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Taxation Law : Cost Of The Asset And Selling

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Question:

Describe about the Taxation Law for Cost of the Asset and Selling.

 

Answer:

Case study 1: Capital Gains Tax

According to Australian Taxation office, capital loss or capital gain is the difference between cost of the asset and selling price of the asset. An individual has to pay tax on the capital gains. The capital gains forms part of the income tax and it is not consider as separate tax (Burrell and McGinn, 2009). If an individual incurred a capital loss then he or she cannot claim it against the income but can use it to decrease the capital gain in same financial income year. If the capital losses exceeds the capital gain in the income year then loss can be forwarded and deducted against the capital gains in coming year. In the given case study, Fred signed a contract to sell holiday home in Blue Mountains in last year. In February, the sale was settled and receives an amount of $800,000 from the. Legal fees incurred by Fred was an amount of $110 and commission from the real estate of an amount $9900 in relation to sale. In march 1987, the holiday home was purchased for an amount of $100,000 and also paid stamp duty for an amount of $2,000 on transfer and legal fees of amount $1000. Fred engaged the builder in order to build garage on the property for an amount of $20,000 in the year January 1990. The capital gain tax is to be calculated on the sale of the asset customer (KimSungKyun, 2007).

The net capital gain of Fred has been calculated is as follows:

 

Amount ($)

Sale of holiday home

800,000

Less:

 

Legal fees

1100

Commission

9900

sale of shares

-10000

GST

-80000

 

721,000

According the Australian Taxation Office, Goods and Service Tax is 10%. The above table shows the net capital gain of Fred for the current arises from the sale of holiday home. The sale amount of holiday home is $800,000, legal fees and commission paid is $1100 and $9900. Fred incurred loss from the sale of shares is -$10000. The goods and service tax has also estimated on the sale of the home (Park Nosu and Hun Park, 2014).

If there is loss from the sale of the antique vase then the net capital gain of Fred would be:

 

Amount ($)

Sale of holiday home

800,000

Less:

 

Legal fees

1100

Commission

9900

sale of shares

-10000

Antique vase

-10000

GST

-80000

 

711,000

The net capital gain of Fred decreased with the loss arose from the sale of the antique vase. Therefore, capital gain tax is paid on the sale of the assets and is calculated by deducting the base cost from market value or gross selling price of the asset. The base cost of the asset includes acquisition cost of asset, incidental expenses of purchasing and selling of the asset and improvement cost. The net capital gain tax is to be calculated on the sale of the assets and the taxpayer has to pay tax on the gains earned from the asset (Prince, 2011).  Taxable income is the total assessable income of an individual or a company less any deductions. The assessable income generally includes wages, salaries, interest, dividend, income from business and rent. The deductions include all the expenses that have been incurred during a course of producing or gaining income. The assets subject to the capital gain tax are very broad and include both intangible and tangible assets. The main aim of the Australian Taxation Office is to introduce an appropriate framework of tax system in Australia. Both resident and nonresident are subjected to income tax and capital gain tax relying on the income source (Thomas, 2010). The tax payable of an individual increases with the increase in income of an individual.           

Case Study 2: Fringe Benefits Tax

Part a

Periwinkle Pty Ltd is a bathtub manufacturing company that sells their products directly to the customers. In the year 2005 of 1st May, the company has provided car to Emma because Emma travelled a lot for the purpose of work. The car was not only used for the work purpose but also is available for any other work.  On 1st May 2015, the company has purchased the car for $33,000 (Bebbington, 2009).

During the period of 1st may 2015 to 31st March 2016, Emma travelled 10,000 kilometers. Emma has incurred the operating expense of $550 on maintenance, and the maintenance was reimbursed through the company (Bitsch, Bromm and Schalich, 2004). The car was not used for 10 days since it has been parked at the airport. Moreover when the car was on repair, as per schedule, at that time the care was not used for five days.

On the year 2015 of 1st September, the company has been provided a loan of $ 5,00,000 to Emma , with the interest rate of 4,45%. A holiday home was purchased by Emma of which the value seems to be $ 4, 50,000 through the help of the loan amount (Kess and Weltman, 2002). The rest amount were provided to her husband by her for the purpose of buying shares at Telstra.

During the year Emma was purchased a bathtub that is manufactured by the Periwinkle Company for $ 13, 00. However the manufacture rate of a bathtub was $700 of cost which has been provided to the Periwinkle and that bathtub was sold to the public at the cost of $2600.

Fringe Benefit tax:

Fringe Benefit tax is a tax that has been paid by the employer on a certain benefits that has been provided by the employer to the employee (Shanske, 2011). The Fringe benefit tax is applied only for the non- cash benefits and that are paid by the company to their employees.

There are some certain exemptions from Fringe benefit tax which are as follows:

Loans that are excepted

Expenses that are interrelated to work

The car that has been provided by the company for the staff benefits and that car must be used for the work purpose.

Benefits that having the taxable cost value must be less than $300

Relocation expense for the employees

Housing allowance has been provided to the employees for those whose houses are located at remote place (Stoianoff et al., 2016). 

 

The responsibly of Fringe Benefit Tax:

For the car benefit, loan redemption, expenditure of payment, housing benefit, airline, transport, car parking, property and residency benefits are accepted as fringe benefit and applicable fringe benefit tax are computed for the employers. The car like a station wagon or any vehicle defined by the fringe benefit tax which is used to carry goods which is not more than one tons or any vehicle used to carry less than nine passengers. In order to define fringe benefit tax the car is provided for the employee which does not meet the definition (WALLER, 2007). The definition of the car is used for the private purpose by the employee. Under fringe benefit some benefit are provided to the employees by the employers and for that reason tax will be calculated on such benefit. For less than 3 months if provides the car then it will be not under consideration that the car is  being holding by the employee and thereby the  fringe benefit tax will not be computed. According to the classification of the car, the car is provided to Emma qualifies. The company apply the fringe benefit tax  in about car provided  to Emma and also a car is  used  for the private purpose .It is given for private use to employee and at the premises of employee the car is garaged. .  Fringe benefit tax situation that when the car is at the workshop for renovating purpose the same is expelled from the definition of car used for private purpose.

In two methods   fringe benefit tax can be computed

  • Cost Basis method
  • By Applying Statutory formula

As per question

Base value of the car       $33, 000 Number of days car provided as fringe benefit tax  =335-5 = 3

Note: Car ha taken for repairing and was not used for 5 days won’t be counted in total days used by Emma for private use. Whereas car parked at airport will be included in total days used by Emma for private use. Has the keys of the car been given to the employer the same would not have been included in Total Days. The car runs for less than 15000km during fringe benefit period. As a result the rate would be 20%

Taxable Value

$33000*20%*330/365                                                                 $5,967

Less expense incurred by employee                                          $550

FRINGE BENEIFT TAX$5,417

To employee, treatment of Loan provided by employer at a low rate of interest

Fringe benefit tax with respect to loan will be calculated when a loan provided by the employer to its employee at a lower rate of interest. In another words, When an employer provide a loan to employee at a rate lower than bench mark or interest free loan the tax fringe benefit tax will be computed as follows:

The benchmark rate of Interest is 5.95% while the company provided a loan at interest rate 4.45%

SO fringe benefit tax is as follows:

5, 00,000* 1.50%  = $7,500

Now the used part of employees $ 4, 50,000, this cost was used for the buying a house and rest was transferred to her husband for purchase of shares. Since Emma incurred $ 4, 50,000 for house work, hence the taxable value will remain same i.e. $7,500.

Part b

Now if Emma uses the total amount of loan i.e. for buying the property value $ 4, 50,000 and also buying shares value $50,000. Fringe benefit tax would be computed are as follows in the given bellow:

Taxable value of the loan fringe benefit without the deductible value $ 7,5005,00,000*1.50%

Disregarding any interest charged and supposed that the loan was interest free $29,750, $5,00,000*5.95%

Now suppose that the employee has been paid interest equal to the amount of taxable value $ 29,750*10/100

Now appear at the real situation if employee is being charged interest on loan

$5,00,000*4.45%*10%=  $2,225

Now subtract 3 and 4

$2,975-$2,225= $750

Taxable value 1-5 7500-750                                                 = $6,750

Debt Waiver Benefit of Fringe:

In the given case Emma has been purchased bathtub for $1,300 that was sold in the market to the general public for $ 2,600. Therefore the difference i.e. $ 2600-$1300=$ 1300 which is fringe benefit liability.

 

References

Burrell, D. and McGinn, J. (2009). Cornerstone law series. [Adelaide]: Law Society of South Australia.

KimSungKyun, (2007). Review of Inheritance Tax System―focused on unrealized capital gain―. Seoul Tax Law Review, 13(2), pp.375-413.

Park Nosu, and Hun Park, (2014). Research on Unified Application of Tax Laws related Contractual Rescindment on Capital Gain Tax, Gift Tax and Acquisition Tax. Seoul Tax Law Review, 20(1), pp.243-292.

Prince, J. (2011). Property & taxation. Milton, Qld.: Wrightbooks.

Thomas, G. (2010). Cornerstone law series. [Adelaide]: Law Society of South Australia.

Bebbington, P. (2009). Fringe benefit. New Scientist, 203(2724), p.27.

Bitsch, V., Bromm, U. and Schalich, C. (2004). IMPROVING THE HORTICULTURAL WORKPLACE: FRINGE BENEFIT OPTIONS IN GERMANY. Acta Hortic., (639), pp.339-345.

Kess, S. and Weltman, B. (2002). CCH guide to tax planning for individuals and small businesses. Chicago: CCH Inc.

Shanske, D. (2011). Going Forward by Going Backward to Benefit Taxes.California Journal of Politics and Policy, 3(2).

Stoianoff, N., Kreiser, L., Butcher, B., Milne, J. and Ashiabor, H. (2016). Green fiscal reform for a sustainable future. Northampton, MA: Edward Elgar Pub.

WALLER, V. (2007). The Challenge of Institutional Integrity in Responsive Regulation: Field Inspections by the Australian Taxation Office. Law & Policy, 29(1), pp.67-83.

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