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How to calculate net capital gain or loss?

1. Over the last 12 months, Eric acquired the following assets: an antique vase (for $2,000), an antique chair (for $3,000), a painting (for $9,000), a home sound system (for $12,000), and shares in a listed company (for $5,000). Last week he sold these assets as follows: antique vase (for $3,000), antique chair (for $1,000), painting (for $1,000), sound system (for $11,000) and shares (for $20,000). Calculate his net capital gain or net capital loss for the year.

2. Brian is a bank executive. As part of his remuneration package, his employer provided him with a three-year loan of $1m at a special interest rate of 1% pa (payable in monthly instalments). The loan was provided on 1 April 2016. Brian used 40% of the borrowed funds for income-producing purposes and met all his obligations in relation to the interest payments. Calculate the taxable value of this fringe benefit for the 2016/17 FBT year. Would your answer be different if the interest was only payable at the end of the loan rather than in monthly instalments? What would happen if the bank released Brian from repaying the interest on the loan?

3. Jack (an architect) and his wife Jill (a housewife) borrowed money to purchase a rental property as joint tenants. They entered into a written agreement which provided that Jack is entitled to 10% of the profits from the property and Jill is entitled to 90% of the profits from the property. The agreement also provided that if the property generates a loss, Jack is entitled to 100% of the loss. Last year a loss of $10,000 arose. How is this loss allocated for tax purposes? If Jack and Jill decide to sell the property, how would they be required to account for any capital gain or capital loss? 

4. What principle was established in IRC v Duke of Westminster [1936] AC 1? How relevant is that principle today in Australia?

5. Bill owns a large parcel of land on which there are many tall pine trees. Bill intends to use the land for grazing sheep and therefore wants to have it cleared. He discovers that a logging company is prepared to pay him $1,000 for every 100 metres of timber they can take from his land. Leaving aside any capital gains tax issues, advise Bill as to whether he would be assessed on the receipts from this arrangement. Would your answer be different if he was simply paid a lump sum of $50,000 for granting the logging company a right to remove as much timber as required from his land? 

How to calculate net capital gain or loss?

1. In the given case, Eric has acquired certain assets in the last 12 months. The assets that has been acquired by Eric in the last 12 months has been sold by him during the same here. The assets acquired by Eric include painting, antique chairs, antique vase, shares in the listed companies and a home sound system.

In the below working file, the capital gain and loss has been computed using the purchase price and sales price of the assets:                                                     

As per the provision of Australian tax laws, an asset that has been acquired for a relatively longer period has been termed as a capital asset. Capital gain and loss has been calculated on sale of Capital Asset. There are certain exceptions provided in the Australian tax laws in relation to the sale of capital asset which may lead to capital gain and loss for an individual or a company. Any Capital Asset that has been acquired before 28 September 1985 is outside of the purview of capital gain tax in Australia. Thus, any capital Asset that has been acquired after 20 September 1985 which is not within the exemption limit covered under the definition of capital gain tax in Australia and thus eligible for capital gain tax. Further, any Capital Asset whose purchase value is less than $10,000 is also kept outside the purview of capital gain tax.

Considering the above provision in relation to the above case, any Capital Asset whose purchase price is less than $10,000 not eligible for capital gain tax. Considering these laws, only the listed shares and this home sound system that has been sold by Eric is eligible for capital gain tax. (Australian tax authority)

Finally net capital gain or loss on assets of Eric is as below:

Assets

Purchase Price

Selling Price

Capital gain/(loss)

Home sound system

 $        12,000

 $        11,000

 $                (1,000)

Shares in a listed company

 $          5,000

 $     20,000

 $                15,000

Total

 $      17,000

 $        31,000

 $                14,000

2. As per the provision of Australian tax laws, if any benefit has been provided by the employer to his employee in relation to his employment which is not covered the monthly salary that has been provided by the employer to his employee will be treated as friends benefit and will be eligible for fringe benefit tax. However there are certain exceptions provided in the Australian tax laws in relation to the taxability of fringe benefit tax. There are number of additional benefits that have been provided by an employer to which employee. Interest free loan car loan at low interest rate then the interest rate prevailing in the market is also termed as an additional benefits provided by an employer to his employees. As per the provision of Australian tax laws, it is very difficult to determine the market interest rate for determining the difference in the interested. Thus, the Australian taxation law has determined the benchmark interest rate which can be used in determining the difference in the interest rate for computation of fringe benefit tax. If the loan has been provided by the employer at a rate which is less than the benchmarking rate, the same will be treated as a fringe benefit and will be eligible for fringe benefits.  The benchmarking rate has been kept at 5.65% for the year ending 31st March 2017. (Australian tax authority)

What is the taxable value of fringe benefits and how is it calculated?

In the given case, the employees agreed to provide loan at an interest rate of 1% per annum. On the other hand as per the Australian tax laws the benchmarking interest rate for providing loan to an employee his 5.65%. Thus, being the interest rate at which the loan has been provided to the Employees is less than the benchmarking rate, the differential in the interest rate will be eligible for French benefit taxation. The employer has sanctioned a loan amount of 1 million dollars for the employee but is utilised only 40% of the sanctioned loan amount. In the scenario, difference benefit taxation will be eligible only on the amount that has been utilised by the employee.Thus, considering the difference in the interest rate 4.65% (5.65%-1%) applied on $0.4 million will bring the interest rate amount to $15, 977. This amount will be eligible for fringe benefit taxation. As per the Australian tax laws, fringe benefit tax rate is 49%. thus, in this scenario the fringe benefit tax that will be paid by the employer will be $ 7,829.

On the other hand, if the employee agrees to provide interest free loan to the employee, the entire amount of interest that would have been calculated using the benchmarking rate ie 5.65% will be treated as fringe benefit when will be taxable in the hands of the employer at the rate of 49%. In this scenario, the fringe benefit tax that will be paid by the employer will be $ 9,493. Furthermore, if this interest value is not paid in monthly installment but is paid at the time of ending of the loan then there will be no fringe benefit. (Fisher, 2005)

3. As per the provision of Australian tax laws, in case of rental property income, if the property has been owned by co-owners and the co-owners are individuals, then in that case the rental income will be segregated among both the co-owners equally. In circumstances where he property is owned by person other than individuals, the rental income earned from the property will be segregated based on the legal interest that the owner has on the property. Any capital gain a lost that has been booked in respect of selling the property which has been jointly owned by two individuals will also be born equally buy for the owners.

In the given circumstances, jack and Jill agreed to borrow money to acquire a property. It has been decided that the income that has been received by renting the property will be shared between both the owners. It has been decided that out of the profit on from the renting property 10% of the profit will be taken by jack in 90% will be owned by Jill. In case where there is a loss in renting the property the entire loss will be borne by Jack.

How are rental property losses allocated for tax purposes?

By applying the above provisions in the given case, any profit or loss that has been booked in respect of renting the property will be segregated equally between both individuals for tax purposes. Although both the parties have entered into an agreement in respect of sharing the rental profit and loss amount, the same will have no impact text purposes and all the profit and loss that has been on from renting the property will be shared equally irrespective of any legal agreements that has been entered into by both the parties.

Thus, in the situation the loss worth $10,000 that has been incurred in respect of the renting property will be segregated equally between both the owners. Father any capital gain which the owners earns in respect of selling the property will also be segregated equally between the owners. (Australian tax authority)

4. Tax evasion and tax avoidance are entirely different things. On one side tax evasion is considered by the government for penalties while on the other hand tax avoidance is one which is accepted by law. In the year 1936 IRC v Duke of Westminster [1936] AC 1" case came into picture which is related to tax avoidance. In the case law provided, duke of Westminster hired a Gardner and used to pay him weekly salary for his services. Later on, the duke decide to enter into an agreement with the gardener where he agreed for drawing a covenant for an equivalent amount for the weekly salary that was being paid to the gardener. In the situation, the gardener was losing nothing and was getting an equal amount of salary irrespective to the fact that earlier the salary was paid in cash now it is been paid through covenant. By this arrangement, the duke was able to save income tax and was able to reduce his Income Tax liability as a result of covenant that has been created on gardener salary.

This issue was highlighted by the Income Tax authorities. The court came into picture and concluded that if there's been any loopholes that has been identified by a company or an individual in the tax law house tax laws, he cannot be held liable for any additional income tax liability on the individual or company because of the income tax loopholes. It has further been concluded that it is human nature and any action that has been taken by him in relation to save his income tax liability using the loopholes in the income tax laws cannot be penalized in any case. After the court judgment the case was won by Duke and hence he was not being made liable to pay any additional tax.

What is the principle established in IRC v Duke of Westminster?

Australian tax provisions states that this principle which is being followed in case of Duke is also relevant in current scenario. As a result in the year 1936 there came the difference between tax evasion and tax avoidance and the same theory is still being followed.

5. Large parcel of land is being owned by Bill having tall pine trees. Bill intends to clear the trees as he wants to use this land for sheep grazing. $1000 for every hundred meters of timber is being agreed by the logging company as extracted from the land. Below Provides the details about whether the assessment of the bill will be made basis the receipts including the treatment of the payment permission granted for lump sum amount of $ 50000 for clearing the land.

This rule applies to any person who is engaged in forest operation and also person not engaged in forest operations but disposes of the timber.

Thus in case where trees tended or planted disposed off for the purpose of sale , even though whole or part of the business belongs to trees, disposal is not part of ordinary course of business then the value of the tree will be considered as assessable income of the taxpayer.

In case if the taxpayer receives royalty by granting the right to sell the timber on taxpayers land will be assessable income of the taxpayer.

Hence, as per provisions given above the amount as receivable from the logging company for clearing of the timber will be taxable in the hands of  bill. However, if the logging company pays a lump sum amount $ 50000 for the purpose of clearing of timber it will be considered as assessable income of the bill and will be taxable in his hands

Adams, J., 2011. what is The Difference between Tax Avoidance and Tax Evasion? [Online] Available at: https://www.taxinsider.co.uk/680-What_is_The_Difference_Between_Tax_Avoidance_and_Tax_Evasion.html [Accessed 3 Sept 2017].

Australain Tax Authority, 2016. ATO ID 2007/4. [Online] Available at: https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID20074/00001 [Accessed 3 sept 2017].

Australain Tax Authority, n.d. CGT assets and exemptions. [Online] Available at: https://www.ato.gov.au/General/Capital-gains-tax/CGT-assets-and-exemptions/ [Accessed 3 Sept 2017].

Australain Tax Authority, n.d. Co-ownership of rental property. [Online] Available at: https://www.ato.gov.au/Individuals/Tax-return/2017/In-detail/Publications/Rental-properties-2017/?page=4#Co_ownership_of_rental_property [Accessed 3 Sept 2017].

Australain Tax Authority, n.d. Fringe benefits tax – rates and thresholds. [Online] Available at: https://www.ato.gov.au/Rates/FBT/?page=1#Statutory_benchmark_interest_rate [Accessed 3 Sept 2017].

Australain Tax Authority, n.d. Tax ruling 93/32. [Online] Available at: https://www.ato.gov.au/law/view/document?docid=TXR/TR9332/NAT/ATO/00001 [Accessed 3 Sept 2017].

Fisher, P., 2005. 1936: a good year for tax? [Online] Available at: https://www.taxation.co.uk/articles/2005/08/25/3425/1936-good-year-tax [Accessed 3 Sept 2017].

Index, O., n.d. Westminster doctrine. [Online] Available at: https://oxfordindex.oup.com/view/10.1093/oi/authority.20110803121911242 [Accessed 3 Sept 2017].

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[Accessed 05 March 2024].

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