Calculation of Net Capital Gain or Loss for the Year

In Australia, Income Tax Assessment Act, 1997 is the main legislation governing provisions related to matters of income tax including capital gain tax. The concept of capital gain tax in Australia was introduced in the year 1985. Provisions of capital gain tax applies on sale of assets subsequent to the introduction of capital gain tax in 1985. The provisions of Income Tax Assessment Act 1997 (ITAA 1997), taxation rules (TR), notifications by Australian Taxation Office (ATO)  and case laws, where ever applicable, shall be considered to calculate the net capital gain or loss of the tax payer in this document.

Issue:

Is the sale of vacant land by the client on June 3 for $320,000 raise taxable capital gain to her and when is the capital gain event (CGT) for the above sale as she received the amount on January 3 next year when the sale was registered.

Rules:

As per the ATO, except for personal assets such as resident, home furniture and other personal assets and business assets, sale of all other assets raises capital gain or capital loss to the tax payer. Capital gain or capital loss is the difference between the sale proceeds received from sale of a capital assets and the cost of the asset. The concept of capital gain tax was introduced on 20^th September, 1985 thus, assets acquired since then are liable to capital gain tax (Australia, 2016).

According to ATO, in case of sale of vacant land or real estate properties, the time of the CGT event is when the taxpayer enters into the contract to sale the land or real estate and not when the contract is settled. Thus, in case the contract was entered in the current income year but the sale proceeds was to be settled in the next year, the seller would be liable to capital gain tax in the current income year as the time of CGT event is the time when the contract was formed and the seller entered into contract to sale the capital asset (Burkhauser, Hahn and Wilkins, 2015).   

Application:

It has been specifically told that the client does not carrying any business thus, the vacant land sold by her is not a business asset, neither it is a personal asset. The asset was acquired by the client in January 2001 thus, the asset is liable to capital gain or capital loss since it is after September 20, 1985. Out of the sale price of $320,000, the seller will get $20,000 on the date of entering into the contract and the balance January 3, next year (Jacob, 2018).

Applicability of CGT on Sale of Vacant Land

Conclusion:

The entire sale consideration of $320,000 shall be subjected to capital gain in the current income year as the contract was entered into on June 3 even though the majority of sale proceeds will be settled on January 3 of next year. Hence, the capital gain from the sale would be as following:

Issue:

Is the loss due to theft of antique bed is a capital loss to the client and to be deducted from capital gains of the client to ascertain net capital gain?

Rules:

ATO has specifically excluded personal assets including resident and furniture from the perspective of capital gain tax. Such assets are not capital assets for capital gain tax (CGT) purposes in the country (Dixon and Nassios, 2016). Thus, in case of sale or involuntary disposal of personal assets such as loss due to destruction and other reasons, CGT is not applicable. The client is a collector and investor in antiques. Thus, in case of loss or destruction of antique collection of her she will be assessed accordingly (Chardon, Freudenberg and Brimble, 2016). In case the antique item is a personal asset of the taxpayer then she will not be liable to pay CGT on the disposal of such asset. Similarly for involuntary disposal of such item if resulted in receipt of insurance claim, then such amount would be considered as the proceed from involuntary disposal for calculation of capital gain or capital loss on such asset.  

Application:

Antique bed stolen on November 12 of current tax year is not a personal asset as it was not used as such by the client. Since, she is an investor and antique collector, collection of such items is natural. Loss of such asset will be considered as an involuntary disposal of capital asset. Insurance claim received for such loss would be considered as the proceeds from involuntary disposal, accordingly, capital gain or loss shall be calculated (Richardson, Taylor and Lanis, 2015).

Conclusion:

Taking into consideration the above it is clear that the antique bed stolen from the house of the client is not her personal asset thus, subjected to capital gain tax. Accordingly, the capital gain or loss on such antique bed is calculated below.

Issue:

Is the sale of painting for $125,000 by the client that was purchased on May 2, 1985 attracts capital gain tax is the main issue to be discussed here.

Capital Loss on Antique Bed

Rules:

According to ATO, all capital assets acquired since September 20, 1985 are subjected to capital gain tax (CGT). This is because on the day of September 20, 1985, capital gain tax was introduced in the country. Thus, assets acquired before the introduction of CGT, i.e. prior to 20^th September, 1985 are not subjected to CGT. Hence, any assets sold by a tax payer that was acquired by him or her before 20^th September, 1985 will not be liable to the provisions of CGT (Evans, Minas and Lim, 2015).

Application:

In this case the tax payer acquired a painting by $2,000 of a well-known artist on May 2, 1985. Though the price of the painting has significantly raise subsequent to the death of the artists however, the sale price of such painting is not subjected to capital gain tax as the painting was acquired before the introduction of capital gain tax in the country. CGT was introduced on 20^th September, 1985 and the paining was purchased on May 2, 1985. Painting has been defined under collectables by ATO and has been specifically mentioned as a collectable which is subjected to CGT but since the asset was introduced prior to introduction of CGT in the country hence, no capital gain or loss is applicable on the sale of such painting (Chung, 2017).

Conclusion:

The client is not liable to pay CGT on disposal of the painting as it was acquired before 20^th September, 1985, i.e. before introduction of CGT in the country.

Calculation of capital gain or loss on sale of shares by the client:

Accordingly, the capital gain or capital loss from sale of the above shares have been calculated in the table above.       

Issue:

Issue here is to determine whether the violin sold by the client is a capital asset or personal asset and whether the sale of such violin attracts capital gain tax.

Rules:

ATO in its website has clearly mentioned that capital gain tax is applicable on all capital assets acquired on or after 20^th September, 1985. As per the ATO, in case of sale of personal asset no CGT liability will arise provided the asset was acquired at less than $10,000. Personal asset though has not been defined in ATO’s website however, in general term personal assets are the assets that are used on regular basis by a person for his or her personal use (Huizinga, Voget and Wagner, 2018). According to ATO, personal assets include;

• Goods of electronic in nature.
• Household items.

CGT Applicability on Sale of Painting

A musical instrument used by a person though has not been defined but if such instrument is personally used by such person on regular basis then this definitely comes within the purview of personal assets. In case of personal use assets that have been acquired at less than $10,000 then disposal of such asset would not attract capital gain tax liability (Burkhauser, Hahn and Wilkins, 2015).

Application:

The client has sold her personal violin which she used to play on regular basis for a consideration of $12,000. She brought the violin for a price of $5,500 on June 01, 1999 thus, it costs lower than $10,000 (Goncharov and Jacob, 2014).

Conclusion:

Since the client used to play the violin on regular basis and it was purchased for a cost of $5,500, i.e. below $10,000 hence, the sale of the asset would not attract CGT liability. Net capital gain of the client is calculated below from all the CGT events.

Issue:

Issue is to determine whether the car provided to one of its employees by Rapid Heat Pty Ltd is fringe benefit and is the organization liable to FBT for providing such benefit to the employee. Also the FBT liability of the employer for providing a loan to one of its employees is to be discussed here.   

Rules:

ATO provides that the liability to FBT arises in respect of car when an employer make his car available for the personal use of an employee. In such cases, the FBT is calculated by using either of the following two methods:

1. Statutory formula method.
2. Operating cost method.

An employer can choose the method that minimizes his liability towards FBT (Hoopes, Robinson and Slemrod, 2018).

In case of statutory percentage the following table can be referred to for calculating the taxable value for FBT.

Any contribution from the employee shall be deducted from the specific amount calculated by using statutory percentages to calculate the net taxable value for FBT purpose.

Under operating method the actual and deemed cost of operating the car is calculated which is reduced by the amount of contributions made by the employee to determine the taxable value for FBT (Dridi and Boubaker, 2015).

For loan provided at low rate of interest to the employee the employer will be liable to FBT. The taxable value for calculation FBT in such case will be calculated by considering the difference between statutory benchmark interest rate and the rate at which the loan was given to an employee.

Calculation of Capital Gain or Loss on Sale of Shares

Application:

In case of car provided by the rapid Heat Pty Ltd (Rapid Heat) since it was available for personal use of the employee hence, Rapid Heat is liable to FBT. Similarly the interest provided to the employee at 4.25% is lower than the statutory bench mark rate of the FBT year ending on 31^st March, 2018, i.e. 5.25% (Eslake, 2015). Hence, taking into consideration the applicable provisions FBT of Rapid Heat is calculated below.

Taxable value under operating method would be higher hence, the employer has used statutory percentage method to calculate taxable value for car benefits provided to the employee.  

Taxable value of FBT for the loan provided at lower rate of interest than statutory benchmark interest rate of 5.25% (Eslake, 2015).

In case jasmine would have used the $50,000 to purchase share for herself then the taxable value of Fringe benefit would have been as following:

Conclusion: 

The taxable value of fringe benefit for the Rapid Heat Pty Ltd for car provided to one of its employee would be $7,874.79 and for interest free loan provided to Jasmine it would be $2,916.27. If Jasmine would have used the balance loan of $50,000 for acquiring share for herself then the taxable value for FBT would have been $2,625.00.

References: 

Australia, C.C.H., 2016. Australian Master Tax Guide: 2016. CCH Australia.

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.

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.

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.

Chung, E., 2017. The absolute beginner’s guide to capital gains tax. REIQ Journal, (May 2017), p.35. [Online] Available from: https://search.informit.com.au/documentSummary;dn=865667655444649;res=IELBUS [Accessed 30 September 2018]

Dixon, J.M. and Nassios, J., 2016. Modelling the impacts of a cut to company tax in Australia. Centre for Policy Studies, Victoria University.

Dridi, W. and Boubaker, A., 2015. The difference between the accounting result and taxable income in detecting earnings management and tax management: The Tunisian case. International Journal of Business and Management, 10(7), p.131.

Eslake, S., 2015. Reforming the Australian taxation system: a principled approach. Australian Financial Review Tax Reform Summit. [Online] Available from: https://www.smh.com.au/cqstatic/gjsp9o/Saul-Eslake-AFR-Tax-Summit-2015.pdf [Accessed 30 September 2018]

Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: an alternative way forward. Austl. Tax F., 30, p.735. [Online] Available from: https://heinonline.org/HOL/LandingPage?handle=hein.journals/austraxrum30&div=35&id=&page= [Accessed 30 September 2018]

Goncharov, I. and Jacob, M., 2014. Why do countries mandate accrual accounting for tax purposes?. Journal of Accounting Research, 52(5), pp.1127-1163. [Online] Available from: https://onlinelibrary.wiley.com/doi/abs/10.1111/1475-679X.12061 [Accessed 30 September 2018]

Hodgson, H. and Pearce, P., 2015. TravelSmart or travel tax breaks: is the fringe benefits tax a barrier to active commuting in Australia? 1. eJournal of Tax Research, 13(3), p.819.

Hoopes, J.L., Robinson, L. and Slemrod, J., 2018. Public tax-return disclosure. Journal of Accounting and Economics.

Huizinga, H., Voget, J. and Wagner, W., 2018. Capital gains taxation and the cost of capital: Evidence from unanticipated cross-border transfers of tax base. Journal of Financial Economics.

Jacob, M., 2018. Tax regimes and capital gains realizations. European Accounting Review, 27(1), pp.1-21. [Online] Available from: https://www.tandfonline.com/doi/abs/10.1080/09638180.2016.1203811 [Accessed 30 September 2018]

Richardson, G., Taylor, G. and Lanis, R., 2015. The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling, 44, pp.44-53.

Sikka, P., 2017, December. Accounting and taxation: Conjoined twins or separate siblings?. In Accounting forum(Vol. 41, No. 4, pp. 390-405). Elsevier. [Online] Available from: https://www.sciencedirect.com/science/article/pii/S0155998216302356 [Accessed 30 September 2018]