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Taxation, Theory, Practice & Law : Capital Loss Of Assests

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Question:

Discuss about the Taxation, Theory, Practice & Law for Capital Loss of Assests.

 

Answer:

Case 1:

The capital gain or capital loss happens due to sale of capital assets. The understanding of capital assets and the valuation of the assets is completely dependent on nature of assets. The assessment of Capital gain or capital loss is calculated from the difference between historical cost of the assets sold and the sale price. If the sale price is higher than the acquisition cost of the asset then theincome generated out of the sales is to be considered as capital gain. The capital gain tax is a income tax but tax implications are different from regular income. There are some exceptions and rules regarding assessment of capital gains are contained in various sections Income Tax Assessment Act 1997 to be discussed below(Yourinvestmentpropertymag, 2016).

The revenue nature of income is different from capital gain, therefore capital gain or capital loss cannot be adjusted against normal income. The revenue income will not be clubbed with capital income for tax calculation. The capital losscan only be adjusted againstfuture capital gains from sale capital assets. If the capital loss cannot be adjusted in the same accounting year, then the capital loss can be carried forward to the next year. According to the income tax act, personal assets are almost exempt from the capital gain tax. The CGT is not applicable for those assets on which depreciation is charged. It is important to understand the fact that Australian tax resident earns from the sale of property situated other place then Australia, gain on the sale of the assets will be taxed as capital gain tax in Australia(Pwc, 2013).

According to Australian Income Tax act, residential house sold by assesses is not considered as the capital assets. The profit from the sale proceeds is not capital gain. The income from the sale of assets is neither considered as capital gain or normal income. The single dwelling house is not covered under capital assets but there are some criteria that will have to be fulfilled.

The resident taxpayer’sdwelling property is under tax exemption from capital gain tax arising out of sale of the property. There are some important considerations that will have to be covered,  including the fact that the individual has to dwell or live on that property. There person has to reside at the property. The property has not been used for the business purpose even in part thereof. The address of the property shall match with the electoral roll of the assessee. The other address proofs like electricity bill and the gas connection shall also substantiate the fact that this is only the dwelling property of the assesse(Koulizos, 2016).

The exemption will be allowed from capital gain tax in full provided the resident fulfilling the following criteria;

The assessee and his family own the house for the full financial year.

The property is not in any way being used by the assessee to produce assessable income- and the person has not used any part of the property for use of business.

The land area is below two hectares or less of the property.

Here the case is however not part of the exemption but it is more relevant to the fact of assessment of the tax. The sale of real estate can also be considered as normal business income, if the property was bough and developed with the intension to make profit out of the investment. Here in this case the factor is considered different and the assessment is completely based on capital gain tax.

There is exemption allowed in case the property is inherited by the assessee. The property is inherited but considering the fact that property was residence of the person who left it to the current owner. The assessee needs to keep record of cost incurred during handover of the property(Yahoo, 2016).

In this problem the assessee had incurred loss from investment in shares. The loss from the investment is capital loss and that loss can be carried forward to the next year and can be deducted from the capital gain. Shares are sold either generates income or generate loss is to be treated as capital gain and it becomes subject to capital gain tax.

Using Indexation

Sale Proceeds

$800,000

Less:

 

Purchase Price

$100,000

Stamp Duty

$2,000

Legal Fees

$1,000

 

$103,000

Improvement Cost

$20,000

Index

 

March, 1987

$45

August, 2015

$108

January, 1990

$56

Sale Proceeds

$800,000

Less: Index cost of acquisition

$245,563

Less: Indec cost of Improvement

$38,434

Taxable Capital Gain

$516,003

Less: Loss on capital gain

$10,000

Total taxable capital gain

$506,003

Tax on Capital gain

 

Tax on 180000

$54,547

After 180001 to 516002.92

$146,701

Tax Payable

$201,248

Discount Method

Tax on 180000

$54,547

Tax on Rest

$225,000

Total Tax

$279,547

50% Exemption

$139,773

The capital gain assessment can either be done on the basis of indexation or the discount method can be used to calculate capital gain. The discount method will be applied if property belongs to a trust and to a society or to any person. Under the discount method capital gain tax is reduced by 50%.

Here in this case, Fred is a resident who signed a contract to sell his holiday home in the Blue Mountains in August last year. The sale was settled in February this year when Fred received $800,000 from the purchaser. Fred incurred legal fees of $1100 (Inclusive of GST) and real estate agent’s commission of $9,900 (Inclusive of GST) in relation to the sale(Workingin-australia, 2016).

The holiday home in March 1987 for $100,000 and paid $2,000in stamp duty on the transfer and $1000 in legal fees. In January 1990, Fred engaged a builder to build a garage on the property for $20,000.

 

Case 2:

The fringe benefit tax is nothing but the extra monetary benefit or benefit in kind, which can be valued in money is provided to the employee as a recognition of his ability and loyalty. Fringe benefit is a different kind of facility apart from salary and wages paid to the employees, the nature of the benefit cannot be equaled to or shall not be considered as salary or wages. The Australian income tax act has definition for fringe benefit, according to the definition and fringe benefit tax rules benefit provided to the respect of employment. There are effective ways to calculate fringe benefits provided to the employee. The calculation of benefit provided to the employee in course of employment will be calculated in comparison to the market value of the benefit provided to the employee. If employee has benefited from it the benefit amount will be considered as taxable income and to be taxed according to the normal income tax rate(Ato, 2016).

This offers an employee to use a work car for the private purpose.

  • Work car for private purposes
  • Offering cheap loan
  • employee's gym membership
  • By way of free tickets to concerts
  • Foods at restaurants and accommodation facility
  • Reimburses an expense incurred by an employee incurred by an employee(Ato, 2016)

The benefits provided in respect to the employment and the use of those facilities is mainly for work is not considered as fringe benefit. The computers, laptops and mobile phone given to the employee to be used for the work related purpose will also not be used will not be considered as fringe benefit and hence will not be taxed. There are specific exemption limits mentioned in the income tax act and the exemption will be disallowed once the benefits are used primarily for office purpose and later on for the personal reasons(Ato, 2016).

The benefits which are not considered as employment benefits will be taxed in the hands of the employee. The cheap loan provided to the employee will be taxed to the extent the loan is enjoying interest free benefit or low interest rate. The taxable value of the loan will not be considered as fringe benefit can be reduced in accordance with the income tax rules of Australia. The taxable value will be reduced to the extent the interest is paid against the loan. If the employee uses the loan for investment in fixed interest bearing instrument, the interest received from the instrument will be reduced by the amount of interest paid by the employee(Ato, 2016). 

Here in the case the company Periwinkle provided car to his employee Emma which she uses for work purposes. The cost price of the car was $33,000 (including GST). She travelled 10,000 kilometers in and the car expenses incurred of $550 (including GST).  Emma has never used that car for personal reasons. Emma's usage however is not restricted to work but she could have used it for personal purpose. In fact she has not used the car for her personal purpose. Therefore the facility provided to her not is considered as fringe benefit(Ato, 2016). Apart from the car the following facilities are also provided to Emma;

Periwinkle provided Emma loan of $500,000 at an interest of 4.45%. the loan amount is used partially to buy holiday home worth of $450,000 and rest $50,000 she gave to her husband on interest free to purchase shares.

Emma purchased a bathtub from Periwinkle for $1,300. The bathtub costs in the market at $2600 and company cost is $700(Ato, 2016).

To calculate fringe benefit tax; first case is however tax exempt as car was used by Emma for official purpose only. This car use will not be considered under FBT.

The use of lower interest loan from the company would be treated as the fringe benefit;

1

Calculate the taxable value of

 
 

the loan fringe

 
 

FBT Tax

28250

 

Deduction $500000 @4.45%

22250

   

6000

 

FBT Benchmark Interest Rate 5.65%

 

2

Interest rate charged on $50000

28250

 

at 5.65%

 

3

Employee paid interest

 
 

equal to the amount of

 
 

FBT Tax $450000 @ 5.65%

25425

4

   
 

Employee is being charged interest

 
 

on the loan

 
 

Taxable Amount more than $50000

2225

5

   
 

Subtract  deductible amount

23200

 

step 4 from amount in step 3

 

6

The taxable value is the result from

28250

 

step 1 minus the result from step 5.

 
 

Less: Interest paid on purchase of Shares

2225

 

Total Taxable fringe benefit

26025

The taxable fringe benefit as calculated above would be $26025. Emma purchased a bathtub manufactured by Periwinkle for $1,300. The bathtub cost Periwinkle $700 to manufacture and is sold to the general public for $2,600. Therefore the tax amount will be added with another $1300 ($2600-$1300). Total taxable fringe benefit to Emma would be $27325(Ato, 2016).

The fringe benefit tax rate for accounting yearending 31 March 2016 and 31 March 2017 is 49%. Emma will have to pay tax on $27325 @ 49% tax amount will be added apart from the tax calculation on her salary and other income. The tax liability of the employee would be increased significantly as she used the benefits provided to her and the benefits are being diverted for the use of personal purpose(Ato, 2016).

 

Bibliography

Ato, 2016. FBT exemptions and concessions. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/fbt-exemptions-and-concessions/ [Accessed 19 September 2016].

Ato, 2016. Fringe benefits tax – rates and thresholds. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/Rates/FBT/ [Accessed 19 September 2016].

Ato, 2016. How to calculate your FBT. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT/ [Accessed 15 September 2016].

Ato, 2016. Reduction in taxable value where interest would have been deductible to employee. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(fbt)/In-detail/Employers-guide/Loan-and-debt-waiver-fringe-benefits/?page=8#8_8_Reduction_in_taxable_value_where_interest_would_have_been_deductible_to_employee [Accessed 19 September 2016].

Ato, 2016. What is fringe benefits tax? [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/In-detail/Employers-guide/What-is-FBT-/ [Accessed 19 September 2016].

Ato, 2016. Work-related items exempt from FBT. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/do-you-need-to-pay-fbt-/work-related-items-exempt-from-fbt/ [Accessed 19 September 2016].

Business, 2016. Fringe Benefits Tax (FBT). [Online] www.business.gov.au Available at: https://www.business.gov.au/info/run/tax/fringe-benefits-tax [Accessed 13 September 2016].

Koulizos, P., 2016. What is Capital Gains Tax? [Online] www.realestate.com.au Available at: https://www.realestate.com.au/advice/what-is-capital-gains-tax/ [Accessed 19 September 2016].

Pwc, 2013. Australia: Legislation to remove 50% capital gains tax discount for foreign and temporary residents is now law. [Online] www.pwc.com Available at: https://www.pwc.com/gx/en/hr-management-services/newsletters/global-watch/assets/pwc-australia-removes-capital-gains-tax-discount.pdf [Accessed 19 September 2016].

Workingin-australia, 2016. Understanding Australian capital gains tax. [Online] www.workingin-australia.com Available at: https://www.workingin-australia.com/money-and-costs/tax/capital-gains#.V-KJ5fl97MU [Accessed 18 September 2016].

Yahoo, 2016. What % rate is capital gains tax in australia? [Online] au.answers.yahoo.com Available at: https://au.answers.yahoo.com/question/index?qid=20080209205535AAkTXFh [Accessed 18 September 2016].

Yourinvestmentpropertymag, 2016. Capital Gains Tax Estimator. [Online] www.yourinvestmentpropertymag.com.au Available at: https://www.yourinvestmentpropertymag.com.au/calculators/capital-gains-tax/ [Accessed 19 September 2016].

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