Taxation For Fred Australian Citizen: Indexation And Discounted Methods For Calculating Capital Gain Tax

Case 1: Capital Gain Generated After Selling Holiday Home

Describe about the Taxation for Fred Australian Citizen.

The capital gain that might be generated by Fred after the sales of holiday home:

Fred being an Australian citizen could effectively use the both indexation and discounted method for calculating the capital tax. In addition, the indexation method could be effectively used as the property was mainly purchased before 1999 September (Ato.gov.au 2016). In addition, the any property that is been purchased after the 1999 September the indexation method could not be used for calculating the capital gain. Fred has mainly purchased the property in 1987. Furthermore, the Consumer Price Index (CPI) has been used for determining the CPI of 1987 quarter and 1999 quarter (Ato.gov.au 2016). With the help of this valuation, the overall capital gain and taxable amount of Fred could be effectively evaluated.

Furthermore, the indexation method has been effectively conducted by using the CPI value for both 1987 and 1999. In addition, Fred is both a citizen and an individual in Australia, which allows Fred to use both Indexation and discounted method for calculating his capital gain tax. After the effective calculation of both indexations and discounted method, Fred could choose the capital tax method, which reduces his overall taxes (Ato.gov.au 2016).   

In addition, with the help of discounted method Fred is able to obtain a reduced taxable income, which might help in increasing his retained income. In addition, the capital loss, which was incurred in previous year, might effectively be deducted from the overall taxable income generated after the discounted method. As per ATO, discounted method is more helpful for individuals investors to reduce their overall taxable amount (Ato.gov.au 2016).

Calculating the Net Capital Gain/Loss of Fred for the period ending on 30th June,2016
	Discounted Method		Indexation Method
Particulars	$ Amount	$ Amount		$ Amount	$ Amount
a) Sale of Holiday Home :
Sales Consideration		8,00,000			8,00,000
Less : Cost Base of the Property	100,000			153378.4
Legal Fees on Sales (Exclusive of GST)	1,000			1,000
Commission of Real Estate Agent	9,000			9,000
Stamp Duty on Purchase	2,000			3,067.6
Legal Fees on Purchase	1,000			1,533.8
Construction Cost of Garage	20,000	133,000		24,673.9	192,653.6
Capital Gain on Sale		667,000			607,346.4
Less : 50% Exemption on Capital Gain		333,500
Taxable Capital Gain (A)		333,500			607,346.4
Less : Capital Loss of Previous Year		10,000			10,000
Net Taxable Capital Gain		323,500			597,346.4

Table 1: Depicting Fred’s capital gain for 2016

(Source: as created by author)

Table 1, mainly helps in depicting the overall capital gain that might be generated by Fred by following the discounted or indexation method. Moreover, the use of discounted method might help Fred in reducing the overall taxable income and in turn retain more profits from sale of the Holiday home. The taxable amount as per discounted income is at 323,500. However, the indexation method might increase the taxable amount to 597,346.4 so the use of discounted method is more profitability for Fred.

The second situation mainly states that the overall capital loss, which was incurred by Fred mainly generated from loss of antique. In addition, as per the ATO the capital loss generated from an antique could only be deducted from capital gain generated from antique (Ato.gov.au 2016). Thus, the overall taxable amount of Fred will change in the current situation and will be around 333,500 as per the discounted method.

Calculating the Net Capital Gain/Loss of Fred for the period ending on 30th June,2016

a. Providing relevant information of Periwinkle regarding the FBT consequences that it currently faces:

Fringe Benefit Tax (FBT) on Car:

The following table mainly helps in depicting the overall fringe benefit that is provided by Periwinkle to its employee Emma. In addition, the benefit is effectively taxable amount as per the guidelines of ATO. Furthermore, the car was mainly used for 336 days and thus fringe benefit is only calculated on that basis and amounts to $6,059.02, which is taxable on Periwinkle. Schneider (2013) cited that governments with the help of fringe benefit taxation system are able to effectively change tax on income that is been distributed among employees of the company.

Calculating the Fringe Benefit generated from car
Particulars	Details	Amount
Total Kms. Travelled during the FBT year	A	10,000
No. of Days in the FBT year	B	366
No. of Days of Travel	C	336
Annualised Kilometres	(A x B/C)	10,892.857
Statutory Rate as per Annualised Km.	E	20.00%
Cost Base	F	$33,000
No. of Days available for Private Use	C	336
No. of days in FBT Year	B	366
Taxable Value	(FxExC)/B	$6,059.02

Fringe Benefit Tax (FBT) on Loan:

The following table mainly helps in depicting the overall Fringe benefit tax, which might be paid by Periwinkle for lending help to its employee. As per the ATO guidelines, the interest is calculated on the market rate and thus, 5.95% is calculated for depicting the fringe benefit generated from loan. In addition, the overall taxable amount on fringe benefit generated from loan amounts to $22,250. Scott, Currie and Tivendale (2012) mentioned that fringe benefit tax mainly helps in reducing the unethical measures taken by the company to retain more profits.  

Calculating the Fringe Benefit generated from loan
Particulars	Details	Amount
Loan to Employee	A	$500,000
Benchmark Interest Rate	B	5.95%
Actual Interest Rate	C	4.45%
Taxable Value Interest on Loan	D = (AXC)	$22,250

Fringe Benefit Tax (FBT) on Discount:

The following table main depicts the overly fringe benefits that is been generated by providing discounts to employee of Periwinkle. In addition, the taxable amount was mainly calculated by deducting the 75% of market price by actual price paid by the employee (Morris and Wilson 2014). Then the balance amount $650 is taxable under fringe benefit.

Calculating the Fringe Benefit generated from discount
Particulars	Details	Amount $
Market Price of the Bathtub	A	2,600
Special Price for the Employee	B	1,300
Taxable Value of the Bathtub	C=A x 75%	1,950
Taxable Value of Benefit	C – B	650

Providing fringe benefit tax that needs to be paid by Periwinkle inclusive of GST:

The following table mainly helps in depicting the overall fringe benefit tax, which is to be paid by Periwinkles. In addition, the segregation of GST inclusive and free fringe benefits is effective depicted in the table. Barkoczy (2016) stated that segregation of GST tax mainly help in depicting the exact taxable amount of the company. Moreover, around $28,374.33 is the total taxable amount, which needs to be paid by Periwinkle for the period ending 31^st march 2016.

Calculating the Fringe Benefit Tax of Periwinkle Pty. Ltd for the period ending on 31st March,2016
	GST Inclusive	GST Free
Particulars	Amount $	Amount $
Car Benefit	6,059.02
Interest on Loan		22,250
Sale at Special Rate		650
Total of GST Inclusive/Free Benefits	6,059.02	22,900
	A	B
Gross-up Rate	2.1463	1.9608
	C	D
Gross-up Value	13,004.47	44,902.32
	E = A x C	F=B X D
Total Taxable Fringe Benefit	57,906.79
	G = E + F
Fringe Benefit Tax Rate	49%
	J
Fringe Benefit Tax Liability	28,374.33
	K = G x J

If Emma has purchased the overall shares then Periwinkle would be entitled for a deduction in FBT, which in turn help in decreasing its overall fringe benefit liabilities. In addition, the income that might be generated from shares like dividend will not be a taxable amount and Periwinkle is not entitled to pay any tax for such benefits. Lastly, the income that is being generated from shares will be a taxable amount for Emma and not affect the overall fringe benefit tax of Periwinkles. Gabbay and Smets (2013) argued that income generated from shares is mainly taxable under income tax or capital gain tax.

Reference and Bibliography:

Ato.gov.au. (2016). How to calculate your FBT | Australian Taxation Office. [online] Available at:https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/how-to-calculate-your-fbt/ [Accessed 18 Sep. 2016].

Ato.gov.au. (2016). Loan and debt waiver fringe benefits | Australian Taxation Office. [online] 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 18 Sep. 2016].

Ato.gov.au. (2016). Property fringe benefits | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(fbt)/In-detail/Employers-guide/Property-fringe-benefits/?page=4#Goods_manufactured_or_produced_by_the_provider [Accessed 18 Sep. 2016].

Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.

Ford, A. and Wiebe, Z., 2015. Financing for College with the Uniform Transfers to Minors Act: Make the Zero Rate for Qualified Dividends and Net Capital Gain Work toward Building a College Fund. Journal of Accountancy,220(1), p.56.

Gabbay, D.M. and Smets, P. eds., 2013. Quantified Representation of Uncertainty and Imprecision (Vol. 1). Springer Science & Business Media.

Harding, M., 2013. Taxation of Dividend, Interest, and Capital Gain Income.

KAPLAN, R.L. and PRICE, D.J., 2014. I. THE 100TH ANNIVERSARY OF THE REVENUE ACT OF 1913: MARKING A CENTURY OF INCOME TAX LAW IN THE UNITED STATES: Change and Continuity in Fringe Benefit Taxation: Seeking Sense and Sensibility. NYL Sch. L. Rev., 59, pp.285-775.

Morris, A. and Wilson, S., 2014. Struggling on the Newstart unemployment benefit in Australia: The experience of a neoliberal form of employment assistance. The Economic and Labour Relations Review, 25(2), pp.202-221.

Nijland, L. and Dijst, M., 2015. Commuting-related fringe benefits in the Netherlands: Interrelationships and company, employee and location characteristics. Transportation Research Part A: Policy and Practice, 77, pp.358-371.

Reichert, C.J., 2015. Right to Purchase Land Is a Capital Asset: A Taxpayer’s Sale of His Position in a Lawsuit Resulted in Capital Gain Rather Than Ordinary Income. Journal of Accountancy, 219(3), p.68.

Schneider, K.N., 2013. Soften the blow by providing tax-free fringe benefits to terminated employees. Journal of Legal Issues and Cases in Business, 2, p.0_1.

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.

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