HI6028 Taxation Theory, Practice & Law | Australian Law
Added on -2020-02-18
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Taxation Theory, Practice, and Law 1TAXATION THEORY, PRACTICE, AND LAW Student’s NameName of the CourseProfessor’s NameName of the UniversityCityDate
Taxation Theory, Practice, and Law 2Question 1According to the Internal Revenue Service’s (2017) items owned by an individual meant for personal use or for investment purposes can be thought of as capital assets. Capital assets includeland, buildings, jewellery, household fixtures and furnishings, securities (bonds, equity, mutual funds, bank deposits, debentures, life insurance) trademarks, vehicles, patents, plants and machinery (Dave, 2017). Upon the sale of a capital asset, the amount realised from the sale less the adjusted basis in the asset is either a capital gain or capital loss (Internal Revenue Service, 2017). When the asset is disposed of at an amount greater than the acquisition cost, then a capitalgain is realised, in circumstances where the disposal price is less than the acquisition cost, then a capital loss arises. The Australian Taxation Office (2017a) computes net capital gains and net capital losses as follows Net Capital Gain = Sum of all Capital Gains realised within the fiscal year (amounts arising from managed funds and trusts are added here) – Sum of Capital Losses (net capital losses arising from prior periods is added to the current capital losses) – Capital Gains arising from discounts in tax and concessions given to small businessesNet Capital Loss = Sum of Capital Losses (including losses realised in prior periods) – Sum of Capital GainsWhen computing capital gains and capital losses some factors are taken into considerations. Capital gains or losses on collectables which include items like paintings and antiques of values equivalent to or less than $500 are disregarded. Capital losses associated with collectables can
Taxation Theory, Practice, and Law 3only be offset by capital gains from collectables. Capital gains or losses on personal use items such as furniture and household items of values of less than 10,001 are disregarded. AssetPurchase PriceSales Price Gain (Loss)Antique Vase $ 2,000.00 $ 3,000.00 $ 1,000.00 Antique Chair $ 3,000.00 $1,000.00 $ (2,000.00)Painting $ 9,000.00 $ 1,000.00 $ (8,000.00)Home Sound System $ 12,000.00 $11,000.00 $ (1,000.00)Shares $ 5,000.00 $ 20,000.00 $ 15,000.00 Net Loss on Collectables = $1,000 - $2,000 – $ 8,000 = $ 9,000Net Gain = $ 15,000 - $ 1000 = $ 14,000Question 2Fringe benefits are sometimes referred to as employee benefits, perquisites or perks (Klonoski, 2016, p. 52). These benefits consist of non-salary (wage) compensation awarded to employees on top of their stipulated remuneration. Examples of fringe benefits include accommodation provided by the employer (the accommodation could be fully furnished and serviced with all utilities catered for or could simply be in form of rent), insurance coverage (these could include medical and life assurance), income guarantees in case of disability, childcare, school fees, sick leave, vacation allowances, retirement contributions, household staff, profit sharing, amongst others (Ohio University, n.d.). These benefits are often considered to be indirect expenses to the organisation (International Accounting Standards Board, 2015;United States Bureau of Labour Statistic, 2016).
Taxation Theory, Practice, and Law 4According to the Austrian Tax Office (2017b), the taxes on these fringe benefits are paid by the employer. As such the employer withholds tax obligations that arise from benefits conferred to the company’s directors, current employees, potential employees, and past employees. An employer for purposes of taxes includes sole traders, partnerships, corporations, unincorporated organisations, governments, non-government organisations, and trustees. The fringe benefits tax is payable irrespective of whether or not the employee is liable to pay other categories of taxes. The term loan encompasses situations whereby the employee owes the employer a given amount and on the day the debt falls due the employee fails to retire the debt. The amount that remains unpaid is considered as a loan. The loan advanced to Brain can be considered as a loan fringe benefit. A loan fringe benefit is defined as a loan provided by the employer to the employee at an interest-free rate or a low-interest rate (this is a rate that is lower than the benchmark rate) [Inland Revenue, 2016]. In Australia, instead of the market rate of interest, the statutory interest rate determined by the Reserve Bank of Australia is used as the benchmark rate.In April 2016, the published rate was 5.65% (Australia Tax Office, 2017b). The value of the loan fringe benefit that is taxable on the loan given to Brain is calculated as follows:Step 1: Computation of value of the loan fringe benefits that is taxable without consideration of the deductible ruleValue of Loan Fringe Benefit that is Taxable = Benchmark (Statutory) interest on the loan – Actual interest charged on the loanStatutory Interest on the Loan = 5.65% x $ 1,000, 000 = $ 56,500Actual Interest Paid on Loan = 1% x $ 1,000, 000 = $ 10,000Value of Loan Fringe Benefit that is Taxable = $ 56,500 -$ 10,000 = $ 46,500
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