expenses related with the acquisition or disposal of asset, incurred expenses in order to increases the assets value, legal fee payment for property sale and amount of paid commission to real estate agent in order to sold out property. For such traders who are GST registered the GST amount is deducted from the cost base as they are eligible for claiming the input GST credit for that amount and for Non-GST registered candidates they are not allowed to claim the credit for that amount and with this effect for such traders GST amount get included in their cost base. Individuals as well as small businesses are eligible for claiming 50% discount over capital gain if the capital asset get hold by taxpayer for more than a year. With this capital loss get carried forwards and get deducted from the capital gain in next year. Along with this amount of capital loss over the sale of collectible items didn't get deducted from the amount of capital gain. It is also stated that capital assets must get acquired by the taxpayer before 20th September 1985 in order to get fall under pre-CGT assets because these assets are exempt from the capital gain tax payments. However, if there is any addition made over the property by the taxpayer after 20th September 1985 and the property was purchased before 20th September 1985 then taxpayer losses its pre-CGT asset status. With this effect taxpayer is liable to pay capital gain tax over the disposal of such asset (Jones, 2016).

HI6028 Taxation Theory Practice and LawAs per the given scenario Fred an Australian resident sold out his holiday home for an amount of $800,000 along with this he pays $1,100 as legal fees as well as $9,900 as commission to real estate agent. These both get included under GST. Fred purchase this holiday home in 1987 by paying $100,000 and also pays $1,000 as legal fees as well as $2,000 as stamp duty. In 1990 Fred contact builder for the purpose of constructing an garage over this property and this activity costs him of $20,000. He also make carry forward of loss amounting $10,000 which is occurred due to the sale of shares. Since it is not provided whether Fred is GST registered or not, due to which net capital gain calculations are made by assuming both situations such as one is for GST registered and one is for GST non-registered (Jones, 2016).

Below statement shows Fred's net capital gain such as: -

Case 1: When Fred is GST registered

Particulars

Amount

Proceeds with Capital Sale

 

$800,000

Less: Cost Base

 

 

Purchase price

$100,000

 

Stamp duty

$2,000

 

Legal fees for purchase of property

$1,000

 

Garage construction expenses

$20,000

 

 Legal fees on sale

$1,000

 

Real estate agent commission

$9,000

$133,000

Capital gain

 

$667,000

Less: 50% Discount

 

$333,500

Net Capital Gain

 

$333,500

Less: Capital loss carried forward

 

$10,000

Net taxable capital gain

 

$323,500

(Tanti, 2011)

Case 2: When Fred is not GST registered

Particulars

Amount

Capital Sale proceeds

 

$800,000

Less: Cost Base

 

 

Purchase price

$100,000

 

 Stamp duty

$2,000

 

 Legal fees for purchase of property

$1,000

 

 Garage construction expenses

$20,000

 

Legal fees on sale

$1,100

 

Real estate agent commission

$9,900

$134,000

Capital gain

 

$666,000

Less: 50% Discount

 

$333,000

Net Capital Gain

 

$333,000

Less: Capital loss carried forward

 

$10,000

Net taxable capital gain

 

$323,000

(Evans, et. al., 2015)

Notes: -

S. No.

Note Description

1.

Fred pay stamp duty and legal fees at the time of property purchases and with this effect both elements get included under the cost base as they are the part of cost base.

2.

There is construction made by the Fred over the property in order to construct garage over it and make payment of $20,000 that also included under cost base.

3.

Since Fred is GST registered due to which the GST amount didn't get considered as elements of cost base and didn't get included under it.

On the other hand since Fred is GST registered and GST adjustment is not required to made and with this effect paid GST amount get included among the elements cost and in this situation Fred is not able to enjoy the benefits of GST input credit.

4.

Fred purchase property in the year 1987 and with this effect he didn't considered as pre-CGT asset as it require purchase before 20th September 1985.

5.

Since, Fred is individual taxpayer and he hold the asset for more than a year before its sales, so that he become eligible for getting 50% discount over the capital gain earned in current year.

6.

The carry forward loss (with the sale of shares) get easily deducted from the current years capital gain in order to calculate net capital gain.

(Wallace, et. al., 2013)

Would your answer be different if the loss arose from the sale of an antique vase?

An antique vase get considered as collectible for defining capital asset and capital loss occurred due to sale of collectible item get deducted only from the share of capital gain earned by sale of collectible item. Since Fred is not earn any capital gain with the sale of collectibles in current year and with this effect carry forward capital loss of sale of antique vase didn't get adjusted with the current year's capital gain amount. So, as per this case net taxable gain amount should be different as amount of capital loss didn't get deducted. The net capital gain as per this case will be $333,500 or $333,000 as per the suitable case (Wallace, et. al., 2013).

Case study 2: - Fringe Benefit Tax

(a) Advise Periwinkle of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2016. You may assume that Periwinkle would be entitled to input tax credits in relation to any GST-inclusive acquisitions.

Fringe benefit tax: - It is that part of tax which is paid by the employer over that such amount which is given to his employees in the form of perquisites and facilities. Payment of obligation is included under this part of tax. Different perquisites and facilities must get treated differently because some of these perquisites and facilities having GST payable due to which employer's GST is credited from fringe benefit tax (Mather, 2013). In the below statement steps of calculating fringe benefit tax is provided such as: -

Steps

Description

Step 1

Calculation of fringe benefits taxable value provided to employees

Step 2

Calculation made for such taxable value for fringe benefits in which GST credit is not eligible or calculate non-GST benefits.

Step 3

Calculation made for such taxable value for fringe benefits in which GST credit is  eligible

Step 4

Make calculation for non-GST fringe benefits taxable value by multiplying it with 1.8692

Step 5

Make calculation for GST fringe benefits taxable value by multiplying it with 2.0647

Step 6

Make addition of both values of step 4 & step 5

Step 7

Net amount is termed as total taxable value of Fringe benefits on which FBT get applicable. Rate of FBT is 47%.

(Tang & Wan, 2015)

On the basis of the provided scenario Periwinkle Pty. Ltd. is manufacturer of bathtub provide various benefits to their employee Emma in the previous financial year 2014-15. Calculation of taxable value over perquisites and facilities rendered to Emma is conducted below such as: -

Perquisites 1: Car and its repair

There are two methods available of calculating fringe benefit tax includes statutory formula and operating cost method. From both statutory formula is utilised. Last year (2014-15) Emma utilise the car provided by company for official as well as personal purpose also and in the end car runs for 10,000 km (Tang & Wan, 2015). In the below table statutory rates are provided that helps in getting taxable value of fringe benefits such as: -

Total Kilo-meters runs (in an financial year)

Statutory rate (applicable from 1at April)

Lesser than 15,000 Km

20%

15,000 to 24,999 Km

20%

25,000 to 39,999 Km

20%

More than 40,000 Km

20%

(Tang & Wan, 2015)

Fringe benefit calculation for Emma in order to make utilisation of car is as follows: -

{30,000 * 20/100 = 6,000}

As car is fallen under non-GST benefit its value is taken as 30,000 only as GST amount is calculated as: - [33,000 * 1/11 = 3,000]

Once the GST amount is removed from its total value and get utilised for setting off from FBT payment.

During the financial year Emma was made repairing expenses over car and Periwinkle Pty. Ltd. make reimbursement of that amount. As per the section 20 personal expenses incurred by employee should fall under extended benefits to employer. So, in the above case section 20 is implied and amount of $550 added into taxable value of fringe benefits. This amount also make inclusion of GST amount of 50 [550 * 1/11] and it get removed from total payable amount and this amount is further utilise for setting off the FBT total payment (Matt, et. al., 2013).

Perquisites 2: Render her loan.

Periwinkle Pty ltd. render her personal loan in the financial year 2014-15. She make personal use of that loan amount in order to purchase a holiday home and its cost is $450,000. Total loan amount was $500,000 out of which she spent $450,000 for purchasing home and remaining amount of $50,000 get transferred to husband so that he purchase shares. The provision of fringe benefits stated that internist over loan get included for calculating taxable value of Periwinkle Ltd. for fringe benefit tax. But out of total amount she utilise $50,000 for purchasing shares and with this effect this share can't get utilise for deduction and no GST is applied over it (Matt, et. al., 2013).

Interest amount for $450,000 at the rate 4.45% = $20,025 (450,000 * 4.45/100)

Perquisites 3: Goods taken by Emma

During the year she took bath tub. It is considered as her employee render him company's good and with this effect they make deduction of its selling price from outside customers. This transactions is considered for Fringe benefit tax for that year (Matt, et. al., 2013). Transactions may include: -

Selling price for customers = $2,600

Price charged to Emma = $1,300

So fringe benefit is provided for $1,300 only and also become taxable for company.

Below statement shows the calculation of fringe benefit tax liability for 2014-15: -

Particulars

GST benefits

Non-GST benefit

2.0647

1.8692

Amount

Car's Fringe benefit

6,000

-

$12,388

-

$12,388

Repair reimbursement amount

500

0

$1,032

-

$1,032

Loan Interest

-

$20,025

-

$37,430

$37,430

Total Taxable value

 

 

 

 

$53,280

Less: Fringe benefit tax @ 47%

 

 

 

 

$25,041.60

Less: GST Credit

 

 

 

 

$3,050

Net FBT liability

 

 

 

 

$25,188.40

(Mortimore, 2011)

(b) How would your answer to (a) differ if Emma used the $50,000 to purchase the shares herself, instead of lending it to her husband?

If Emma utilise the loan amount of $50,000 for purchasing shares for herself then it can't considered for taxation purpose under fringe benefit tax for Periwinkle. The whole amount or $50,000 didn't considered for the scope of fringe benefit tax and it is because this amount is being used for attaining such assets that make some returns and with this effect it must get removed from the payment of fringe benefit (Taylor, 2016). In the below statement revised fringe benefit tax liability is calculated for Periwinkle Pty. Ltd. such as: -

Particulars

Calculations

Net Amount in $

Interest amount (on loan)

400,000 * 4.45/100

17,800

Taxable value on interest amount (on loan)

17,800 * 1.8691

33,270

Taxable value (Fringe benefits)

 

49,120

Fringe benefit tax

 

23,086

Less: Amount of GST credit

 

3,050

Net amount of Fringe benefit payable

23,086 - 3,050

20,036

(Taylor, 2016)

References

Brown, P., Ferguson, A. & Sherry, S. 2010, "Investor behaviour in response to Australia's capital gains tax", Accounting & Finance, vol. 50, no. 4, pp. 783-808.

Evans, C., Minas, J. & Lim, Y. 2015, "Taxing personal capital gains in Australia: An alternative way forward", Australian Tax Forum, vol. 30, no. 4, pp. 735-761.

Jones, D. 2016, "Capital gains tax: The rise of market value?", Taxation in Australia, vol. 51, no. 2, pp. 67-69.

Mather, P. 2013, "What's up in fringe benefits tax?", Charter, vol. 84, no. 2, pp. 54.

Matt Campbell Bianca Hall, Hall, S. & Hagon, T. 2013, Vehicle sales remain steady despite plans to change fringe benefits tax: ELECTION 2013 - AUSTRALIA DECIDES - Automotive, Fairfax Digital, Melbourne, Vic.

Mortimore, A. 2011, "What now for environmental sustainability? Government fails to link the Australian car FBT concession to vehicle emissions", Australian Tax Forum, vol. 26, no. 3, pp. 541-583.

Tang, R. & Wan, J. 2015, "Fringe benefits tax and fly-in fly-out arrangements: John Holland Group Pty Ltd v Commissioner of Taxation", Australian Resources and Energy Law Journal,vol. 34, no. 1, pp. 17-19.

Tanti, P. 2011, "Capital gains tax: The obscure provisions", Taxation in Australia, vol. 45, no. 11, pp. 668-675.

Taylor, E.J. 2016, "Urban Growth Boundaries and Betterment: Rent?Seeking by Landowners on Melbourne's Expanding Urban Fringe", Growth and Change, vol. 47, no. 2, pp. 259-275.

Wallace, M., Hart, G. & Evans, C. 2013, "An evaluation of the contribution of Justice Hill to the provisions for the taxing of capital gains in Australia", Australian Tax Forum, vol. 28, no. 1, pp. 123-136.