The Net Capital Losses or Gains Analysis

Question: Explain the net capital losses or gains for the current tax year of Dave. Answer: In this particular case, the objective is to determine the net capital losses or gains for the current tax year of Dave as per the given transactions. Dave Solomon has sold some of his assets in order to prepare for his retirement. These selling operations of the given assets would result reasonable tax implications in terms of capital losses or gains. A brief discussion on the selling of the assets are as follows. Selling of the residence place (St. Lucia) As per the given information, it can be concluded that to achieve the reasonable amount of superannuation fund, Dave has sold his residential house which was situated in St. Lucia and he resided in that house from last 30 year. As per this information it would be said that Dave must have purchased this two story residency house in the year 1986. Since, the house has been purchased after 20 September 1985, therefore, any capital gains realised by selling this residential place would be considered for CGT (Capital Gains Tax) as per ITAA, 1997 (Sadiq et. al., 2015) . Despite the residence not being exempted from the aegis of CGT, the main residence exemption may allow for capital gains concession in line with Division 118 ITAA, 1997. However, this would require the current residence to fulfil the following two conditions as are mentioned below (Barkoczy, 2015). The taxpayer must necessarily have stayed in the house ever since it has been purchased for the house to be classified as the main or permanent residence. Also, the commercial usage of the residence would not be there for deriving any sort of income. From the case information provided, it may be deciphered that in the given case, the satisfaction of both conditions takes place and thereby the given house can be classified as the main or permanent residence for Dave in the absence of any other residence. Hence, no CGT would be paid by Dave Solomon on any gains that are made on the sale of the residence (Gilders et. al., 2015). Capital gains computation of painting It is known from the question that the painting has been acquired in the post CGT era that commences on September 20, 1985 and therefore capital gains tax is applicable on any capital gains which may be derived by liquidation Paintings acquisition cost for Dave = $ 15,000 Sales price obtained on selling of the painting = $ 125,000 Gains of capital nature derived from painting sale = 125000 15000 = $ 110,000 Since the painting was held for more than a year, hence the capital gains derived from the same are of long term nature (Sadiq et. al., 2015). Capital gains computation of luxury boat It is known from the question that the luxury boat has been acquired in the post CGT era and therefore capital gains tax is applicable on any capital gains which may be derived. Purchase price of boat = $ 110,000 Liquidation price of boat = $ 60,000 Resultant capital losses = 110000-60000 = $ 50,000 Since the boat was held for more than a year, hence the capital losses are of long term nature (Sadiq et. al., 2015). Capital gains computation of shares It is known from the question that the shares have been acquired in the post CGT era and therefore capital gains tax is applicable on any capital gains which may be derived. Share acquisition price in January 2016 = $ 75,000 Selling price of the shares = $ 80,000 However, as per the question, there are certain costs that are incidental to the normal transaction and therefore as per Section 110-25 would contribute to the cost base of the asset. As per the information provided, the incidental costs are brokerage charges and also the stamp duty. Besides, the asset financing cost is also added to the overall cost base as per Section 110-25. In the given case, since ATO has denied providing any deduction to Dave Solomon, hence the interest costs would also add on to the overall share cost base (Barkoczy, 2015). Therefore, cost base for shares = 5000 + 250 + 75000 + 750 = $ 81,000 Sale proceed on share liquidation = $ 80,000 Capital losses on account of share sale = 81000 80000 = $ 1,000 Hence, the total gains of capital nature that Dave can derive based on the given transactions = 110000 50000 -1000 = $ 59,000 The case information also states that in the previous year, Solomon has made a loss of capital nature to the tune of $ 10,000 for the shares that Dave had sold. These losses would be brought forward in the current year and adjusted against the capital gains for the current year (Gilders et. al., 2015). Post adjustment net capital gains = 59000 -10000 = $ 49,000 The capital gains that are derived by Solomon are long term in nature and considering the individual taxpayer status of Solomon, a discount of 50% with regards to capital gains is available. Therefore, capital gains on which CGT would be levied = 49000*0.5 = 24,500 It is evident from the above computation that Dave makes a capital gain and thereby would have to pay CGT which is applied at a flat rate of 30% and is independent of the underlying value. Thus, liability related to CGT = 24500*0.3 =$ 7,350 The question now presents a situation where Solomon would make loss for FY2016 also and in this case the previous year losses would be accumulated and the cumulative loss would be transferred to the future years for balancing against the potential future capital gains, Ir is noteworthy that the accumulated losses would be rolled on till perpetuity until these are neutralised with adjustment against capital gains (Deutsch et. al., 2015). The given facts of the case reflect the fact that the employer Periwinkle has extended certain fringe benefits to the employee Emma which may have FBT (Fringe Benefit Tax) implications. The aim of the question is to opine on the tax implications arising from the above benefits in line with the provisions mentioned in the Fringe Benefit Tax Assessment Act 1986 (FBTAA86). The discussion of the tax implications of the host of fringe benefits extended in this case is carried out below. Fringe benefit linked to personal car usage The car fringe benefit is deemed to be derived under the circumstance when the employee uses the company owned car for satisfying his/her personal usage. This is in line with the description extended in Section 8 of the FBTAA86. The usage of the car and the underlying distance in kilometres leads to the determination of the fringe benefit and the associated tax liability. Additionally, as per Section 23L of the ITAA 1936, due to the car fringe benefit the tax implications will be levied on the employer (Sadiq et. al., 2014). As per the case details, Emma has been given car fringe benefit since the employer owned car was given by the employer for personal usage. For the computation of taxable value on a grossed up level, it is imperative to ascertain whether GST is paid or not (McCouat, 2012). In the event that GST is paid on the car, the relevant factor deployed for grossing up is 2.1463(ATO, 2015). The calculation of the resultant FBT liability is shown below (Wilmot, 2012). Step 1: Taxable Value Determination The formula for determination of the FBT taxable value is shown below. The various components which act as input need to be determined as is visible below. The applicable statutory percentage in the given case would be 20% as per the guidance from the ATO rule which states that the car must be utilised for a distance which is less than 15,000 km as the corresponding figure is 10,000 km (ATO, 2015). Total period for personal car usage by the employee i.e. Emma = 365-30-5 = 330 In the given case, 30 days have been deducted since the car was provided to Emma not at the beginning of the financial year but when a month had already been elapsed. Besides, further five days are adjusted for the repair period but no adjustment for ten days has been made for the parking as the ownership of the car was with Emma. Value of the fringe benefit due to car = 32450 0.2 (330/365) = $ 5,867.7 Step 2: Liability associated with FBT Fringe benefit tax on the value of the fringe benefit due to car = 5,867.7 2.1463 0.49 = $ 6,170.95 Loan linked fringe benefit The loan fringe benefit is the result of the extension of loan to employee by the employer at a rate of interest which is lower as compared to the prescribed rate of RBA and hence provides benefit to employee. Like the other fringe benefits, the liability arising on behalf of the loan fringe benefit has to be borne by the employer. The current RBA rate is spelled out in the TD 2015/8 and is equal to 5.65% pa (Barkoczy, 2015). The interest rate applicable on the loan given to Emma is 4.45% pa and hence the employee is being benefited due to lower interest rate. The actual amount of loan fringe benefit is the amount of saving of employee on the cumulative interest cost supposing that it was lent at the rate prescribed by RBA (Gilders et. al., 2015). Finance cost when loan is extended at RBA prescribed cost = 500,000 0.0565 = $ 28.250 Finance cost when loan is extended at employer prescribed cost = 500,000*0.0445 = $ 22,250 The total cumulative savings on interest = $ 28,250 - $ 22,250 = $6,000 Hence, FBT at the rate of 49% would be levied on the loan related fringe benefit of $ 6,000. Since 90% of the extended loan of $ 500,000 is deployed for holiday home purchase for deriving personal gains, hence the employer would get rebate on the interest paid on this loan which would lead to the FBT liability lowering (Sadiq et. al., 2015). Fringe benefit related to bathtub By extension of bathtub to employee Emma at a rate lower than that charged by the retail customer, Periwinkle has indeed extended a fringe benefit whose value is equal to the costing differential between the normal retail customers and Emma. Thus, on this differential amount FBT should be levied at the rate of 49% (Deutsch et. al., 2015). The information provided in the question states that there is a change in fund deployed as $ 50,000 which was earlier used by Emma would now be used by her husband who would use them for indulging in share investment. The tax rebate on account of the interest on the component of the loan used for purchase of the holiday home would still be continued. However, otherwise there would be a decrease in the FBT linked liability as is computed below (Sadiq, et. al.,2015). Finance cost when 10% loan is extended at RBA prescribed cost = 50,000*0.0565 = $ 2,825 Finance cost when loan is extended at employer prescribed cost = 50,000 0.0445= $ 2,225 Therefore, decrease in the fringe benefit taxable value = 2825-2225 = $ 600 Total decrease in FBT related liability = 600*0.49 = $ 294 References ATO 2015, How to calculate your FBT, Australian Taxation Office. 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