Computation of Net Capital Gain or Loss for CGT

Question:

Discuss About The Obligation Payment Interest Charges On Loan?

The present study is based evaluation of given 5 case scenarios by applying Australian taxation provisions. For the solution of each case study, ILAC approach will be applied in to provide a viable solution to the taxpayer.

In the previous twelve months, Eric had acquired, and sold capital assets thus present part of study deals with computation of net capital gain or loss for the year by considering the transaction value of each item.

Table 1: Other method for computation of net capital gain or loss

Method	Description	How to calculate
Individual who hold assets for less than a year, this method is for them (Harding, 2013). To identify if individual obtained the asset at the least 1 year before the capital tax gain event, exclusive of both acquisition and event date (Australian Taxation office, 2017).	This method is considered to be the most common method to calculate CGT.	Deduct the cost of the asset from the sale price.

Table 2: computation of net capital gain or loss by considering transactions of Eric

Assets	Purchase value	Sales value		Loss or Gain
Antique  vase	$2 000	$3 000	$3 000.00 – $2 000.00	$1 000.00
Shares	$5 000	$20 000	$2 0000.00 – $5 000.00	$15 000.00
Painting	$9 000	$1 000	$1 000.00 – $9 000.00	-$8 000.00
Antique chair	$3 000	$1 000	$1 000.00 – $3 000.00	-$2 000.00
Sound system	$12 000	$11 000	$11 000.00 – $12 000.00	-$1 000.00
Net capital gain	$5 000.00

In accordance with the above calculation it can be said that there is a net gain of $5 000.00 to Eric, so he is liable to pay tax on the net computed amount.

Brian is working as an executive in a bank. In its remuneration package part, the employer of Brian offered him a 3-year loan of a total amount of $1m at the rate of interest of 1% per annum (payment to be made on a monthly basis). operations would assess calculation of the taxable value of this FBT regarding the 2016 and 2017 Fringe benefit year and effect if interest was to be made at the loan’s end instead of monthly payments and in the situation where the bank had released Brian from the obligation of payment of the interest charges on loan.

FBT arise when the loan arise if the loan is offered to the employee, in which no or less interest if charge upon loan (Faccio and Xu, 2015). Fringe Benefit’s taxable loan value is determined by the interest rate charged on loan and standard interest rate which is 5.65% as per TD 2016/5 for FBT year1 April 2016 to 31 March 2017 (Braverman, Marsden and Sadiq, 2015).

By applying above described provisions computation of taxable value on which FBT will be payable is as follows:

Table 3: Statement showing computation of taxable value on which FBT will be payable

Particulars	Loan amount	Interest rate	Amount[1]
Interest obligation of Brian as per special interest rate	$1 000 000	1%	$10 000.00
Standard obligation of Brian as per statutory rate	$1 000 000	5.65%	$56 500.00
Net benefit attained			$46 500.00

If the interest rate is payment is made on the year end instead on a monthly basis, then interest will be consistent. However, if the brain got a release from the bank for paying interest than the total interest @5.65%, i.e. $56500 and same will be considered as taxable value.

Computation of Taxable Value for FBT Payment

Jack is an architect and his spouse Jill is a housewife, they lend money in order to purchase a rented property being as joint tenants. They agreed to a written contract which stated that Jack is allowed profits of 10% from the total property and Jill is allowed 90% profits from the total property. The deed also provided in case property suffers from loss, then Jack is entitled to the total loss incurred. In the previous year, there was a loss $10,000. Thus; this part of the study is focused on the evaluation of allocation of revenue as well as a loss for tax purposes.

Distribution of profit and loss must be done if the Co-owners are not running a business of rental property, in regards to rental premises along with their legal interest in the premises. In case they have premises as joint tenants, each holding same interest in premises (Australian Taxation office, 2017). In general, tenants might hold an imbalanced interest in premises, for instance, an individual may have interest of 20% and the other having the interest of 80% (Woellner and et al. 2016). Income and expenses from rental must be credited to both the co-owners as per the property’s legal interest, irrespective of any contracts held between co-owners (oral or written), stating otherwise.

The rental property was purchased by Jack and Jill being as joint tenants. They both agreed share income and bear loss from the premises as follows;

	Jack	Jill
Ratio for distribution of profit	20%	80%
Ratio for distribution of loss	100%	nil

Having or renting out a sole property does not amount to carrying on business. Both Jack and Jill are not considered as partners by the general law; however, their relationship will be treated as a partnership for the purpose of income tax. Profits and loss occurred from the premises must be shared in the equal ratio as they are having 50:50 share in the business. Their deed to share income and losses in various ratios is a personal agreement that contains no influence on the purpose of income tax.

By considering the above-described provision, it can be stated that loss of 50% will be entitled to Mr Jack for the purpose of income tax. Furthermore, if in future they decide to sell the property then also above cited provision will be applied according to which Jack can claim 50% of capital gain or loss.

According to the case facts of Duke of Westminster v CIR 19 TC 490, Duke had promised to pay the extra amount to gardener if they provide additional services. The agreement takes place in written format. However, this management was formed with the mere objective to take a deduction with the objective of tax evasion.

Inclusion of Sale Value from Tree Disposal in Assessable Income

In the case situation of Duke of Westminster v CIR 19 TC 490, the rule was introduced that; Each and every person is allowed to organize their own affairs, as the tax attached as per the suitable action will be minimum (Crook and Kemp eds., 2014). This principle is preferred by various individuals, and they would like to see the implementation of this rule on a constant basis after the introduction of any general anti-avoidance rule in Australia.

In the previous year, the constitution has been establishing that needs advisors to inform HMRC of some scheme kind that can form tax evasion. However, this will be not be seen in the all over the board, and it stays to be observed that what actions will be taken while receiving such type of notifications (AbdulRazaq and Adam, 2015). It might be observed in settlement of time when these rule will act as an originator to the establishment of new provisions rather more wide-ranging existing provisions.

Lord Wilberforce found that even though the principle of Duke of Westminster prevented the court from looking after a real transaction to certain supposed fundamental substance, it will not ‘oblige the court to look over the document in blinkers, inaccessible from any context to which it properly belongs’.

The court must determine the transaction’s legal nature by which it is required to make attachment of a attach a tax or a tax result and in case it comes out as series or mixture of transactions, aimed to work as such, it is that combination or series which is required to be considered by regulatory authorities in case analysis.

In such type of cases, the representative ‘must search out facts and further make a decision by considering the matter (reviewable) of law to categories whether the issue is covered in the composite transaction and it is supported by the independent transaction.

By considering this fact, it has been made clear that the scheme was only for the tax avoidance, without commercial justification, the purpose was to pursue all it stages to complete end. It would thus be irrelevant to assess just one step in the Business process of isolation.

Bill owns a huge land of which there are extensive tall pine trees. Bill aims to make use of land by grazing their sheep and thus desires to make it clear from the start. He discovered that a sorting business is arranged to pay him $1,000 for every 100 metres of timber to logging company which it can take from his land. Thus present part of study deals with providing advice to Bill as to inform him would be assessed from the receipts from this cited arrangement and consequence if he gets lump sum payment of $50,000 for granting a right to the logging company for removal of timber as much as required for his land.

Implications of Lump Sum Payment for Granting Logging Company Rights

According to point 22 of ruling TR 95/6; a taxpayer owning disposal of trees, that is planted and have a tendency for the sale purpose might result in the inclusion of sale value in the assessable income in the year in which disposal takes the place of  taxpayer under subsection 36(1) (Sceales, 2015). This might so if or if not the taxpayer is running a business of forest work, from the time the taxpayer is running the business and disposal of trees is not done in the regular business course.

For applicability of this provision, primary requirement is that the trees must represent the business entirely or part of it. Next, the point 2s of ruling TR 95/6 reveals that the tree’s value must be either;

• On the day of disposal the market value will be considered; or
• According to paragraph 36(8) (a) if Commissioner has an opinion that there is lack of evidence of the MV –that value which is considered by the Commissioner.

As per the point 25 of ruling TR 95/6, a taxpayer who is running the forest operations might put its standing timber into a sale by providing permission to a person to remove it, either having the right or not to cut the timber. The income has been generated from the sale purpose can be assessable according to subsection 25(1). Furthermore, royalty will be received by the taxpayer in regards to providing right for procurement of timber on land possessed by the taxpayer will be part of the assessable income of the taxpayer according to (subsection 25(1)) (Barkoczy, 2016). This provisions will be considered in the computation of assessable income of the recipient irrespective of the fact that granting the right by the taxpayer is not carrying on a business of forest operations.

Table 4: Application of ruling TR 95/6 on the cited case

	Transaction	Applicable section	Assessability of income
Situation 1	Disposal of standing timber by Bill for $1,000 for every 100 metres of timber to logging company, not in the ordinary course of business	36(1)	Yes
Situation 2	Disposal of rights to standing timber	25(1)	Yes

In accordance with the applicability of above-described provisions, if only timber is sold than income will be assessable under section 36(1) and in case of rights for lump sum amount is sold then taxability will be under section 25(1) and computation will be according to point 25 of ruling TR 95/6.

Conclusion

In accordance with the present case study; conclusion can be drawn that tax payers are required to consider relevant provisions to determine tax liability and should comply with the same to discharge their obligation in an appropriate manner.

References

AbdulRazaq, M.T. and Adam, K.I., 2015. Anti-Avoidance Legislations: Issues & Doubts in the Application of Tax Rules in Business. AGORA Int’l J. Jurid. Sci., p.1.

Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.

Braverman, D., Marsden, S. and Sadiq, K., 2015. Assessing Taxpayer Response to Legislative Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl. Tax’n, 17, p.1.

Crook, T. and Kemp, P.A. eds., 2014. Private rental housing: Comparative perspectives. Edward Elgar Publishing.

Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(3), pp.277-300.

Harding, M., 2013. Taxation of dividend, interest, and capital gain income.

Sceales, R.W.F., 2015. A review of the trend in the judicial interpretation, and judicial attitudes towards tax avoidance in the United Kingdom, Australia and South Africa, with reference to the” declaratory” and” choice” theories of jurisprudence (Doctoral dissertation).

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.

Australian Taxation office. 2017. Co-ownership of rental property. [Online]. Available through <https://www.ato.gov.au/Forms/Rental-properties-2013-14/?page=5>. [Accessed on 14^th September 2017].

Australian Taxation office. 2017. Working out your capital gain. [Online]. Available through <https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-capital-gain/>. [Accessed on 14^th September 2017]