TAXATION: Analysis of Capital Gains, Fringe Benefits, and Tax Law

This TAXATION assignment solution analyzes five different scenarios related to tax implications. The first scenario calculates annual net capital profit or loss, considering the acquisition and disposal of various assets, including personal use assets and collectibles, and determining tax liabilities. The second scenario focuses on fringe benefits, specifically a low-interest loan provided by an employer, calculating the loan fringe benefit and the tax implications. The third scenario examines property rental income between a husband and wife, detailing the allocation of profits and losses and the associated tax responsibilities. The fourth scenario discusses the legal principle from the case of IRC v Duke of Westminster, emphasizing an individual's right to minimize their tax liability through legal means. The fifth and final scenario assesses the tax implications for an individual who sells timber from their land, determining whether the income is considered a revenue receipt or capital gain. This assignment provides detailed calculations and considerations for each scenario, making it a valuable resource for students studying taxation.

TAXATION
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1. Calculation of annual net capital profit or loss:
The attempts of Eric vested in procurement of certain assets have been observed in the course
of the past one year which is a clear indicator that he was in possession of the assets for a
period lesser than a year. It has been established that capital gains could be assumed as
taxable only under the condition if the selling price of an asset is greater than the cost base.
Eric will also not be able to acquire the indexation benefit due to the possession of assets for
less than a year (Andreas & Markus, 2014).
Categorized of Assets
Personal use assets that are intended for personal use are generally procured for personal
enjoyment and this category excludes the collectibles. Sale of assets that are procured at costs
less than or equal to $10000 to other persons could not be subject to the liability of taxation
on capital gains. According to the requirements of the question, the personal assets acquired
by Eric include a home sound system and the shares of a listed company (Brean, 2013).
While the procurement cost of the home sound system was found to be $12000 the shares
were found to be costing $5000.
Collectibles could be defined as assets purchased by individuals for fulfilling personal
efficacies alongside providing enjoyment like personal assets. In the case of collectible that
capital gains are not taxable under the condition that the procurement cost of the collectibles
is less than or equal to $500 (Besley & Persson, 2013). The information provided in the
question facilitates an impression of the collectibles acquired by Eric as follows. Eric
acquired a painting that was associated with a procurement cost of $9000 and an antique
chair at a procurement cost of $3000. Another collectible acquired by Eric included an
antique vase which amounted for an acquisition cost of $2000 (Becker, Reimer & Rust,
2015).
The data obtained from the above stated scenario could be utilized as inputs for formula to
calculate capital gain on the assets which were under possession for less than a year.
Capital Data of the assets
Asset Cost Base of Assets Capital Proceeds of
Assets
Net Capital Profit/
(Net Capital Loss)
Home Sound 12,000 11000 (1000) Loss

System
Shares in listed
company
5,000 20000 15000 Profit
Painting 9,000 1000 (8000) Loss
Antique Chair 3,000 1000 (2000) Loss
Antique Vase 2,000 3000 1000 Profit
Net Capital
Gain/Loss
5000 Profit
Points to considers:
-The assets that were acquired for personal use by Eric depict procurement costs more than
$10000 which validates the taxability of capital gains on the assets (Drautzburg & Uhlig,
2015).
-The procurement costs of all the collectibles were estimated to be above $500 which
suggests the applicability of taxation to the capital profits on the assets.
-In order to identify the net profit or loss the annual capital losses have to be set-off with
capital gain.
2. The scenario suggests the provision of a three year loan by the employer of Brian to him
with the condition of a special one percent interest rate. Another notable highlight is observed
in the condition of the employer for the interest to be repaid in monthly instalments. The loan
amount is estimated to be $1 million and provision of such a substantial amount of loan at
considerably lower interest rate than the prevailing rates in the market accounts for
classification of the loan as fringe benefits (Farhi & Werning, 2013). The element of statutory
interest rate should also be considered effectively in order to determine the taxability of the
benefit from the loan. According to the information provided in the question, the loan was
offered on April 1, 2016 which suggests that the statutory interest rate could be estimated as
5.65% (Guner, Kaygusuz & Ventura, 2014).
Step 1
This step involves the calculation of the loan fringe benefit through discarding the deductible
rule. The deductible rule implies that the interest on the loan calculated on the basis of actual

rate of interest should be subtracted from the interest on loan calculated on the basis of
statutory rate of interest (Henneman, 2015).
Interest according to statutory rate of interest= $1000000 * 5.65%= $56,500
Interest according to actual interest rate= $1000000 * 1%= $10000
Therefore the loan fringe benefit can be calculated as the difference between the two amounts
which is = $56,500-$10,000= $46,500
Step 2
The second step involves the computation of interest based on statutory interest rate with the
assumption that the interest is the real amount payable Interest based on statutory interest
rate= $1000000 * 5.65%= $56,500
Step 3
This step should involve the calculation of tax deductible interest expense since Brian has
spent forty percent of the loan for addressing future obligations and the tax deductible interest
expense could be assumed as hypothetical in nature (Higgins & Pereira, 2014). The tax
deductible interest expense could be calculated as follows: $56,500 * 40% = $22,600
Step 4
The real tax deductible interest expense for Brian should also be calculated since Brian has
utilized 40% of the loan for dealing with future obligations (Jaimovich & Rebelo, 2017). The
real figures for tax deductible interest expense could be calculated as follows: $10000 * 40%
= $4000
Step 5
This stage involves the subtraction of actual amount from the hypothetical figure in order to
reach a specific conclusion. Therefore, $22,600- $4000= $18,600
Step 6
The final taxation amount is estimated in this step through subtracting the amount calculated
in the fifth step from that determined in the first step.Hence, Brian has to pay a final amount
of, $46,500- $18,600 = $27,900

The conditions in which interest is paid at the termination of the loan rather than in monthly
instalments, the deemed period in case of the loan would have to be calculated from the time
when the interest becomes payable (Mellon, 2016). In the case of monthly repayments the
deemed period is assumed from the time when the interests are paid respectively. On the
other hand, it is necessary to emphasize on the case if Brian is not obliged to repay the
interests then the computation has to follow the similar approach only with the assumption of
zero actual interest rate (Matter, 2016).
3.The scenario depicts the agreement between Jack and Jill who are husband and wife to rent
a property under the condition that Jack would be eligible for 10% of the profits earned from
the property while the wife, Jill, would be eligible for 90% of profits. Furthermore, the
agreement also involved Jack’s consent to bear complete responsibilities of any sort of losses
thereby relieving Jill of the burden (Maurer, 2016). Hence it can be stated that the loss of
$10000 observed last year becomes the sole liability of Jack without any responsibility of Jill
in the case. On the other hand, Jack also has the opportunities of offsetting the loss of $10000
through his other incomes thereby reaching on a final estimation of net profit or loss for the
concerned year. Jack also has the option to carry forward the losses for subsequent years until
the point where the property has to be sold which can lead to either profits or losses for Jack
and Jill (Piketty & Saez, 2013).
In event of a loss, the responsibility for the entire amount is vested in Jack who has the
privilege to carry forward the losses or implement them for determination of net profit or
losses in the concerned year or upcoming years (Thomson, 2015). On the contrary, if an event
of profit is encountered then the amount must be distributed in the agreed shares of 10% of
Jack and 90% for Jill respectively. Jack also has the privilege of offsetting the loss of $10000
incurred last year with the profits acquired from sale of property. Therefore, it can be
concluded that Jack can offset the losses of the past year in the present year through income
that can be acquired as profits from the sale of the property (Wallace, 2015). However, if
there are no observed profits in the current year, then Jack is responsible for the losses with
the exclusion of Jill from such undertakings. Hence it can be concluded that Jill would not be
subject to any consequences in context of tax treatment while Jack is obliged to be
responsible for the losses in his accounts.
4. The case of IRC v Duke of Westminster [1936] AC 1 provided insights into the fact that an
individual is rightfully entitled to utilize legal strategies and resources for decreasing total

income at the end of a year. Therefore, it can be imperatively observed that in cases where an
individual decreases their total income at the end of the year, the Commissioners of Inland
Revenue are not authorized for inquiry into the matter or pressurizing the individual to
increase their payable tax (Thomson, 2015). However, it is necessary to consider that such
rule is applicable only in cases where an individual utilizes authentic measures for decreasing
total income at the end to the year helping them in reducing the total payable tax.
The notable principles that can be apprehended from the case include the following:
Every individual is rightfully eligible to implement strategic measures in account
management leading to depreciation in their total income
An individual is not liable to pay additional taxes if the procedures adopted for decreasing
income are ethical and moral.
Adoption of legal means to decrease the total payable tax amount also indicates that an
individual cannot be questioned for validity. The individual is also exempted from any sort of
pressure to pay an increased amount of tax.
However, the validity of the above mentioned rule could be questioned on the grounds of
inferences drawn from new case laws in the contemporary scenario (Jaimovich & Rebelo,
2017). The prominent difference could be observed in the reforms in ideologies underlying
review of accounts and their management. In the current scenario, the rule can be presented
as follows:
The rule mentioned previously holds significance in the contemporary environment in order
to prevent organizations from utilizing unscrupulous means for modification of accounts to
accomplish superior advantage. The rule is also reflective of the legal right for businesses to
execute their operations feasibly (Higgins & Pereira, 2014). An example of the application of
the rule can be observed in a company which is encountering losses and is unable to fulfil its
obligations. This type of organization could prefer alteration of balance sheet amounts
alongside writing off their fixed assets according to the intended values. The organization
should also emphasize on the significance of authenticity of the documents that are used to
justify the transactions (Henneman, 2015). On the other hand, the organization is liable to
experience backlash in event of adopting unethical means for management of accounts due to
the rule. Therefore, it can be concluded that transactions which facilitate effective operations

of an enterprise could be considered valid from a legal perspective without any concerns of
questioning by legal authorities.
5. The scenario indicates the abundance of big pine trees in the piece of land owned by Bill
which in turn is intended by him to be used as grazing grounds for sheep. In order to
accomplish this feat, Bill has to ensure that the trees are cut from the property. Hence, Bill
hired the services of a logging company which agreed to reimburse Bill with $1000 for every
100 meters of timber (Guner, Kaygusuz & Ventura, 2014). The question that needs to be
addressed in this context is the applicability of the tax on Bill for the amount of profits earned
by the logging company. The question does not provide clear insights into the exact amount
of receipts for clearing of trees which implies the assumption that is a revenue receipt in
hands of Bill. Therefore, Bill is not liable to pay the capital gains tax.
The lump sum amount attained by Bill can be considered as a capital receipt in his hands. For
example, if Bill receives $50000 from the logging company for removing the timber from his
property then that amount can be ascertained as capital receipt for Bill. Considering the
payment as capital receipt could be validated on the grounds of the lump sum nature of the
payment alongside the zero presence of recurring receipts (Farhi & Werning, 2013). Another
characteristic that should be noted in this context is that the transaction is underlined by the
provision of rights to another party for removal of trees from the property. Hence it can be
observed that since the receipt in the hands of bill is a lump sum amount and has been
considered as capital receipt, the amount is taxable according to the rules of capital gains tax.
The scenarios depicted above provide an illustration of the fact that Bill is acquiring money
in either case. The first case suggests that Bill receives payments in recurring receipts which
are also small in nature while in the second case Bill receives a capital receipt in the form of a
lump sum amount of $50000 which is not recurring in nature. The concern of providing the
right to the logging company for clearing of trees from the property is also liable for
classifying the lump sum amount eligible for capital gains tax (Farhi & Werning, 2013). The
receipt in the second case is larger in amount and can be estimated as one-time in nature
owing to the considerable period of time required for regrowth of the trees after cutting them
down. Hence the second case indicates that Bill is engaged in the sale of an asset to another
company for a considerable amount alongside providing rights to the company. According to
the precedents of taxation law, sale of assets for consideration by one party to another implies
consideration of capital receipt and taxability for the seller (Farhi & Werning, 2013). On the
contrary, the first case depicts formidable implications towards recurring receipts which in

turn limit the prospects for acquiring capital gain tax. Therefore the scenario in the first case
should be addressed through normal taxation rates rather than subjecting the profits to capital
gains tax.
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