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Assessment of net capital loss or net capital gain

Question 1


You are working as a tax consultant in Mayfield, NSW. Your client is an investor and antique collector. You have ascertained that she is not carrying on a business. Your client provides the following information of sales of various assets during the current tax year:

(a) Block of vacant land. On 3 June of the current tax year your client signed a contract to sell a block of vacant land for $320,000. She acquired this land in January 2001 for $100,000 and incurred $20,000 in local council, water and sewerage rates and land taxes during her period of ownership of the land. The contract of sale stipulates that a deposit of $20,000 is payable to her when the contract of sale is signed and the balance is payable on 3 January of the next tax year, when the change of ownership will be registered.

(b) Antique bed. On 12 November of the current tax year your client had an antique four-poster Louis XIV bed stolen from her house. She recently had the bed valued for insurance purposes and the market value at 31 October of the current tax year was $25,000. She purchased the bed for $3,500 on 21 July 1986. Although the furniture was in very good condition, the bed needed alterations to allow for the installation of an innerspring mattress. These alterations significantly increased the value of the bed, and cost $1,500. She paid for the alterations on 29 October 1986. On 13 November of the current tax year she lodged a claim with her insurance company seeking to recover her loss. On 16 January of the current tax year her insurance company advised her that the antique bed had not been a specified item on her insurance policy. Therefore, the maximum amount she would be paid under her household contents policy was $11,000. This amount was paid to her on 21 January of the current tax year.

(c) Painting. Your client acquired a painting by a well-known Australian artist on 2 May 1985 for $2,000. The painting had significantly risen in value due to the death of the artist. She sold the painting for $125,000 at an art auction on 3 April of the current tax year.

(d) Shares. Your client has a substantial share portfolio which she has acquired over many years. She sold the following shares in the relevant year of income:

Events that trigger Capital Gain Tax provisions

(i) 1,000 Common Bank Ltd shares acquired in 2001 for $15 per share and sold on 4 July of the current tax year for $47 per share. She incurred $550 in brokerage
fees on the sale and $750 in stamp duty costs on purchase.

(ii) 2,500 shares in PHB Iron Ore Ltd. These shares were also acquired in 2001 for $12 per share and sold on 14 February of the current tax year for $25 per share.
She incurred $1,000 in brokerage fees on the sale and $1,500 in stamp duty costs on purchase
(iii) 1,200 shares in Young Kids Learning Ltd. These shares were acquired in 2005 for $5 per share and sold on 14 February of the current tax year for $0.50 per
share. She incurred $100 in brokerage fees on the sale and $500 in stamp duty costs on purchase.
(iv) 10,000 shares in Share Build Ltd. These shares were acquired on 5 July of the current tax year for $1 per share and sold on 22 January of the current tax year
for $2.50 per share. She incurred $900 in brokerage fees on the sale and $1,100 in stamp duty costs on purchase.
(e) Violin. Your client also has an interest in collecting musical instruments. She plays the violin very well and has several violins in her collection, all of which she plays on a regular basis. On 1 May of the current tax year she sold one of these violins for $12,000 to neighbor who is in the Queensland Symphony Orchestra. The violin cost her $5,500 when she acquired it on 1 June 1999.Your client also has a total of $8,500 in capital losses carried forward from the previous tax year, $1,500 of which are attributable to a loss on the sale of a piece of sculpture which she sold in April of the previous year.

Required:

Based on this information, determine your client’s net capital gain or net capital loss for the year ended 30 June of the current tax year.

Question 2

Rapid-Heat Pty Ltd (Rapid-Heat) is an Electric Heaters manufacturer which sells Electric Heaters directly to the public. On 1 May 2017, Rapid-Heat provided one of its employees; Jasmine, with a car as Jasmine does a lot of travelling for work purposes. However, Jasmine's usage of the car is not restricted to work only. Rapid-Heat purchased the car on that date for $33,000 (including GST).

For the period 1 May 2017 to 31 March 2018, Jasmine travelled 10,000 km in the car and incurred expenses of $550 (including GST) on minor repairs that have been reimbursed by Rapid-Heat. The car was not used for 10 days when Jasmine was interstate and the car was parked at the airport and for another five days when the car was scheduled for annual repairs.

On 1 September 2017, Rapid-Heat provided Jasmine with a loan of $500,000 at an interest rate of 4.25%. Jasmine used $450,000 of the loan to purchase a holiday home and lent the remaining $50,000 to her husband (interest free) to purchase shares in Telstra. Interest on a loan to purchase private assets is not deductible while interest on a loan to purchase income-producing assets is deductible.During the year, Jasmine purchased an Electric Heaters manufactured by Rapid-Heat for
$1,300. The Electric Heaters only cost Rapid-Heat $700 to manufacture and is sold to the general public for $2,600.

Required:

(a) Advise Rapid-Heat of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2018. You may assume that Rapid-Heat would be entitled to input tax credits in relation to any GSTinclusive acquisitions.

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

Assessment of net capital loss or net capital gain

The first requirement seeks to assess the net capital loss or net capital gain of the client based on the information provided about its various assets during the present financial year. In addition to this, the first requirement also addresses the consequence of income tax due to occurrence of transactions during the particular financial year. The client provides information about tax that a capital loss of amount $ 8500 has been carried forward from the previous year. Sculpture sale has also resulted in a loss that is attributable from previous tax of amount $ 1500.

The section 102-20 of ITAA 1997 takes into account the fact that any capital loss or gains arises due to happening of any transactions, activities or any capital gain tax (CGT) event. Events concerning capital gain tax can occur in multiple occasions. The provisions for capital gain tax are triggered by the events that lead to incurring of such taxation. There exist considerable number of events that is common to making provisions of CGT. This involves disposing any assets related to CGT. According to section 104-10(1) of ITAA 1997, disposition of CGT assets results in concurrence of CGT event and such event might result in capital gain or capital loss. Capital loss occurs when the proceeds from capital is more than the reduced cost base of assets. Capital gain, on other hand occurs when the disposal results in lower capital proceeds that the cost base of assets. It is said that entering into contact generates placing importance on the CGT event in accordance with the decision of the case “Sara Lee household v FCT (2000)”. There is no separate provision for taxing the event resulting in capital gain; instead they are taxed with the sequence of ordinary taxation.

During a particular financial year, it is required to take into account total capital for paying tax according to section 102-5 of ITAA 1997. The capital gains can be used by tax payer to offset the amount of capital loss incurred due to such event. Such capital loss resulting from events is to be carried forward instead of deducting it in the current year. Occurrence of capital gain tax happens when the tax payer disposes off or destroys the assets as per the section 102-20 of ITAA 1997and it is applicable on the assets that have been acquired after 20th September in year 1985.

One of the events that lead to happening of the capital gain tax events is selling or acquiring a block of vacant land. Acquisition or selling of land is treated as capital assets because it can be used for any investment or private purpose by the owner. In addition to this, disposal of such assets results in occurrence of CGT event. Such happens when the owner enters into the disposal contract and the owner of assets is no long in the hand of entity. In this case, selling of block of vacant land results into disposing of such CGT assets (Yagan 2015). The land was acquired by the clients at $ 100000 and additional expenses has been incurred of amount $ 20000 in the form of land tax, local council, sewerage and water rates during the period of land ownership. In respect of sale of any capital assets, the owner of such assets is accounted for gain in capital tax in accordance with the rules of Australian taxation. In this particular case, it can be seen that owning of tax has not generated any income to taxpayer and has resulted in incurring of expenses in the form of water and sewerage waste and municipality taxation. In addition to this, income was generated only at the time of selling the land for amount $ 320000 and additional amount of $ 20000 for registering the ownership change. Therefore, tax payer cannot claim any deductions on this. Moreover, for determining the capital gain tax amount, it is required to take into account net property cost that is arrived by incorporating the amount of expense that has been incurred.

Events that trigger Capital Gain Tax provisions

The case is about loss of antique item and accounting of this rare item has been presented under the section 108-10(2) of ITAA 1997. As per this section, losses generated from collectables should not be used for reducing the capital gain of $ 500 and collectable is any antique, jewellery, manuscript, artwork, rare folio and postage stamp (Butler and Calcott 2018). For any financial year, any net capital loss or net capital gain from collectables can be used to reduce the capital gains only from collectables. Therefore, the loss or gain from capital assets cannot be accounted for when the collectables base price is less than $ 500.

Since, the insurance policy does not take into account antique bed as specific item and therefore under the content policy of household, client is entitled to receive amount $ 11000. Since the assets under this case is neither sold nor acquired, it is stolen and was not recovered under the insurance policy.

Any capital loss arising from the assets for personal usage is disregarded according to section 108-20(1) of ITAA 1997. Any capital loss arising from selling of assets for personal use should not be accounted for computing the tax liability of client. In addition to this, any personal asset that is acquired at a price of less than $ 10000 should be exempted from any capital gains (Scheuer and Wolitzky 2016). Since the painting has been acquired on 21st July, 1986 that is after 1985, the painting is to be incorporated in CGT assets and moreover, such items should not be accounted for capital gain.

In terms of acquisition of shares, the occurrence of CGT event arises in the event of capital payment for shares or when it is declared that the financial instrument or shares are worthless. Also, in event of selling of shares, there is occurrence of capital gain tax. Sale of shares will give direct rise to capital gain and relate directly to capital receipt (Martin 2014). Disposing or selling of shares held by client in all the organization such as Common Bank ltd, PHB Iron ore limited, Share Bid ltd and Young Kids learning limited would give rise to capital gain or capital loss. There is no capital loss in event of capital payment. However, capital gain arises when the cost base of shares is more than the payment.

Violin:

An asset for personal use or that are kept for personal enjoyment is considered as capital gain tax asset as per section 108-20(2). It does not include any structure, building and stratum unit and is considered separately due to sub division 108-D. when the cost of acquiring the assets for personal use is lower than $ 10000, then the taxable income does not incorporate the capital gains that has resulted from sale of such assets. In the given case, the cost of acquiring the violin stood at $ 5500 which is less than $ 10000. Since the selling value of violin is less than the cost base, it is not required to take into account the capital gain in determining the tax liability (Soled and Thomas 2016).

Disposition of CGT assets

In the given case, computation of liability of fringe benefit tax and the consequences of the same is to be determined for advising Rapid heat. Under the Fringe benefit Income tax assessment act 1986, assessment of the given car by company to its employee is required to be done as she is required to a lot of travelling. Providing of car to company should be treated as fringe benefit under the section 7 of the FBTAA 1986. Moreover, it is also required to assess that whether the person to whom the fringe benefit is provided should bear the expense that is incurred for parking of car. Determination of such facts under subsection A of FBTAA 1986 also intends to identify the evaluation of the loan fringe benefits consequences (Chardon et al. 2016).

Fringe benefits can be defined as the benefits that arise on part of obligations of employees toward his or job and is provided in addition to the salaries or ordinary wages given. The amount of individual fringe benefit provided by employer is the addition of all the taxation values for fringe benefits in relation to taxation year. The law says that such benefit arises due to the result of job entitlement and as a result of job of employees. The section 7 of the FBTAA 1986 says that such fringe benefit arises due to the employer and employees relationship (Auerbach and Hassett 2015). In the given case, employer has provided car to its employee where the benefits are held by employee in relation to its job obligations. Under the given case, providing of car by employer is treated as fringe benefit. It is provided under the subsection 136(1) of the FBTAA 1986 that usage of car by employee or any of the associated will be considered as fringe benefits. However, if the employee is using the car for his personal use and no such assessable income is gained by employees, then there will be application of fringe tax of such benefits derived. Benefits derived from using car are considered as an exempt benefit in the year of tax in respect to the current employee employment. However, the section 86-60 of the ITAA Act, 1997 says that such amount cannot be deducted by the person providing benefits for the benefits being provided (Ato.gov.au 2018).

The subsection B 22A of FBTAA 1986 takes into account the fringe benefits expenses. Expenses on the fringe benefits are the amount which the employees incur and the employer should make the reimbursement of such amount. Such costs can be incurred on part of both official and private reasons which might not incorporate any activities relating to official purpose (Heathcote and Perri 2016). Therefore, the rule concerning the fringe benefits says that an employee incurring expenses in terms of such benefit, it is entitled by employer under the title expense fringe benefit to reimburse the amount. Therefore, it is required to tax the amount that is reimbursed by the employer.

Computing tax liability for personal assets and shares


The subsection B 39C of FBTAA 1986 takes into account the taxable value attributable from car fringe benefits. The fringe benefit of car in relation to particular taxation year is held by person receiving the benefits. Initiation of car fringe benefits arises in association with the premises that are arranged within one kilometer or for lowering down the cost (Bhaduri et al. 2015). There are some additional circumstances when the fringe benefits can happen and they are as follows:

  • During employment course, employer has taken the car
  • Car parking is done in a day for more than four hours.
  • Car is used by employer for travelling to office from home at least in a day.
  • Car parking within the company premises

Jasmine is provided with the car because of her job demand and she can use the car for private reasons. Holding of such car for both private and official purpose is giving rise to fringe benefits according to the subsection 136(1) of FBTAA 1986. Using of private car has resulted in fringe benefits according to FBTAA 1986 in the case of “FCT v Lunney (1958). In addition to this, expenses incurred by Jasmine of amount $ 550 is reimbursed by Rapid heat private limited. However, the parking cost is not meant to be reimbursed by employer because car has not been parked within radius of one kilometer and not within the premise of company. Furthermore, the loan amount given to Jasmine is taken into account for the consideration of benefits.

It can therefore be concluded that the benefits received by Jasmine is accounted under "section 7 of the FBTAA 1986".


Rapid Heat provided loan of amount $ 500000 that is provided in the statute at the rate of 4.25% and such amount will be considered as the additional benefit that is provided to Jasmine. In addition to this, it can be seen that Jasmine is being charged interest rate that is lower than the applicable statutory rate. She is also attributable to distinctive benefits such as credit and repairing cost reimbursement. The difference between the actual rates applicable in accordance with the section 4 of FBTAA 1986 and arising of interest rate if the statutory rate is applicable forms the actual value of benefits attributable from loan fringe (Fleurbaey and Maniquet 2015).

Statement presenting computation of FBT Amount

Particulars

Amount ($)

Amount ($)

Car Repair Expenses

550

Gross Type 1

2.1463

Gross Amount

1180.465

Interest

21,250

Gross Type 2

1.9608

Gross  Amount

41667

Total Fringe benefit

42,847

Fringe Benefit Tax (47%)

20138.31

It is required by the tax payer under the section of FBTAA 1986 to record the details forming the part of assessable salary such as claiming deductions and cost details. There is allowance on part of ascertaining the costs associated over the range of assessable payment.

Jasmine would have been entitled to claim deductions under the section 8-1 of ITA 1997 if the amount of $ 50000 is used for acquisition of shares instead of giving the amount to husband. However, her husband purchased the shares for the same amount provided by Jasmine and therefore in relation to the amount of loan, jasmine is entitled to claim deductions according to section 8-1 of ITAA 1997.

Reference and bibliography list:

Ato.gov.au. (2018). Types of CGT events. [online] Available at: https://www.ato.gov.au/General/Capital-gains-tax/Selling-an-asset-and-other-CGT-events/Types-of-CGT-events/#SharesG [Accessed 27 Sep. 2018].

Auerbach, A.J. and Hassett, K., 2015. Capital taxation in the twenty-first century. American Economic Review, 105(5), pp.38-42.

Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D., 2017. Federal Income Taxation. Wolters Kluwer Law & Business.

Barry, J.M. and Caron, P.L., 2015. Tax regulation, transportation innovation, and the sharing economy. U. Chi. L. Rev. Dialogue, 82, p.69.

Bhaduri, A., Raghavendra, S. and Guttal, V., 2015. On the Systemic Fragility of Finance?Led Growth. Metroeconomica, 66(1), pp.158-186.

Biørn, E., 2017. Taxation, technology, and the user cost of capital (Vol. 182). Elsevier.

Burkhauser, R.V., Hahn, M.H. and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.

Butler, C. and Calcott, P., 2018. Optimal fringe benefit taxes: the implications of business use. International Tax and Public Finance, 25(3), pp.654-672.

Chardon, T., Freudenberg, B. and Brimble, M., 2016. Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, p.321.

Devereux, M., 2016. Economic Theory of the Optimal Taxation of Multinational Profit. In European Tax Policy Forum Policy Paper (Vol. 4).

Fleurbaey, M. and Maniquet, F., 2015. Optimal taxation theory and principles of fairness (No. 2015005). Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

Heathcote, J. and Perri, F., 2016. On the desirability of capital controls. IMF Economic Review, 64(1), pp.75-102.

Jacob, M., 2018. Tax regimes and capital gains realizations. European Accounting Review, 27(1), pp.1-21.

Jones, S., 2015. 'Cost-to-company'explained: tax planning. Tax Breaks Newsletter, 2015(349), pp.6-7.

Martin, L., 2014. Taxation, loss aversion, and accountability: theory and experimental evidence for taxation’s effect on citizen behavior. Unpublished paper, Yale University, New Haven, CT.

Piketty, T., 2015. About capital in the twenty-first century. American Economic Review, 105(5), pp.48-53.

Scheuer, F. and Wolitzky, A., 2016. Capital taxation under political constraints. American Economic Review, 106(8), pp.2304-28.

Soled, J.A. and Thomas, K.D., 2016. Revisiting the Taxation of Fringe Benefits. Wash. L. Rev., 91, p.761.

Weber, R., 2014. Tax increment financing in theory and practice. In Financing economic development in the 21st century (pp. 297-315). Routledge.

Yagan, D., 2015. Capital tax reform and the real economy: The effects of the 2003 dividend tax cut. American Economic Review, 105(12), pp.3531-63.

Yunker, J., 2014. Capital wealth taxation: theory and application. Review of Political Economy, 26(1), pp.85-110.

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