Taxation: Calculation of Capital Gain or Loss on Sale of Assets

This document discusses the provisions related to matters of income tax including capital gain tax in Australia. It provides answers to questions related to the sale of assets and calculation of capital gain or loss. The document also discusses the liability of an organization to FBT for providing fringe benefits to its employees.

Running head: TAXATION
Taxation
Name of the Student:
Name of the University:
Authors Note:

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Contents
Introduction:....................................................................................................................................2
Answer to question 1:......................................................................................................................2
Answer to question 2:....................................................................................................................14
Conclusion:....................................................................................................................................19
References:....................................................................................................................................20

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Introduction:
In Australia, Income Tax Assessment Act, 1997 is the main legislation governing
provisions related to matters of income tax including capital gain tax. The concept of capital gain
tax in Australia was introduced in the year 1985. Provisions of capital gain tax applies on sale of
assets subsequent to the introduction of capital gain tax in 1985. The provisions of Income Tax
Assessment Act 1997 (ITAA 1997), taxation rules (TR), notifications by Australian Taxation
Office (ATO) and case laws, where ever applicable, shall be considered to calculate the net
capital gain or loss of the tax payer in this document.
Answer to question 1:
(a)
Issue:
Is the sale of vacant land by the client on June 3 for $320,000 raise taxable capital gain to her
and when is the capital gain event (CGT) for the above sale as she received the amount on
January 3 next year when the sale was registered.
Rules:
As per the ATO, except for personal assets such as resident, home furniture and other personal
assets and business assets, sale of all other assets raises capital gain or capital loss to the tax
payer. Capital gain or capital loss is the difference between the sale proceeds received from sale
of a capital assets and the cost of the asset. The concept of capital gain tax was introduced on 20th
September, 1985 thus, assets acquired since then are liable to capital gain tax (Australia, 2016).

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According to ATO, in case of sale of vacant land or real estate properties, the time of the CGT
event is when the taxpayer enters into the contract to sale the land or real estate and not when the
contract is settled. Thus, in case the contract was entered in the current income year but the sale
proceeds was to be settled in the next year, the seller would be liable to capital gain tax in the
current income year as the time of CGT event is the time when the contract was formed and the
seller entered into contract to sale the capital asset (Burkhauser, Hahn and Wilkins, 2015).
Application:
It has been specifically told that the client does not carrying any business thus, the vacant land
sold by her is not a business asset, neither it is a personal asset. The asset was acquired by the
client in January 2001 thus, the asset is liable to capital gain or capital loss since it is after
September 20, 1985. Out of the sale price of $320,000, the seller will get $20,000 on the date of
entering into the contract and the balance January 3, next year (Jacob, 2018).
Conclusion:
The entire sale consideration of $320,000 shall be subjected to capital gain in the current income
year as the contract was entered into on June 3 even though the majority of sale proceeds will be
settled on January 3 of next year. Hence, the capital gain from the sale would be as following:
Particulars Amount ($) Amount
($)
Sale proceeds 320,000.
00

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Less: Cost base
Cost of acquisition 100,000.00
Local council cost 20,000.00
120,000.
00
Capital gain before discount 200,000.
00
Less: CGT discount (200000 x 50%) 100,000.
00
Capital gain 100,000.
00
(b)
Issue:
Is the loss due to theft of antique bed is a capital loss to the client and to be deducted from capital
gains of the client to ascertain net capital gain?
Rules:
ATO has specifically excluded personal assets including resident and furniture from the
perspective of capital gain tax. Such assets are not capital assets for capital gain tax (CGT)

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purposes in the country (Dixon and Nassios, 2016). Thus, in case of sale or involuntary disposal
of personal assets such as loss due to destruction and other reasons, CGT is not applicable. The
client is a collector and investor in antiques. Thus, in case of loss or destruction of antique
collection of her she will be assessed accordingly (Chardon, Freudenberg and Brimble, 2016). In
case the antique item is a personal asset of the taxpayer then she will not be liable to pay CGT on
the disposal of such asset. Similarly for involuntary disposal of such item if resulted in receipt of
insurance claim, then such amount would be considered as the proceed from involuntary disposal
for calculation of capital gain or capital loss on such asset.
Application:
Antique bed stolen on November 12 of current tax year is not a personal asset as it was not used
as such by the client. Since, she is an investor and antique collector, collection of such items is
natural. Loss of such asset will be considered as an involuntary disposal of capital asset.
Insurance claim received for such loss would be considered as the proceeds from involuntary
disposal, accordingly, capital gain or loss shall be calculated (Richardson, Taylor and Lanis,
2015).
Conclusion:
Taking into consideration the above it is clear that the antique bed stolen from the house of the
client is not her personal asset thus, subjected to capital gain tax. Accordingly, the capital gain or
loss on such antique bed is calculated below.
Particulars Amount
($)
Amount
($)

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Sale proceeds 11,000
.00
Less: Cost base
Market value by the expert 25,000
.00
Capital gain / (capital Loss) (14,000.0
0)
(c)
Issue:
Is the sale of painting for $125,000 by the client that was purchased on May 2, 1985 attracts
capital gain tax is the main issue to be discussed here.
Rules:
According to ATO, all capital assets acquired since September 20, 1985 are subjected to capital
gain tax (CGT). This is because on the day of September 20, 1985, capital gain tax was
introduced in the country. Thus, assets acquired before the introduction of CGT, i.e. prior to 20th
September, 1985 are not subjected to CGT. Hence, any assets sold by a tax payer that was
acquired by him or her before 20th September, 1985 will not be liable to the provisions of CGT
(Evans, Minas and Lim, 2015).
Application:

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In this case the tax payer acquired a painting by $2,000 of a well-known artist on May 2, 1985.
Though the price of the painting has significantly raise subsequent to the death of the artists
however, the sale price of such painting is not subjected to capital gain tax as the painting was
acquired before the introduction of capital gain tax in the country. CGT was introduced on 20th
September, 1985 and the paining was purchased on May 2, 1985. Painting has been defined
under collectables by ATO and has been specifically mentioned as a collectable which is
subjected to CGT but since the asset was introduced prior to introduction of CGT in the country
hence, no capital gain or loss is applicable on the sale of such painting (Chung, 2017).
Conclusion:
The client is not liable to pay CGT on disposal of the painting as it was acquired before 20th
September, 1985, i.e. before introduction of CGT in the country.
(d)
Calculation of capital gain or loss on sale of shares by the client:
Particulars Amount
($)
Amount
($)
Amount
($)
Sale proceeds from commonwealth bank shares 47,000
.00
Less: Brokerage on sale proceeds 55
0.00
Net proceeds from sale 46,450

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.00
Less: Cost base
Acquisition cost (1000 x 15) 15,000
.00
Stamp duty 75
0.00
15,750
.00
30,700
.00
Sale proceeds from PHB Iron Ore Ltd shares 62,500
.00
Less: Brokerage on sale proceeds 1,000
.00
Net proceeds from sale 61,500
.00
Less: Cost base
Acquisition cost (2500x 12) 30,000

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.00
Stamp duty 1,500
.00
31,500
.00
30,000
.00
Sale proceeds from young Kids Learning Limited 60
0.00
Less: Brokerage on sale proceeds 10
0.00
Net proceeds from sale 50
0.00
Less: Cost base
Acquisition cost (1200x 5) 6,000
.00
Stamp duty 50
0.00

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6,500
.00
(6,000
.00)
54,700
.00
Less: CGT discount (54700 x 50%) 27,350
.00
Capital gain (Long term gain) 27,350
.00
Sale proceeds from Share Build Limited 25,000
.00
Less: Brokerage on sale proceeds 90
0.00
Net proceeds from sale 24,100
.00
Less: Cost base
Acquisition cost (10000x 1) 10,000
.00

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Stamp duty 1,100
.00
11,100
.00
capital gain (Short term gain) 13,000
.00
Total capital gain from sale of shares 40,350
.00
Notes:
Shares have been classified as capital assets in case held as an investment. Sale proceeds from
sale of shares will be subjected to capital gain tax if acquired on or after 20th September, 1985. In
This case except the shares in Share Build Limited, all other shares were held for more than 12
months before the CGT event. Thus, except for sale of 10,000 shares of Share Build Limited the
benefit of CGT discount method will be available for sale of all the other shares (Hodgson and
Pearce, 2015).
Accordingly, the capital gain or capital loss from sale of the above shares have been calculated in
the table above.
(e)
Issue:

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Issue here is to determine whether the violin sold by the client is a capital asset or personal asset
and whether the sale of such violin attracts capital gain tax.
Rules:
ATO in its website has clearly mentioned that capital gain tax is applicable on all capital assets
acquired on or after 20th September, 1985. As per the ATO, in case of sale of personal asset no
CGT liability will arise provided the asset was acquired at less than $10,000. Personal asset
though has not been defined in ATO’s website however, in general term personal assets are the
assets that are used on regular basis by a person for his or her personal use (Huizinga, Voget and
Wagner, 2018). According to ATO, personal assets include;
 Boats.
 Furniture.
 Goods of electronic in nature.
 Household items.
A musical instrument used by a person though has not been defined but if such instrument is
personally used by such person on regular basis then this definitely comes within the purview of
personal assets. In case of personal use assets that have been acquired at less than $10,000 then
disposal of such asset would not attract capital gain tax liability (Burkhauser, Hahn and Wilkins,
2015).
Application:
The client has sold her personal violin which she used to play on regular basis for a consideration
of $12,000. She brought the violin for a price of $5,500 on June 01, 1999 thus, it costs lower than
$10,000 (Goncharov and Jacob, 2014).
Conclusion:

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Since the client used to play the violin on regular basis and it was purchased for a cost of $5,500,
i.e. below $10,000 hence, the sale of the asset would not attract CGT liability. Net capital gain of
the client is calculated below from all the CGT events.
Net capital gain
Particulars Amount
($)
Amount
($)
capital gain from sale of vacant land before CGT discount 200,000.
00
capital gain / (loss) on antique bed disposal (14,000.0
0)
capital gain from sale of shares before CGT discount 54,700.
00
Gross capital gain before CGT discount 240,700.
00
Less: CGT discount (240700 x 50%) 120,350.
00
120,350.
00
Short term capital gain from sale of shares 13,000.

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00
133,350.
00
Less: Capital loss brought forward 8,500.
00
Net capital gain 124,850.
00
Answer to question 2:
Issue:
Issue is to determine whether the car provided to one of its employees by Rapid Heat Pty Ltd is
fringe benefit and is the organization liable to FBT for providing such benefit to the employee.
Also the FBT liability of the employer for providing a loan to one of its employees is to be
discussed here.
Rules:
ATO provides that the liability to FBT arises in respect of car when an employer make his car
available for the personal use of an employee. In such cases, the FBT is calculated by using
either of the following two methods:
I. Statutory formula method.
II. Operating cost method.

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An employer can choose the method that minimizes his liability towards FBT (Hoopes,
Robinson and Slemrod, 2018).
In case of statutory percentage the following table can be referred to for calculating the taxable
value for FBT.
Kilometres travelled during the FBT year Relevant
statutory
percentages
Less than 15000 26%
15000 to 24999 20%
25000 to 40000 11%
Above 40000 7%
Any contribution from the employee shall be deducted from the specific amount calculated by
using statutory percentages to calculate the net taxable value for FBT purpose.
Under operating method the actual and deemed cost of operating the car is calculated which is
reduced by the amount of contributions made by the employee to determine the taxable value for
FBT (Dridi and Boubaker, 2015).
For loan provided at low rate of interest to the employee the employer will be liable to FBT. The
taxable value for calculation FBT in such case will be calculated by considering the difference

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between statutory benchmark interest rate and the rate at which the loan was given to an
employee.
Application:
In case of car provided by the rapid Heat Pty Ltd (Rapid Heat) since it was available for personal
use of the employee hence, Rapid Heat is liable to FBT. Similarly the interest provided to the
employee at 4.25% is lower than the statutory bench mark rate of the FBT year ending on 31st
March, 2018, i.e. 5.25% (Eslake, 2015). Hence, taking into consideration the applicable
provisions FBT of Rapid Heat is calculated below.
Statutory percentage method
Particulars Amount
($)
Base value of the car 33,000
.00
Kilometre ran 10000
km
Statutory percentage applicable
0.26
Taxable value {(33000 x 26%) x 335/365} 7,874
.79

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Taxable value under operating method would be higher hence, the employer has used statutory
percentage method to calculate taxable value for car benefits provided to the employee.
Taxable value of FBT for the loan provided at lower rate of interest than statutory benchmark
interest rate of 5.25% (Eslake, 2015).
Particulars Amount ($) Amount
($)
Loan amount 500,000.00
Used for purchasing non-income producing asset 450,000.00
Used for purchasing income producing asset 50,000.00
FBT taxable value
Statutory benchmark interest 0.05
Interest provided at 0.04
Taxable value for FBT {500000 x (5.25% - 4.25%)} x 7/12 2,916
.67
In case jasmine would have used the $50,000 to purchase share for herself then the taxable value
of Fringe benefit would have been as following:
Particulars Amount Amount

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($) ($)
Loan amount 500,000.
00
Used for purchasing non-income
producing asset
450,000.
00
Used for purchasing income producing
asset
50,000.
00
FBT taxable value
Statutory benchmark interest 0
.05
Interest provided at 0
.04
Taxable value for FBT {4500000 x (5.25% - 4.25%)} x
7/12
2,625
.00
Conclusion:
The taxable value of fringe benefit for the Rapid Heat Pty Ltd for car provided to one of its
employee would be $7,874.79 and for interest free loan provided to Jasmine it would be

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$2,916.27. If Jasmine would have used the balance loan of $50,000 for acquiring share for
herself then the taxable value for FBT would have been $2,625.00.

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