The Taxability Aspect of Capital Gains | Assignment


Added on  2020-04-01

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1. Eric’s net capital gain or loss for the yearIssue: In the past 12 months, Eric has acquired various assets such as an antique vase, an antiquechair, a painting, a home sound system, and shares in a listed company. Last week he has soldthe same for different values. This shows that the assets were in his possession for less than ayear1. Thus his net capital gain or loss this year would be short-term in nature. The taxabilityaspect of capital gains can be realized only when the sale proceeds from the assets are greaterthan the cost base at which they have been purchased. A significant observation is that Ericwould not be able to take advantage of the indexation model since the assets were held byhim for less than 12 months2.Rule:When an individual buys assets in order to meet his personal needs or recreation purposes,the same can be termed as “assets for personal use”. Collectibles are the assets that are oflower quantity but of higher value. Eric’s assets like the home sound system and the shares ofthe listed firm belong to “assets for personal use” category whereas the antique vase, antiquechair, and painting can be categorized under collectibles3. When assets with the procurement cost of less than USD 10,000 are sold, the capital profitsfrom such sale are not subject to taxation. In the given situation, assets for Eric’s personal arethe home sound system worth USD 12,000 and the shares in a listed organization worth USD5,000.ApplicationThe other assets that were sold be Eric were collectibles. As per the taxation rules, the capitalgains that an individual acquires from such sale, whose procurement cost is at par with or lessthan USD 500 cannot be subject to tax4. Eric’s collectibles included antique vase worth USD2,000, antique chair worth USD 3,000, and the painting worth USD 9,000. The providedinformation has been used to determine Eric’s capital performance:AssetsCost base of AssetsCapitalProceeds of Difference valueNet Capital Gain/ (Net Capital Loss)1Serrato, Juan Carlos Suárez, and Owen M. Zidar.The Structure of State Corporate Taxation and its Impact on State Tax Revenues and Economic Activity. No. w23653. National Bureau of Economic Research, 20172Sierra, Gretchen, Rosanne Altshuler, Ray Beeman, and Ronald Dickel. "Cross-Border Taxation: Exploring Options."Taxes92 (2014): 953Spilker, Brian, B. C. Ayers, J. Robinson, E. Outslay, R. G. Worsham, J. A. Barrick, and C. Weaver. "Taxation of Business Entities." (2014)4Foucault, Martial, Katsunori Seki, and Guy D. Whitten. "Good times, bad times: Taxation and electoral accountability."Electoral Studies45 (2017): 191-200.

AssetsAntique Vase2,0003,0001,000Capital GainAntique Chair3,0001,000-2,000Capital LossPainting9,0001,000-8,000Capital LossHome Sound System12,00011,000-1,000Capital LossShares in listed firm5,00020,00015,000Capital GainTotal31,00036,000Net Capital Gain / Loss5,000Total Net Capital Gain Conclusion:Eric’s total cost base of personal assets exceeds USD 10,000 which indicates that his capitalgains from the sale are taxable in nature. Similarly, the procurement value of his collectibleassets is greater of USD 500, thus they are also subject to tax5.2. The taxable value of Brian’s fringe benefit for the 2016/17 FBT year.Issue: The scenario presented features the loan of USD 1 million taken by Brian from his employerfor a time period of 3 years at a special interest rate of 1% per annum that is payable inmonthly installments.Rule:The margin between the current rate of interest in the market and the special rate of interestcharged by the employer can be termed as the fringe benefits of Brian. In order to accuratelycompute Brian’s taxable value of the fringe benefit, the prevailing statutory rate of interestmust be taken into account. As per the details, the loan was offered to Brian in 2016, April 1st,so the applicable rate of statutory interest is 5.65%6. ApplicationA series of steps have to be followed to arrive at the taxable value of his fringe benefits forthe 2016/17 FBT year. Firstly, the loan fringe benefit would be computed based on theprecedent of eliminating the deductible rule. The deductible rule states that interest on the5Picciotto, S. "Towards unitary taxation: combined reporting and formulary apportionment."Global tax fairness(2016): 221-2386Sachs, Dominik, Aleh Tsyvinski, and Nicolas Werquin.Nonlinear tax incidence and optimal taxation in general equilibrium. No. w22646.National Bureau of Economic Research, 2016

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