Capital Business Gain Tax Investors

Question: Describe about the Capital Business Gain Tax Investors. Answer: 1. The key points that are required to be highlighted in the given case are mentioned below. Fred had made a purchase of a holiday home in the Blue Mountains for a total amount of $ 100,000. In addition, he also incurred certain legal costs and expenses in the form of stamp duty to execute ownership change in his favour. The same holiday home has been sold in FY2016 at a total value of $ 800,000. Even though the implementation of the sale agreement and receiving of the $ 800,000 are separated by considerable time of six months, but as both these events have transpired in FY2016 only, hence the capital gains on the sale of the holiday home would be taxable in the same year i.e. FY2016. It is known that while executing the sale of the house, Fred had to incur legal costs ($1,100) along with a hefty commission to the real estate agent ($9,900). These would be reflected in the cost base as highlighted in Section 110-25, ITAA 1997 (Barkoczy, 2016). Also, while calculating the overall capital gains for the current year, consideration needs to be accorded to the past capital loss to the tune of $ 10,000 which was incurred in the last year on account of indulgence in share trade and sale of antique vase. For achieving the task at hand, it is imperative to identify the various capital gains events and determine if capital gains derived are taxable or not. Once it is ascertained that these are indeed taxable, then using the discount or indexation method, the CGT liability can be potentially determined (CCH, 2013). Applicability of CGT on Holiday Home It is apparent that the house is not being used as a main residence since it is a holiday home. Hence, main residence exemption under Division 118 is not applicable in the given case. Further, considering that the property was purchased at a time when CGT was already in place, hence the capital gains tax could not be escaped on the premise that the asset was bought in the pre-CGT era (ATO, 2016a). As a result, CGT would be payable on the taxable gains arising from the sale of the holiday home. Determination of Taxable Capital Gains It is known from the given facts that Fred has incurred certain costs over and above the purchasing price of the holiday home. These costs are accounted for in the computation of cost base which as advocated by Section 110-25 consists of the following elements (Coleman et. al., 2016). Acquisition price of the asset Incremental cost related to acquiring the asset ownership Incremental cost related with finding a suitable buyer and execution of sale Any cost during construction undertaken for any modifications or additions that enhance the value of the asset significantly. Any cost incurred by the owner to continue the asset possession and ownership. The cost base computation for the holiday home at Blue Mountains is illustrated below (Barkoczy, 2016). Price at which acquisition of asset took place = $ 100,000 Incremental cost related to acquiring the asset ownership = Stamp Duty + Legal Fees = 2000 + 1000 = $ 3,000 Incremental cost related with finding a suitable buyer and execution of sale = Fees given to the real estate agent + Legal Fees = 9900 + 1100 = $11,000 Any cost during construction undertaken for any modifications or additions that enhance the value of the asset significantly Cost of erecting a garage on the property = $ 20,000 Therefore, total cost base of asset in accordance with Section 110-25 = 100,000 + 3,000 + 11,000 + 20,000 = $ 134,000 Fred owing to his status of being an individual taxpayer and the fact that holiday home was purchased before 1999 has two choices for net capital gains calculation in the form of indexation and discount method. For this case, Fred would choose the discount method since it is expected to yield lower taxable gains due to the cost base being insignificant in comparison to the sales proceeds. This method is given in Section 115-25 and advocates that on long term gains, a 50% discount on capital gains is permissible (CCH, 2013). Proceeds derived on sale of asset = $ 800,000 Computed cost base of asset = $ 134,000 Hence, capital gains of asset = 800000 134000 = $ 666,000 The question also highlights previous capital losses on share sale to the extent of $ 10,000 which would be brought forward to the current year and adjusted against the gains derived from house sale in FY2016. Once the net capital gains are derived by adjusting previous losses, then the discount method can be used for computation of the taxable component of capital gains for Fred in the current year (ATO, 2016a). Post adjustment capital gains for Fred = 666,000 10,000 = $656,000 Offered discount on the above gains (Section 115-25) = (1/2)* 656,000 = $ 328,000 Thus, capital gains component that is taxable for the current year = $656,000 - $ 328,000 = $ 328,000 Capital losses from Antique vase Unlike the share losses which were adjusted against property capital gains, the same is not possible for antique vase because for antiques the losses have to be necessarily settled against future capital gains that are derived only from the sale of antique product only. Thus, for the situation at hand, the previous loss would be carried forward to the next year where it would be only adjusted against the antique capital gains if present (Coleman et. al., 2016). Post adjustment capital gains for Fred = 666,000 0 = $666,000 Offered discount on the above gains (Section 115-25) = (1/2)* 666,000 = $ 333,000 Thus, capital gains component that is taxable for the current year = $666,000 - $ 333,000 = $ 333,000 2. Issue The critical issue is to opine the fringe benefits tax (FBT) liability for Periwinkle for the given fringe benefits to Emma. Law and Application In the current case, Periwinkle Pty Ltd is bathtub production firm which offered car fringe benefits, loan fringe benefits and internal expense fringe benefits to employee Emma. The fringe benefits liabilities for the proposed fringe benefits would be computed below: Car fringe benefits Section 8, FBTAA 1986 highlights that any vehicle (owned by employer) extended on behalf of the firm to the employee for the personal use would be termed as car fringe benefits. The employer is responsible for the FBT payable for the car fringe benefits (Coleman et. al., 2016). Periwinkle bought car on May 1, 2015 and on the same day gave it to Emma. Periwinkle paid $33,000 for the car and had not specified the nature of the use of the car to Emma. As a result Emma is authorised to use the car even for personal use which she indeed does and hence car fringe benefits have indeed been given to Emma. The relevant FBT calculation in regards to this is carried out below (ICB, 2016). Base value of Car Cars base value for FY2016 = Actual car price - amount spent on car repairing in FY2016 = 33000 550 = $32,450... (1) Statutory Percentage As per the ruling of the ATO, any vehicle purchased after April 1, 2014 would be accountable for the statutory percentage as 20% and in the current case, the car had been bought on May1, 2015 and thus, it is taken as 20% for the financial year 2016 (ATO, 2016c). Statutory percentage of the car = 20%.................................................. (2) Availability of Car for the employee Emma (FY2016) Car was extended to Emma on May 1, 2015 only instead of the year beginning or April 1 and hence, the availability of the car in this income year is 335 out of 365. Additionally, five days were deductible from total available days because in that period car was at service station for yearly repairing. However, the period of 10 days would not deductible when the car was at airport because it was parked at the airport by Emma as she was not present in the town for that 10 days period. Availability of car in FY2016 for employee Emma = 335 5 =330 days (3) Gross up factor for the car for FY 2016 would be taken as 2.1463 as GST is payable on the car which makes it is a good belonging to Type 1 category (ATO, 2016b). = Gross up factor = 2.1463 .. (4) Hence, grossed up value of car fringe benefit derived by Emma = 2.1463 = $12,594 On the basis of the above steps, FBT that Periwinkle has to pay = =$6,171 Loan fringe benefits Loan amount should be provided at the standard interest rate declared by the Reserve Bank of Australia for the respective financial year. If any fund is issued by employer at lower than this rate, this would lead to the loan fringe benefits (CCH, 2013). Periwinkle offered the loan of $500,000 at 4.45% pa however, the standard interest for tax year 2015-2016 was 5.95%. Therefore, the loan fringe benefits have been offered by Periwinkle to Emma. The shortfall of the interest calculated on the loan amount with respect to the standard interest rate (RBA) and offered interest rate would be considered for the computation of the FBT payable for the firm Periwinkle (Barkoczy, 2016). Step 1 Interest payable (@5.95 % as per the RBA standard rate) = = $28,250 (1) Step 2 Interest payable annually (@ 4.45 % as per rate offered by employer) = = $22,250 (2) Step 3 Interest amount saved due to lower interest rate on an annual basis = $ 28,250 - $ 22,250 = $6,000 (3) Step 4 Periwinkle offered loan on September 1 it means the total number of days for which loan was utilized by Emma for the tax year 2015-16 is given by = 213 days. (4) Step 5 Taxable value for the issued loan fringe benefits = 6000 = $3,491.80 (5) Step 6 Loan is listed in the type 2 goods and hence (ATO, 2016b) = Gross up factor = 1.9608 (6) Step 7 Grossed up value for the offered loan fringe benefits = 3,491.80 1.9608 = 6,846.72 On the basis of the above steps = 6,846.72 = $3,355 In case, the offered amount by employer would generate income at the employees end, then the interest on the amount would be considered for the income tax deduction for employer (ICB, 2016). As per the case, if the holiday home which was bought with the help of the loan amount produced income to Emma then the interest on the amount of $450,000 would be liable for tax deduction for Periwinkle. However, this aspect is not valid for the amount $50,000 which was used by her husband. Internal expense fringe benefits (bathtub) The product of the Periwinkle firm i.e. bathtub was issued to Emma at half of the sale value which means the internal expense fringe benefits is offered by Periwinkle (Austlii, 2016). Step 1 Selling price of the product (bathtub) = $2,600 ... (1) Step 2 Special offered price for Emma for the bathtub = $1,300 (2) Step 3 Internal expense fringe benefits = 2600 1300 = $1300 . (3) Step 4 75% of Selling price of the product (bathtub) = = 1,950 On the basis of the above steps Taxable amount for the internal expense fringe benefits = 1950 1300 = 650 FBT that Periwinkle has to pay = 650*2.1463*0.49 = $ 684 (b) If Emma herself utilized the amount $50,000 for buying the shares and dividend income is received by Emma, than the tax deduction is applicable for Periwinkle on this amount (Coleman et. al., 2016). Step 1 Interest payable (@ 5.95 % as per the standard rate) = = $2825 (1) Step 2 Interest payable (@4.45 % as per rate offered by employer) = = $2225 (2) Step 3 Deductible amount for the employer = $ 2825 - $ 2225 = $600 References ATO 2016a, Personal investors guide to capital gains tax 2016, Australian Taxation Office, Available online from https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/Personal-investors-guide-to-cgt-2016.pdf (Accessed on September 30, 2016) ATO 2016b, Gross-up rates for FBT, Australian Taxation Office, Available online from https://www.ato.gov.au/rates/fbt/?page=3 (Accessed on September 30, 3016) ATO 2016c, Car fringe benefits statutory formula rates, Australian Taxation Office, Available online from https://www.ato.gov.au/rates/fbt/?page=4 (Accessed on September 30, 3016) Austlii 2016, FRINGE BENEFITS TAX ASSESSMENT ACT 1986 - SECT 20, Australian Legal Institute, Available online from https://www.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/s20.html (Accessed on September 30, 2016) Barkoczy,S 2016,Foundation of Taxation Law 2015,8th eds., CCH Publications, North Ryde CCH 2013, Australian Master Tax Guide 2013, 51st eds., Wolters Kluwer, Sydney Coleman C, Hart G, Jogarajan S, Krever R McLaren J, Sadiq K 2016, 9th eds., Principles of Taxation Law, Thompson Reuters, Sydney ICB 2016, Fringe Benefits Tax, Institute of Certified Bookkeepers, Available online from https://www.icb.org.au/out/?dlid=12013 (Accessed on September 28, 2016)