Calculating Net Capital Gain Or Loss And Understanding Fringe Benefit Taxation Laws

Determination of Net Capital Gain or Net Capital Loss

It is essential for tax consultants to have better understanding about different financial concepts to give better advice to their clients. This report is helpful in developing understanding about these financial concepts in practical manner. In his concern, the aim of this report is to gain practical knowledge about the process of calculating net capital gain or net capital loss for a client through different financial transactions in a specific financial year. There are different financial transactions in the given scenario that are considered in process of calculating net capital gain and net capital loss. These financial transactions are sale of antique bad, vacant land, sale of painting, sale of violin and investment in equity of different companies. All of these financial transactions are considered by the tax consultants while determining net capital gain or net capital loss. In this concern, the report is helpful in making better understanding about financial transactions in making the business decisions. Along, with this, the report is also determining the concept of fringe benefits taxation (FBT) laws that are adopted in entire Australia. The analysis of FBT will be accomplished in context of a specific scenario of Rapid-Heat. The report is also focusing on impact of different financial transactions on consequences of FBT for a specific organization.

In financial management, the term net capital gain is considered as total contribution of different transactions made by an organization during the a specific financial year towards its capital position. It is essential for the management to analyze the net capital worth of the company and gaining during each financial year to make further business decisions. In order to calculate the net capital gain or net capital loss, entire financial transactions are recorded in appropriate manner and analyzed by the management to measure the financial performance in a specific year. The involvement of different financial transactions and operational transactions is measured by identifying the variation between the selling price and total cost of the equipment. This variation is known as value of capital gained during the business transactions of the organization. The calculated capital may be positive or negative. The negative value of the calculated capital will determine net capital loss during the financial and business transaction of the organization, whereas the positive value will determine net capital gain from the financial and business transactions (Bonnet et al., 2014). In order to measure the valuation of gained capital from different transactions, following formula can be used by an individual:

Financial Transactions Considered for Calculating Capital

Capital Gain or Loss = Price of selling of a specific product – Purchased price of the product – Incurred expenses during the entire transaction

From the above formula, it is analyzed that the net capital gain can be calculated by subtracting entire purchasing value and other expenses in entire process from total of selling price. It is a standard formula of calculating net capital gain or net capital loss during a specific financial year. In this concern, it is essential for the individuals to have proper attention on each of the financial transactions during the purchasing and selling process in a specific financial year.

Net capital gain or net capital loss from different transactions for the given scenario is calculated as below:

(a) Calculation of net capital gain from Vacant Land

Contract price to sale the vacant land = $320,000

Purchased price of the vacant land = $100,000

Other expenses such as local council, sewerage and water = $20,000

Capital Gain/ Loss = $320,000 – $100,000 – $20,000 = $200,000

Note: The given scenario is determining that the client has received amount of $20,000 at the time of sign and contract made for selling of vacant land. The purchaser will pay rest amount in the upcoming year to the client. Therefore, the contribution of financial transaction will be $20,000 for this year towards the net capital gain. The rest amount of transaction will contribute towards the net capital gain in upcoming year as it will be attained from the purchaser in next financial year.

(b) Calculation of net capital gain from Antique Bed

Insurance amount collected for Antique Bed from insurance company = $11,000

Purchasing price of Antique Bed = $3,500

Alterations cost for Antique Bed = $1,500

Therefore, net capital gain / loss form Antique Bed = $11,000 – $3,500 – $1,500 = $6,000

(c) Calculation of net capital gain/loss from sale of Painting

Selling price of painting = $125,000

Purchasing price of painting = $2,000

Therefore, net capital gain / loss from selling of Painting = $125,000 – $2,000 = $123,000

(d) Calculation of net capital gain from purchase and sale of shares

In order to evaluate the capital gain from the transactions of shares, the individuals can use below formula:

Gained capital from sale of shares = Selling price of the shares – Purchasing price of shares – stamp duty – brokerage on transactions

(i) Securities of Common Bank Ltd:

Fringe Benefit Taxation (FBT)

Total sales price of shares = Sales price per share * Total quantity of Shares

Total sales price of shares = $47 * 1000 = $47,000

Total cost of purchasing = Purchasing price of one share * Total quantity of shares

Total cost of purchasing = $15 * 1000 = $15,000

Brokerage cost on transaction = $550

Cost of stamp duty = $750

Therefore,

Capital gain from sale of shares of Common Bank Ltd = 47,000 – 15000 – 550 -750 = $30,700

(ii) Shares of PHB Iron Ore Ltd

Total price of purchasing shares = Purchasing price of one share * Total quantity of share

Total price of purchasing shares = $12 * 2500 = $30,000

Sales value of entire shares = Selling price each share * Quantity of shares

Sales value of entire shares = $25 * 2500 = $62,500

Total brokerage charges on transaction of shares = $1,000

Cost of stamp duty = $1,500

Therefore, gained capital = Total price of sales – total price of purchasing – stamp duty- brokerage Cost

Gained capital = 62,500 – 30,000 – 1,500 – 1,000 = $30,000

(iii) Sales of Shares of Young Kids Learning Ltd

Total value of purchasing shares = Price per share * Total number of purchased shares

Total value of purchasing shares = $5 * 1200 = $6,000

Total sales price of shares = Sale per share * Total number of shares

Total sales price of shares = $0.50 * 1200 = $600

Stamp Duty = $500

Brokerage cost = $100

Therefore, capital gain during entire transaction = 600 – 6000 – 100 – 500 = -$6000

(iv) Share Build Ltd

Total price of purchasing = Price per share * Total number of purchased shares

Total price of purchasing = $1 * 10,000 = $10,000

Total amount collected by selling of shares = Selling price for each share * Total quantity of share sold

Total amount collected by selling of shares = $2.50 * 10,000 = $25,000

Stamp Duty = $1,100

Cost of Brokerage = $900

Therefore, total gained capital = Total amount collected by selling of shares – total price of purchased shares – Stamp Duty – Brokerage cost

Total gained capital = 25,000 – 10,000 – 1,100 – 900 = $13,000

(e) Capital Gain or Loss by selling of Violin

Total purchasing price for Violin is $5,500

Total selling Price for Violin is $12,000

Impact of Financial Transactions on FBT

Formula to calculate capital gain or loss:

Capital Gain or Loss = Total selling price – Total purchasing price

Capital Gain or Loss = 12,000 – 5,500 = $6,500

Based on the value of above transactions, net capital gain or net capital loss is determined in the below table:

Net Capital Gain or Net Capital Loss
Particulars	In depth Values ($)	Total Value ($)
Capital gained from sales of vacant land	20,000
Insurance amount claimed from insurance company for the antique bad	6,000
Amount collected from the painting	123,000
Sales amount for 1000 shares of Common Bank	30,700
Sales amount of PHB Iron Ore Ltd	30,000
Sales amount for shares of Young Kids	(6,000)
Sales amount for Share Build Ltd	13,000
Amount collected by sale of Violin	6,500
Total of gained capital from different transactions	$223,200	$223,200
Less: Net Capital Loss from previous year		-$8,500
Less: Capital Loss from sculpture in previous year		-1,500
Net Capital Gain		$213,200

FBT stands for fringe benefit taxation, which is legislation associated to fringe benefits across Australia. It is essential for the organization to consider this legislation while providing fringe benefits to their employees. Fringe benefits refer to additional benefits provided by the organizations in form of monetary or non-monetary forms for their employees other than salary. The fringe benefits can be provided in the form of addition services such as personal car, living rooms, special membership and foreign tours for the employees (Kaplan and Price, 2014). The regulatory bodies of the country impose some taxes on these fringe benefits which are known as fringe benefit tax. However, there are some fringe benefits on which fringe benefit taxes are not applied. These fringe benefits are amount received during termination process, shares allotted by the company to employees and amount received from well known welfare organizations.

The legislation of FBT is mandatory for entire organizations to consider in the organization policies and provide fringe benefits to the employees while operating the business operations in Australia. These organizations are bound to provide the fringe benefits under the FBT law of Australia (Lowe, 2014). FBT law is imposed to private and public sector organizations as well as non-profit organizations if they are providing fringe benefits to their employees.

FBT Consequence to personal car offered to Jasmine:

A personal car is offered to Jasmine by the company as a fringe benefit so that it comes under the law of FBT. Based on analysis of different tax slabs, it is analyzed that company will be charged by 47% tax rate (Gupta and Sawyer, 2015). In order to determine the tax liability for Rapid Head below formula can be used:

Taxable Value ($) = Type 1 * 2.0802 (Barkoczy, 2015)

Total fringe benefits provided by Rapid Heat = Purchase price of the car + amount of loan received by jasmine + indirect fringe provided on purchase of electric heater + other expenses (i.e. repair and maintenance)

= 33,000 + 450,000 + 1,300 + 550 = $484,850

Therefore, taxable value = $484,850 x 2.0802 = $1008584.97

FBT consequence an organization can be ascertained as below:

Conclusion

FBT consequence = FBT Tax Rate * Total Taxable Amount

= 47% * 1008584.97

= $474,034.94

In this concern, it is analyzed that the value of fringe benefits and addition expenses on these fringe benefits are considered by the consultant while calculating total tax on provided fringe benefits. It is essential for the consultant to have in depth understanding about each of the fringe benefits and addition expenses on these fringe benefits to improve the reliability of fringe benefits. For instance, the value of purchased car is considered as a monetary value of fringe benefit and taxable amount but other expenses provided by the company are also considered as taxable value while calculating total taxable amount on fringe benefits.

Valuation of FBT Tax, if the Remaining Loan of $50,000 is used by Jasmine for Investment in Securities not by Her Husband:

From the scenario, it is analyzed that the Jasmine is not used the amount of $50,000 to invest in securities. Therefore, the remaining amount of $50,000 will be added while calculating total taxable amount. In this situation, following formula can be used to evaluate total value of fringe benefits:

Total amount used by Rapid Heat in fringe benefits = Purchase price of the car + Total amount of loan gained by Jasmine + Additional expenses (i.e. repair and maintenance) + Fringe benefits received in indirect manner with purchase of heater + Invested amount in securities in

= 33,000 + 450,000 + 550 + 1,300 + 50,000 = $534,850

Formula to calculate taxable amount = Type 1 x 2.0802

Total taxable amount = 534,850 x 2.0802 = $1,112,594.9

Therefore, FBT = Total Taxable Amount x FBT Rate

FBT = $1,112,594.9 x 47% = $522,919.603

Based on the above calculation, it is analyzed only used fringe benefits or amount of loan is taxable while calculating total fringe benefit tax. Thus, it is essential for the tax consultant to have knowledge about the used money by the employees provided by the company as a fringe benefit to the employees to improve the reliability of the calculated FBT.

Conclusion

From the above discussion, it is analyzed that the proper understanding of different financial transactions and concept is essential for an individual to provide better financial advices. It is essential for a business entity to provide information about entire financial transactions to the tax consultant to gain better advice about the business operations and identify the misstatements in the financial records. The tax consultants can provide better advice to their clients based on net capital gain and net capital loss. There are several financial transactions such as purchasing cost, purchasing price, sales cost and other expenses related to these financial transactions that plays an immense role in measuring capital gain in a specific financial year. It is also analyzed the net capital gain or net capital loss can be calculated in effective manner by considering each of the financial transaction during the specific financial year. Without analysis of these financial transactions the net capital gain or net capital loss cannot be measured in reliable manner.

It is analyzed that FBT is an essential legislative tool that is applicable for entire organization in Australia. This tax is applicable for these companies during the offering fringe benefits to their employees. It is found that there are several fringe benefits such as benefits offered by well known welfare organization, dividend offered by the companies, payment during termination and the benefits provided in the form of share allotment under employee wealth programs are exempted from FBT. In this concern, the consultants should also consider the FBT on different fringe benefits provided by the organizations to their employees.

References

Barkoczy, S. (2015) Australia’s industry innovation and competitiveness agenda and the proposed new rules for taxing benefits under employee share schemes, Austl. Tax F., 30, pp. 37-39.

Bonnet, O., Bono, P. H., Chapelle, G., and Wasmer, E. (2014) Does housing capital contribute to inequality? A comment on Thomas Piketty’s Capital in the 21st Century, Sciences Po Economics Discussion Papers, 7, pp. 12-15.

Gupta, R., and Sawyer, A. (2015) The costs of compliance and associated benefits for small and medium enterprises in New Zealand: Some recent findings, Austl. Tax F., 30, pp. 135-137.

Kaplan, R. L., and Price, D. J. (2014) Change and Continuity in Fringe Benefit Taxation: Seeking Sense and Sensibility, NYL Sch. L. Rev., 59, pp. 281-284.

Lowe, M. (2014) Obesity and climate change mitigation in Australia: overview and analysis of policies with co?benefits, Australian and New Zealand journal of public health, 38(1), pp. 19-24.