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Taxation for Amount of Sale Proceed

Question:

Discuss about the Taxation for Amount of Sale Proceed.

Answer:

Case study 1

As per section, 100-35 of the Income Tax Assessment Act 1997 capital gain is explained as the amount of sale proceed received in excess of the cost of the CGT asset. If the Cost of the asset is more than the sale price of the CGT asset then it is a capital loss. It is important to calculate Capital Gain because it is taxable and forms part of the income tax (Faccio and Xu 2015). If an asset is held for more than 12 months then there are two methods of calculating depreciation provided the asset is purchased before 21 September 1999 but after 20 September 1985. If the assets are purchased before 20 September 1985 then there is no Capital Gain (Jones 2016).   If the asset is purchased after 21 September 1999 then only Discount method for calculating capital gain can be used. Under this after computing the capital gain, it is reduced by 50%. If the asset is purchased before 21 September 1999 then indexation method can be used. Under this method, cost base of the asset is indexed for computing capital gain. If both the methods are applicable then the taxpayer can choose either of the two methods for calculating the capital gain (Saad and Udin 2016).

In the given case, Fred has purchased the holiday home on 1987 and constructed a garage on 1990. Therefore, capital gain is calculated under both the method and it is found that capital gain under discount method is less than the indexation method so in this case discount method will be used for calculating capital gain (Taylor and Richardson 2013). The taxation law provides that legal expenses incurred before 30 June 1989 should not be included in the incidental cost. In the given case, Fred paid a legal fee of $1000 on March 1987 so it is excluded from calculation of cost base as it is before 30 June 1989. The law provides that if the taxpayer is not GST registered then while calculating the cost bases no input credit adjustments is made (James et al. 2015). In the given case, it is assumed that Fred is not GST registered. The calculations of capital Gain is shown below.

Statement showing computation of Capital Gain Using Discount Method

Particulars

Amount

Sales Proceed

 $        800,000.00

Less:

 

Cost of purchase

 $      (102,000.00)

Cost of building garage

 $        (20,000.00)

Commission on paid sales

 $          (9,900.00)

legal fees on sales

 $          (1,000.00)

Capital Gain

 $        667,100.00

Less:

 

Discount (50%)

 $      (333,550.00)

Capital loss from last year for sale of shares

 $        (10,000.00)

Net Capital Gain/(loss)

 $        323,550.00

           

Statement showing computation of Capital Gain Using Indexation Method

Particulars

Amount

Sales Proceed

 $        800,000.00

Less:

 

Cost of purchase

 $      (154,628.99)

Cost of building garage

 $        (24,459.86)

Commission on paid sales

 $          (9,900.00)

legal fees on sales

 $          (1,000.00)

Capital Gain

 $        610,011.15

Capital loss from last year for sale of shares

 $        (10,000.00)

Net Capital Gain/(loss)

 $        600,011.15

 

Calculation of Indexation factor cost of purchase

CPI for September 1999

123.4

CPI for March 1987

81.4

Indexation factor

1.515970516

 

Calculation of Indexation factor cost of garage

CPI for September 1999

123.4

CPI for March 1990

100.9

Indexation factor

1.222993062

The section 100-50(2) of the ITAA Act 1997 states that while calculating net capital gain or loss the capital gain of the current year can be reduced by the capital loss of the previous year in any order as chosen by the taxpayer (Woellner et al. 2016). The net capital loss can be carried forward for the next year and there is no time limit for this. It is specifically provided in the law that net loss from collectibles can only be deducted from capital gain of collectibles (Tran-Nam et al. 2014).  In the given case if the net loss arose from sale of antique then the deduction of capital loss would not be allowed and the net capital gain computed will be different the calculation is given below.

Statement showing computation of Capital Gain Using Discount Method

Particulars

Amount

Sales Proceed

 $        800,000.00

Less:

 

Cost of purchase

 $      (102,000.00)

Cost of building garage

 $        (20,000.00)

Commission on paid sales

 $          (9,900.00)

legal fees on sales

 $          (1,000.00)

Capital Gain

 $        667,100.00

Less:

 

Discount (50%)

 $      (333,550.00)

Net Capital Gain/(loss)

 $        333,550.00

 

Statement showing computation of Capital Gain Using Indexation Method

Particulars

Amount

Sales Proceed

 $        800,000.00

Less:

 

Cost of purchase

 $      (154,628.99)

Cost of building garage

 $        (24,459.86)

Commission on paid sales

 $          (9,900.00)

legal fees on sales

 $          (1,000.00)

Net Capital Gain/(loss)

 $        610,011.15

Case study 2.

(a)       

The tax that employer’s pays on certain benefits provided to the employee is termed as fringe benefit tax. The benefit received by the family and other associates of the employee is also included in the benefit received by the employee for the purpose of this tax (Braverman et al. 2015). The benefits include services, privileges and rights that are provided to the employee as a part of the salary or in addition to the salary. Few examples of the fringe benefits that are provided by the employer are employee uses office car for personal purpose, if loan at cheap rate is provided to the employee, if gym membership is paid to the employee, if free tickets are provided to the employee for entertainment, if expenses incurred by the employee are reimbursed etc. There are two ways of calculating taxable fringe benefit (Hodgson and Pearce 2015). One method is called higher gross up rate and the other is lower gross up rate. If GST credit can be taken for benefit provided to the employee then it is higher gross up rate method. If GST credit benefit is not allowed then it is lower gross up rate.  

In the given case, Emma is an employee of the Periwinkle PTY ltd. The company provided a car of $33000.00 for both office and personal purpose. The section 7 of the Fringe benefit Tax Assessment Act 1986 states that if an employer provides a car to an employee in relation to the employment and the employee puts the car for personal use then it is termed as car benefit provided by an employer (Scott et al. 2012). The section 8 of the FBTA Act 1986 provides that under certain circumstances the car benefits are exempted from Fringe Benefit tax, they are:

  • If the car is provided for only to travel between work and house then it is exempted,
  • If the car is provided only for, travel related to employment,
  • If the car is provided for occasional use,

In the given case as Emma is provided the car for official and private use therefore it is not exempted and should be included in the FBT payable. There are two methods of calculating taxable value of the car benefit. One method is the statutory method based on the cost price of the car and the other is the operating cost method whichever method provides the lowest taxable value is chosen. In the given case as operating cost is not provided so taxable value of car benefit is calculated using statutory method as provided in the section 9(1) of the FBTA Act 1986.  The formula used for calculating taxable benefit is: (ABC)/D –E. In this formula A stands for base value of the car in the given case it is $33000.00. B stands for the statutory fraction that is 0.20. C is the number of days the car is used in the given case it is 350 days. D is the number of days in the year that is 365 days and E is the contribution by the receipt that is zero (Shields and North-Samardzic 2015). The taxable car benefit calculated using statutory method comes to $6328.77 and the grossed up taxable value is $13583.43.

The section 20 of the FBTA Act 1986 states that if the employer reimburses an expense of the employee then it should be included in the expense payment fringe benefit.  The car expense payment is exempted as per section 22 of the FBTA Act 1986. In the given case, reimbursement of the car expenses by Periwinkle to Emma will not be included in the fringe benefit payable as per the section 22 of the act (Barkoczy 2016).

If an employer provides loan to employee at low rate of interest or without charging interest then it is a loan fringe benefit as per section 16 of the FBTA Act 1986. If the interest rate charged by the employer is less than the benchmark rate of 5.95% for 2015 then it will be considered as low rate of interest (Pearce and Pinto 2015). In the given case, Emma received loan from the company at 4.45%, which is less than the benchmark rate so it is a loan benefit under section 16 of the FBTA Act 1986. As in interest no GST is payable so lower gross up rate is used for calculating grossed up value. The grossed up taxable value of loan fringe benefit comes to $14706.00.

The section 40 of the FBTA Act 1986 describes that a property benefit can arise if the employer provides the property at free or discount to the employee.  Property here includes all the goods, real estate property and other properties (Mihaylov et al. 2015). In the given case, Emma received a bathtub from the company at a discount rate of $1300.00 and it is sold to public for $2600.00. Therefore, in the given case the property fringe benefit is $1300.00.

The calculation of taxable fringe benefit and FBT payable is given below:

Calculation of FBT Payable

Particular

Taxable value of the benefit

Gross up rate

Grossed up taxable value

Car Fringe benefit

 $                    6,328.77

2.1463

 $           13,583.43

Loan Fringe benefit

 $                    7,500.00

1.9608

 $           14,706.00

Property Fringe Benefit

 $                    1,300.00

2.1463

 $             2,790.19

Total Fringe Benefit taxable amount

 $           31,079.62

FBT rate

49%

Fringe Benefit Tax payable

 $           15,229.02

(b)

It is provided in section 19 of the FBTA Act 1986 that if the loan amount is used for purchasing income producing asset then reduction in the taxable value is allowed. Emma took a loan of $500000.00 at low interest rate from employer. She used the loan for purchasing holiday home and the remaining amount was lent to her husband for purchasing Telstra share. In this case, as both are non-income producing asset so no deductions are allowed. On the other hand, if Emma used $50000.00 for purchasing share herself then a reduction in taxable value is allowed under section 19 of the act. Then the reduced gross up taxable value of loan fringe benefit will be $13235.40 and the FBT payable is $14508.42. The calculations are given below:

Calculation of FBT Payable

Particular

Taxable value of the benefit

Gross up rate

Grossed up taxable value

Car Fringe benefit

 $                    6,328.77

2.1463

 $           13,583.43

Loan Fringe benefit

 $                    6,750.00

1.9608

 $           13,235.40

Property Fringe Benefit

 $                    1,300.00

2.1463

 $             2,790.19

Total Fringe Benefit taxable amount

 $           29,609.02

FBT rate

49%

Fringe Benefit Tax payable

 $           14,508.42

Reference

Barkoczy, S., 2016. Core tax legislation and study guide. OUP Catalogue.

Braverman, D., Marsden, S.J. and Sadiq, K., 2015. Assessing taxpayer response to legislative changes: A case study of ‘in-house’fringe benefits rules. Journal of Australian Taxation, 17(1), pp.1-52.

Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(03), pp.277-300.

Hodgson, H. and Pearce, P., 2015. TravelSmart or travel tax free breaks: Is the fringe benefits tax a barrier to active commuting in Australia?.

James, S., Sawyer, A. and Wallschutzky, I., 2015. Tax simplification: A review of initiatives in Australia, New Zealand and the United Kingdom.eJournal of Tax Research, 13(1), p.280.

Jones, D., 2016. Capital gains tax: The rise of market value?. Taxation in Australia, 51(2), p.67.

Mihaylov, G., Tretola, J., Yawson, A. and Zurbruegg, R., 2015. Tax compliance behaviour in Australian self-managed superannuation funds.

Pearce, P. and Pinto, D., 2015. An evaluation of the case for a congestion tax in Australia. Tax Specialist, 18(4), p.146.

Saad, N. and Udin, N.M., 2016. Public Rulings as Explanatory Materials to the Income Tax Act 1967: Readability Assessment. Advanced Science Letters, 22(5-6), pp.1448-1451.

Scott, R.A., Currie, G.V. and Tivendale, K.J., 2012. Company cars and fringe benefit tax–understanding the impacts on strategic transport targets February 2012.

Shields, J. and North-Samardzic, A., 2015. 10 Employee benefits. Managing Employee Performance & Reward: Concepts, Practices, Strategies, p.218.

Taylor, G. and Richardson, G., 2013. The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), pp.12-25.

Tran-Nam, B., Evans, C. and Lignier, P., 2014. Personal taxpayer compliance costs: Recent evidence from Australia. Austl. Tax F., 29, p.137.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016.Australian Taxation Law 2016. Oxford University Press.

 

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