Tax - Theory - Practice and Law

Question: Discuss about the Tax, Theory, Practice and Law. Answer: According to the ITAA 1997, capital gains are the returns realized from the disposal of property or the sale of an investment. It can be the sale of shares, the sale of furniture and fittings, the sale of a building, the sale of land, the sale of property, plant and equipment and so forth (Woellner, Barkoczy, Murphy, Evans, and Pinto, n.d., Pp.10-20). Sec 104-5 (A1) states that it calculated by taking the amount realized from the sales value less purchase value (Berube, and Pinto, 2010, Pp.300). Since this is a contract entered into, the capital gains would be the capital proceeds from creating the contract less any incidental costs from creating it as stated by ITAA 1997 Sec 104-5(D1). The sales cost may include other expenses incurred while selling while the buying price can include costs incurred while buying (Barkoczy, 2015, Pp.55). If one realizes capital gains, he is subject to the CGT. If one realizes a capital loss, on the other hand, he is subject to a tax shield benefit. In this question, Fred bought his holiday home at the cost of $ 100,000. He incurred other expenses like stamp duty of $ 2,000 and legal fees of $ 1,000. After three years, he engaged someone to build a garage for $ 20,000. The total cost is, therefore, $ 123,000. In August, he decided to sell his house by signing a contract. The buyer offered $ 800,000 for the house, which was settled (indexing capital gains,' 2010, Pp.231-250). Here, he incurred expenses like the legal fee of $ 1,100 and commission of $ 9,900 for the person who he employed to sell the house. These costs are inclusive of GST, which is the goods and services tax of 10%. This implies that for us to determine the net capital gain for Fred, we must first deduct the GST from legal fees and the real estate agents commission incurred on the sale of the holiday home. If Fred qualified for input tax credits, then the GST could be offset. This can be calculated as shown below: Fred incurred $ 1,000 in legal fees and $ 9,000 in commission as shown above. The case study further assumes that Fred suffered a net capital loss $ 10,000 last year from the sales of shares (Barkoczy, 2015, Pp.100). According to ITAA 1997 Sec 104-5(K5), if a net capital loss is realized from a collectible or from shares that have fallen in the market, it will not recognize any capital gain (Income Tax Assessment Act, 2006, Pp.153). This implies that it should not be included when calculating capital gain. Fred, therefore, paid $ 810,000 when selling his home as shown in the table below. Total Purchase Cost Buying Price $ 100,000 Stamp duty $ 2,000 Legal fees $ 1,000 Cost of building garage on the property $ 20,000 Total Purchase Cost $ 123,000 Total Selling Price Sale Price $ 800,000 Legal fees $ 1,000 Real estate agent's commission $ 9,000 Total Selling Price $ 810,000 According to the Westfield Limited vs. Federal Court of Australia, any profit realized from the sale of the property is assessable income for the purpose of calculation of capital gains (Iknow.cch.com, 2015). The same notion is evident in Myer vs. FCT case where the court ruled that any profit made from the ordinary course of business operations would be assessed for capital gains (Law.ato.gov.au, 2015). Capital gains and losses are affected by other factors such as interest rates and inflation (Barkoczy, 2015, Pp.145). Here, Fred will be subject to an increase of 0.8 percent. This method of calculation of capital gains is called the indexation method (Australian Taxation Office, 2016, Pp.352). The cost that Fred incurred as at February this year would be: To calculate the long-term capital gains tax, a tax rate of 15% is applied as shown below: Assuming that Fred incurred a loss from the sale of an antique vase and not the shares. When we consider this scenario, the capital gains tax shield will not be the same. This is because the antique vase is a capital asset held for personal use and therefore it will be reduced from the selling price. According to ITAA 1997 Sec 118-10(3), the cost of the personal use asset must not be less than $ 10,000 for it to be assessable for capital gains. This is also evident in Westfield Limited vs. the Federal Court of Australia (Iknow.cch.com, 2015). In this case, the net loss from the antique vase is equal to $ 10,000, which implies that it must be offset by the selling price (Australian taxation office, 2016). Consider the table below of the selling and buying cost of Fred. Total Purchase Cost Buying Price $ 100,000 Stamp duty $ 2,000 Legal fees $ 1,000 Cost of building garage on the property $ 20,000 Total Purchase Cost $ 123,000 Total Selling Price Sale Price $ 800,000 Legal fees $ 1,000 Real estate agent's commission $ 9,000 Loss from antique vase (10,000) Total Selling Price $ 800,000 Below is the calculation of the capital gains that would be realized from this scenario. Below is the calculation of the capital gains tax that Fred will incur. References Barkoczy, S. (2015). Foundations of Taxation Law. Seventh Edition, Chapter 19.7; Pp. 145. Retrieved on 17 September 2016 from https://www.lib.oup.au/he/samples/barkoczy_FTZ_sample.pdf/ Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. (n.d.). Australian taxation law select. Pp. 10-20. Retrieved on 17 September 2016. Barkoczy, S. (2015). Foundations of Taxation Law. Seventh Edition, Chapter 7.10; Pp. 55. Retrieved on 17 September 2016 from https://www.lib.oup.au/he/samples/barkoczy_FTZ_sample.pdf/. Indexing capital gains. (2010). Washington, D.C.: Congress of the U.S., Congressional Budget Office. Pp.231-250. Retrieved on 17 September 2016. Barkoczy, S. (2015). Foundations of Taxation Law. Seventh Edition, Chapter 19.4; Pp. 100. Retrieved on 17 September 2016 from https://www.lib.oup.au/he/samples/barkoczy_FTZ_sample.pdf/. Income Tax Assessment Act. (2006). Capital Gains Sec 104-5. Pp. 153. Retrieved on 17th September 2016 from https://www.ITA97Vol03_58-122_WD02.pdf/ Australian Taxation Office. (2016). Tax ruling No. IT 2650. Pp. 352. Retrieved On 17th September 2016 from https://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2650/NAT/ATO/00001/ Australian taxation office. (2016). ATO interpretative decision. Web. Retrieved on 26th September 2016 from https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID200723/00001/ Iknow.cch.com (2015). Westfield Limited vs. Federal Court of Australia: Capital Gains Case Study. Retrieved on 17th September 2016 from https://www.iknow.cch.com.au/document/atagUio543018sl16759130/westfield-limited-v-fc-of-t-federal-court-of-australia-full-court-20-march-1991/ Law.ato.gov.au (2015). TR 92/3- Income tax: whether profits on private transactions are income. Retrieved on 17th September 2016 from https://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR923/NAT/ATO/00001/.