Taxable Capital Gains Resident Fred Samples-Myassignmenthelp.Com

Question: Describe about the Taxable Capital Gains for Resident Fred. Answer: 1. This case requires determining the net taxable capital gains for FY2016 for an Australian resident Fred. The capital gains are derived by Fred due to sale of a house in the FY2016 for $ 800,000. It is noteworthy that since the contract enactment date and the receipts of proceeds both lie in FY2016, thus the capital gains arising from the house sale would also be taxed in the same year i.e. FY2016. As per the given question, the asset purchase happened in 1987 and thus any capital gains derived would be taxable under CGT as the cut-off date in relation to application of CGT is September 20, 1985 (Nethercott, Richardson Devos, 2016). With regards to computation of taxable gains, for individual taxpayers such as Fred, there are potentially two options i.e. Discount method and Indexation method (CCH, 2013). The discount method in accordance with Section 115-25 allows for 50% reduction in the long term capital gains derived from asset liquidation which is not available in indexation method (Barkoczy, 2015). The indexation method on the other hand to lower the CGT liabilities relies on escalation of the cost base by adjusting for the rise in inflation as dictated by Section 114-1 (Gilders et, al., 2016). In the given case, preference has been accorded to discount method as this would yield lower taxable capital gains for Fred and hence would be preferred by Fred. Asset Cost base The cost base is defined in accordance with Section 110-25. It primarily constitutes following element (Gilders et, al., 2016). Acquisition cost of asset Incidental costs that the taxpayer incurs during buying the asset Incidental costs that the taxpayer incurs during selling or disposing the asset Capital costs that significantly enhance the asset value Costs incurred to maintain the title on the asset Determination of the capital gains from liquidation of holiday home Proceeds from sale (2015/2016) = $800,000 Acquisition cost (1987) = $100,000 Incidental expenses which taking possession of house = (Legal Fees + Stamp Duty) = 1,000+2,000 = $3,000 Incidental expenses which disposing the house asset = (Legal Fees + Agent Commission) = 1,100 + 9,900 = $ 11,000 Capital expense undertaken for building of garage which would enhance the property value = $20,000 Thus, cost base of holiday home = 100,000 + 3,000 + 11,000 + 20,000 = $ 134,000 Capital gains obtained from sale of holiday day =Sales proceeds Asset Cost Base = 800,000 134,000 = $666,000 Also, accumulated losses of capital nature from share sale the previous year = $ 10,000 Due to the comparable characteristics of property and share, the corresponding gains and losses can be adjusted due to which the previous share loss will be accommodated in the property gains experienced in FY2016 (Deutsch et. al., 2015). FY2016 Net capital gains (Fred) = Home capital gains Share accumulated capital loss = 666,000 10,000 = $656,000 The holding period of the asset is clearly more than a year, hence as per discount method, a rebate of 50% is made available with CGT being chargeable on the residual 50%. Thus, CGT chargeable capital gains for Fred (FY2016) = 0.5*656,000 = $ 328,000 Occurrence of accumulated capital loss occurred on account of antique vase sale In the given case, the accumulated capital loss from previous year unlike in the previous case would not be accommodated due to difference in characteristics of property and antiques items. As a result, the loss would continue to be carried forward till that time in the future when there is some antiques gain against which this could be offset. Hence, in FY2016, this capital gain loss would have no impact as shown below (Sadiq et. al., 2016). CGT chargeable capital gains for Fred (FY2016) = 50% of capital gains from holiday home = =$333,000 2. As per the relevant case details, Periwinkle as the employer is providing a host of fringe benefit to Emma as the employee and the potential tax implications of the same are discussed at length below. Car fringe benefit Section 8, FBTAA86 states that fringe benefit is considered to be present only when the vehicle purchased by employer is used by employee for personal use. The given case information is indicative that Emma does use the car for her personal purposes as well and hence it would be fair to opine that car fringe benefit is indeed present (Barkoczy, 2015). The approach used for computation of the tax implications of this benefit is in line with Section 39F and is stated as follows (Wilmot, 2012). The requisite inputs in the above formula are shown below, Capital value of the car provided by employer = Money spent by employer to buy vehicle Repair expenses incurred= (33,000 550) = $ 32,450 For any car purchased in the aftermath of April 1, 2014 then the statutory percentage that would be appropriate for use is 20% irrespective of the distance travelled during the year by the employee (ATO, 2016b). Availability of car use for the employee Emma = 366 (Calendar days FY2016) 30 (April 1 to May 1, 2015) 5 (Gone for repairs) = 331 days It is worth notice that deduction for ten days has not been made when car was parked at the airport since the unavailability was of Emma and not of the car and hence no deduction claimed for the same in days (Gilders et. al., 2016). CFB (grossed up value) = $ 32450 20% 331/365 2.1463 = $ 12,631.95 For FY2016, the FBT tax rate is applicable at 49%. CFB (FBT liability for Periwinkle) = 12,631.95 *0.49 = $ 6,190 Loan fringe benefit These fringe benefits tend to come to existence when the employer provides financial loans to a particular employee at an interest which is lower than the corresponding rate which the RBA (Reserve Bank of Australia) prescribes on a periodic basis (Deutsch et. al., 2015). As indicated by TD 2015/8, the applicable RBA rate for the current rate is 5.65% (ATO, 2015). However, the interest rate charged by to Emma is just 4.45% and therefore by borrowing at a lower rate, Emma is able to garner interest rate savings. These interest rate savings in comparison with the RBA rate would be the defining quantum of loan fringe benefit (Sadiq et. al., 2016). Also, it needs to be considered that Emma did not have access to the loan for the complete year but only from 1st September, 2015. Thus, total days in FY2016 for which Emma enjoys the loan of $ 500,000 = March 31, 2016 September 1, 2015 = 213 days Interest savings for Emma due to lower interest rate by employer (Loan Fringe Benefit or LFB) = 500000*(5.65% - 4.45%)*(213/366) = $ 3,491.8 LFB (Grossed up value) = 3,491.8*1.9608 = $ 6,846.72 LFB (FBT liability for Periwinkle) = 6,846.72*0.49 = $ 3,355 Expense fringe benefit-Bathtub In accordance with the given case, Periwinkle has provided an item or personal usage i.e. bathtub to Emma for a subsidised price of $ 1,300 while the retail price of the bathtub is $ 2,600. Thus, since the employers action is leading to a savings on the expense of personal nature, thus this is an expense fringe benefit (CCH, 2013). As bathtub sales attracts GST, thus the applicable gross up factor would be 2.1463 (ATO, 2016a) Expense Fringe Benefit (Grossed up value) = (2600-1300)*2.1463 = $ 4,078 Expense Fringe Benefit (FBT liability for Periwinkle)= 4078*0.49 = $ 1.998 In the given case, Emma uses the $ 50,000 for producing income by indulging in share trade and hence incremental deduction on this would be available to Periwinkle the employer. (Nethercott, Richardson Devos, 2016). Incremental deduction for Periwinkle = 50000*(5.65% -4.45%) = $ 600 Thus, in the given case, the total FBT liability for Periwinkle would decrease by $ 600 in comparison to the above case. Reference: ATO 2015, TD 2015/8, Australian Taxation Office, Available online from https://law.ato.gov.au/atolaw/view.htm?docid=%22TXD%2FTD20158%2FNAT%2FATO%2F00001%22 (Accessed on September 20, 3016) ATO 2016a, Gross-up rates for FBT, Australian Taxation Office, Available online from https://www.ato.gov.au/rates/fbt/?page=3 (Accessed on September 20, 3016) ATO 2016b, Car fringe benefits statutory formula rates, Australian Taxation Office, Available online from https://www.ato.gov.au/rates/fbt/?page=4 (Accessed on September 20, 3016) Barkoczy,S 2015, Foundation of Taxation Law 2015, 7th eds., CCH Publications, North Ryde CCH 2013, Australian Master Tax Guide 2013, 51st eds., Wolters Kluwer, Sydney Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, Snape, T 2015, Australian tax handbook 8th eds., Thomson Reuters, Pymont Gilders, F, Taylor, J, Walpole, M, Burton, M. Ciro, T 2016, Understanding taxation law 2016, 9th eds., LexisNexis/Butterworths. Nethercott, L, Richardson, G Devos, K 2016, Australian Taxation Study Manual 2016, 4th ed., Oxford University Press, Sydney, Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2014 ,Principles of Taxation Law 2014, 7th eds., Thomson Reuters, Pymont Wilmot, C 2012, FBT Compliance guide, 6th edn, CCH Australia Limited, North Ryde