Taxing Capital Gains Views from Australia

Question: Discuss about the Taxing Capital Gains Views from Australia. Answer: Letter of advice: Dear Mr Jacob According to the ITAA 1997, every Australian occupant is held liable to pay tax based on the sources from which it is earned be it within or outside of Australia. After analysing the documentary evidence and details, we have understood that you have satisfied the criteria to be called a permanent Australian resident for the taxation year of 2015-16. Going by your private details and your financial plans, we have prepared a report to offer you guidance and advice based on your tax consequences with appropriate tax benefit. CGT on disposal of house property: You intend to sell off your house property in the current taxation year which constitute a CGT asset under section 108-5 (1) of ITAA 1997. It is worth mentioning that Date of Acquisition forms an important element in determining the capital gains tax. Furthermore, the CGT status of an asset largely depend upon the acquisition date such as an asset acquired on or before September 21 1985 will constitute a pre-CGT asset and any such revenue derived is liable to be exempted from tax. Cost base of the asset held or acquired after 21 September 1985 but before 20 September 1999 is calculated under the indexation method which assessing tax (Barkoczy2016). Under such circumstances, the taxpayer is not eligible for 50% exemption on such assets under the index cost base. You bought the old house property on 31st October 1987, which does not constitute a Pre-CGTasset. As the date of acquisition is prior to 20th September 1999, the cost base of such assets must be assessed for taxable purpose under the indexation method. After analysing your document, it is found that you have owned the asset for more than 2 years and being an individual taxpayer you can avail either indexation method or 50% exemption method according to your suitability. Cost base of the Asset: Cost base of the property forms the purchase price of the asset. It is understood from the analysis that at the time acquisition of asset you incurred an expense for legal cost and stamp duty relating to the purchase of property. As per Section 110-25, such expenses forms the part of total cost base and based on indexation method, such index values relating to the expenses should be included with the purchase price of the property (Woellneret al. 2016). It was found that you incurred additional expenses to make the sellable, which should also be included with the original value in computing the cost base under indexation method and 50% exemption method. Exemption for residential property: Capital gains arising out of sale of residential property are exempted from tax. It is found that you have used house as your main residence after purchase barring the period from 31stOctober 2006 to 31stDecember 2014. Thus, we would to like to inform you that you cannot avail full exemption since the residential property remain vacant for eight consecutive years (Wood, Ong andWinter 2012). You are only eligible to avail exemption for the rest of the period and only advised to pay tax on capital gains for a period of eight years. Calculation of capital gains: A detailed computation on sale of property and capital gains derived under both 50% reduction method and indexation method is given below in accordance with the rules and assumption stated above; Calculation of Net Capital Gain Taxation for the year ending 30th June, 2016 Particulars Actual Cost Indexed Cost Amount ($) Amount ($) Anticipated Sale Proceedings $4,80,000 $4,80,000 Cost of Property: Purchase Cost -190000 -274223 Legal Costs incurred on Purchase -1900 -2742 Stamp Duty incurred on Purchase -4850 -7000 Expenses incurred on Re-Painting -6200 -6200 Expenses incurred on Construction of Fence -3600 -3600 Expenses incurred on Repairing of Front Porch -2400 -2400 Capital Gains on Sale of House Property $2,71,050 1,83,835 Less: 50% Exemption -135525 0 135525 183835 Less: Part Exemption for Main Residential Status 98139 133122 Net Taxable Capital Gains $37,386 $50,713 From the above stated computation it is found that capital gains under 50% reduction method will be less than that of the indexation method. Amount derived from capital gains under the 50% reduction should be considered as your statutory income (Minas and Lim 2013). Assessable income for Tax: Incomes are classified under two heads namely ordinary income and statutory income. As stated under Division 15, ITAA 1997 Ordinary Income represents those incomes, which is derived from the normal course of activities whereas, statutory incomes are those incomes, which are earned from abnormal or accidental activities (Gilders 2012,). The status of your incomes is stated below; Income from salary: You are teacher by profession and earn salary by imparting teaching services to your employers. Under section, 15-3 of ITAA 1997 it is considered as return to work payment and it is assessable in the form of ordinary income. Franked dividends: The dividend received by you should exhibit the entire amount for assessment while filing tax return however; you can subtract the sum of franking credit from the gross sum of tax payable. Holiday received from bank for opening new account: The cash amount received by you for holiday from bank because of opening new bank account will be included in the assessable income. As stated under section 21A, any non-cash benefits such as holiday being capable of being measured in cash values does not forming the part of employment relationship in included in the ordinary assessable income while computing tax (Freebairn 2012). Family tax benefit: Family tax benefit received for a dependent child under the age of 21 is not included for assessment. You are only advised to show such expenses in your assessable income and can offset such from your total tax. Watch received as gift: It is found that you received a gift as lifesaver and such gift received by you was entirely without any intentions to earn. Hence, such gift does not constitute in the form of assessable income. Allowable deductions: Expenses occurred for daily livelihood does not forms the part of assessable income. However, expenses occurred for generating income from any sources then such expenses are liable to be deducted from the assessable income. The expenses incurred by include; Purchase of work cloth and shoes: According the documents obtained from your employer it is understood that the official uniform is approved by the authority and it deductions can be availed from the assessable income (Long, Campbell and Kelshaw 2016). Under division 34 of ITAA 1997you can apply for deductions for the expenses incurred on the purchase of clothes and shoes on being approved under register of approved occupational clothing. Work related car expenses: Any kind of expenses incurred for generating income, which is related to work and employment, is eligible for deductions under Division 900 ITAA 1997. It should be noted that not all car expenses are subjected to deductions. Going by the documents provided by you it is found that depreciation is not separately provided by you. Depreciation forms the part of car expenses and should be calculated under the taxable rules. It is noticed that the car ran 25,000 Kms. out of which 5600 Kms was run for occupational purpose. Hence, out of total car expenses a portion of such sum is eligible for deductions from the assessable income in form of work related expense (Wallace 2015). Below listed is the calculation of your deductible car expenses is given below; Particulars Amount ($) Total Kilometre Ran 25000 Work-Related Running Kilometre 5600 Percentage of Work-Related Usage 22.40% Deductible Running Expenses: Fuel Charges $1,700 Repairs Service Expenses $750 Depreciation Expense of Car $10,500Sum of total Running Expenses $12,950 Work Related Car Expenses 2,901 Cost incurred for studying:It is found that you have continued your educations in order to gain promotion. As stated under section 8-1 you can claim deductions on expenses incurred during your own educations (Butler 2016). However, you are not eligible to claim deductions for expenses incurred in the procuring laptop since it represents capita in nature. Superannuation expenses: We would like to inform you that since you are engaged in regular employment, which is more than 10% of the total income. Hence, you cannot claim for any kind of deductions on your superannuation contribution (Jones 2016). Fees incurred on tax agent: Fees incurred on certified tax agent for filling up tax return is not considered as deductible expenses. Computation of Income tax: Based on the above stated discussions and assumptions laid down your net taxable return for the year 2015-16 is listed below: Calculation of Taxable Income for the year ended 30th June,2016 Particulars Amount in ($) Amount in ($) Assessable Income: Ordinary Income: Salary $72,000 Dividends Received $1,995 Franking Credit $855 $2,850 Holidays received $3,200 Family Tax Benefit $1,300 Statutory Income: Net Capital Gain on Sale of House Property $37,386 EUM of TOTAL ASSESSABLE INCOME 116736 Allowable Deduction: Purchase of Working Clothes Shoes $450 Cost of Studying Maters Degree $3,650 Less: Cost of Laptop $1,850 $1,800 Tax Agent Fees $7,50 Car Related Expenses $2,901 Depreciation on Laptop $255 Sum of TOTAL ALLOWABLE DEDUCTION $6,156 NET INCOME TAXABLE $1,10,580 From the above stated table it can depicted that your taxable income stands $1,10,580 and you will be considered under the range of $80,001 to $180,000. Thus, you are require to $17,547 with 37% of the excess income for having earnings beyond $80,000. You shall also be required to pay 2% of the Medicare levy on the net taxable amount since you have a dependent child so you are not required to pay any Medicare levy surcharge (Yinger, Bloom and Boersch 2016). Furthermore, we are also offering you advise where you can avail tax offsets; Franking credit: The franking credit obtained on dividend can be deducted from the sum of total tax payable. Family tax benefit: Family tax benefit is exempted from tax and the benefit put forward by you in your assessable income is eligible for deductions from total tax payable (Nel 2016). From the above stated discussions the sum of tax payable by you for the period of 2015-16 is computed in the below listed table; Calculation of Tax on Taxable Income for the year ended 30th June, 2016 Particulars Amount ($) Amount ($) NET TAXABLE INCOME $1,10,580 Tax on Taxable Income $28,547 Add: Medicare Levy @2% $2,212 GROSS INCOME TAX $30,758 Less: Tax Offset Franking Credit $855 Family Tax Benefit $1,300 PAYG Withholding $15,900 $18,055 NET TAX on TAXABLE INCOME $12,703 Recommendations: After going through the documents provided by you it is advised that instead of selling up the house you should sub lent the house on rent and purchase new house. You can simply prepay the interest incurred on your investment property in order to claim deductions. Whether the house is positively or negatively geared you can put forward your claims on the rental property by being the principle owner of it. It is further recommended that you can claim tax offset on your work related expenses such as telephone cost and subscriptions. In addition to this, you can also claim education tax offset for your family by up to 50% of the cost items such as educational software, home computers, text books and cost incurred for stationaries. Thus, we anticipate that the above stated discussions and recommendations has addressed your queries and have been able to offer you complete satisfactions. References: Barkoczy, S., 2016. Core tax legislation and study guide.OUP Catalogue Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016.Australian Taxation Law 2016. Oxford University Press Wood, G., Ong, R. andWinter, I. 2012, "Stamp duties, land tax and housing affordability: The case for reform", Australian Tax Forum, vol. 27, no. 2, pp. 331-349. Minas, J. and Lim, Y. 2013, "Taxing capital gains - views from Australia, Canada and the United States", eJournal of Tax Research, vol. 11, no. 2, pp. 191. Gilders, F.M. 2012, Understanding taxation law 2012, [6th], 2012. edn, LexisNexis Butterworths, Chatswood, N.S.W. Freebairn, J. 2012, "Personal Income Taxation", Economic Papers: A journal of applied economics and policy, vol. 31, no. 1, pp. 18-23. Long, B., Campbell, J. and Kelshaw, C., 2016. The justice lens on taxation policy in Australia.St Mark's Review, (235), p.94. Butler, D., 2016. Superannuation: Transferring foreign super fund amounts to an Australian resident.Taxation in Australia,50(8), p.481. Wallace, S., 2015. Property Taxation in a Global Economy: Is a Capital Gains Tax on Real Property a Good Idea. InPrepared for the Lincoln Institute of Land Policy-Land Policy Institute of Taiwan, Conference on Toward A(pp. 24-25). Jones, D., 2016. Capital gains tax: The rise of market value?.Taxation in Australia,51(2), p.67. Yinger, J., Bloom, H.S. and Boersch-Supan, A., 2016.Property taxes and house values: The theory and estimation of intrajurisdictional property tax capitalization. Elsevier. Nel, P., 2016. Primary residences, rental income, and tax: income tax.Tax Breaks Newsletter,2016(366), pp.2-3.