Net Realization of a Capital Asset

Question: Write an essay on the cost of acquisition and net realization of a capital asset. Answer: The capital gain can be measured by the difference between the cost of acquisition and net realization of a capital asset. As per Australian Taxation Office there are three options for deriving taxable value of capital gains. The Discount method is used for the capital assets that is believed to be held for more than a year. The Residual method can be used for short term capital assets which are the assets that are held for less than a year on or before the date of disposal of asset. The Indexation method is applicable to the assets as acquired before 21st September and believed to be held for more than a year before the relevant capital gain tax event. Therefore, capital gain taxable value is derived as per all the methods (Ato.gov.au, 2016). Properties that are acquired before 20th September 1985 are exempted: Motor vehicles Reimbursement of expenses for specified injuries Sale of residential house property Any collectable purchased at a cost less than $500. Long Term Capital Loss: Any loss from the disposal of the long term capital asset should be establishing against the income from the long term capital asset and not against the short term capital gains. Moreover, the capital loss can be carried forward on the long term to an unlimited number of consequent years. Short Term Capital Loss: Losses on the short term capital asset can be set off against both long term and short term capital gain under the same block of assets. It can be carried forward to the unlimited number of assessment years. (a) In the given assignment, Mr. David Solomon sold the two- storey building on 27th June of the current tax year for $850,000 which was acquired by him 30 years back for $ 70,000. The property was originally sold at an auction for which the buyer paid a deposit of $85,000 as an advance but subsequently the same has been forfeited because the buyer did not have enough funds to proceed with the transaction. Thus, under the head Income from other sources, the forfeited amount $85,000 will be taxable. Calculation of capital gain NRV $8, 65,000 Imposed under the definition of CST I.E Family home exemption LONG TERM CAPITAL GAIN NIL (b) The pro hart painting as acquired on 20th September, 1985 for $ 15,000 was sold at an amount of $ 125,000. Accordingly, taxable value of capital gain computed as under: NRV $ 1, 25,000 Less: cost of acquisition subject to indexation 15,000*123.4/71.3 $ 25,961 LONG TERM CAPITAL GAIN $150,961 (c) In the year 2004, the luxury motor cruiser was bought for $ 110, 000 which was disposed off to the local broker on the 1st June of the current tax year for $ 60, 0000. Hence, the taxable value of the capital gain would be as follows: Sales proceeds $ 60,000 Less: Indexed cost of acquisition $ 110,000 LONG TERM CAPITAL LOSS $ 50,000 (d) On 5th June, Mr. Solomon had sold his securities in a newly listed mining enterprise for $80,000 of the current tax year which were bought by him on 10th January for $75,000 in the same year. The additional expenses were contributed at a borrowed amount of $70,000 along with interest $5,000 thereon. Additional expenses the sale of securities on purchase were and brokerage at $750 and stamp duty $250. According to Income Tax Assessment Act, interest on loan is not a part of purchased cost and thus it shall not be included (Jin, 2016).Calculation of capital gain as per Income Tax Assessment Act: Sale value $ 80,000 Less: cost of acquisition $75,000 Less: Brokerage $ 750 Less: stamp duty $250 SHORT TERM CAPITAL LOSS $ 4,000 Capital gain for the current tax year Long term capital gain on sale of residential house $ NIL Long Term capital loss on disposal of Boat $ 50,000 Long term capital gain on sale of painting $ 150,961 Short term capital Gain on sale of securities $ 4,000 LONG TERM CAPITAL GAIN $ 104,961 Further, there has been evidence of net capital loss of $10,000 from the sales of the shares from the tax return of Mr. Dave for the previous year as of 30th June. Thus, according to the provision it can be adjusted with current year long- term capital gain. Thus, Net Long term capital gain for the present year is $ 104,961- $10,000 = $ 94,961 Net capital gain can be measured as the difference between losses incurred and profits earned from the disposal of capital assets along with the adjustments for loss on capital asset carried forward from the previous year. As per the rules and principles of ITAA capital gain is not a separate tax head and it forms a part of assessed taxable income of a taxpayer. Hence, the assessee is required to pay tax on the taxable value of capital gain in the relevant tax assessment year in which the event happened. From the above calculations it has been observed that Mr. Dove has earned profits on sale of asset and is eligible to contribute to his superannuation fund. For this purpose Mr. Dove is required to maintain relevant records and documents of the transactions including purchase receipts, documents for interest on loans, expenses incurred for litigation fees, legal fees, brokerage on shares, relevant records for repairs and maintenance of assets etc. (delisted.com, 2016). Net capital loss is derived as a summation of losses incurred from all the capital assets including losses carried forward from previous year. Capital losses are not eligible to be set off from income of any other heads rather allowed to be carried forward to next assessment years for unlimited period and subsequently set off from the capital gains arrived in that year. An assessee is eligible to choose the source of capital gain for set off the acquired losses but cannot carry forward the loss without availing the set off criteria if the same is available. If Mr. Solomon incurred loss on capital gain then he would require to sell more of his assets or borrowing loan to contribute in his superannuation fund and thereafter acquire a rented city apartment. Subsequently, on attaining the age of retirement he could withdraw the tax free amount from his superannuation funds (Learn.nab.com, 2016). Periwinkle Pty Limited, a bathtub manufacturer is a direct seller to public which provided car costing $33,000 in terms of benefit to one of its employees, Emma on 1st May 2015 as she does lot of travelling related to work. However the usage of the car is not limited to the use of work purpose but for personal use as well. The car was used to travel 10,000 kilometers for the period 1st May 2015 to 31st March 2016. Expenditure on repairs has been reimbursed by the company at $550. The car remained unused for 10 days and parked at the airport as well as for 5 days when it was scheduled for repairs. Further, the company provided a loan of $500,000 to Emma on 1 September 2015 at an interest rate of 4.45% which she used to buy a holiday During the current taxation year, Emma bought a bathtub from her employer company for $1,300 whose cost of production to the company was $700 and sales price for general public amounted to $2,600. FRINGE BENEFIT TAX: Fringe benefit tax can be referred to as the tax payable on the taxable value of certain benefits provided by the employer to his employees. Fringe benefit tax can be applicable which are paid by the company to their employees on non-cash benefits or privileges. Below are the certain exempted benefits from fringe benefit tax: Exempted Loans Expenses related to work purpose only. Benefits of car provided by the company to employees if it is used for only work purpose The taxable value of benefits is less than $ 300 Relocation expense related to the employees Housing allowance for the house located at remote place. FRINGE BENETFIT TAX ARE LIABLE ON Loan, Car, Payment of Expense, Airline, transport, Housing, Property, Car parking, and Residual. Moreover, the Fringe Benefit car is defined as a vehicle or station wagon, which is used to carry less than nine passengers or used to carry weight less than one tons. However, if the car is used for personal purpose and is used to provide to the employee doesnt fall into the definition of car as provided in the Act under fringe benefit tax, then the privilege would be falling within the meaning of fringe benefit tax and accordingly tax to be payable by employer on such benefit. Further, if in case the car is provided for less than 3 months then such benefit would not fall under the definition of fringe benefit and accordingly no tax will be evaluated. In the present case, car provided to Emma falls under the meaning of fringe benefit and accordingly, the employer is liable to pay tax on the car allowance provided. Moreover, the car should be considered f or using against personal purpose if the same is not at the premises of the employer. The car should also be considered at the premises of the employee and meant for personal use as well. It should be noted that the definition of the car to be used for the general purpose can be excluded if the car is at the workshop for the repairing process. Cost Basis method By Applying Statutory formula As per question Base value of the car $33,000 Number of days car provided as fringe benefit tax = 335-5 = 333 days Note: Car sent to workshop for repairs and remains unused for 5 days shall not be included in the calculation of number of days car used by Emma for personal purpose while number of days car parked at the airport shall be included. The cost basis could not be included in the Total Days if the keys of the car can be given to the employer. The rate would be 20% if the car runs for less than 15000 kms during fringe benefit period. Taxable Value $33000*20%*330/365 $5,967 FRINGE BENEIFT TAX $5,417 Treatment of Loan provided by employer to Emma at a low rate of interest Fringe benefit tax related to the loan can be evaluated when an employee is provided a lower rate of interest by the employer. Contrastingly, if a loan is provided to employee at a rate lower than benchmark or interest free loan by the employer then tax on fringe benefit will be calculated as follows: If the company is providing a loan at an interest rate of 4.45% then the benchmark rate of interest would be 5.95%. Hence, fringe benefit tax would be as follows: 500,000* 1.50% = $7,500 Further, the employee used $450,000 for the use of buying a house and the balance was transferred to her husband for acquiring the securities. Since Emma incurred $450,000 for house property, hence the taxable value will remain same i.e. $7,500.In case, Emma herself used the entire borrowed amount by herself i.e. for purchase of house property worth $450,000 and buying shares worth $50,000, fringe benefit tax would be determined as follows: I) Taxable value of the loan allowance without the otherwise deductible value 5,00,000*1.50%= $7,500. Ii) Ignore any interest charged and assume that the loan was interest free $500,000* 5.95%= $29,750. Iii) Now suppose that the employee had paid interest equal to the amount of taxable value $ 29,750*10/100= $2,975. iv) Now look at the real situation if employee is being charged interest on loan $500,000*4.45%*10% = $2,225 v) Subtract iii-iv $2,975-$2,225 =$750 Vi) Taxable value i-v 7500-750 $6,750 DEBT WAIVER FRINGE BENEFIT In the given case, Emma bought a bathtub for $1300, which was sold in the market to general public for $ 2,600 by Periwinkle Pty Limited. Hence the difference i.e. $ 2600-$1300=$ 1300 is fringe benefit tax liability in context to Income Assessment Tax Act 1997. 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].