Methods for determining taxable capital gains

Describe about the Foundation of Taxation Law for Taxable Capital Gains.

1. It can be observed from the given information that Fred who is Australia resident for tax purposes has received capital gains from sale of his capital asset i.e. house. The objective is to determine the net taxable capital gains for Fred for the current income year.

Fred has purchased the capital asset in March 1987 i.e. after September 20, 1985 which acts as the threshold date for application of CGT on the derived capital gains from sale of capital assets (Woellner, 2014).

Discount method and indexation methods are the two alternative methods to determine the taxable capital gains (Barkoczy, 2015).

Discount methods is valid for long term assets and provide 50% exemption on the capital gains and the other 50% would be used for levying of the CGT liability (Section 115-25) (Sadiq et. al., 2016).

Indexation method is used when the cost base of the capital asset is adjusted based on the inflation rate differential between September 1999 and time of purchase of the capital asset i.e. September 1987. In such cases, there would not be any discount that is applicable on the capital gains derived (Section 114-1).(Gilders et. al., 2016).

However, discount method would be preferable to determine the taxable capital gains. As it will provide a lower value of capital gains tax for the taxpayer as compared to the capital gains tax calculated from indexation method (Nethercott, Richardson & Devos, 2016).

In this case there is no inconsistency because the enactment of the contract and contractual payment made are in the same income year. The enactment of contract and the settlement of the requisite payment is not required to take place simultaneously for the recognition of capital gains but it should ideally be in the same financial year (Hodgson, Mortimer & Butler,2016).

The cost base is the essential element to calculate the net capital gains for the taxpayer. It is the cost calculated from the addition of actual purchasing cost of the asset to the capital cost and the incidental cost occurred in way of stamp duty, fees in legal formalities, advertising for the asset to find the potential buyer and the expenses incurred for value addition to the existing asset or in maintaining possession and ownership of the asset (Section 110-25) (Deutsch et. al., 2015).

ny previous year capital loss would be accumulated in the current year’s capital gains. However, the nature of the asset should be similar for adjusting the accumulated capital loss against the current year capital gains. If the capital loss has occurred from different asset, than these would not be offset against the capital gains. In such cases, the capital loss would be shifted to next financial year (Barkoczy, 2015).

Acquisition price of house	$100,000
Proceeds received from sale of the capital asset	$800,000
Incidental cost during buying and selling (stamp duty + total legal fees+ commission) (2000+2100+9900)	$14,000
Capital cost (cost due to building of the garage)	$20,000
Cost base (Acquisition price+ Incidental cost+ Capital cost) (100000+14000+20000)	$134,000
Capital gains (Receipts from sale – Cost base) ($800000-134000)	$666,000
Capital loss accumulated  due to sale of shares	$10,000
Net capital gains (capital gains – capital loss) (666000-10000)	$656,000
Taxable capital gains based on discount method (50% of the net capital gains) (0.5*656,000)	$328,000

Cost base calculation

Capital loss occurred from sale of Antique vase

The net capital gains in this case would be different because this loss is from sale of the antique vase, which will not be accommodated against the capital gains earned from sale of the home and hence would be shifted to next year and will only adjust against the capital gains earned from the antique vase in the future (Gilders et. al., 2016).

Taxable capital gains (50% of the capital gains) (0.5* 666000)

$ 333,000

2. It is apparent from the information provided that Emma as an employee has potentially received fringe benefits on account of car, loan and bathtub. The relevant discussion in regards with these is carried out below.

Fringe Benefit Tax Assessment Act (FBTAA), 1986, Section 8 tends to state that car fringe benefit would arise only when employer owned car is being used by employee in his/her personal use. In the given situation, the car owned by the employer is used by Emma for satisfying his personal needs and hence the employer has extended car fringe benefit to Emma  (Woellner, 2013).

Now that it is apparent that car fringe benefit has indeed been extended, the taxable value of this benefit needs to be established.  One of the key inputs required in this endeavour is the gross up factor which varies with regards to the good being classified as Type 1 or Type 2. Since the car attracts GST liability, hence it would be termed as Type 1 good and the applicable value for FY2016 is 2.1463 (Gilders et. al., 2016).

The relevant formula for estimation of car fringe benefit value is in accordance with Section 39F , FBTAA, 1986  and stated below (Wilmot, 2012).

The various input values in the formula shown above are discussed below.

Capital value of Car = Money spent by employer to purchase the car – Expenses incurred= (33,000 – 550) =  $ 32450

The statutory percentage is determined by the two following critical inputs.

Year in which car purchases

Distance travelled for personal usage by the employee

With regards to the applicable norms,  for any vehicle purchased after 2011 and the annual distance travelled not exceeding 15,000 km, 20% is the statutory percentage to be deployed. The car used by Emma in the given case fulfils both the above conditions and hence statutory percentage to be considered is also 20% (Deutsch et. al., 2015).

Days for which car was available to Emma = 366 (FY2016 days count) – 30 (Car given to Emma only on May 1, 2015) – 5 (Unavailability caused by repairs) = 331 days

Accumulation of capital losses

It is noteworthy that there has been no deduction for a period of ten days when the car was idle in the parking as it was available for use as it was in working condition but Emma was not present.

Taxable grossed up value (CFB) = $ 32450 × 20% × (331/366) × 2.1463 = $ 12,631.95

The applicable FBT rate for FY2016 stands at 49%.

Hence, FBT payable by employer on account of CFB = 12,631.95 *0.49 = $ 6,190

Loan fringe benefit

This fringe benefit is considered when the employer extended financial help to the concerned employee at an interest rate lower than the RBA statutory rate. The relevant statutory RBA rate has been prescribed by TD 2015/8 and amounts to 5.65% pa (Sadiq et. al., 2016).  However, the extension of loan to Emma by Periwinkle has been done at 4.45% pa and it is lesser than 5.65% pa, hence loan fringe benefit would result in the given case (Wilmot, 2012).  It is noteworthy that the loan facility has been extended to Emma not at the start of the financial year but on September 1, 2015 and hence adjustment would be made to reflect the same (Barkoczy, 2015).

The amount of interest savings reaped by Emma in FY2016 would be the value of the loan fringe benefit

Loan Fringe Benefit (LFB) = 500000*(5.65% – 4.45%)*(213/366) = $ 3,491.8

Since, no GST is applicable on the interest component, hence the relevant gross up factor is 1.9608.

Taxable value of Loan Fringe Benefit (LFB) = 3,491.8*1.9608 = $ 6,846.72

Hence, FBT payable by employer on account of LFB = 6,846.72*0.49 = $ 3,355

Bathtub related fringe benefit

Based on the given information, Emma has been sold a bathtub of retail value $ 2,600 for a net consideration of $ 1,300 and thus has been provided at a discount of 50% which would constitute as an expense fringe benefit as the bath tub is an item of personal usage by the employee (Hodgson, Mortimer & Butler,2016).

It is known that bathtub sale attracts GST, thus it would be classified as a Type 1 good with the corresponding gross value factor of 2.1463.

Taxable value (Expense Fringe Benefit (EFB)) = (2600-1300)*2.1463 = $ 4,078

Hence, FBT payable by employer on account of EFB = 4078*0.49 = $ 1.998

Use of $ 50,000 by Emma – Impact on FBT

For any loan component that is deployed by the employee for producing income, the employer can claim deduction on the same (Wilmot, 2012). In the given case, instead of $50,000 being used by the husband, it would not be deployed by Emma for generation of gains or income from indulgence in share trading.

Therefore, there would be lowering of tax burden for the employer i.e. Periwinkle since incremental deduction is permissible

Value of the incremental deduction allowed = 50000*(5.65% -4.45%) = $ 600

References

Barkoczy, S 2015. Foundation of Taxation Law 2015, 7^th edn, CCH Publications, North Ryde

Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2015. Australian tax handbook, 8^th edn, Thomson Reuters, Pymont

Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2016. Understanding taxation law 2016, 8^th edn, LexisNexis/Butterworths.

Hodgson, H, Mortimer, C & Butler, J 2016, Tax Questions and Answers 2016, 5^th ed., Thomson Reuters, Sydney,

Nethercott, L, Richardson, G & Devos, K 2016, Australian Taxation Study Manual 2016, 4^th ed., Oxford University Press, Sydney

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016, Principles of Taxation Law 2016, 8^th edn, Thomson Reuters, Pymont

Wilmot, C 2012,  FBT Compliance guide, 6^th edn, CCH Australia Limited, North Ryde

Woellner, R 2014, Australian taxation law 2014, 8^th eds., CCH Australia, North Ryde