Taxation Case Studies: Analysis of Capital Gains and Fringe Benefits

This document presents a detailed analysis of five taxation case studies. The first case examines capital gains tax, calculating profit/loss from asset sales and determining tax liabilities based on holding periods. The second case focuses on fringe benefits tax, specifically loan fringe benefits, calculating taxable value based on interest rate differences. The third case study explores tax avoidance strategies through profit-sharing agreements within a family, considering income clubbing and loss carry-forward. The fourth case analyzes a tax avoidance scheme involving employment contracts and deeds, emphasizing the legality of tax planning. The fifth case examines timber sales and the applicability of taxation rulings, determining tax implications for non-forestry operations. Each case includes critical analysis, supporting evidence, and conclusions, providing a comprehensive understanding of various tax-related scenarios.

TAXATION CASE STUDIES

Table of Contents
Introduction.................................................................................................................................1
Critical analysis:..........................................................................................................................1
Supporting Evidence:..................................................................................................................1
Conclusion:.................................................................................................................................2
Question 2........................................................................................................................................2
Introduction.................................................................................................................................2
Critical analysis:..........................................................................................................................2
Supportive evidence:...................................................................................................................3
Conclusion:.................................................................................................................................4
Question 3........................................................................................................................................4
Introduction.................................................................................................................................4
Critical analysis...........................................................................................................................4
Supporting evidence:...................................................................................................................4
Conclusion...................................................................................................................................5
Question 4........................................................................................................................................5
Introduction:................................................................................................................................5
Critical analysis:..........................................................................................................................5
Supporting evidence:...................................................................................................................5
Conclusion:.................................................................................................................................6
Question 5........................................................................................................................................6
Introduction.................................................................................................................................6
Critical analysis:..........................................................................................................................6
Supporting Evidence...................................................................................................................6
Conclusions.................................................................................................................................7

Question 1.
Introduction
The capital gain is the profits which arise after sale of the assets. It may be for short run
or long run. If the property held for more than 36 months, then in that case, long term capital
gain will arise. Henceforth, the tax is payable after assessing cost of acquisitions and then the tax
is made (Saez and Zucman, 2016). If the assets is acquired on for less than the 36 months then, in
that case, tax are imposed directly.
Critical analysis:
Under this given situation, the Eric acquired assets 12 months ago, which means they
would be liable to have tax on a short term basis. The eric acquired the following assets which
are as follows:
Particulars Acquired Sale Profit/ loss
Antique base 2000 3000 1000
Antique chair 3000 1000 -2000
Painting 9000 1000 -8000
Home sound system 12000 11000 -1000
Shares 5000 20000 15000
Total (Profits) 5000
From the given report, this has been seen that the Eric gain net 5000 profits by disposing
of all the assets. However, the assets which are depriciated, and use for the personal benifits, not
able to pay taxes. Mr. Eric will pay tax on the 5000 net profits.
Supporting Evidence:
According to personal investors guide to capital gain tax 2016, capital gain arise by way of sale
of shares, are taxed under this manner. As per appropriate norms, if any individual dispose off
capital assets and make capital gain over this, then in that case, such individual needs to make a
report of capital gain or losses under his/her return and liable to pay taxes over the gains. But, if
losses arise, then, individual can not claim it against his other income but he/she could
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implement it in order to reduce capital gain. As, per the tax norms, whole assets acquired on or
before 20 September, 1985, are liable to pay CGT unless specifically excluded:
Many of the personal assets are exempt from CGT, and it also does not apply to depreciating
assets used for the taxable aim (Evers, Miller and Spengel, 2015). Henceforth, the tax is not
payable on above mentioned depreciating personal assets.
Conclusion:
Under this report, this has been seen that capital gain tax is payable as per the norms of
the income tax laws. Firstly, there is a need to assess the disposing value and then reduce the cost
of acquisition in a better manner.
Question 2.
Introduction
Fringe benefit is paid by employers pay on specified benefits they gives to their
employees. These are the benefits which are apart from the salary or wage package. This is
different from the income tax and is calculated on the taxable value of the fringe benefits
rendered. Under the given question, the loan fringe benefits is discussed. Brain's employer
provided three year loan amount to $1million @1% per annum. Which is less than the actual
benchmark rate.
Critical analysis:
Under the cited case, this has been seen that the Mr. brian's employer rendered a loan
@1% interest rate. Which is less than the industry benchmark rate. Henceforth, the tax is liable
on it. However, the statutory tax rates in 2016/2017 year is 5.65%. Henceforth, the taxable fringe
benefits would be the difference between the actual interest rate and statutory interest rate.
Under, this case, fringe benefits are calculated by the actual interest rate less than statutory
interest rate (Mullins, 2015). So, value of fringe benefits will be 5.65%-1%= 4.65%
The taxable value is calculated as follows:
Steps Actions Results
1 Taxable value of the loan
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fringe benefits:
Actual interest is calculated
as :
Staututory interest rate is:
Henceforth, the fringe benifits
will be:
$1,000,000*1%=$10,000.
$1,000,000*5.65%=$56,500.
$56500-$10000=$46,500.
2 Taxable value of the loan
benefits if it is provided as free
of costs
$1,000,000*5.65%=$56,500.
3 If Mr. Brian paid interest equal
to the amount of the taxable
value assessed in steps 2. how
much amount would be
eligible for deduction to the
employees.
$56,500*40%=$22600
4 On the actual situation, the
interest permissible as an
income tax deduction to the
employee.
$10,000*40%=$4000
5 Subtract step 4 from step 3 .
the final outcome is the
amount by which the fringe
benefits of the taxable value
may be reduced.
$22600-$4000=$18600
If the interest is payable monthly then interest amount is divided by 12 months. So that the EMI
can be calculated. And the amount would be different from the amount which is calculated
annually.
On the 3rd situation, if the bank makes interest free loans, in that case, the net fringe benefits
would be: $1,000,000*5.65%=$56,500
$56,500*40%=$22600. henceforth, $22600 would be the net fringe benifits.
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Supportive evidence:
As per the fringe benefits tax policy, FB taxable value is the amount under which the
notional amount of interest exceeds the actual amount of interest falling on the loan. Every loan
is to be considered separately.
Conclusion:
Fringe benefits are the benefits which have been allotted by the employer to the
employee, and on behalf on this, the employee paid tax on the fringe benefits taxable amount.
The employee must reduce fringe benefits taxable value to which the notional interest on loan
will be permissible as an income tax deduction to the employee (Brink, 2017). For proving the
deductibility, there is a need to make a declaration report made by the employee to the employer,
which clear the use of loan was put and the extent to which interest on the implement of loan was
allowable as a deduction.
Question 3
Introduction
Under the cited case, Jack and Jill borrowed money for buying rental property. They both were
agreeing to make a contract under which they agreed to share the profits in the ration of 90:10,
and the loss is to be bear by the Jack only. This contract made in order to avoid the tax liabilities.
In the last year, property arose $10000 loss.
Critical analysis
In the given case, they both made a contract for avoiding the tax liabilities. As, this has
been seen that Jill is the housewife who is a dependant lady hence, her income is to be clubbed
under the Jack assessment (McGuire, Wang, and Wilson, 2014). So, the covenant is made for
lowering the tax liabilities and the income is also covered under Jack. Hence forth, if the
property incurred the loss last year, then, in that case, such loss is to be carry forward for nest
year and this would be set off from the nest year or succeeding years profits (Capital gain tax on
property, 2017). If, they both decides to sell it, then any Capital gain or loss arise, then, it would
be assessed under the Jack capital gain head. As, his wife is the dependant lady and earn nothing.
She is not liable to pay tax over any capital gain but his husband would pay the entire capital
gain tax.
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Supporting evidence:
As per the tax laws of the country, one can not take the benefits for which he/ she did not
pay nothing. Hence, the tax is to be paid on the capital gain amount what they are going to
entitled. Henceforth, the tax is to be paid by Jack on CG.
Conclusion
From the given case, this has been concluded that tax is to be paid by Jack on the capital gain
what he earn form the assets. The last year loss is also set off form the capital gain arise for the
sale of the assets.
Question 4
Introduction:
According to Duke of Westminster's case which was based on tax avoidance. They executed a
deed of conveyance of covalent with his lad servant including national helpers, gardeners, etc.
Under a special deed, duke decided to pay some amount for the services which he was rendering
to him. In an written letter which was sent to the servants. In which, it was clearly mentioned that
Duke would pay remuneration on priority in addition to sums, if any, services performed by the
servant as a domestic helper. After analysing all situations Duke has decided to claim such
payment for a tax deduction in preparation for tax avoidance (Gallemore and Labro, 2015).
Critical analysis:
A deed is a known as a contract same as legal document which requires a mutual consents of
more than one people. It is normally used to grant a perfect ways to transfer of such property.
The basic relation among a deed and a contract is that, deed is a written agreement that must be
dully signed and get sealed under the presence of a third party. Like solicitor. An agreement must
be in writing, a dead is a contract which is not required to be unenforceable. In most of the cases,
a deed has a long term enforceable time duration as a easy contract.
Supporting evidence:
According to the above mentioned case, the major issues lies on whether the deed of written
agreement would be seen or burned as under employment contract. Duke was not even paying
the gardeners and servants not weakly wages neither monthly salary that was mentioned under
the employment contract. Therefore, there is no any consideration is made towards the contract
which is said to be one of the major factors in the development of legally binding contract. In the
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case of agreement, the payment is made only in terms of tax deductible (Jiang and Shao, 2014).
If it is an yearly payment to gardener and servants. They Duke have only the right to claim tax
relief for the yearly payment or in the situation where the amount paid for those services
rendered in that particular year.
Conclusion:
The overall case recommended that tax avoidance can only be allowed as long as it follows
enactment law. Under this case the principles amount of that specific format of the agreement
can reduce the tax liabilities. If it get approved and claim for only annual year is made for the
payment.
Question 5
Introduction
The revenue generated via giving the land for producing timber. This is done by cutting
various pine trees. Under the cited case, it is found that Mr. Bill wants to clear its land. For that,
a company is paying him $1000 for 100 metre of timber. This comes under Taxation ruling 95/6,
primary production and forestry. Such ruling covers the receipts comes from the sale of timber
would make accessible income, whether they are from the forestry industry or not. The
deduction is also allowable on such income. Such ruling is covers the tax treatment of
transactions connected to timber which does not comes under the forest operations.
Critical analysis:
Under the give case, Mr. Bill does not engaged in forest operations but he ultimately
indulge in disposing the operations. Hence he is not liable to pay tax on the amount what he will
get from the company. Because, such activity does not covers the forest operations On the other
case, if Mr. bill will get $50000 lump sum amount, in that case, the this would be presumed to be
the assessable income (Jiang and Shao, 2014). As, such activity covers under forest operations,
and liable to pay taxes. Hence, both reflects different answer.
Supporting Evidence
This circumstances comes under taxation ruling, and this ruling is applicable to person
not occupied in forest operations who sale off timber. If any person receives royalties for
removing the trees form the land, does not comes under conducting forest operations if these are
not intentionally planted for the purpose of felling. Hence, not liable pay tax on assessable
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income. On the other hand, the income is received knowingly then, it is liable to pay tax, as the
operations would presumed to the forest operations.
Conclusions
From the cited case study, this has been observed that Mr bill is not carrying forest
operations under first phase, so the revenue earned by him would not liable to pay tax. While on
the other case, he receives $50000 for permitting logging company a right to remove timber,
which covers forest activity, hence liable to pay tax on that.
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REFERENCES
Books and Journals:
Saez, E. and Zucman, G., 2016. Wealth inequality in the United States since 1913: Evidence
from capitalized income tax data. The Quarterly Journal of Economics. 131(2). pp.519-
578.
Evers, L., Miller, H. and Spengel, C., 2015. Intellectual property box regimes: effective tax rates
and tax policy considerations. International Tax and Public Finance. 22(3), pp.502-530.
Mullins, C., 2015. Tax considerations of debit loans: business income tax. TAXtalk. 2015(55).
pp.58-59.
Brink, J., 2017. Taxable benefits provided to expatriate employees seconded in South Africa:
fringe benefits. Tax Breaks Newsletter. 2017(373). pp.5-8.
McGuire, S.T., Wang, D. and Wilson, R.J., 2014. Dual class ownership and tax avoidance. The
Accounting Review. 89(4). pp.1487-1516.
Gallemore, J. and Labro, E., 2015. The importance of the internal information environment for
tax avoidance. Journal of Accounting and Economics. 60(1). pp.149-167.
Jiang, Z. and Shao, S., 2014. Distributional effects of a carbon tax on Chinese households: A
case of Shanghai. Energy Policy. 73. pp.269-277.
Online
Capital gain tax on property. 2017. [Online]. Available
through:<http://www.which.co.uk/money/tax/capital-gains-tax/guides/capital-gains-tax-on-
property>. [Accessed on 18 th September, 2017].
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