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Taxation,Theory,Practice And Law: Capital Gains Tax

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Question:

Discuss about the Taxation,Theory,Practice and Law for Capital Gains Tax.

 

Answer:

Capital Gains Tax 

In the base of Australia, CGT is imposed by persuading with the net gains as the later is treated as the taxable incomes during an assessment year when the capital assets held by the assessee for sale or disposal. If the assessee holds the capital assets for 1 year or more then the gains from the sale or disposal of the same is allowed with a discount of 50% exclusively for the individual taxpayers and 33.3% for the superannuation funds.

For attaining capital gains, only capital assets can be held for sale or despatch. Capital assets are the assets that are owned and possessed by the assessee for any business or professional purposes or even any private purposes. Capital assets include any property, whether movable or immovable, tangible or intangible, fixed or circulating assets in nature (Arnold, et al., 2011). 

Capital Gains Tax

For paying the capital gains tax, it is important that the assessee works out on the capital gains and capital losses if any from the disposal or sale of the capital assets. Capital gains tax is imposed on the net capital profits/losses attained by the taxpayers at the time of sale of the assets.

 

Capital gains from the sale of the capital assets are prone to tax at the standard rates of income tax available in Australia. Capital gains are computed by deducting the cost base from the full value of consideration or rather the sale value of capital assets when set out for sale. The cost base is the summation of the following three components:

  • Purchase cost of the property
  • Costs associated to the improvement
  • Any incidental charges for buying and disposing the property for sale
  • Any non-capital cost of ownership with effect from 21st august 1991

Again, the applied capital gains tax rule in Australia states that if the asset is held with the assessee for less than 1 year, the gains attained from the disposal of that particular asset is not indexed. The concept of indexation is usually applicable for the derivation of the long term capital gains (Clarke, et al., 2011). As a result, when the property is held for less than 1 year, the gains are short term in nature and thus are not indexed.

Long term Capital gains = Sale consideration – Indexed cost of acquisition

Indexed cost of acquisition = Actual cost of acquisition x [Index in the year of sale / index in the year of acquisition]

In the base of Australia, the concept of indexation is applied depending upon the date of acquisition. If the assets are purchased on after 21st September 1999, then the capital gains are unindexed and are discounted @ 50%. Again, if the property is acquired prior 21st September 1999, indexation is applied based on the movements of the consumer price index (CPI) and the indexation is static as at 30th September 1999.

 


Application of capital gains tax is valid on the personal use of the assets and any other collectables. But these are categorized differently. Any capital losses can be set off only against capital gains under the same category and no other category. Fred in the given case scenario acquired the property in 1987, i.e. before 21st September 1999. Then Fred is a taxpayer as per the CPI from 1985-1999. Since the property was acquired on 1987, the CPI is to be considered as 81.4. For deriving the capital gains from the sale of the property, Fred shall deduct the cost base from the sale consideration and the indexation will not be applied as the property was acquired before 21st 1999. Computation of the capital gains tax in given case scenario can be shown as below:

Particulars

Amount AUD ($’000)

Amount AUD ($’000)

Full value of consideration from the sale of the holiday home (1)

 

8, 00, 000

(-) Miscellaneous costs

 

 

-       legal charges

1, 100

 

-       Commission of the agents

9, 900

 

Total costs for the acquisition of holiday home (2)

 

11, 000

Residual value of the property (1-2) = 3

 

7, 89, 000

(-) acquisition costs

1, 00, 000

 

(-) stamp duty

2, 000

 

(-) improvement and development costs to build garage on the premises of the holiday home

20, 000

 

(-) legal fees

1, 000

 

Total costs for disposal of the asset (4)

 

1, 23, 000

Capital gains from the sales (3-4) = 5

 

6, 66, 000

(-) Discount @ 50% on (5) = 6

 

3, 33, 000

Capital gains (5-6) = 7

 

3, 33, 000

However, as per the tax implications, any capital losses from the sale of the assets shall be set of only against capital gains from sale of the property under the same category. The amount of capital loss from the sale of the shares amounting to AUD $ 10, 000 shall be set off against the capital gains earned by Fred from the sale of the holiday home at Blue Mountains. The calculations are depicted below:

Particulars                                                                                          Amount AUD ($’000)

Capital gains from the sale of holiday home               =         3, 33, 000

Less: Capital loss from the sale of the shares              =         10, 000

Net capital gains available in hand                             =         3, 23,000 

Fred is allowed to pay tax on the amount of AUD $ 3, 23, 000 based on the current assessment year as per the tax implications as per the Income Tax Assessment Act 1997.

In accordance to the provision of Part IIIA of the Income Tax Assessment Act 1999, the assets were acquired before 25th June 1992. If the loss would have arose from the sale of an antiques, then the amount of capital assets shall be quite different from the sale from the sale of the shares (Gutiérrez‐i‐Puigarnau and Van Ommeren, 2011). The capital losses attained from the sale of the antiques shall be considered as the sale of personal uses. Considering the fact that the antique vase was acquired before 1992, the antiques are categorized under the exemptions from capital gains tax. Accordingly, the capital losses then would not have been possible against the sale of the house property since antiques are assets for personal effects.

 

Case Study 2: Fringe Benefit Tax

Fringe Benefit Tax is also known as FBT is the tax that usually an employer has to pay off in respect to the benefits that are enjoyed by the employees working in his/her workplaces. Moreover, a FBT is considered as the major attempt for the employers to impose tax implications on the benefits that were most probably avoided by the tax payers. The services that are usually provided to the taxpayers are several privileges, benefits, amenities that are provided from employer’s end to the employees (Scott, et al., 2012). FBT was usually charged @ 30% of the benefits provided by the employers.

There are some exemptions for FBT and these are as follows:

  1. Expenses on the food and beverages that are not incurred during the working hours
  2. Payment of the fees for taking voluntary participation in any conferences
  • Any expenses incurred for meeting all the statutory and legal requirements as per the government norms

FBT is different from the income tax and is always applied on the taxable value of the fringe benefits rendered by the employers to the employees. FBT is charged with effect from1st April to 31st March of the current assessment year. In Australia, FBT is levied as per the Australian Tax System and is applicable for any non-cash benefits provided by the employer to his employees. FBT is applicable regardless of the fact that whether the non-cash benefits are provided directly or indirectly to the employees by the employers or to any other associate of the employees who work at the same workplace.

In Australia, FBT was levied initially in 1986 and with effect from 1986 the employers are levied with FBT. In Australia, the benefits include any non-cash benefits apart from the compensation, salaries, wages, rewards, bonuses etc. For example, any health related benefits, child education benefits, company car for official purposes and personal uses, loanable fringe benefits etc. (Tiley and Loutzenhiser, 2012).

When the benefits are regarded as exemptions to FBT, then it does not necessarily mean that it is not an FBT. But that then is computed as 0% FBT liability. Again, as per the rules of Australian FBT rules, when the employer of any organization provides his/her employees with car, then it is not necessary that the employer is imposed to FBT, provided the car is equally used for the personal uses. As per the FBT considerations of 2008, the exemption for FBT on electronics benefits were removed.

As per the budget of 2015-2016, the federal government of Australia has brought some changes for FBT on the meal entertainment and holiday accommodation. FBT is now however applicable for several benefit – housing; accommodation; meal; dinner etc.

 


In the given case scenario, Emma is using the car for her personal use, [assuming that she is using the car by 50% for her personal use] the car provided by the management of Periwinkle Ltd. is optimally imposed to FBT. A car under FBT charges can be categorized as per three conditions:

  1. A car is a sedan or a station wagon
  2. Possesses the capacity to carry a maximum of 9 individuals at a time
  • Also can carry goods weighing 1tonnes at a time

The car that is used by Emma is categorized under two different categories effective for personal uses and also can be made effective for personal purposes (Woellner, et al., 2016). But a car is again is treated as an exemption under the following situations:

  1. Journey between home and the workplace
  2. Journey for the employment related works
  3. Non-work-related uses that is minor, irregular and uncommon

Once the actual amount of the FBT increases the ultimate limit of AUD $ 2000, then the employee is obliged to file up tax returns on the benefits availed.

Particulars                                                                    Amount AUD ($’000)

A: Fringe benefit amount of the car = {original cost of the care * 2 * (350/1/2)} / 365 – the actual contribution of the employee

= $ {33, 000 * 2 * 175} / 365 – 0

= $ 31, 643.83

= $ 31, 644 (rounded figure)

Note: the car was used for 50% for the personal uses by Emma

B: Total FBT liability                          = $ 31, 644 * 47% = $ 14, 872.68

C: Fringe benefit tax on the loanable amount provided to Emma

Loanable fund = $ 5, 00, 000.00

Interest rate charged = 4.45%

Standard interest rate on loan in Australia = 5.95%

The excess is to be filed as fringe benefit tax

Therefore, Fringe benefit tax on loan = principle amount * difference of the interest rate * time

= $ [5, 00, 000 * (5.95 -4.45) % * 6/12]

= $ [5, 00,000 * 1.5 * 0.5]

= $ 3, 75, 000

D: Fringe benefit on the sale of the bathtub

Sale price of the bathtub = $ 2, 600

Acquisition cost = $ 1, 300

Manufacturing cost = $ 700

Amount of fringe benefit = Sale price – acquisition cost

Fringe benefit p= $ 1300

E: Total value of fringe benefits availed by Emma therefore is the summation of the fringe benefits in all the three cases

= $ [31, 644 + 3, 75, 000 + 1,300]

= $ 4, 07, 944

Therefore, the total value of fringe benefits can be derived as = $ 4, 07, 944 / 0.51

                                                                                                            = $ 7, 99, 891 

 [Note: The car is utilized by Emma for her personal use @ 50%.]

If Emma would have utilized the amount of AUD $ 50, 000 for personal use, instead of lending to her husband, then the amount of FBT would have been as follows:

Particulars                                                                           Amount AUD ($’000)

Fringe benefits on the loanable fund =           $ [4, 50, 000 * (5.95 -4.45) % * 6/12]

Gross amount of fringe benefit = $3, 37, 500

The entire amount of FBT shall be subjected to rules and Australian tax system as per IT Act 1997 provisions. 

 

Bibliography

Arnold, J.M., Brys, B., Heady, C., Johansson, Å., Schwellnus, C. and Vartia, L., (2011). Tax policy for economic recovery and growth. The Economic Journal, 121(550), pp.F59-F80.

Clarke, M., Seng, D. and Whiting, R.H., (2011). Intellectual capital and firm performance in Australia. Journal of Intellectual Capital, 12(4), pp.505-530.

Gutiérrez‐i‐Puigarnau, E. and Van Ommeren, J.N., (2011). Welfare Effects Of Distortionary Fringe Benefits Taxation: The Case Of Employer‐Provided Cars. International Economic Review, 52(4), pp.1105-1122.

Scott, R.A., Currie, G.V. and Tivendale, K.J., (2012). Company cars and fringe benefit tax: understanding the impacts on strategic transport targets.

Tax, C.G., (2010). Capital Gains Tax. NEWSLETTER.

Tiley, J. and Loutzenhiser, G., (2012). Revenue Law: Introduction to UK Tax Law; Income Tax; Capital Gains Tax; Inheritance Tax. Bloomsbury Publishing.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., (2016).Australian Taxation Law 2016. Oxford University Press.

Yates, J., (2011), August. Housing in Australia in the 2000s: on the agenda too late?. In The Australian Economy in the 2000s, Proceedings of a Conference, Reserve Bank of Australia, Sydney (pp. 261-296).

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