Investment Planning

Question: Case Study: Calculation of net capital gains or losses. Answer: Tang, R., Wan, J. (2015). Fringe benefits tax and fly-in fly-out arrangements: John Holland Group Pty Ltd v Commissioner of Taxation.Australian Resources and Energy Law Journal,34(1), 17. Introduction: This assignment is representing consequences and determination of few aspects of income tax liability for individual assesses and company assessee with the help of necessary computations and reasons and evidence thereof, as per the requirements of two case studies. One is related to the determination of capital gain taxable in the hands of an individual asessee Mr. Dave Solomon, while the other one is for fringe benefit tax liability in the hands of the company Periwinkle Pty Limited, assessee. In the present case, net capital gain or loss as per the Australian Taxation Office Act 97/ 36 is to be determined for the year ended 30th June in the books of assessee Mr. Dave Solomon aged 59 years. A Capital Gain Taxable For the year ended 30 June Particulars Amount $ Amount $ (a) residence apartment: Long term asset Net Realised Value (i) 850,000.00 cost of acquisition 70,000.00 Add: Indexation (70,000*106.8/37.9) 197,255.94 Indexed cost of acquisition 267,255.94 comission on sale 15,000.00 Total cost incurred (ii) 282,255.94 Net Proceeds (i- ii) 567,744.06 Less: Discount @50% as per Provision contained in ATO Act (283,872.03) Add: Forfeiture of deposit 85,000.00 Capital gain taxable 368,872.03 (b) Painting: Long term asset Sale Proceeds 125,000.00 Cost of Acquisition (15,000.00) Net Proceeds 110,000.00 Less: Discount @50% as per Provision contained in ATO Act (55,000.00) Capital gain taxable 55,000.00 (c) Motor Cruiser: Long term asset Sale Proceeds 60,000.00 Cost of acquisition (110,000.00) Capital Loss incurred (50,000.00) (d) Shares: Short term asset Sale Proceeds 80,000.00 Less: Brokerage on sale (750.00) Net value realized 79,250.00 Less: Cost incurred- Purchase price 75,000.00 Stamp duty 250.00 (74,750.00) Short term capital gain taxable 4,500.00 Net capital Gain Taxable in the current year of taxation: Particulars Amount $ Amount $ capital gain from residence apartment 368,872.03 capital gain from painting 55,000.00 Capital loss from Motor cruiser (50,000.00) Short term capital gain from shares 4,500.00 Total capital gain taxable incurred in the current year tax 378,372.03 Less: capital loss on sale of shares from previous year (10,000.00) Net capital gain taxable in the current year 368,372.03 Reasons and Evidence: As per the provisions contained under the Income Tax Assessment Act 1997/ 1936 of Australian Taxation Office, any asset held for more than 12 months is considered to be long term asset (Gtze, Northcott Schuster, 2015). Therefore, in case of assessee Mr. Dave Soloman three out of four assets are long term i.e. residential apartment, painting and motor cruiser. Ruling under ITAA 1997/ 1936 states than any long term asset acquired before 20th September 1985, qualifies for indexation. This means that the cost of acquisition of any asset purchased before the specified date should be increased by indexation factor (Moosa, 2016). Indexation factor is considered for the year in which the expenditure incurred and in the year in which capital gain taxable event happened. As a matter of fact, residence apartment which was bought my Mr. Dave 30 years back from the current year tax, cost of purchase of which has been increased by the indexation factor. Whereas other assets i.e. painting, motor cruise were acquired on or after 20th September 1985, hence no indexation required (Dore, 2015). As per the Income Tax Assessment Act ruling, a capital discount of 50% is allowed on capital gain taxable for all the long term assets (Mason Harrison, 2015). Therefore, deduction of 50 % on residence apartment, painting has been claimed. Since, there is a capital loss in case of motor cruiser no discount can be claimed on the same. Further, such discount is also not available on short term assets and therefore, entire amount of capital gain on sale of shares which were acquired in the current year of taxation is taxable in the hands of Mr. Dave. Additionally, as per ITAA rulings on forfeiture of deposits, it has been clarified that any amount in relation to deposits forfeited shall be included for the purpose of Capital gain tax. Thus, a deposit forfeited by Mr. Dave on cancellation of sale of property shall be taxable and no discounted shall be claimed on such amount (McDonald, 2015). Further, the rulings also clarify the allowance of interest expense as deduction. Any interest expense on loan borrowed for the purpose of buying short term assets does not qualify for deduction. Thus, $5000 interest expense on loan borrowed for purchase of shares is not an allowable deduction (Mcnamara, 2015). According to ITAA 1997/ 1936 rulings, loss incurred on long-term asset in the year of assessment is allowed for set off against the long-term capital gain (Kim, OConnor Han, 2015). Therefore, loss on sale of motor vehicle has been set off with the long term capital gain from other assets. Any loss on capital gain carried forward from previous year shall be set off against the net capital gain taxable in the current year of assessment (Gill, 2015). Hence, loss of $10,000 carried over from previous year is allowed to be set off against net capital taxable in the current year. According the calculation of net capital gain taxable in the hands of Mr. Dave Solomon in the above requirement, net capital gain amounted to $368,372.03 has been determined. Mr. Dave can either deposit the amount in any tax free investments such as superannuation fund, provident fund or Mr. Dave can acquire risk and tax free bonds. In case Mr. Dave is a risk taker individual, then he can also opt for investment the amount into listed stocks and securities (Board, 2015). It is also provided that Mr. Dave is willing to invest his funds upto $1,000,000 in superannuation fund but he could raise upto $368,372. Hence, we assume that Mr. Dave Solomon would contribute his net capital gain amount to the said fund. In case Mr. Dave has net capital loss, he can carried over the loss to next year of assessment together with the net capital loss on sale of shares he had already carried from previous year. According to the rulings in sections of Income Tax Assessment Act 1997/ 36 under Australian Taxation Office, capital loss incurred by an individual assessee is allowed to carry forward to future years. Though there is a specified limit for the number of years an asessee can carry. In case of capital loss this is the only option an assessee can avail apart from savings in payment of tax amount and reduction as capital loss in certain specified transactions entered by the asessee (Weisbach, 2016). Conclusion: This assignment has been dealt with the cases of calculation of net capital gains or losses taxable in the hands of individual assesee, Mr. Dave Solomon with the help of explanations to each transaction, which resulted in tax liability on net capital gain taxable value of around $ 368,372. As Mr. Solomon planning to contribute the funds to superannuation fund before the end of current tax year amounted to $1,000,000, he can invest the part of the amount raised by him out of net capital gain raised on sale of assets. Further, in the second case, fringe benefit tax liability valued to $ 43,739 in the hands of company, Periwinkle Pty Ltd which provided various allowance to its employee, Emma during the period 1st May 2015 to 31st March 2016. This, case also presented the deductions, Emma can claim in two different situation while computation of her income tax liability. Reference List: Board, C. F. P. (2015).CFP Board Financial Planning Competency Handbook. John Wiley Sons. Braverman, D., Marsden, S. J., Sadiq, K. (2015). Assessing taxpayer response to legislative changes: A case study of in-housefringe benefits rules.Journal of Australian Taxation,17(1), 1-52. Cooper, R. (2015). Income protection policies: the impact of the changes: payroll taxes.Tax Breaks Newsletter, (355), 4-5. Delany, T. P. (2012). Fringe benefits tax. Dimitropoulos, A., van Ommeren, J. N., Koster, P., Rietveld, P. (2016). Not fully charged: Welfare effects of tax incentives for employer-provided electric cars.Journal of Environmental Economics and Management,78, 1-19. Dore, M. H. (2015).Dynamic Investment Planning (Routledge Revivals). Routledge. Fisher, D. (2015). Mid market focus: No joy regarding FBT on travel expenses for FIFO arrangements. Gill, D. E. (2015). Consolidating the gains: Government intervention in risk capital.Venture Capital,17(1-2), 43-58. Gtze, U., Northcott, D., Schuster, P. (2015). Capital Budgeting and Investment Decisions. InInvestment Appraisal(pp. 3-26). Springer Berlin Heidelberg. Hodgson, H., Pearce, P. (2015). TravelSmart or travel tax breaks: is the fringe benefits tax a barrier to active commuting in Australia? 1.eJournal of Tax Research,13(3), 819. Kim, H. M., OConnor, K. B., Han, S. S. (2015). The spatial characteristics of global property investment in Seoul: A case study of the office market.Progress in Planning,97, 1-42. Mason, C. M., Harrison, R. T. (2015). Business angel investment activity in the financial crisis: UK evidence and policy implications.Environment and Planning C: Government and Policy,33(1), 43-60. McDonald, J. (2015). Capitalisation rates for commercial real estate investment decisions.Journal of Property Investment Finance,33(3), 242-255. Mcnamara, P. (2015). The changing nature of property investment: Implications for Urban Planning.Connections, 189-204. Moosa, I. (2016).Foreign direct investment: theory, evidence and practice. Springer. Schwartz, A. (2016). The Low-Income Housing Tax Credit, Community Development, and Fair Housing: A Response to Orfield et al.Housing Policy Debate,26(2), 276-283. Scott, R. A., Currie, G. V., Tivendale, K. J. (2012). Company cars and fringe benefit tax: understanding the impacts on strategic transport targets.