Accounting Taxation Theory Practice and Law

Question: Explore taxation theory practice and law. Answer: The difference between capital proceeds and cost of acquisition of capital gain tax asset is known as the capital gain. Three methods can be used for calculating capital gain. The methods are as follows: Discount method: application of this method takes place more than 12 months before the event of capital gain tax occurs. Indexation method: The application of this method takes place on the acquisition of assets before 21st September and this method is held for more than twelve months before the event of capital gain tax occurs Residual method: The application of this method takes place when assets are held for less than twelve months. Thus calculation of capital gain is done by the application of these three methods only (Clark 2014). Exemption of the following assets from gain on sale of capital asset Motor vehicles; Selling of family houses used for residential purposes; Reimbursed amount for particular injuries; Acquired collectable amounting to less than $500; which were acquired before 20th September 1985. Provisions relating to set off and carry forward of losses arising from capital gain Long Term Capital Loss (LTCL): Long term capital loss can be set off against long term capital gain only. The possibility of any other mode of set off is nil. The carrying forward of this loss can be done to subsequent indefinite assessment years. Short Term Capital Loss (STCL): Short term capital loss can be set off against the long term capital gain. The carrying forward of this may be done to the subsequent indefinite assessment years and it may be set off against both short term and long term capital gain. (a) In the instant problem, Mr. Dave Solomon lived in a building which was two-storeyed. He purchased the building at $70,000 and lived there for the last 30 years. The building was sold by Mr. Dave Solomon on 27th June of the current tax year for an amount of $ 8, 50,000. The selling of the resident was done through auction and an amount of $ 85000 was paid as advance money by the buyer. But subsequently the buyer failed to give the remaining amount and as a result the money was forfeited. Hence, the received amount of $ 85,000 has to be charged to Income from other sources. Calculation of capital gain Sale proceed $8, 65,000 The above amount falls under the exemption category as per the definition of CST I.E Family home exemption Long term capital gain (ltcg) Long term capital gain (ltcg)NIL (b) A pro hart painting was sold for $ 1, 25,000 which was bought at an amount of $ 15,000 on 20th September, 1985. Calculation of capital gain: Sale Proceed $ 1, 25,000 Less: Indexed acquisition cost 15,000*123.4/71.3 $ 25,961 LTCG $150,961 (c) On current years 1st June, a luxury motor car was sold to a local boat broker at an amount of $ 60,000 which was bought at an amount of $ 1, 10,000 in late 2004. Calculation of capital gain: Sales proceeds $ 60,000 Less: Indexed cost of acquisition $ 1,10,000 LTCL $ 50,000 (d) Mr. Dave Solomon purchased some shares in a newly listed mining company at an amount of $ 75,000 on 10th January of the current year. He sold these shares at an amount of $ 80,000 on 5th June of the current year. For the purpose of purchasing these shares he took a loan amounting to $ 70,000 and paid an interest of $ 5,000 on the loan. He also paid $ 250 as stamp duty for purchasing the shares and paid am amount of $ 750 as brokerage for selling the shares. Interest on loan is excluded in the acquisition cost under the provisions of the law relating to income tax. For this reason, the interest on loan has been excluded (Woellner et al. 2012). Part a Calculation of capital gain: Sale proceed $ 80,000 Less: stamp duty $250 Less: Brokerage $ 750 Less: Acquisition cost $75,000 STCL $ 4,000 Calculation of total capital gain LTCG on sale of residential building $ NIL LTCG on sale of painting $ 1, 50,961 STCG on sale of shares $ 4,000 LTCL on sale of motor car $ 50,000 LTCG $ 1,04,961 A net capital loss amounting to $ 10,000 from the sale of the shares is shown on the tax return of Mr. Dave Solomon for the previous year ending on 30th June. Adjustment of the same can be done with the long term capital gain of the current year. Thus, Net LTCG is $ 1, 04,961-$10,000 = $ 94,961 for the current year. Part b The calculation of the net capital gain is done by adding all the gain acquired by the sale of capital assets and then subtracting all the losses which were suffered by the sale of capital assets and it also includes the sale of capital assets in the previous year. Capital gain tax does not fall under the category of separate tax. A part of the assessable income is formed by the capital gain and tax is payable on the profit arising out of the selling of the assets in the relevant income year when the sale was made. Thus a gain on the sale of asset has been earned by Mr. Dove Solomon. Consequently fund can be contributed by him to his personal superannuation fund. Relevant records of the major transactions relating to purchase, interests on loan, litigation fees, etc. have to be maintained by him. Other relevant records include records relating to the maintenance and repairing of assets and the amount paid on brokerage for purchase of shares (Woellner et al. 2012). Part c Calculation of net capital loss is done by adding all the losses incurred from the sale of capital asset in which the loss suffered in the previous year is also included. The capital loss cannot be set off from the other source of income by the assesse. It has to be carried forward for the subsequent years and is to be deducted from the capital gain earned in the subsequent years. The carrying forward of capital loss cannot be done for an indefinite period of time. Capital loss cannot be chosen to be set off against any capital gain by the assesse. Such loss can, however, be deducted from the capital gain as per the choice of the assesse. If there is no positive capital gain for Mr. Dave Solomon, more assets have to be sold and more loan needs to be acquired for the purpose of contributing some fund to his personal superannuation fund. Then Mr. Dave can afford to buy a rented apartment in the city and tax free amount can be withdrawn from his personal superannuation fund only after t he attainment of 60 years of age in next year on the month of August (Vernimmen et al. 2014). Part a The Company, Periwinkle Pty Ltd. Carries on the business of selling bathtubs to the public. One of the employees named Emma does a lot of traveling for doing the work of the Company and as a result he received a car from the Company on 1st May, 2015. The car which was given by the Company to Emma can be used not only for work purpose but for other purposes as well. The car was purchased by the Company at an amount of $33,000 on 1st May 2015. 10,000 kilometers were travelled in the car by Emma for the period starting from 1st May, 2015 to 31st March, 2016. The expenses incurred by Emma for repairing the car amounted to $ 550 and the Company reimbursed the same. Emma did not use the car for 10 days during which the car was parked at the airport. The car was also not used during the repairing period which lasted for 5 days. Emma received a loan amounting to $ 5, 00,000 from the Company at rate of interest of 4.45% from the Company on September 1, 2015. A holiday home amounting to $ 4, 5 0,000 was purchased by Emma and the remaining amount of the loan was given to Emmas husband who bought shares of the Telstra Company. A bathtub amounting to $ 1300 was purchased by Emma during the year and was sold to the public at $2600. The bathtub was bought from the Periwinkle Company, which manufactures a bathtub at a cost of $ 700. Fringe benefit tax: The tax payable by the employer on certain benefits given to the employee is known as Fringe benefit tax. The Fringe Benefit tax is not applied to the cash- benefits paid to the employees by the Company and it payable only on non-cash benefits. Exemptions from Fringe benefit tax Following are exempted from the Fringe benefit tax: Work expenses Benefits of a car which has been given by the company to an employee provided the car has not been used for any other purpose other than work purposes. Expenses relating to relocation of employees Exempted loans Benefits, whose taxable value is less than $ 300. Allowance relating to housing provided the location of the housing is at a remote place. The Fringe benefit tax are payable on loan, housing, transport, property, car, airline, car parking and the residual. Under the fringe benefit tax, a car is defined as station wagon which is used to carry less than 1 ton of goods or any vehicle which carries less than 9 passengers. If the car which is provided by an employer to an employee is used by the employee for private purposes for a period exceeding 3 months and such car does fulfil the criteria according to the definition given under the fringe benefit tax, then such benefit will not be exempted from the fringe benefit tax. (Hodgson and Pearce 2015). The car which has been given to Emma fulfils all the criteria and therefore tax would be payable on such benefit. Under the provisions of fringe benefit tax a car is supposed to be used for private purpose if it is not garaged in the employers premise or if it is at the workshop for repair purpose. Methods of calculating fringe benefit tax Cost Basis method Application of Statutory formula In the instant problem, Base value of the car $33,000 Number of days car has been used under Fringe benefit tax =335-5 = 3 Note: Car was at workshop for 5 days which has been deducted and parking at airport qualifies to be used for private purpose, therefore it has not been deducted. The car travelled a distance of 15000 km during fringe benefit period, consequently the rate would be 20%. Taxable Value $33000*20%*330/365 $5,967 Less expense incurred by employee $550 FRINGE BENEIFT TAX $5,417 Treatment of Loan provided to employee at a low interest rate by employer The computation of fringe benefit tax will be done in the following way when an employee is given loan at an interest rate lower than benchmark or interest free loan: The Company provided the loan at 4.45% interest rate while the benchmark interest rate is 5.95%. Therefore, following is the fringe benefit tax: 5,00,000* 1.50% = $7,500 Now, $4, 50,000 was used by the employee for purchasing a house and the remaining amount was given to Emmas husband for purchasing shares. The taxable value will be the same i.e. $7,500 since the amount of $4, 50,000 was incurred on house work. Part b If the entire amount of $ 5, 00,000 would have been used by Emma then the fringe benefit tax would have been calculated as follows: i) Taxable value of the loan under fringe benefit tax 5, 00,000*1.50% $7,500 ii) Assume that the loan was interest free and ignore any interest charged $5, 00,000*5.95% $29,750 iii) Now suppose the interest paid by the employee equals to the amount of taxable value $29,750*10/100 $2,975 iv) Now, consider the real situation interest has been imposed on loan $5, 00,000*4.45%*10% $2,225 v) Subtract iii-iv $ 2,975- $2,225 $750 vi) Taxable value i-v 7500-750 $6,750 DEBT WAIVER FRINGE BENEFIT In the instant problem, the bathtub was purchased by Emma for $1300 and was sold at $2600. The fringe benefit liability is $ 2600-$1300=$ 1300. References Balli, F., Kalemlià ¢Ã¢â€š ¬Ã‚ Ozcan, S. and Srensen, B.E., 2012. Risk sharing through capital gains.Canadian Journal of Economics/Revue canadienne d'conomique,45(2), pp.472-492. 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Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014.Corporate finance: theory and practice. John Wiley Sons. Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2012.Australian taxation law. CCH Australia. Calculation of capital gain etc. have to be maintained by him. Other relevant records include records relating to the maintenance and repairing of assets and the amount paid on brokerage for purchase of shares (Woellner et al. 2012).