Taxation And Accounting: Capital Gain/Loss, Fringe Benefits, Rental Property, And Tax Principles

Calculation of Net Capital Gain or Loss for the Year

1. In the given case, in the last 12 months, Eric acquired the following assets: an antique vase (for $2,000), an antique chair (for $3,000), a painting (for $9,000), a home sound system (for $12,000), and shares in a listed company (for $5,000). The assets so acquired by him in the last week.

As per the section 104 of income tax act 1936, capital gain tax applies to all capital assets acquired after 20^th Sept 1985. However, there are certain exceptions to the rule. Personal assets whose acquired value is less than $10,000 are not considered as a capital asset for capital gain tax perspective. Further, Antique assets are kept outside the bracket of capital gain tax. In this scenario, for the purpose of capital gain tax, home sound system and shares in the listed company will be liable for capital gain taxation. (ATO)

In this regard, the net capital gain for Epic will be calculated as follows:

Considering the above provision, the net capital gain will be $14,000.

2. In the given case, Brian as part of his remuneration has received loan at concessional rates worth $1m, out of the loan sanction 40% of the amount was been used by Brian.

As per the section 51 of income tax act 1936 and considering the provision of Fringe benefit tax in Australia, if an employer provides loan to the Employees either interest free or at low interest rate less than the benchmark limit, it will attract fringe benefit tax on the employer. The statutory bench marking interest rate for the year ended 31st March 2017 is 5.65%. Thus, if the interest rate is less than the benchmarking rate, the differential amount will be treated as fringe benefit and will be taxable in the hands of the employer.

The cumulative interest the employee will be paying in the year ending 31st March 2017 at an interest rate of 1% per annum will be $3,396. On the other hand, if the employee would have paid interest at the benchmark rate of 5.65% per annum, the interest rate that would be paid will be 19,373. In this scenario, the employer is liable to pay fringe benefit tax on the extra benefit that is provided to the employee in terms of interest rate differential worth $15,977. The fringe benefit tax rate for the year ended 31st March 2017 is 49%. Thus, the fringe benefit tax that will be paid by the employer in the given circumstances will be $7,829.

Calculation of Taxable Value of Fringe Benefits for the 2016/17 FBT year

If the employer would have released Brian from paying any interest rate on the loan amount that has be utilized by him, the entire amount of interest calculated using the benchmarking rate, will be treated as fringe benefit from the perspective of the employee and will be taxable in the hands of the employee at the rate of 49%. In the circumstances, $19,373 will be treated as the fringe benefit value and the fringe benefit tax would be $9,493. If the interest amount would have been paid at the end of the loan period rather than paying in monthly installment, there would be no change in the fringe benefit value for the employer.

If the employer would have released Brian from paying any interest rate on the loan amount that has be utilized by him, the entire amount of interest calculated using the benchmarking rate, will be treated as fringe benefit from the perspective of the employee and will be taxable in the hands of the employee at the rate of 49%. In the circumstances, $19,373 will be treated as the fringe benefit value and the fringe benefit tax would be $9,493.

3. Jack (an architect) and Jill his wife who is a housewife borrowed money for the purpose of purchasing a rental property .As per the agreement as entered in between both of them Jack will be allowed 10% from the profits accruing from the property while Jill will be allowed remaining 90% of the profits. Also, in case of any loss accruing the designated property Jack will be bearing entire 100% of the losses. Previous year has incurred a loss amounting to $10,000.Below details shows the allocation of this loss between Jack and Jill for tax purposes and also accounting of any capital gain or loss accruing from the said property in case of sell of the property.

As per the tax law, division of rental income and expense between the co-owner varies basis whether they are joint tenants or whether there is any partnership for the purpose of carrying out the business of rental property or whether they are tenants in common.

In case Co-owners are not carrying out the business of rental property then rental income or loss arising out from the rental property must be divided in accordance with the legal interest in the rental property. Hence if the property is owned as:-

• Joint tenants , then each of  them hold equal interest in the rental property
• Tenants in common , wherein they hold varied interest in the rental property , for example one may have 30% and other may have 70% interest

Hence any income or loss arising out of rental must be attributed between the co-owner as per the legal interest owing to the property, irrespective of the fact that there is agreement between the co-owners whether oral or written stating otherwise. As per Australian tax laws, any capital gains or laws arising out of selling of rental property should be allocated on the basis as rental income.

Allocation of Losses for Tax Purposes and Accounting for Capital Gain/Loss on Sale of Rental Property

In given case law, Jack (an architect) and his wise Jill has purchased the property as Joint tenants and the money is borrowed for the same purpose as Joint tenants. Hence both of them hold equal legal interest in the rental property. However, there is a written agreement between them stating Jill is entitled to 90% of profits while Jack is entitled to 10% of profits from the rental property and in case of losses Jack is entitled to entire 100% of losses.

Conclusion:

As per the law stated above any rental income or loss is divided basis the legal interest of the co-owners. Hence if the co-owners are joint tenants then each of the co-owner holds equal interest in the rental property. As a result, as Jack and his wife Jill both are joint tenants having equal legal interest in the property so last year loss amounting to $ 10,000 will be allocated equally between Jack and Jill. I.e. $ 5,000 each and written agreement wrt distribution of profit or loss as agreed between both them has no relevance.

Hence as per tax laws , since both Jack and Jill are co-owners as joint tenants and having equal legal interest in the property hence any income or loss including capital gain or loss arising out of this rental property will be allocated equally between them irrespective of any agreement written between them. As a result, capital gain and loss will be accounted equally between Jack and Jill as co-owners. (ATO)

4. There is a difference between tax avoidance and tax evasion. The tax avoidance event is acceptable by law whereas the tax evasion attract penalties for government. The case IRC v Duke of Westminster [1936] AC 1″ was a tax avoidance case which came into picture in the year 1936. In the given case, the duke of Westminster it was decided that tax avoidance was acceptable in law. In this case, the duke of Westminster was paying salary to his gardener on weekly basis. Duke decided in a discussion with gardener that in spite of paying weekly wages, they entered into an agreement where they will draw a covenant agreeing to pay an equal amount to his salary. (Oxford Index)

In this scenario, the gardener will receive equal amount to what he was expecting from his normal salary. But by entering into this agreement, duke was able to save his Income Tax liability as during that period, through the help of covenant one can reduce the tax liability.

IRC v Duke of Westminster Principle and Its Relevance Today in Australia

During this case, court judgment concluded that every human being rental to manage his affairs which may help in reducing his tax liability payable to the tax authorities. As per the judge, if by any means the taxpayer is able to determine any tax loopholes and able to save some tax, the tax securities cannot compel the taxpayer to pay additional tax. (Adam, 2011)

After court judgment, Duke won the case and he was not supposed to pay any additional tax.

Considering the provision of Australian tax laws, the principle that was decided in duke case is relevant in Australia today as well. The Tax avoidance and tax evasion concept has been made clear 1936 by Duke Case and it is still being followed in Australia. (Fisher, 2005)

5. Bill is the owner of large parcel of land having lots of tall pine trees. Bill wants to use this land for grazing sheep and hence intends to clear the trees. Logging company has agreed to pay $ 1000 for every 100 meters timber as extracted from the land. Below details advises the bill whether assessment will be made basis receipts as received from the arrangement. Also the treatment if the payment is made $ 50,000 in lump sum for granting permission to the logging company for the purpose of removal of timber from the land.

Below rule applies to:

• Person engaged in forest operations and
• Person not engaged in forest operations who dispose of timber

In case wherein taxpayer disposes the tress planted or tended for the purpose of sale , although whole or part of business is constituted by the trees , the disposal is not carried out as ordinary course of business , the value of trees becomes taxpayer’s assessable income

Thus as per section 6, royalties as received by the taxpayer by way of granting right to sell the timber on taxpayer’s acquired land will be considered as assessable income of the taxpayer in the year

Considering the provision of the above law, the amount that has been received by Bill from the company for taking of timber from the land will be considered as taxable income in the hands of Billy. The same will not be considered as an ordinary course of business for Billy. On the other hand, if the company agrees to pay a lump sum amount worth $50,000 for taking off timber from the land, the same will again be treated as assessable income in the hands of Billy and will be taxable in his hands. (ATO)

Considering the provision of above laws, the amount that will be received by Billy from getting the timber removed from the land will be taxable in his hands as normal assessable income.

Adams, J., 2011. what is The Difference between Tax Avoidance and Tax Evasion? [Online] Available at: https://www.taxinsider.co.uk/680-What_is_The_Difference_Between_Tax_Avoidance_and_Tax_Evasion.html [Accessed 3 Sept 2017].

ATO, 2016. ATO ID 2007/4. [Online] Available at: https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID20074/00001 [Accessed 3 sept 2017].

ATO, n.d. CGT assets and exemptions. [Online] Available at: https://www.ato.gov.au/General/Capital-gains-tax/CGT-assets-and-exemptions/ [Accessed 3 Sept 2017].

ATO, n.d. Co-ownership of rental property. [Online] Available at: https://www.ato.gov.au/Individuals/Tax-return/2017/In-detail/Publications/Rental-properties-2017/?page=4#Co_ownership_of_rental_property [Accessed 3 Sept 2017].

ATO, n.d. Fringe benefits tax – rates and thresholds. [Online] Available at: https://www.ato.gov.au/Rates/FBT/?page=1#Statutory_benchmark_interest_rate [Accessed 3 Sept 2017].

ATO, n.d. Tax ruling 93/32. [Online] Available at: https://www.ato.gov.au/law/view/document?docid=TXR/TR9332/NAT/ATO/00001 [Accessed 3 Sept 2017].

Fisher, P., 2005. 1936: a good year for tax? [Online] Available at: https://www.taxation.co.uk/articles/2005/08/25/3425/1936-good-year-tax [Accessed 3 Sept 2017].

Index, O., n.d. Westminster doctrine. [Online] Available at: https://oxfordindex.oup.com/view/10.1093/oi/authority.20110803121911242 [Accessed 3 Sept 2017].

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order