Tax Law For Australian Investors

Capital gains tax calculation methods

Describe about the Tax Law for Australian Investors.

The difference between the acquisition cost of capital gain tax asset and the capital proceeds is termed as capital gain. There are three manners in which the calculation of capital gain done, they are  (Ato.gov.au, 2016):

Discount method: application of same is 12 months prior to event of capital gain tax;

Indexation method: applied at the time of acquiring of assets prior to September 21and should have been held for at least 12 months prior to the event of capital tax gain; and

Residual method: applied when assets have been held for a period less than 12 months.

Items which are exempted from gain on capital assets sale are those properties which have been acquired prior to 20^th September 1985 being (i) sale of house of residence, (ii) cars, (iii) amount which have been reimbursed for some kind of injury, and (iv) collectable item acquired for an amount being less than $ 500.

The losses that arise from Capital Gain can either be set off or carried forward when (a) there is capital loss which is long term, this type of loss is set off against capital gain which is long term, no other type of set off can be done with it; and (b) capital loss that is short term can be set off either from long-term capital gain or from short term.

(i) Mr. Dave Solomon in the given situation was a resident for 30 years in the building which had been purchased by him for $ 70,000. Later in 27^th June present tax year, he sold it for $ 8, 50,000 which was sold originally at the auction and advance money of $85,000 was paid. Since later the purchase did not go through due to lack of funds . Hence, there was forfeiture of the amount and the $85,000 was therefore charged as “Income from other sources.”

Capital Gain Calculation

Proceed with Sale	$8, 65,000
Exemption under CST I.E. Family Income definition
Long Term Capital Gain (“LTCG”)	$ 0

(ii) Pro-hart painting purchased for $ 15,000 on 20^th September, 1985, sold for $1, 25,000.

Calculation of Capital Gain

Proceed from Sale	$ 1, 25,000
(Minus) Indexed Acquisition Cost      15,000 x 123.4/71.3	$ 25,961
LTCG	$150,961

(iii) Purchase of luxury motor cruiser during late 2004 for $ 1, 10,000, sold later for $ 60,000 June present year.

Calculation of Capital Gain

Proceed from Sale	$ 60,000
(Minus) Indexed Acquisition Cost	$ 1,10,000
Long Term Capital Loss (“LTCP”)	$ 50,000

(iv) A parcel of shares was sold by him for $ 80,000 of a mining company listed newly in the current year June 5^th, later for repurchase he took a loan of  $ 70,000 and  $5,000 interest thereon was paid by him. Sale brokerage and stamp duty he paid $750 and $250 respectively. Interest on loan under taxation law is not part of acquisition thus, same is not included  (Ato.gov.au, 2016).   

Exemptions from capital gains tax

Calculation of Capital Gain

Proceed with Sale	$ 80,000
(Minus) Brokerage	$75,000
(Minus) Stamp duty	$250
Short Term Capital Loss (“STCL”)	$ 4,000

Total Capital Gain in the year is:

LTCG Residential Property Sale	$ 0
LTCG Painting Sale	$ 1, 50,961
LTCL Boat Sale	$ 50,000
STCL	$ 4,000
LTCG	$ 1,00,961

The previous year tax return of Mr. Dave indicates capital loss due to the sale of shares . Thus, this amount gets adjusted with LTCG. Therefore:

LTCG Net for present years-   $ 1, 00,961-$10,000 =    $ 90,961

Tax is required to be paid for the gain which arises due the capital assets’ sale since capital gain asset is a part of the income assessed of an assessed and this would be for the year of the sale. On the sale of asset Mr. Dove has thus earned a gain. He, therefore, can contribute to the fund of personal superannuation. Relevant records have to be kept of all major and important transactions  (Ato.gov.au, 2016).

Summation of all the loss due to capital sale asset including that in the previous year is Net Capital Loss. It can only be set off against the capital gain in subsequent years and not income from other sources and thus has to be carried forward. If there is no positive capital gain that Dave has he shall either acquire the loan or continue selling his assets so that contribution can be made to personal superannuation fund (“Fund”). Later he can rent an apartment, and tax-free income can be withdrawn from the Fund after next year when he is 60  (Ato.gov.au, 2016).

Part I

There are certain benefits that Periwinkle Private Limited has given to Emma such as a Car that she can use for both personal and professional which the company bought on 1^st May 2005 for $ 33,000. Expenses that were incurred by Emma due to this case being $ 550 (for repairs) the company reimbursed. She was also given a loan of $ 5, 00,000 on 1^st September 2015 for purchasing a $ 4, 50,000 at 4.45%. The balance of this amount was given to her spouse for buying shares in Telstra. She also purchased a bathtub sold to the public for $2600 at $ 13, 00 and the cost of the company towards the bathtub was $700.

The tax that an employer pays for benefits given to the employee is Fringe Benefit tax, and this is applied to benefits that are non-cash.

Exemptions to this fringe benefit tax are (i) loan(s), (ii) work-related expenses; (iii) benefits which have less than $ 300 taxable value; (iv) car provided to staff provide that it is used for work-related purposes; (v) housing allowance for house in remote areas; and (vi) expenses for relocation. 

Set-off of losses from capital gains

 If the car that has been provided to the employee is used for any personal purposes, then it will be a fringe benefit and will be taxable under Fringe Benefits Tax, and hence, the tax would be computed on this. If however it is only for less than three months that this car is provided then it cannot be calculated under fringe benefit tax.  Thus, the car which has been provided to Emily is a fringe benefit; it is garaged not with the employer but with Emma. However at the time when the car is at a garage as per Fringe Benefits, it excluded from being the car used for personal purposes. There are two methods by which Fringe benefit can be calculated (i) Cost Basis Method and (ii) Statutory formula application.

Proceed from Sale	$ 60,000
Car’s Base Value	$33,000
Period for which car is provided	=335-5 = 3

Base value of the car  $33,000

The five days when the car was given for repairing will not be included in days of private use of the car by Emma. However, the time when the car was parked in the airport would be counted as personal use as the keys were with Emma and not the company. It is less than 15000km that the car has run during the fringe benefit period hence the rate would be 20%.

Taxed Amount

$33000*20%*330/365	$5,967
(Minus) expenses employee incurred	$550
Fringe Benefit Tax	$5,417

When a loan is given by an employer to an employee at a lower interest rate then the loan which is without interest shall be calculated for fringe benefits tax in the below-mentioned manner:

Loan Bench Mark = 5.95%

Interest Rate by Company= 4.45%

Fringe Benefit Tax = 5,00,000* 1.50%   = $7,500

Since only $4, 50,000 was used by the employee for buying the house, and the rest was given to her husband the taxable value would be $ 7,500 only.

If however the entire amount has been used by Emma, then the fringe benefits tax would be calculated as follows:

• Fringe Benefit Tax without the value deductible otherwise = 7,500 5,00,000*1.50%
• Assuming that the loan was interest free = $29,750 $5,00,000*5.95%
• In case, interest paid was equal to taxable amount =

$ 29,750*10/100            $2,975

• Looking at the actual situation where interest is being charged on the loan

  $5, 00,000*4.45%*10%            $2,225

1. v) Subtract (c)-(d)

$ 2,975- $2,225      $750

• Value of Tax = i-v       7500-750              $6,750

Debt waiver of Fringe Benefit i.e. the product that Emma purchased for $1,300 sold in the market for $ 2,600 difference would be the fringe benefit liability:

$ 2600-$1300=$ 1300

References

Capital gains tax | Australian Taxation Office. [online] Ato.gov.au. Available at: <https://www.ato.gov.au/General/Capital-gains-tax/> [Accessed 19 May 2016].

Capital gains tax. [Canberra]: Australian Taxation Office.

Calculating Capital Gains Tax – the basics for Australian investors | deListed Australia. [online] Delisted.com.au. Available at: <https://www.delisted.com.au/capital-gains-tax/basics> [Accessed 19 May 2016].

Calculating and paying capital gains tax. [online] Help and guidance. Available at: <https://learn.nab.com.au/calculating-and-paying-capital-gains-tax/> [Accessed 19 May 2016].

Global Property Guide. 2016. Australia capital gains tax rates, and property income tax. [ONLINE] Available at: https://www.globalpropertyguide.com/Pacific/Australia/Taxes-and-Costs. [Accessed 19 May 2016].

Jin, L., n.d. Capital Gain Tax Overhang and Price Pressure. SSRN Electronic Journal.

T., J., 1959. Capital Gain. Science, 129(3363), pp.1583-1583.

The taxation of capital gains . 2016. The taxation of capital gains . [ONLINE] Available at:https://www.taxpayer.com.au/KnowledgeBase/10080/Individuals-Tax-Super/Capital_gains. [Accessed 19 May 2016]

 J., 2011. Tax for Australians for dummies. Richmond, Vic.: John Wiley & Sons Australia.