Calculating and Paying Capital Gains Tax

Question: Discuss about the Calculating and Paying Capital Gains Tax. Answer: Introduction: The case given in the question revolves around Mary Jackson who is the employee of a company. The company has given many benefits to Mary. Mary works as a marketing consultant for the company. On February 10th Mary decided to shift to Brisbane where she would work for Elite Retail as a marketing consultant. Several benefits have been provided to Mary by the company. When a company provides such benefits to its employees, a fringe benefit tax is to be levied on it. In Australia the Fringe Benefit Tax for the year ending 31st march 2016 was 49%. On all the given benefits, fringe benefit tax shall be charged, but not all of the benefits shall be taxable. Certain benefits are exempted from fringe benefit tax like any electronic device that has been provided to the employee is exempted (ato.gov.au, 2016). Mary had been provided with benefits by Elite Retail. Following mentioned benefits include those taxable and those not taxable Firstly, Elite Retail paid $4,000 to Mary for transfer of her furniture. On 10th February Mary Jackson was relocating to Brisbane to work at Elite Retail as a marketing consultant. As she was relocating, the company paid for moving her furniture from one place to another. This transfer was a special benefit provided to Mary by the company. Thus, fringe benefit tax is to be levied on it. An entertainment allowance, part of the salary of Mary, was paid to her by the company. An amount of $5,000 was added to her salary. The idea behind the entertainment allowance was that Mary had to meet many clients. She needed to spend a lot of money on meeting the clients hence the company provided her with the entertainment allowance. Had she not been a marketing consultant this benefit would not have been provided to her. Thus, this benefit is provided to her under the fringe benefit tax (legislation.gov.au, 2016). A laptop worth $2,400 and a mobile phone valued at $800 was provided to Mary by the company. The Fringe Benefit Assessment Act clearly states that if an employee is provided with items that are work related to the employee, the item is exempted from fringe benefit tax. Such items like mobile phones, tablets, laptops, computer software, etc are all exempt from fringe benefit tax. Thus, there shall be no fringe benefit tax on the laptop and mobile phone provided by the company. The phone bill of Mary Jackson was being paid by the company for every month. $330 was the monthly phone bill. We assume that GST has been included in the amount. Thus, the yearly bill would be $600. Mary had joined in the month of January. She had worked for two months only. Hence, this would be taxable under the fringe benefit tax. A car was provided to Mary for travel purposes. The car cost the company around $30,000. This benefit was provided to Mary by the company. Thus under Section 7 of the Fringe Benefit Assessment Act 1986 this is taxable. For the professional subscriptions of Mary, the company was paying her an amount of $1,500. If a company pays anything related to work to their employees, fringe benefit tax is to be paid on it. Here, for the subscriptions fringe benefit would be levied. At the end, the company gave a loan to Mary. The loan was given to Mary at a very low interest rate of 4%. It is assumed that the current market rate on the loan was 12%. Thus, being an employee of the company she got a discount of 8%. Thus, the benefit in this case given by the company would be $500,000 * 8%= $40,000 (Section 16, Fringe Benefit Assessment Act). Total amount on which the Fringe Benefit Tax is to be paid by the company = = $(4,000 + 5,000 + 300 + 30,000 + 1,500 + 40,000) =$80,800. Fringe benefit tax rate in Australia is 47%. Thus, Fringe benefit tax= 47% of $80,800 = $37,976. The given question revolves around provisions of Capital Gains with respect to Australia. When an asset is being sold at a price that is higher than the actual cost of the asset, a capital gain tax shall be chargeable on it. However, certain assets are exempt from capital gain tax. Individuals have been provided with some benefits that they can either choose the indexation method or the discount method. In the given case there is Scott who is an individual who sold his property. Being an individual, his capital gain can be calculated either by discount method or indexation method. Discount Method Selling price of the land was= $800,000 *40% = $320,000 Cost price of the land held by Scott =$60,000. Amount of Capital Gain= ($320,000 - $60,000) = $260,000 As the property had been held by Scott for more than 12 months, the discount method shall be applied. Scott had also purchased a painting in the month of February 2005 for an amount of $16,500. The painting was lost by him on September 2015. Even then would capital gain tax will be levied on the painting. This tax shall be a complete loss for Scott. This is similar to the case of Wilson v Jackson. Therefore, Capital gain = 50% of $(260,000 165,000) = $121,750. Indexation Method Net Indexation for the year 1999 =68.7/43.2 = 1.59 Net Indexation for the year 2016 would be =108.6/82.1 = 1.32 Indexed cost of acquisition will be= $60,000 * 1.59 = $95,400 Selling price of the land of Scott= $320,000 Capital gain on the land become = ($320,000 - $95,400) = $224,600 Capital loss on the painting was = $21,780. (ato.gov.au, 2016) Thus, the net capital gain in the question= $(224,600 - 21,780) = $202,820 Thus, as compared to the indexation method, the capital gain from the discount method was lower. Thus, Scott would opt for discount method to calculate capital gain. Net capital gain for Scott = $121,750. Capital gain tax is to be paid on the above amount Had Scott sold his property to his daughter for $200,000 the calculation shall be different from PART A. As per the Act, in the case of a capital asset, its sale value can be either at the amount that it is sold in or the market value of the asset, whichever is higher is to be taken. In the given case, the property was sold by Scott to his daughter for $200,000. The market value of the property was $800,000. Higher of the two values is the market value $800,000. Thus the sale value of the property shall be considered as $800,000. Thus, capital gain in PART B shall be the same as PART A. It will be $121,750. Bibliography Guide, G. (2016). Taxes are high in Australia. Global Property Guide. Retrieved 5 October 2016, from https://www.globalpropertyguide.com/Pacific/Australia/Taxes-and-Costs Calculating and paying capital gains tax. (2016). com.au. Retrieved 5 October 2016, from https://www.nab.com.au/personal/learn/managing-your-debts/capital-gains-tax Calculating Capital Gains Tax - the basics for Australian investors | deListed Australia. (2016). com.au. Retrieved 5 October 2016, from https://www.delisted.com.au/capital-gains-tax/basics Fringe Benefits Tax (FBT). (2016). gov.au. Retrieved 5 October 2016, from https://www.business.gov.au/info/run/tax/fringe-benefits-tax Kaleb, J. (2015). Understanding Fringe Benefits Tax 101 - The Pulse Australia. The Pulse Australia. Retrieved 5 October 2016, from https://www.myob.com/au/blog/tax-benefits-101/ Small Business - FBT changes for work-related electronic devices. (2016). gov.au. Retrieved 5 October 2016, from https://www.ato.gov.au/General/new-legislation/in-detail/direct-taxes/fbt/small-business---fbt-changes-for-work-related-electronic-devices/