The first step towards calculating net capital gain or loss for each year is calculating the net capital gain or loss for each asset (Hoang, 2007, p.2). The net capital gain or loss for the year is then submitted as the income tax return for taxation by the government of Australia.
In order to avoid a person being taxed twice, there are rules that must be observed when calculating the capital gain or loss on an asset. For instance, when one sells land or property at a price higher than the buying price thus making a profit, it is supposed to be included as ordinary income and eliminated from the calculation of capital gain. On the other hand, if one opts to include the profit in the capital gain or loss, then he or she should eliminate it from the ordinary income.
Net capital gain
Net Capital Gain =Total Capital Gains (for the year or assets including trust & managed fund) Total Capital Loss (Including Net Capital Losses from the previous year) Net Capital Loss.
In case the capital losses for the current year are more that the total capital gains, then the individual has a net capital loss
Net capital loss
Net Capital Loss = Total Capital Losses (Include Total Capital Losses for the previous year) - Total Capital Gains.
It is important to note that the net capital loss is not directly deducted from the individuals ordinary income. Rather, it is carried forward and deducted from capital gains in the following year. In addition, net capital losses can be carried forward to as many years in the future.
Trust gains and losses
Any capital losses incurred in a trust or managed fund is normally distributed among the beneficiaries of the trust fund. In addition, capital losses on trust can be carried forward to several years in the future.
Capital Losses to be disregarded.
The following capital losses should be disregarded when calculating net capital gains or losses:
Capital losses as a result of personal use of an asset.
Capital losses from the use of assets such as motorcycles and cars.
Capital losses from some collectibles.
Capital losses from lease the lease item is used for the production of assessable income.
In the case in point, the net capital gain was calculated by first considering the total capital gain and losses for each capital asset, which included property, a painting by Pro Hart, Luxury Motor Cruiser, and Parcel shares. In the transactions of the luxury motor cruiser, the individual incurred a capital loss. On the other hand, the person incurred capital gains on the rest of the capital assets and thus posted $829,000 capital gain on assets.
What to Do with Capital Gains and Losses
Almost every property owned by an individual is a capital asset. Some of the common examples of capital assets are household furnishings, bonds, stocks and homes (Burrow and Kleindl, 2012, p.92). When the capital asset is sold, the difference between the value of the asset and the amount realized after the sale is referred to as capital gain or capital loss. The initial cost of the asset is normally referred to as its adjusted basis. Therefore, if the price at which an asset is sold is more that the adjusted basis, then a capital gain is realized. Otherwise, a capital loss is incurred. However, losses incurred as a result of personal use of the capital asset are not tax deductible.
Capital gain and losses are either short-term or long-term. A long-term capital gain or loss is incurred if the capital asset is held for more than one year. On the other hand, if the capital asset is held for less than a year, then the capital loss or gain is said to be a short term (Burrow and Kleindl, 2012, p.78). The nature of capital gain or capital loss is determined by counting the number of days from the time the capital asset was acquired to the time the capital asset was sold or disposed of.
If an individual has a net capital gain, then a lower tax rate is applied to the gain compared to the tax rate applied to the individuals ordinary income. The difference between the net long-term capital gain for the year and the net short-term gain for the year is what is referred to as the net capital gain.
In the case in point, the individual posted a net capital gain of $829,000. This means that the total capital gains exceeded the total capital losses for the capital assets within the one year period. The net capital gain is then submitted for tax returns to the government for computation of the amount of tax to be paid to the government by the individual. However, in most cases, the tax rate on capital gain is no more than 15 percent. For instance, in the 10-15 percent ordinary income tax bracket, a 0 percent tax rate applies. If the taxable income of the individual exceeds the threshold, a 20 percent rate applies.
Fringe benefits tax (FBT)
A fringe benefits tax is a tax paid by employers on company benefits they give to employees. These include benefits the employers extends to the employees family and other dependants. In addition, directors and other top managers of a company are often entitled to numerous company benefits which the employer is expected to disclose to the government for taxation purposes. These benefits are often an addition to the employees salary and wages. It is important to point out that fringe benefits are separate from other taxable income and are often calculated separately based on the fringe benefits submitted by the employer for taxation purposes. In the case in point, Periwinkle Pty Ltd provided one of its employees, Emma with a company car since she does a lot of traveling while on duty. Since Periwinkle Pty Ltd purchased the car and is used for private tasks by Emma, there are serious fringe benefits scenarios that may arise from the situation. However, the Australian fringe benefits tax law includes a list of categories of fringe benefits that are taxable and valuation criteria for each category. This include:
Car fringe benefits
The car fringe benefit law allows employers who make cars they own or lease available for use by their employees to provide a car fringe benefit to those employees entitled to the benefit (Horvath and Chodikoff, 2008, p.56). Since Periwinkle Pty Ltd made available to Emma, a company car that was bought at $33,000, the company has to submit car fringe benefit to the government for taxation purposes. However, the details about the car have to be made available since in Australia, a car fringe benefit applies only to the following types of cars:
Station wagon or sedan
A goods-carrying vehicle with a maximum capacity of less than 1 tonne (Includes 4 wheel drive cars).
Passenger vehicle with a carrying capacity of less than 9 passengers.
According to the fringe benefits tax, the above definitions are the only ones that fit the definition of a car. However, if the vehicle provided to an employee does not meet this definition, the provision of the vehicle may be considered a residual fringe benefit. In the case in point, the details about the type of car given to Emma by the company are not provided and thus it is not possible to determine whether it should be considered a car or not at least based on the definition of the car as provided in the Australian car benefit tax law.
Cars for Private use
Company cars that are given to employees and their associates on any day or time for their use can be entitled to car fringe benefits. The car may either be made available for use on private purposes. If the car is garaged near the employees home for security purposes, it is considered available for private use by the employee and therefore entitled to car fringe benefits. This applies even if the employee does not have permission to use the car for private purposes. In addition, if the employee uses the car to travel to and from work, it is considered on private use and therefore qualifies for fringe benefits tax. Some of the exemptions to fringe benefits tax include the use of a taxi by an employee to and from work. In addition, when the employee uses a taxi when performing work-related tasks and the use of the vehicle for non-work related tasks in an irregular and infrequent manner.
Other important benefits related to the car include reimbursement of an employees road tolls which are categorized as expense payment fringe benefits. The other category is the use of electronic toll tags which are taxed under residual fringe benefits rather than car benefit tax. On the other hand, the use of any motor vehicle other than a car is considered residual fringe benefit and does not fall under the car benefit category.
In the case in point, the car provided to Emma by the company is available for private use by both Emma and her immediate associates. As a result, it can be considered as an appropriate candidate for the car benefit tax calculation which can be done if Periwinkle Pty Ltd discloses it to the tax authorities.
Expense payment fringe benefits
If an employee incurs expenses and the employers reimburse the incurred expenses or pay any third party for the sake of the expenses incurred, then the employer has to file a fringe benefits tax on the expenses. Some of the expense payment fringe benefit tax categories include a corporate credit card. The expenses may, however, cover entertainment, property or residual items. In the case in point, Emma incurred expenses on minor repairs of the car which amounted to $550. As a result, the expenses payment fringe benefits tax applies and can be done when Periwinkle Pty Ltd discloses this information to the tax authorities.
Loan fringe benefits
The loan fringe benefits tax is calculated when employers give interest-free or low-interest loans to employees (Ajami, 2006, p.17). However, when the employee is released from the company, a debt waiver benefit where the employee is released from the obligation to repay the loan. The benchmark interest rate on loans as on 31st March 2015 in Australia is 5.95 percent. Any interest rate above 5.59 percent is considered high-interest rate. On the other hand, any interest rate lower than the given threshold is considered a low-interest rate. However, in the case in point, Emma extended the loan interest-free to her husband to buy shares. As a result, the loan fringe benefits do not apply.
The loan of $500,000 extended to Emma by Periwinkle at a rate of 4.45 percent has an interest rate that is lower than the threshold of 5.59 percent. As a result, the loan fringe benefits tax shall apply (Ajami, 2006, p.46). However, since Emma lend $50,000 to her husband interest-free to purchase shares, this amount should be excluded from the $500,000 loan available for taxation, which means the taxable amount for the loan fringe benefits will be $450,000.
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