Capital Taxation Theories Assignment Help

Capital Taxation Theories Assignment Help

Capital Taxation Theories Assignment Help

This capital taxation theories assignment help is based on the case study of fringe benefit of tax and capital gain tax

Case Study 1: Capital Gain Tax

Capital gains tax (CGT) is basically a tax imposed on capital gains. The tax is calculated on the profit that is gained on the sale of any property or non-inventory assets. The profit is made when the cost of purchase of those assets was lower than the sum recognized on the sale. Commonly the capital gains tax is computed on the sale of any property, bonds, shares or any precious metals. The capital gain taxation theory is still not been executed in all the countries and the countries where it has been implemented has a different taxation rates as compared to other countries (Burman, 2010). Hence, CGT is a type of tax which is charged on the gain received when a non-inventory asset whose value is been appreciated from the date when it was purchased is sold or disposed by an individual or any institute or organization.

In Australia, an individual who is a resident or non-ordinary residents are liable to CGT. In Australia there is no such particular CGT taxation rate. Currently, the top most marginal tax rate is 46.5% but if the asset is hold for at least 1 year by the holder before disposing it then he is entitled to rebate of 50% CGT, through this only half of the amount is charged to the tax. If the individual after exercising the 50% CGT rebate is charged to top marginal tax rate then his or her tax rate will be reduced to 23.25%. This rebate with effect from May 2012 is not applied or exercised on temporary as well as non-residents. If the trader is registered under GST then he or she is application for exercising the rebate after claiming for the input GST credit for that particular amount but if the trader is not registered under GST then he or she is not application to claim input GST credit for that particular amount. If an individual or association who is a resident of Australia has a power to offset their capital losses against those of capital gains and can be carried forward for a indefinite period but these loses cannot be offset against the ordinary gains (Clarke.et.al, 2011). Apart from this, any loss arises due to sale of any collectible assets then such losses cannot be set off or carried forward against the capital gain.

An individual whose profits comes under tax-free allowances in the year are also not subjected to CGT. Any type of investment made in the newly start up venture are also not liable to CGT i.e. these are exempted. If the individual who is a taxpayer acquires any non-inventory assets before 20th September 1985 then he or she is entitled to obtain a title of pre-CGT asset and the asset holding this title is exempted from the CGT but if any additional repair or construction is done on the property after 20th September 1985 then an individual will not be entitled to pre-CGT asset and hence no exemption will be provided for that asset.

Now, according to the case, Fred who is a resident of Australia is selling his second home which is located at Blue Mountains and he has already signed the selling contract in August in last year but in this year on Feb the sale was settled and he receives an amount of $800,000 from the buyer and for this he bears expenses for $9,900 as commission and $1100 as legal fees including the GST. The home was purchased for $100,000 by the Fred on 1987 apart from this he also paid stamp duty of about $2,000 and $1000 as legal fees. He also has incurred expenditure on constructing the garage for $20,000 (Altshuler.et.al, 2010). It is also given in the case, that Fred is also having a capital loss of $10,000 aroused last year from the sale of shares. It has been found that in the case it has not been mentioned whether Fred is registered under GST or not and therefore the net capital gain is being calculated by assuming both the situations by making two sets i.e. one as registered under GST and another as non-registered under GST. The format for calculating the Fred’s current year capital gain is as follows:  

Figure 1: Computation of net capital gain.
The following is the computation of current net capital gain of Fred:

Set 1: If Fred is registered under GST:-Table 1: Computation of Net Capital Gain

PARTICULARS

AMOUNT (IN $)

Capital Sale

 

800,000

Less: Cost Base

 

 

Purchase price

100,000

 

Expenses incurred for constructing garage

2,000

 

Stamp duty

2,000

 

Legal fees (purchase)

1,000

 

Legal fees (sale)

1,000

 

Commission to the agent of real estate

9,000

133,000

Capital Gain

 

667,000

Less: 50%  exemption

 

333,500

Net Capital Gain

 

333,500

Less: Capital loss carried forward

 

10,000

Net Taxable Capital Gain

 

323,500

Set 2: If Fred is not registered under GST:- 
Table 2: Computation of Net Capital Gain

Particulars

Amount (in $)

Capital sale

 

800,000

Less: Cost Base

 

 

Purchase price

100,000

 

Expenses incurred for constructing garage

20,000

 

Stamp duty

2,000

 

Legal fees (purchase)

1,000

 

Legal fees (sale)

1,100

 

Commission to the agent of real estate

9,900

134,000

Capital Gain

 

666,000

Less: 50% exemption

 

333,000

Net Capital Gain

 

333,000

Less: Capital Loss carried forward

 

10,000

Net Taxable Capital Gain

 

323,000

Notes: 

  • The stamp duty and legal fees payments made by the Fred during purchase of holiday home are considered as cost base.
  • The expenditure incurred by the Fred for constructing the garage on the property is also included in the cost base.
  • In the first set, Fred is considered as a registered under GST and therefore GST amount is being deducted from the cost base and in second set, Fred is considered as non-registered under GST and hence, the GST amount is also included in the cost base by not allowing any deductions.
  •  Fred is also not entitled to enjoy the title of pre-CGT asset because the property was purchase by the Fred after 20th September 1985.
  • It is noticed that Fred is a taxpayer and he also holds the property for more than the one year and hence, he is entitled for 50% exemption in the capital gain.
  • The loss occurred on the sale of shares are also carried forward and set off against the current capital gain of Fred. 

According to the case, Fred is not eligible to carry forward and set-off the loss occurred from the sale of antique vase against the current capital gain. This is so because, antique vase falls under collectible assets and any loss incurred related to these asset can only be carried forward and set-off against the capital gain received from the same assets. Due to this reason, Fred cannot adjust the loss incurred from the sale of antique vase as he does not receives any capital gain from the same asset after getting such loss. So, the new net capital gain and net taxable capital gain will be $333,500 for the case if Fred is registered under GST and the new net capital gain and net taxable capital gain for the case if Fred is non-registered under GST will be $333,000.

Case Study 2: Fringe Benefit Tax

Fringe benefit is basically additional benefits provided to the employees by the employer in the employment session. These benefits complement a staff’s salary and it could be private health care, private loan, accommodation fringe benefits or car fringe benefits. These benefits are only provided in employment terms and are provided only to the associates or employees and not to the contract based employees (Atkinson and Leigh, 2010). A different method is used for every fringe benefit in order to calculate the tax value of such benefits.

 According to the Australian government, the taxation implications rate of fringe benefits taxes (FBT) are as follows:

Table 3: FBT taxation rates

FBT TAX RATES

Year Ending

Tax Rates

March 2018

47%

March 2017

49%

March 2016

49%

March 2015

47%

March 2014

46.5%

The FBT will charged to the employer for the fringe benefits provided to the employees at 49% taxation rate as per 31 march 2016 year ending, this would characterize the greatest marginal rate of income tax i.e. 45% including Medicare levy which has also been increased to 2%. The above rate is applied to the taxable amount of all total benefits provided by the employer to the employee. If any payment is made on behalf of the employees then such contribution is deducted or exempted from the FBT (Woellner.et.al, 2016). Australian government has given relief by exempted some of the benefits provided to the employees by the employer under the employment session and these are the following:

  • Wages and salary
  • Relocation expenses of the employees
  • Superannuation
  • Remote area housing
  • Benefits provided irregularly plus the values of such benefits are less the $300
  • Items provided that is related to the work like for example tools, laptops, protective clothes, etc.

(A). Advise Periwinkle of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2016. You may assume that Periwinkle would be entitled to input tax credits in relation to any GST-inclusive acquisitions.

With respect to the case, Emma who is an employee in Periwinkle Pty Ltd which is manufacturer of bathtub is provided with many different fringe benefits in the year 2014-15. The following are the various benefits which an organization has granted to Emma.

Car Fringe Benefit:
Emma has been provided a car in the year 2014-15 by the Periwinkle organization as she has to travel a lot for the work purposes. But the use of car is not limited to the office use only. Therefore, it is required that Periwinkle has to consider the misuse of such benefits as it has leads to FBT consequences for the organization. In the year 2014-15 the car has been run about 10,000 km. It has found that the car was parked in the airport when she was gone out of station for 5 days. The statutory percentage is determined by using the following formula by considering the kilometre that a vehicle is being used. Therefore, in order to calculate the tax liability related to FBT then, Periwinkle can make use of any two methods but the best method would be the use of statutory formula method as it requires less maintaining of records and also facilitates low rates FBT (Barkoczy, 2016). Emma has also incurred some expenses for repairing the car and for this Periwinkle has repaid to her. It has been mentioned in the section number 20 of FBT act that if any expenditure is being incurred by the employees on the benefits provided to them should be treated as extended benefits of the employer and therefore, the expense of $550 made by the Emma for repair is included in the FBT value. The amount of GST included in the expenses made on repair by Emma i.e. $550 is also deducted from the net taxable amount. The amount of GST is calculated in the following way:
$550*1/11 = $50

The statutory percentage is determined by using the following formula by considering the kilometre that a vehicle is being used.

Table 4: Statutory Percentages

Kilometre travelled during FBT period

Statutory Rate

Less than 15,000 kilometre per annum

20%

15,000 km to 24,999km per annum

20%

25,000 km to 40,000 km per annum

20%

More than 40,000 km per annum

20%

The calculation of FBT taxable value of car is as follows:
Taxable value = [(20/100) * $30,000 = $6,000]

Note: The worth of the car is considered as $30,000 since it does not come under non-GST benefits and the amount of GST included will be:
$33,000 * 1/11 = $3,000

Loan Fringe Benefit:
In year 2014-15 Emma has been provided a personal loan of $500,000 by Periwinkle Ltd. Emma has used $450,000 for purchasing a holiday home and the remaining amount is hand over to her husband for purchasing a shares. The net fringe benefit taxable value is calculated by using the interest. According to the case it is noticed, that the whole of the loan amount is not utilized by her so the amount which is not utilized is not used for deduction since GST is not implicit on it. Therefore, the new interest amount will be the following:
$450,000 * 4.45/100 = $20,025

Goods purchased by Emma:
Emma purchases a bathtub from Periwinkle in year 2014-15 for $1,300. The same bathtub is being sold outside to the customer for $2,600. Therefore, this will also be considered as a fringe benefit granted by Periwinkle to her employee Emma so, it will be taxable under Periwinkle. Following is the calculation of FBT liability for 2014-15:

Table 5: Computation of FBT liability for 2014-15

PARTICULARS

GST BENEFITS

NON-GST BENEFITS

2.0647

1.8692

AMOUNT

Car fringe benefit

$6,000

-

$12,388

-

$12,388

Repairing reimbursement amount

$500

0

$1,032

-

$1,032

loan interest amount

-

$20,025

 

$37,430

$37,430

Total Taxable Value

 

 

 

 

$53,280

Less: FBT @ 47%

 

 

 

 

$25,041.60

Less: GST Credit

 

 

 

 

$3,050

Net FBT Liability

 

 

 

 

$25,188.40

(B). How would your answer to (a) differ if Emma used the $50,000 to purchase the shares herself, instead of lending it to her husband?

It is assumed that the if Emma had used the remaining amount i.e. $50,000 for the purpose of purchasing the shares for herself without lending the money to her husband without interest then the that particular amount will not be considered as a fringe benefit and will not be included in calculating the taxation for periwinkle Pty. Ltd (Henry, 2010). This is because she is receiving revenue from such assets and hence, it will not be considered as fringe benefit payment. Therefore, the revised FBT liability for Periwinkle would be the following:

Table 6: Computation of revised FBT liability for 2014-15

PARTICULARS

CALCULATIONS

NET AMOUNT

Amount of loan interest

[$400,000 * (4.45/100)]

$17,800

Taxable value over amount of loan interest

($17,800 * 1.8691)

$33,270

Fringe benefit taxable value

 

$49,120

FBT

 

$23,086

Less: Amount of GST credit

 

$3,050

Net Fringe benefit payable amount

[$23,086 - $3,050]

$20,036

References

  • Altshuler, R., Harris, B.H. and Toder, E., 2010. Capital income taxation and progressivity in a global economy. Va. Tax Rev., 30, p.355.
  • Atkinson, A.B. and Leigh, A., 2010. The distribution of top incomes in five Anglo-Saxon countries over the twentieth century.
  • Barkoczy, S., 2016. Core tax legislation and study guide. OUP Catalogue.
  • Burman, L.E., 2010. The labyrinth of capital gains tax policy: A guide for the perplexed. Brookings Institution Press.
  • Clarke, M., Seng, D. and Whiting, R.H., 2011. Intellectual capital and firm performance in Australia. Journal of Intellectual Capital, 12(4), pp.505-530.
  • Frogner, B.K., 2010. The missing technology. Applied health economics and health safety policy, 8(6), pp.361-371.