Tax Implications on Capital Gain: A Case Study Analysis

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HI6028 – Taxation Practices, Theory and Law
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Introduction
Individual pay taxes over the income earned in the form of salary or profit or any kind of
gain. Taxes paid by the individuals considered as the revenue for their respective government
and they make use of this revenue for the betterment of their public (Ramli, et. al., 2015).
Government makes adequate provisions in which they provide relaxation to their public as
well as charge tax from them. ATO set some rules for an individual in regards to income tax.
Such as till the amount $18200 they didn’t charge tax but after that, they are charging tax at
progressive rates (Ramli, et. al., 2015). This report describes the tax implications on the
capital gain with the sale of collectables, personal income service and interest on the loan.
ATO charge tax over the assessable income of individual and that include salary or wages
earned, business profit or capital gain earned by an individual.
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Q1
Capital gain is positive margin when the purchase amount of that capital asset is deducted
from the sales amount. Most of the times individual attain capital gain with the sale of their
capital asset but sometime they might face capital gain (Thuronyi, & Brooks, 2016). In case
individual suffers a capital loss then the amount of capital loss is set off with the amount of
capital gain amount in the current year as well as capital gain of next year. The individual is
allowed to carry forward its capital losses (Thuronyi, & Brooks, 2016). ATO impose rule for
capital gain tax as it is only applicable to such assets which were purchased after 20th
December 1985. Any asset purchased before that date get termed as Pre-CGT and not utilised
for tax calculation. Capital loss helps in lower down the total taxable amount of capital gain
(Thuronyi, & Brooks, 2016).
Collectables are such products that individually purchased them for their personal usage.
They don’t have the motive of profit earning from those products. But in case they sold it out
then it might be possible that individual attain capital gain. Over that gain individual need to
pay adequate taxes (Huizinga, Voget, & Wagner, 2018). Product list that gets termed as
collectables include sculptures, paintings, rare books, rare book manuscripts, photographs,
jewellery and many more. ATO also impose rule over collectables that if any collectable
purchased before 16th December 1995 then those products are not utilised for the purpose of
tax calculation (Huizinga, Voget, & Wagner, 2018). There is one more exemption point, that
needs to be met to make it eligible for tax calculation. Exemption criteria state that
collectables purchased price must be more than $500 else it will not be included for capital
gain tax calculation at the time of its sales. Secondly, if the amount of capital gain is $500 or
less then also it is not utilised for tax calculation.
In case if there is a loss over the sale of collectable then it is also considered as a capital loss
and it gets set off only with the capital gain from the sale of collectables. It is carrying
forward to set off in the next year (Huizinga, Voget, & Wagner, 2018).
Helen runs a business of fashion designing and to support it she requires some liquid funds.
For this purpose, she sold out some personal products. These products include ancient
sculpture, an antique jewellery piece, ancient impressionism painting and picture. These
products fall under the list the collectables. So, for the purpose of calculating the capital gain
tax, firstly there is a need to check their eligibility. All four collectables were purchased on
different dates.
Antique Impressionism Painting: -
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This product was brought in the February month of 1985 by her father and the cost paid by
them was $4000. She sold out at the cost of $14000. But this is not utilised for the purpose of
calculating capital gain tax as it was purchased before the date of 16th December 1995
(provision for collectables). It is also termed as Pre-CGT because the provision of capital
gain tax was introduced on 16th December 1985.
Historical Sculpture: -
The purchased dated of this product was December 1993. The cost paid to purchase this
product was $5500 and it got sold for the amount of $6000. As a collectable, it was purchased
before the date of 16th December 1995 but the difference between the sales price and the
purchased price is $500. Both these factors state that this transaction is not eligible for the
purpose of calculating capital gain tax. As per its provision, the gain amount attained with the
sale of collectable must be more than $500 else it will not be eligible for purpose of capital
gain tax calculation.
Antique Jewellery piece: -
This product was brought in the month of October of 1987. As per the capital gain provision
it is not termed as pre-CGT because it was purchased after 16th December 1985. The purchase
price of jewellery that time was $14000 whereas when it got sold the amount attained by
Helen is $13000. It shows that Helen suffers a loss of $1000. Due to the effect of loss, it is
stated that it is not eligible for capital gain tax. Although this amount is utilised for the
purpose of setting off with the capital gain earned. But as per the provision loss from
collectable will be set off with the capital gain from collectables only. So, Helen is eligible to
set off her loss with the capital gain earned with the sale of other collectables.
Picture: -
Helen’s mother makes purchases of this product in the month of March 1987. She paid an
amount of $470 to acquire the picture. This collectable is also considered as the capital asset
as it was purchased after 20th December 1985. But as per the exemption criteria of
collectables, it misses the eligibility criteria for calculating capital gain tax. It is due to the
purchase price paid by her mother which is $470. As per the criteria purchased price of
collectable must be more than $500.
Helen suffers a net loss of $500 as she got a profit over the sale of the sculpture of $500 and
loss of ($1000) with the sale of the antique jewellery piece. The amount of $500 which is loss
can be adjusted against the capital gain from collectables. She is eligible to carry forward the
loss amount.
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Q2
As per income tax rule individual need to pay tax after a set limit over their earnings
throughout the year. The exemption limit which is provided by the ATO is $18200. After this
limit, they are charging tax with the help of progressive rate due to which it is also termed as
a progressive tax (Thuronyi, & Brooks, 2016). These progressive rates lie between 0-45%.
Australian government impose the highest rate of 45% over the earnings of individuals.
Individual earn in the form of salary or wages, capital gain and business profit. In order to
earn a salary, he/she need to render an adequate level of services that satisfy the need of their
employer. When the individual input his/her efforts or works as per the attained skill set then
the income earned falls under PSI (Personal Service Income) (Thuronyi, & Brooks, 2016).
The information shared in the case scenario provided Barbara is an individual having
knowledge about economics. On the basis of her knowledge and experience in the field of
economics as she is economist researcher and commentator, Eco Books Ltd. reach her out to
offer a contract. As per the contract she needs to write a book. She is not having an
experience of writing a book but then also she accepts the contract against the amount of
$13000. Company agrees to pay the amount after the completion of book. After some-time
she complete the book and handover its copyrights to Eco Books Ltd. as per the contract
signed. She also provides the manuscript of book to the library of Eco Books Ltd. along with
the interview manuscripts. She took some interviews while writing the book to gather
adequate information which is utilised for completing the books. She also paid for selling
manuscript of books and interview manuscript. She got $4350 for book manuscript and
$3200 for interview manuscript. As per the contract she gets paid for written book by the
amount of #13400.
The total income earned by the Barbara from the contract signed is $20,950 ($13,400 book
amount + $4350 for book manuscript + $3200 for interview manuscript). All the amount gets
combined that helps in getting the total amount of $20950.
In the absence of any other information related to income earned by Barbara, it is considered
that it is the final amount she earned. So, she is liable to pay tax over this amount only. First,
the basic limit gets removed from the total amount which is $18200 in order to get the net
taxable amount. Net taxable amount is $2750 ($20950 of total income amount - $18200
amount of basic limit).
The amount of $2750 is taxable at the rate of 21% (in which 19% is as per slab rate + 2% of
Medicare levy). The tax amount which she needs to pay is $577.5
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2nd scenario: -
Barbara writes a book on “Principles of Economics” on the basis of her knowledge and
experience she attains. She wrote that book in her free time. Once she completes the book,
she kept it for sale in the near future. Eco Books Ltd. gives an offer to Barbara in order to sell
out the book at the price of $13400. This transaction termed as a business transaction as there
is no such employee-employer relationship between them.
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Q3
Interest on the loan is an expenditure made by the individual and for this, he is liable to get
deduction while calculating income for income tax (Hasseldine, & Fatemi, 2018). It is the
additional amount that is paid by the individual over the loan amount. Interest is charged as
they lent their funds for a time being. Interest paid is considered as a deductible expense
(Hasseldine, & Fatemi, 2018). David starts his personal business and needs monetary support
to run. Patrick who is his dad offers him a loan of $52000 and he accepts it. While this
offering Patrick also stated that at the time of repayment David will repay $58000. Patrick
pays the amount to David without any agreement or security deposit for a tenure of 5 years.
Patrick also states that he didn’t require any kind of interest over the loan amount lent to
David. The loan was repaid by David after 2 years only. He paid $2600 more to his David
over the agreed amount of repayment. The amount of $2600 is 5% of the borrowed amount.
Patrick needs to pay the tax over the amount received in the form of interest.
Patrick received the total amount of $60600 (agreed amount of $58000 + $2600 additional
repayment amount). He received a total amount of $8600 as an interest amount (2600
additional amount + $6000 difference between the borrowed amount and agreed to repay
amount).
Patrick needs to pay 10% tax on interest amount received. Along with he needs to pay 2%
over the loan amount received. Total tax amount is $2072 (10% on interest amount $8600 +
2% on loan repay amount $60600).
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Conclusion
In the end, it is concluded that capital gain on collectables is charged only when the asset is
purchased after 16th December 1995 and attain a purchase price of more than $500. If there is
any loss occurred with the sale of collectable then it will be set off only with the capital gain
of collectables. Income earned with the help of personal skills and capabilities then it falls
under Personal Service Income. These incomes get taxable as per the slab rate prescribed by
ATO. Interest on the loan is paid by the individual and it can be deducted from the taxable
income at the time of tax calculation.
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References
Hasseldine, J., & Fatemi, D. (2018). Tax practitioner judgements and client advocacy: the
blurred boundary between capital gains vs. ordinary income. eJTR, 16, 303.
Huizinga, H., Voget, J., & Wagner, W. (2018). Capital gains taxation and the cost of capital:
Evidence from unanticipated cross-border transfers of tax base. Journal of Financial
Economics, 129(2), 306-328.
Ramli, R., Palil, M. R., Hassan, N. S. A., & Mustapha, A. F. (2015). Compliance costs of
Goods and Services Tax (GST) among small and medium enterprises. Jurnal Pengurusan
(UKM Journal of Management), 45.
Thuronyi, V., & Brooks, K. (2016). Comparative tax law. Kluwer Law International BV.
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