Capital Gain Tax

Discuss about the Taxation, Asset Theory, Practice and Law.

Capital gain and the capital loss from the sale of asset actually mean the difference between the cost of the assets and the sale price of the assets. If the sale proceeds are higher than cost price of the assets, then it is accounted as capital gain. The capital gain tax is considered as a part of income tax.

The capital loss on the other hand cannot be deducted against normal income but can be used as a deduction against capital gains from sale of other capital assets. If the capital loss cannot be adjusted in the same accounting year, then the capital loss can be carried forward to the next year. This carried forward loss can be adjusted against the capital gain of the next year. Most personal assets are exempt from the capital gain tax, car home and furniture. The CGT does not apply for the depreciable assets used for business purpose. Australian resident if holds and property outside Australia then capital gain on the sale of the assets will be taxed in Australia as capital gain tax (Ato, 2016).

Selling of home is not covered under capital gain tax. The resident taxpayer residing on the same property can claim tax exemption on the property sold. The resident individual has to dwell on it and he must have to live on that property to be eligible to claim tax exemption on the property.

The definition of is dwelling is considered as following;

• The person and his family live in the property.
• The personal belongings of the family are there in the property.
• This should be the address where the mails are delivered.
• The address of the property should match with the electoral roll.
• The service connection for phone and gas will also be considered as proof of dwelling.

The exemption on the dwelling property to the residents will be allowed in full provided the resident fulfilling the following criteria;

• The person and the family own the house for the full financial year.
• The property has not been used by the resident to produce assessable income- the person do not run a business in that property.
• The land area of the property should be two hectares or less

The partial exemption will be allowed on the sale of the property provided the person has fulfilled the following conditions;

• The person and the family own the house for the part of a financial year.
• The property has been used to produce assessable income- the person do not run a business in that property.
• The land area of the property is more than two hectares (Ato, 2016).

The sale of real estate and the profit arising out of the sale proceeds can be considered as the  capital gain tax for the tax assessment purpose, provided the person has fulfilled the following conditions;

When there is change of ownership of the property and there was no contract for that available.

• The acquiring entity has offered compensation.
• The acquiring entity becomes owner of the property.
• The acquiring entity after acquisition enters the property with the power of compulsory acquisition.
• The acquiring entity if takes possession of the property completely (Ato, 2016).

If the property belongs to assesses and it was inherited by him and the property was main residence of the person who left is for the current owner of the property. The current assessee need to keep record of the cost incurred by the assessee during handover of the property.

Real Estate Tax

However the record is not required to be kept for the assessee if he;

• Inherited the dwelling property after 20 August 1996
• The dwelling property was main residence before inheritance.
• The property was not to produce income.

Selling of shares is treated as other normal capital assets. When shares are sold in the market then the income generated out of the sale proceed is to be treated as capital gain and it becomes subject to capital gain tax (Ato, 2016).

The capital gains can be worked out by the help of two methods one is discount method and another is indexation method. To use the indexation benefit the asset has to be acquired before 21 September 1999.

Under the indexation method the base cost of the asset acquired can be indexed on the basis of consumer price index (CPI) (ATO, 2016).

Indexation factor

=

CPI for quarter ending 30 September 1999 CPI for quarter in which expenditure was incurred

The discount method can also be applied if the property belongs to a trust and to a society or to any person. The capital gain tax will be reduced by 50% under discounted method. The discount method is not applicable to companies. The tax rates in Australia are high and the standard income tax rates is applicable to the individual liable to pay tax under capital gain tax.

Here in this case, Fred is a resident who signed a contract to sell his holiday home in the Blue Mountains in August last year. The sale was settled in February this year when Fred received $800,000 from the purchaser. Fred incurred legal fees of $1100 (Inclusive of GST) and real estate agent’s commission of $9,900 (Inclusive of GST) in relation to the sale.

The holiday home in March 1987 for $100,000 and paid $2,000in stamp duty on the transfer and $1000 in legal fees. In January 1990, Fred engaged a builder to build a garage on the property for $20,000.

The legal fees of $1100 and $9900 as commission will not be deducted.

Sale Proceeds	$ 800,000.00
Purchase Price	$ 100,000.00
Stamp Duty	$     2,000.00
Legal Fees	$     1,000.00
	$ 103,000.00
Improvement Cost	$   20,000.00
Indexing
March, 1987	$           45.30
August, 2015	$        108.00
January, 1990	$           56.20
Sale Proceeds	$ 800,000.00
Less: Index cost of acquisition	$ 245,562.91
Less: Index cost of Improvement	$   38,434.16
Taxable Capital Gain	$ 516,002.92
Less: Loss on capital gain	$   10,000.00
Total taxable capital gain	$ 506,002.92
Tax on Capital gain
Tax on 180000	$   54,547.00
After 180001 to 516002.92	$ 146,700.87
Tax Payable	$      201,248
Not Using Indexation
Tax on 180000	$   54,547.00
Tax on Rest	$ 224,999.55
Total Tax	$ 279,546.55
50% Exemption	$      139,773

Fred would do better if he does not do for indexation but discount model of capital gain tax calculation.

Fringe benefit is a payment to the employee from the employer which shall not be considered as salary or wages. According to the definition of fringe benefit tax rules, it is the benefit provided to the respect of employment. This is an effective means for the calculation of benefit provided to the employee in course of employment. The employee is entitled to receive the salary and the benefit is to be provided to the employee who has died will not be considered as fringe benefit.

Shares Tax

The term benefit and the fringe benefit has boarder meaning; the benefit includes privileges for the service (Business, 2016).

This offers an employee to use a work car for the private purpose.

• Offering employee a cheap loan
• The entertainment by way of free tickets to concerts
• Reimbursement of some of the expenses incurred by an employee, like school fees

The benefits provided in respect of the employment will not be considered as the fringe benefit and it would not be taxed. There is specific exemption allowed for the fringe benefits provided to the employees in relation to the employment. 

The benefits which are provided to the employee are not considered as employment benefits. The benefits will be taxed in the hands of the employee (Ato, 2016).  

The taxable value of the loan will not be considered as fringe benefit can be reduced in accordance with the income tax rules of Australia. The taxable value of fringe benefit will be reduced to the extent the interest is paid against the loan. If the employee uses the loan for investment in fixed interest bearing instrument, the interest received from the instrument will be reduced by the amount of interest paid by the employee.

In this case the employer, Periwinkle provided Emma a car as Emma which she uses for work purposes. Emma’s usage however is not restricted to work only.

• The cost price of the car was $33,000 (including GST). She travelled 10,000 kilometers in and the car expenses incurred of $550 (including GST).
• Periwinkle provided Emma loan of $500,000 at an interest of 4.45%. Out of that loan amount she $450,000 to purchase a holiday home and rest $50,000 she gave to her husband on interest free to purchase shares.
• Emma purchased a bathtub from Periwinkle for $1,300. The bathtub costs the company $700 to but sells it to general public for $2,600.

These are the three cases which actually important to calculate fringe benefit tax. The first case is however tax exempt as the car was used for official purpose not for the personal purpose. This implies the fact that the car use will not be considered under FBT (Ato, 2016).

The second and the third case will attract FBT:

1	Taxable value of
	the loan fringe benefit
	FBT Tax	28250
	Deduction $500000 @4.45%	22250
	FBT Benchmark Interest Rate 5.65%	6000
2	Ignoring interest rate charged on $50000	28250
	at 5.65%
3	Suppose Emma had
	paid interest equal of
	Market rate
	FBT Tax $450000 @ 5.65%	25425
4	How much of this interest is
	allowable as an income tax
	Taxable Amount more than $50000	2225
5	Subtract amount	23200
	(step 4) from deductible
	amount (step 3)
6	The taxable value	28250
	Step 1 minus the result from step 5.
	Less: Interest paid on purchase of Shares	2225
	Total Taxable fringe benefit	26025

The taxable fringe benefit for case two would be $26025. As in the case 3 Emma purchased a bathtub manufactured by Periwinkle for $1,300. The bathtub only cost Periwinkle $700 to manufacture and is sold to the general public for $2,600.

Therefore the tax amount will be added with another $1300 ($2600-$1300). Total taxable fringe benefit to Emma would be $27325.

The fringe benefit tax rate for Ending 31 March 2016 and 31 March 2017 is 49%. Therefore, Emma will have to pay tax on $27325 @ 49%. This tax amount will be added apart from the tax calculation on her salary and other income. This much value of benefit she has enjoyed for her family which was not linked to the job in any way. Therefore, there will be no exemption on offer for Emma (Ato, 2016).

References:

Ato, 2016. Capital gains tax. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Capital-gains-tax/ [Accessed 13 September 2016].

Ato, 2016. Fringe benefits tax – rates and thresholds. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/Rates/FBT/ [Accessed 13 September 2016].

Ato, 2016. Reduction in taxable value where interest would have been deductible to employee. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(fbt)/In-detail/Employers-guide/Loan-and-debt-waiver-fringe-benefits/?page=8#8_8_Reduction_in_taxable_value_where_interest_would_have_been_deductible_to_employee [Accessed 13 September 2016].

Ato, 2016. Selling your home. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/capital-gains-tax/your-home-and-other-real-estate/selling-your-home/ [Accessed 13 September 2016].

Ato, 2016. The discount method of calculating your capital gain. [Online] www.ato.gov.au/General/Capital-gains-tax Available at: https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/The-discount-method-of-calculating-your-capital-gain/ [Accessed 13 September 2016].

ATO, 2016. The indexation method of calculating your capital gain. [Online] www.ato.gov.au/General/Capital-gains-tax Available at: https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/The-indexation-method-of-calculating-your-capital-gain/ [Accessed 13 September 2016].

Ato, 2016. Timing of a real estate CGT event. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/capital-gains-tax/your-home-and-other-real-estate/timing-of-a-real-estate-cgt-event/ [Accessed 13 September 2016].

Ato, 2016. What is fringe benefits tax? [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/In-detail/Employers-guide/What-is-FBT-/ [Accessed 13 September 2016].

Business, 2016. Fringe Benefits Tax (FBT). [Online] www.business.gov.au Available at: https://www.business.gov.au/info/run/tax/fringe-benefits-tax [Accessed 13 September 2016].