Capital Gain Calculation Methods And Losses Set Off And Carry Forward

Computation Methods for Capital Gain

Question:

Describe about the capital gain tax asset. 
 

The difference between the cost of acquisition capital gain tax asset and the capital proceeds is called as the Capital Gain. It can be calculated with three methods that are generally applied by the persons who calculate it. There are three methods available to compute the Capital gain such as – Discount Method, Indexation Method and Residual Method (Aust 2013). The first one is the process that is applicable for the calculations of more than 12 months and then the calculations must be done with this discount system. The second method is used for the calculations when the assets are obtained before September 21^st and held for more than 12 months instantly before relevant capital gain tax event. The Residual Method is the process of calculation in the time when assets are held for less than 12 months or one year (Baldwin et al. 2012).

Items Exempted From Gain on Sale of Capital Asset

The property that is claimed before calculating the capital asset were obtained before 20^th September 1985 are follows –

• Various motor vehicles
• Reimbursed amount for exact injuries
• The sale of residential houses of various families
• The product that is needed to acquire has to less than $ 500

Set off and Carry Forward of Losses that is Arising from the Capital Gain

Long Term Capital Loss: When there is, a long-term capital loss happened then loss can be making up by another capital gain. In this case, the help of any short-term capital loss cannot overcome the long-term capital loss (Brigham and Ehrhardt 2013).

Short Term Capital Loss: In the cases of any short term, capital loss the same source can be compensated by the same kind of short-term asset or with any long-term capital asset. The loss can be carry forwarded to the subsequent assessment year and set off against both short-term gain and long-term gain.

(a) According to the question, Mr. Dave Solomon has sold the building at $ 8, 50,000 where he was living for more than 30 years in a two-storey structure, which was of  $ 70,000 when bought (Burman et al. 2016). Mr. Dave Solomon has sold the building on 27^th June of the current tax year. Then there was an auction arranged in which the resident was originally sold at $85,000 as advance money that was very high against the buying price. However, subsequently the consumer did not have adequate money to proceed with such buy. Thus, the money was forfeited. Hence, $ 85,000 received be charged to “Income from other sources”

Calculation of Capital Gain

(b) On 20^thSeptember, 1985 a painting by Pro Hart has bought at the price of $ 15,000 while sold it in $1, 25,000.

Therefore, the Capital Gain is:

(c) In late 2004, an extravagance motor cruiser was bought at $ 1, 10,000 and then it was sold on 1^st June of this year to the local boat broker at the price of $ 60,000.

Hence capital gain will be:

(d) He also sold a package of shares in a recently listed mining business on 5^th June of the current year at a price of $ 80,000. He bought these shares on 10^th January in this year for $ 75,000. He borrowed a loan of $ 70,000 and paid interest on the loan of $5,000 to purchase these shares. An amount of $750 has paid by him as brokerage for sale of the shares and $250 in crush duty for acquire of share. According to the income tax law, interest on loan cannot be a part of cost of gaining. Therefore, interest of law has not included here. 

Items Exempted From Gain on Sale of Capital Asset

Hence, capital gain will be as follows:

Capital gain for the year is as follows

Now the tax arrival of Mr. Dave for the year-end 30 June of the earlier year that is showing a net capital loss of $10,000, since the auction of shares. Consequently, it can be accustomed with current year long-term capital gain.

So, Net Long term capital gain for the recent year is $ 1, 04,961-$10,000 =$ 94,961 

Capital gain is the amount that an individual or a business of an individual gets by selling out an asset rather the capital asset. In the words of (), the capital gain must be calculated after deducting the amount of all the losses that the asset has generated. () stated that the term “capital gain” can also be referred as the “investment income”. This is because, the capital gain is generated by selling out the fixed or real assets like, building, machinery or other property of the individual. At the same time, the capital gain is calculated before considering the taxable amount. The amount that are charged on the capital gain is known as capital gain tax.

As per the case study, Mr. Dove has achieved a capital gain and so he has an option of contributing this amount to the fund of superannuation. At the same time, it is very important for Mr. Dove to maintain the records of the valuable transactions in which he is involved. This transactions may include, Loan interest, receiving receipts for purchase, amount spent for meeting the legal fees (Hurd 2013). Along with these, the records like payment of brokerage are also needed to be maintained properly.

The negative balance that is derived by selling a capital asset is known as the capital loss. This capital loss also includes the loss that has been incurred in the previous year. The amount of capital loss must be carried forward to the years subsequent to the year of loss and at the same time, the loss amount is needed to be deducted from the amount of capital gain in those years. However, it is very important to remember that the amount of capital loss is not eligible for setting off by some other gain (Mason and Stephenson 2015). According to the case study situation, if Mr. Dove has faced a capital loss then he may sale some other assets that he has owned in order to avail a loan to contribute in his superannuation fund. At the same time, he can purchase an apartment and after that he can withdraw the money from the personal fund of superannuation after reaching at the age of 60. 

Periwinkle Pty ltd, is a producer of bathtub and the company sells its products through direct selling. Recently, the management of the company has provided a car to one of their employees namely Emma, who travels much for the purpose of the company. however, the use of the car is not restricted to the office use only. Emma has the right to use the car for various personal reasons also. The price that the management of the company has spent to avail the car is $33000 on 1^st May 2015.

Set Off and Carry Forward of Losses that is Arising from the Capital Gain

As per the data available, the total kilometers that Emma has travelled by the car is 10000 and along with that Emma has also spent $550 for the purpose of repairing. On the other side, the car has been used by Emma just for 10 days and total 5 days the car was unused.

Emma took a loan of $500000 from the company that is Periwinkle Pty Ltd as on 1^st May 2015. The company charged an interest of 4.45% per annum. After taking the loan from the company, Emma at first bought a holiday home at $450000 and the rest of the loan money she gave to her husband in order to invest in the share of Telstra.

In the same year, Emma Bought a bathtub from her company that is Periwinkle  and spent $1300. However, the cost of producing a single bathtub is $700 and at the same time, those bathtubs are available in the market for $2600.

FBt is payable by employer on certain perquisite given to employees. It is exempt income in the hands of employee.

There are few items on which FBT is not payable which are benefits of value which is not more than $ 300, work expenses, employee relocation expenditure, exempted loans, allowance for housing in distance places and motor car provided to employee.

Employer is liable to pay FBT on reimbursement of expenditure, Airline and parking of car allowance, residence allowance, giving a loan and providing motorcar. As per FBT motorcar is a vehicle which has a capacity of carrying not more than 9 person or not more than 1 tonne.

However if a car is used for personal purpose by the employee then it is not taxable as per FBT. If a car is given for not more than 3 months then it will not fall under the purview of FBT. A Car does not fall under the scope of FBT it is at the place of employee and is not garaged with the employer. If the car is at repair station then the time period will be excluded from the calculating the time period 

FBT can be computed by 2 methods which are application of statutory formula and method of cost basis

In the given question,

The car given to Emma is liable to FBT as it meet all the criteria of FBT

Car cost       $33,000

Number of days car is used (335-5) = 3

Car was in the repairing station and so not used for days which is to be excluded. No of days it is parked in the airport is to be included as per the provision of FBT. The car has travelled for not more than  15000km during FBT period so the rate is 20%

Treatment of Loan

FBT on loan is payable when loan is provided to employee by the company at less than market rate. In this given sum the market rate in 5.95% and loan is provided at 4.45% so difference of 1.5% is liable to FBT.

Therefore FBT payable is

1.50% of 500000 = $7,500

Emma has used $4, 50,000 for the purchasing a house and rest was given to her spouse for acquire of shares. Since Emma has used $ 4, 50,000 for purchasing of residential house,so the assessable value will be same which is $7,500

If Emma utilize the full amount of loan alone for acquiring house for $ 4,50,000 and purchase of  shares valuing $ 50,000. FBT is payable as follows

I) Value of Advance fringe benefit which is taxable without any deduction $7,5005,00,000*1.50%

Ii) Assuming no interest is payable on the loan           $29,750

($5,00,000*5.95%)

Iii) Assuming employee had paid interest equivalent to the taxable value                                         $ 29,750*10/100                                                                                                $2,975

iv) As per real circumstances if interest is charged on the loan payable by employee

$500,000*4.45%*10%=2225                                                                            v) Deduct iii-iv

$ 2,975-750 = $2,225                                                                                                                                

Vi) Taxable value   i-v       7500-750                                                                       $6,750

Debt Waiver Fringe Benefit

In the given case Emma purchased bathtub for $1,300 which was sold in the market to general public for $ 2,600. Hence the difference i.e. $ 2600-$1300=$ 1300 is fringe benefit liability. 

Reference List

Aust, A., 2013. Modern treaty law and practice. Cambridge University Press.

Baldwin, R., Cave, M. and Lodge, M., 2012. Understanding regulation: theory, strategy, and practice. Oxford University Press on Demand.

Brigham, E. and Ehrhardt, M., 2013. Financial management: Theory & practice. Cengage Learning.

Burman, L.E., Gale, W.G., Gault, S., Kim, B., Nunns, J. and Rosenthal, S., 2016. Financial Transaction Taxes in Theory and Practice. National Tax Journal, 69(1), pp.171-216.

Hurd, I., 2013. International organizations: politics, law, practice. Cambridge University Press.

Mason, A.T. and Stephenson, G., 2015. American constitutional law: introductory essays and selected cases. Routledge.

Moser, C., 2012. Gender planning and development: Theory, practice and training. Routledge.

Weber, R., 2013. Tax increment financing in theory and practice. Financing economic development in the 21st century, 53, p.55.

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