HI6028 Taxation Theory, Practice and Law Assignment

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HI6028 – TAXATION THEORY, PRACTICE AND LAW
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Contents
What is capital gain?................................................................................................................................3
What is capital gain tax (CGT)?..............................................................................................................3
Question 1................................................................................................................................................4
Question 2................................................................................................................................................8
Question 3..............................................................................................................................................10
References..............................................................................................................................................12
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What is capital gain?
Capital gain is such value of the capital asset which is higher than the purchase price. The
difference amount in selling price and purchase price can be termed as capital gain (when
selling price is higher than purchase price) (Fitzpatrick, 2019, February). It is attained only
when the capital asset is sold. Capital gain can be attained over short term as well as over
long term.
What is capital gain tax (CGT)?
Capital gain raised with the sale of the capital asset and it can include sale of property (land,
building), sale of shares, sale of bonds, sale of antiques collectibles and others (Fitzpatrick,
2019, February). When individual get the capital gain with the sale of the capital asset then
there is a tax applied over it which is known as Capital Gain Tax.
Note: - It is not necessary that every time individual get a capital gain with the sale of the
capital asset sometime, they may suffer capital loss. In this situation individual is eligible for
setting his/her loss against the capital gain he/she earned in the next year (Fitzpatrick, 2019,
February).
As per the ATO capital gain tax was introduced by 20th September 1985. In order to apply
capital gain tax then asset must purchase on or after 20th September 1985 (Fitzpatrick, 2019,
February). Assets purchased before that date can termed as Pre-CGT asset and tax is not
applied over the gains earned with the sale of such assets. CGT is part of income tax and it is
not separated from it (Fitzpatrick, 2019, February). ATO also suggested that any item which
has a purchase price lower than $500 then such items considered as
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Question 1
According to the information provided in the assignment brief there is an individual Helen’s
who sold out some of her collectibles in order to fund her business. Her collectibles include
Antique impressionism painting which was purchased by her father, historical sculpture, an
antique Jewellery piece and picture purchased by her mother. All four items sold at decent
price in order to support the business. But it is not necessary that all four collectibles are
eligible for capital gain calculation. Capital gain taxation was introduced on 20th September
1985.
Eligibility of collectibles for calculation of capital gain tax: -
a.) Helen’s father purchased an antique impressionism painting In February month of
1985 which is well before 20th September 1985. This collectible is not eligible for the
calculation of the capital gain tax and termed as Pre-CGT.
b.) Helen purchase Sculpture in the month of December of the year 1993. This collectible
is eligible for capital gain tax.
c.) Helen make a purchase of antique Jewellery piece in the month of October of the year
1987. This collectible is eligible for capital gain tax.
d.) Helen’s mother purchase picture in the month of March of the year 1987. As per the
date it is eligible for calculation of capital gain tax but by looking at the purchase
price ($470) which make it exempt from the tax calculation.
As per the criteria two collectibles are eligible for the calculation of Capital Gain Tax. On the
other hand, one is exempted from the tax calculation and one is not eligible for the same.
Methods available for calculating capital gain tax: -
Discounting method: - This method allows to deduct the purchase price from sales price.
Over the amount of gain 50% share is discounted for individuals. Remaining 50% is utilised
for the purpose of tax calculation.
Indexation method: - With the use of the indexation method purchase price get multiplied by
Consumer Price Index (CPI) and divided by the Consumer Price Index of the sale month. The
indexation amount which realised is utilised for deducting from sales price.
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Formula of Indexation Factor: -
Indexation factor: - [(Purchase price of Item * CPI of that month) / CPI of Sale Month]
a.) Sculpture: -
Capital gain from Indexation method: -
Purchase price = $5,500
Sales price = $6,000
CPI of purchase month = 112.6
CPI of sales month = 61.2
= [($5,500 * 112.6) / 61.2]
= $10,119
Indexation amount = $10,119
Capital gain = Sales price – Indexation amount
= $6,000 - $10,119
= -$4,119
With the sale of Sculpture as per the indexation method Helen attain loss of ($4,119).
Capital gain from Discounting method: -
Capital gain = Sales price – Purchase price
= $6,000 - $5,500
= $500
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With the sale of Sculpture as per the discounting method Helen attain capital gain of $500.
b.) An antique piece of Jewellery
Capital gain from indexation method: -
Purchase price = $14,000
Sales price = $13,000
CPI of purchase month = 112.6
CPI of sales month = 47.6
= [(14,000 * 112.6) / 47.6]
= $33,118
Capital gain = Sales price – Indexation amount
= $13,000 - $33,118
= -$20,118
With the sale of antique piece of Jewellery Helen attain the capital loss of ($20,118).
Discounting method
Capital gain = Sales price – Purchase price
= $13,000 - $14,000
= -$1,000.
With the sale of antique jewellery piece Helen suffer capital loss of ($1000).
As per the indexation method the total capital gain or capital loss is ($24,237)
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Amount of capital gain/loss of Sculpture = ($4,119)
Amount of capital gain/loss of Antique jewellery piece = ($20,118)
Total amount of capital gain/loss = ($4,119) + ($20,118) = ($24,237)
As per the discounting method the total capital gain or capital loss is ($500)
Amount of capital gain/loss of Sculpture = $500
Amount of capital gain/loss of Antique jewellery piece = ($1000)
Total amount of capital gain/loss = $500 + ($1000) = ($500)
Disclaimer: -
As per the above calculation it is clearly observed that with the sale of the collectibles Helen
suffered a capital loss of ($24,237) as per the indexation method and ($500) as per the
discounting method.
As per the indexation method it provides CPI which helps in getting almost accurate figure
for the purpose of calculation. With the effect of this Helen carried forward the loss of
$24,237 to next year for the purpose of setting off. Although she needs to set off the loss
against the capital gain from the collectibles only.
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Question 2
Income tax is applicable over the income earned by the individual and ATO provide slab
rates for charging tax against them (Braithwaite, & Reinhart, 2019).
As per the information provided in the case scenario an individual Barbara sign contract with
the book company “The Eco Books Ltd.” to write a book. She is an economist researcher and
providing professional services to the company. As an income she gets an amount of $13,000
against the book.
She also made some income by selling different things like she sold out the book copyright to
the company only against the amount of $13,400. She also sold out the manuscript of book at
the price of $4,350 to the library of the company. Lastly, she also sold out the interview
manuscript which is gathered by her at the time of writing book at the price of $3,200.
All these receipts get considered as the income for the Barbara and get calculated for taxation
purpose. A legal Contract between them results into developing employee and employer
relationship between Barbara and company. As the income earned from this transaction is
taxable under income tax provisions with this, she is also liable for the available deductions.
Company also get the deductions facility over the amount paid for acquiring copyrights of the
book. She gets a basic exempt limit while calculating taxation amount.
Note: - there is no such information is provided related to the deduction availed by the
Barbara so no such adjustments were made in the tax calculation.
Below is the calculation for the tax amount such as: -
Copyright = $13,400
Book manuscript = $4,350
Interview Manuscript = $3,200
Total income received = $13,400 + $4,350 + $3,200
Total income received = $20,950
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Taxable income = Total income – basic exemption limit
= $20,950 – $18,200
= $2,750
Taxable income = $2,750
Income tax = Taxable income * (19% + 2% levy)
= $2,750 * 21% = $577.5
Income tax amount = $577.5 or $578.
Scenario 2nd: - If there is no such contract made between Barbara and The Eco Books Ltd.
and she write the book in her spare time.
In the case scenario she is not legally bound to the company and for The Eco Books Ltd, this
transaction would consider as one-time transactions. Both of them didn’t avail the benefits of
deductions. Barbara didn’t get the benefits earned with the sale of the different things.
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Question 3
Any amount which is earned by the individual is considered as income and as per the slab
rate he/she needs to pay tax over it (Sakurai, & Braithwaite, 2019). Whether it is earned as
salary, interest on loan, rental income, sale of assets and many more (Sakurai, & Braithwaite,
2019).
As per the information provided in the case scenario David get a loan of $52,000 from his
father Patrick. He needs to make use of that fund to start his business. There is no such
interest rate mentioned over which Patrick gives the money but both of them agrees that
David will pay $58,000 at the end of the 5 years. There is no such agreement or contract
made between two. After two years David repays the whole amount but the amount is 5%
more as compare to the actual amount.
As per the information Patrick was receiving loan amount after 5 years but David repays after
the completion of 2nd year. Due to this fact Patrick get the deduction facility of $10,400 (1/5th
amount of total loan amount) for the first year and in 2nd year he is allowed to get deduction
of whole remaining amount (it also includes the interest amount). As the loan is repaid after 2
years only.
Calculation: -
Assumption
Actual loan amount = $52,000
Duration of loan = 5 years
Amount of loan repaid after completion of time period = $58,000
Notional interest amount = Amount to be repaid – Amount of Loan
= $58,000 - $52,000
Notional interest amount = $6,000
Actual
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Actual loan amount = $52,000
Duration of loan = 2 years
Amount of loan repaid after completion of time period = $54,600
Interest amount = Amount to be repaid – Amount of Loan
= $54,600 - $52,000
Interest amount = $2,600
Patrick get the $2,600 as a interest over the loan amount which he paid to David.
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References
Braithwaite, V., & Reinhart, M. (2019). The Taxpayers' Charter: Does the Australian Tax
Office comply and who benefits?. Centre for Tax System Integrity (CTSI), Research School
of Social Sciences, The Australian National University.
Fitzpatrick, K. (2019, February). The Australian Taxation Office's approaches to aggressive
tax planning. In Centre for Tax System Integrity Third International Conference
on'Responsive Regulation: International perspectives on taxation'. Canberra, 24-25 July
2003.. Centre for Tax System Integrity (CTSI), Research School of Social Sciences, The
Australian National University.
Sakurai, Y., & Braithwaite, V. (2019). Taxpayers' perceptions of the ideal tax adviser:
Playing safe or saving dollars?. Centre for Tax System Integrity (CTSI), Research School of
Social Sciences, The Australian National University.
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