Student name:

Taxation Law 6

Taxation

Question 1a

Determination of Dave Solomon’s net capital gain or net capital loss for the year ended 30th June of current tax year.

The two storey residence at St. Lucia

Dave has lived in the residence for the last 30 years having purchased it at $70,000. Australian tax principles indicate that when one sells his/her residence, it will be deemed tax exempt as far as the capital gains tax is concerned. This will be so where the residence has been used as one’s family home during the time the seller owned it. It must be noted however that for this to apply, the residence must not have been put to use for producing assessable income. If the above conditions apply, then one can claim full CGT exemption. As stated above, Dave has used this property as the family residence for the last 30 years. Since the case does not give any indication that Dave used the residence for any income generating activity, it will be assumed that the residence was solely used as a family residence. Therefore, it is clear based on the above facts in regard to relevant taxation laws that Dave’s residence is CGT exempt and hence he will be entitled to claim full CGT exemption from the gain he has made after selling the residence.

The painting

Dave also sells a painting by Pro Hart that he had purchased on 20th September 1985 for $15,000. He sells the painting at an auction on 31st May of the current tax year for $125,000. The Australian tax law would treat this as sale of an individual collectable and hence a CGT even. This is because the law stipulates that sale of individual collectables will attract CGT on the gain made unless the asset in question had been acquired for $500 or less. However, Dave acquired his painting at $15,000 and thus the gain made will attract CGT deduction.

The luxury motor cruiser

Dave purchased the luxury Motor cruiser that he has moored at the Manly Yacht club in late 2004 for $110,000 and he then sells it for $60,000 on 1st June of the current tax year. The law would treat this as a personal use asset and thus liable for CGT deduction for any gain made from the sale. The Australian tax office provides that a personal use asset will be treated as a CGT asset and one would only be exempted from CGT if the asset in question was acquired for $10,000 or less. Dave bought the luxury motor cruiser for $110,000 and hence the asset will be subjected to CGT deduction if any gain is made on its sale.

Sale of the parcel of shares at $80,000

The shares are expected to result in income in future in the form of dividends or capital gain at the time of sale. As such, their sale is a CGT event that would attract deduction if any gain is made on their sale.

Computation of capital loss or gain

The two storey residence at St. Lucia

Note that the house was acquired after 11.45 am on 21st September 1999 and Dave owned it for more than 12 months. Thus, we will use the Discount method in computing the CGT payable and David being an individual, the discount rate will be 50%.

House sale price = $865,000

Commission paid = ( $15,000)

Deposit = $85,000

Total proceeds = $935,000

Buying price= $70,000

Net gain = $865,000

Discount @50% = $432,500

Capital gain = $432,500.

However, as stated above, Dave will be entitled to claim full CGT exemption on the sale of the residence.

The painting

Painting selling price =$125,000

Less buying price =$15,000

Gain = $110,000

Discount @50% = $55,000

Capital gain = $55,000

The luxury motor cruiser

Selling price =$60,000

Less buying price =$110,000

Loss on sale =$50,000

Discount @50% =$25,000

Capital loss =$25,000

Parcel of shares

Selling price =$80,000

Less expenses

Buying price $75,000

Brokerage fee $750

Stamp duty $250

Gain $4,000

Computation of total capital gain/loss

Total capital gain = $432,500+$55,000+$4,000-$432,500-$25,000 =$34,000

The calculations above indicate that Dave realized a net capital gain of $34,000 and hence he will have to pay CGT on the amount. If he had made a capital loss on his other activities during the tax year, the capital gain can also offset the loss and hence reduce the amount of capital gains tax he is supposed to pay.

b) What Dave would do with the amount if he had a net capital gain?

As stated above, if Dave makes a net capital gain, then he would be entitled to pay the capital gains tax thereof. However, he can also use the capital gain amount to offset any capital loss amounts that he might have made during the tax ear and hence reduce the overall capital gains tax he is liable to pay.

c) What Dave would do with the amount if he had made a net capital loss?

Had he made a net capital loss, he would not be taxed on it and cannot claim the capital loss against income. He would however be able to use the capital loss in reducing the amount of capital gain made within the same year as stated above. If this loss has exceeded the capital gains that he has made in the same tax year, he will be able to carry forward the capital loss and deduct it against the capital gains that he makes in the coming years.

Question 2 a

Advice to Periwinkle on its FBT consequences that arose from the above information

Fridge Benefit Tax

In computing the FBT the company should pay, it will be considered that the company is entitled to claim an input tax credit whenever a GST item is initially purchased. This entitles the company to apply type 1 gross-up rate when calculating the FBT thereof.

The car provided to Emma was made available to her both for employers and her own personal/private use. The tax law provides that such benefit should attract fridge benefit tax as it is provided by the employer to the employee and the employee contributes nothing towards this benefit. The car availed to Emma is worth $33,000. This is the amount that will be used as tax base in computing FBT thereof. During the current tax year, the car travels 10,000 km and hence a statutory percentage of 20% will be applied in determining the fridge benefit as provided by the tax law in the annualized kilometers schedule. The car is availed to Emma 1st May 2015 to 30th March 2016 or eleven months. Within this period, it is taken for annual repair for five days and hence not available for her private use and for ten days, it is packed at the airport during the time that Emma has travelled. It should be noted that this is not Emma’s workplace neither does she return the car keys to the boss during the time she travels. Thus, it should be considered still available to Emma for private use during this time. Thus, during the tax year, the car is available for Emma’s private use for 365- April- repair time or 365-30-5 = 330 days. Though Emma did contribute some money towards the car’s minor repairs, the money was reimbursed and hence she has contributed nothing towards managing the car indicating his contribution towards reducing the FBT is nil.

This loan was charged an interest rate of 4.45% by the employer which is much lower than the statutory allowed rate of 5.65%. Thus, Emma enjoys a fridge benefit that results from the difference in interest she pays and the interest she would have paid should the statutory rate have been applied on the loan. Emma puts the loan to different uses including the $450,000 she uses in purchasing a holiday home and the $50,000 she lends her husband to buy shares in Telstra charging her no interest. The tax law provides that when calculating fridge benefit thereof, interest on loan that has been used in buying income producing assets is deductible (Taxpayer.com.au, 2016). On the other hand, it is not deductible if it is used in the purchase of private assets that do not generate income. Thus, it will be concluded that the part of the loan that is used for purchasing a holiday home will have its interest not being deducted. The portion that is lent to Emma’s husband to purchase shares at no interest will also not be deducted. This is because though these shares will result in income in future; this income will accrue to the husband and not to Emma. Thus, the whole loan will be deemed to have been used for non-income generating activities.

The bathtub

Emma buys a bathtub from Periwinkle @$1,300 though the normal price is $2,600. The bathtub cost the company $700. Thus, Emma enjoys a fringe benefit of the difference between her buying price and the market price of the bathtub.

Computation of the FBT thereof;

FBT = Taxable value× FBT rate

In this case, taxable value will be the product of the car’s base value, the statutory percentage and the number of days in the year that the car was availed to Emma for private use dividend by the number of the tax year days. This is given by;

Taxable value = $33,000*0.2*(330/365) = $5,967

FBT =2.1463* $5,967*49% = $6,275

In this case, the taxable value is the interest calculated at benchmark statutory rate less the actual interest charged by Periwinkle.

Taxable value = $500,000(5.65%-$4.45%) = $6,000

FBT = $6,000*1.9608*0.49 = $5,765

The bathtub

The fridge benefit will be = $2,600-$1,300-$700 = $600×1.9608×49% = $576

Total FBT thereof = $576+5,765+6,275 = $12,616

Thus, Periwinkle should pay $12,616 as FBT arising from the benefits availed to Emma.

b) How my answer would differ if Emma used the $50,000 to purchase the shares herself, instead of lending it to her husband

It should be noted that the buying of shares by Emma would be considered an income generating activity for her and hence the interest thereof would be deductible. Thus, she would only be required to pay FBT that arises from purchasing the holiday home. In this case, the FBT would be;

FBT = $450,000(1.2%)*1.9608*49%= $5,188.

Thus the company’s FBT obligation would be less. This would amount to;

$5,188+$576+$6,275 = $12,039.

References:

Taxpayer.com.au, 2016, Tax & You, Retrieved on 28
th May 2016, from;

http://www.taxpayer.com.au/KnowledgeBase/10022/Individuals-Tax-Super/CGT,_GST,_FBT