Implications of Capital Gains on Jason - Report Example

Title: Name: Institution: Lecturer: Course: Date: Introduction As pointed out by Woellner et al. 2012, capital gain tax is charged when one sell or dispose off assets which include both the tangible and intangible assets. This contributes to revenue for the country but in case a person makes a loss then they are not liable to pay tax on the capital loss. According to the Australian tax laws, computation of the capital gains enables one to meet their capital tax obligations thus being law compliant. This is because a Capital gain is considered part of a person’s taxable income. On the other hand when one makes a capital loss they are used to reduce the person’s capital gain in that year of income or in future incase in that year there is no capital gain to claim in income. Since Jason is below 55years, on his retirement, if he was committed to making contribution to a superannuation fund Jason will have an obligation of contributing some amount equal to the CGT for exemption from the contribution. This is because he has applied for retirement earlier before time. This will result to increase in the financial obligation for this year of income. This report focuses on Jason a carpenter who is retiring and to that effect has sold off his assets. Calculated are the capital gains for each of the transactions as well as the net capital gain for the year ended 30 June 2013 ignoring the concessions, exemptions and rollovers for small businesses (Woellner 2012). Computation of capital gain/loss Capital tax gain = cost of sale – cost of acquisition For motor vehicle= $25,000 -$45, 000= -$20,000 Cutting machine=$35,000 -$50,000=$15,000 Business premises= ($880,000 -$14,000 -$450) - ($520,000+77,000) = $268,550 Painting= $26,500-$29,000 =$2,500 Shares = $11,200 – ($600+ $3,600) = $7,000 Net capital gain/loss Transaction capital gain/loss For motor vehicle ($20,000) Cutting machine $15,000 Business premises $268,550 Painting $2,500 Shares $7,000 Additional payment by Fred $20,000 Less loss carried forward ($23,000) Net capital gain for the year ended 30 June 2013 $265,050 Implications of capital gains on Jason The realized net capital gains are assessed on income for tax purposes. This is because they are considered part of a person annual income and thus liable for taxation. Thus, Jason is liable for taxation on his computed income gains after considering the discount entitled to his on the assets that have been in the business for more than 12 months. The capital gains imply increased tax liability for Jason since the gains for part of his annual taxable income (Burman 2009). According to Burman (2009), due to the effect of ignoring concessions applicable for small businesses, the depreciation claimed for the cutting machine has been ignored in calculating the capital gain. This has effected to a higher capital gain and eventually higher tax liability for income on Jason. Jason is also entitled to a 50% discount on capital gain realized from the sale of assets. This is because the assets have been in the business for more than one year. This discount on gains is called discount capital gains. Since the discount is one of the concessions applicable to small businesses, the 50% discount on the asset’s capital gain will be added to the taxable income and thus included in the payment of capital gain tax. This is a disadvantage to Jason since it results to increase in the tax liability on capital gains on each asset owned for more than a year since 1999 as it was affected on tax laws relating to capital gains. The The motor vehicle is considered not to be used solely for taxable purposes and thus not exempted in the computation of capital gains. The business premise is also a consideration for capital gains since it is among the real assets considered for capital gain according to the Australian tax laws. Any transactions involving shares attracts capital gain since tax is paid on the gains received from such transactions. Therefore, when Jason disposed 500 shares a capital gain was realized since they were disposed off at a higher amount than the cost of acquisition. Unlike companies which pay capital gains tax at the rate of 30% Jason will pay it at his income tax rate for the year. This is because his business operated as a sole proprietor and thus not separate from its owner (Beekman 2010). According to (Woellner 2012), capital gains arise when an asset that has been acquired is sold or deposited. The acquisition does not only refer to when one purchased it. In the case where a person has inherited an asset or received it as a gift then when it is sold or disposed it is considered for capital gain since ownership had been transferred to the person. Jason acquired the business through an inheritance after his father died. This makes him the owner of the premise. He is considered to have acquired the premise at $520,000 which is the amount which the building was valued at when Jason was acquiring it, that is at the time of his father’s death. T he building had appreciated from the cost of $60,000 that his father had used to acquire it. The implication of the inheritance on Jason is increased capital gains which increase his income tax liability. Beekman (2010) points out that, capital losses incurred on disposal or sale of individual assets cannot be offset against taxable income it is instead offset against capital gain earned from other assets. Incase no capital gain has been made in the year of income then the capital loss is carried forward and offset again the next years capital gains. By selling his motor vehicle to Fred, Jason made a capital loss of $ 20,000. He also has a loss carried forward from 30 June 2012; the two losses have been offset against capital gains made from the sale of other assets. This has resulted to a decrease on Jason’s taxable income and hence lower tax liability. Since he has made capital gain from other assets the loss carried forward has been offset in the current year. The costs associated with the disposal of the building, that is the legal fees and the artwork reduce the disposal cost for the building. This means that lower proceeds are realized from the disposal as it would have been without the extra expenses. The additional cost reduces the capital gain made from the disposal. This means a decline in taxable income and thus lowers Jason’s income tax liability. Capital gains tax implications on his remaining assets As stated by Sørensen & Johnson (2010), according to the Australian tax laws regarding CGT when a resident wants to leave the country to go settle in another country permanently, the person is required to dispose of all the CGT assets. The person becomes a non- resident and so has to dispose all assets that are not taxable Australian property. This makes the person not liable to pay CGT on the assets left behind since they are no longer regarded as residents. This rule however is with exception of the main residence. Therefore, before relocating to Canada Jason is allowed by the Australian tax laws to rent out his family home in Australia for a period of about 6years after leaving for Canada and on disposing the residence Jason will do it free of Australian CGT. This means that Jason can make income from the home for six years and yet continue regarding it as his main residence. However, this is applicable if he only had one family home either in Australia or abroad at any given time. This implies that as long as Jason is holding the home as his main residence he is not liable to pay any capital gain tax even if he sells that home. However, he cannot nominate any other home even in his new country as his main residence. The shares in Telstra by Jason are also regarded as part of the investment properties held. As per the Australian tax laws on CGT Jason does not necessarily need to dispose them to be exempted from paying tax on them after becoming a non-resident. This is because according to the rules the shares are to be sold at their market value once Jason becomes a non-resident and capital gain or loss recognized at that time. Therefore, Jason can choose to pay tax on these shares when leaving so that he is not liable to pay any Australian tax on the shares when he is a non-resident. According to Shaviro (2011), the option provides Jason with a tax saving opportunity especially if one expects growth in the value of the investments with time because Jason will have already paid his tax liability and thus the growth will not be factored in for taxation. Though, if he sells the shares the implication will be on his taxation in Canada. He may also decide to disregard disposal of these shares on becoming a non-resident. This makes the shares to be regarded as taxable Australian property and thus extends his period of exposure to capital gains tax. This implies that Jason will have less tax liability on the shares as a non-resident but upon disposal of the asset capital gain or loss will be accounted for the period the shares were held, that is both as a resident and a non-resident. References Beekman, N, A, 2010, virtual assets, real tax: the capital gains/ordinary income distinction in virtual worlds, the Columbia Science and Technology Law Review, 11, 152-175. Burman, E, 2009, taxing capital gains in Australia: assessment and recommendations, Australian Business Tax Reform in Retrospect & Prospect. Sydney: Thomson Reuters. Shaviro, D, 2011, the 2008 financial crisis: implications for income tax reform, NYU Law and Economics Research Paper, (09-35). Sørensen, P, B, & Johnson, S, M, 2010, taxing capital income: options for reform in Australia, in Melbourne Institute, Australia’s Future Tax and Transfer Policy Conference (pp. 179-235). Woellner, R, Barkoczy, S, Murphy, S, Evans, C, & Pinto,D, (2012), Australian taxation law, CCH Australia. Read More