Chapter 6 income tax by banggawan PDF

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NORTHERN CPA REVIEW4 th Floor Pelizloy Centrum, Lower Session Road, Baguio City, Philippines Mobile Numbers: SMART 09294891758 & GLOBE 09272128204 E-mail Address: ncpar@yahooREX B. BANGGAWAN, CPA, MBATAXATIONCAPITAL GAINS TAXATIONThe assets of the business are classified as: 1. Ordinary assets –...

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Northern CPAR: Taxation – Capital Gains Taxation

NORTHERN CPA REVIEW 4th Floor Pelizloy Centrum, Lower Session Road, Baguio City, Philippines Mobile Numbers: SMART 09294891758 & GLOBE 09272128204 E-mail Address: [email protected]

REX B. BANGGAWAN, CPA, MBA TAXATION CAPITAL GAINS TAXATION The assets of the business are classified as: 1. Ordinary assets – includes: a. stock in trade of the taxpayer, or other property of a kind which would properly be included in an inventory of the taxpayer if on hand at the end of the taxable year b. properties held by the taxpayer primarily for sale to customers in the ordinary course of trade or business; c. properties used in trade or business of a character which is subject to allowance for depreciation; and d. real properties used in trade or business Examples: inventories, property, plant and equipment 2. Capital assets – any other assets that does not fall under the definition of ordinary assets Examples: investment properties, notes receivables and investment in equity or debt securities (for a non-security dealer taxpayer) Gains arising from sale of ordinary assets are called “ordinary gains.” Gains arising from sale of capital assets are called “capital gains.” All ordinary gains are taxable under regular income taxation. Capital gains are taxable either under final tax or under regular income tax. CAPITAL GAINS SUBJECT TO FINAL TAX A. Capital gains tax on sale, barter, exchange and other disposition of domestic shares of stock directly to buyer Requisites: a. There is a net gain. b. The capital asset sold is a domestic stock. c. The sale is made directly to buyer. Capital Gains Tax Rates: First P100,000 of the net gain Excess of the net gain over P100,000

5% 10%

Note to candidates: This rule on capital gains on sale of domestic stocks directly to buyer is uniform to all income taxpayers (individuals or corporate) regardless of classification. The rule do not applies to: 1. Gains on sale shares of stock is that is traded in the Philippine Stock Exchange (PSE) ⇒ This is subject to a transaction tax (percentage tax) of ½ of 1% of selling price. 2. Gains under similar conditions by security brokers or dealers When to file the Capital Gains Tax Returns? 1. Per transaction basis: Within 30 days after each transactions 2. Annual basis: a. For individuals – On or before April 15 of the following year b. For corporations – On or before the 15th day of the fourth month following the close of the taxable year When to pay the capital gains tax? 1. Lump sum – Upon date of filing the return with the Bureau (within 30 days from date of sale) 2. Installment – tax on installments is due within 30 days from receipts of each installments Documentary Stamp Tax

1 th

Driven for real excellence!

Batch – HQ05

TAX by Rex B. Banggawan, CPA, MBA

TAX – 6th

Northern CPAR: Taxation – Capital Gains Taxation • •

•

•

Par value stock: P0.75/P200 or fractional part of the par value of due bill, certificate of obligation or stock No-par stock: 25% of the documentary stamp tax paid on the original issue of said stock. (The documentary stock on original issue of non-par stock is based on actual consideration for the issuance – Sec. 174 NIRC) Limit: Only one tax shall be collected on each sale or transfer of stock or securities from one person to another regardless of whether or not a certificate of stock is issued or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer. Deadline: Documentary stamp tax return shall be filed within 10 days after the close of the month when the taxable document was made, signed, issued, accepted or transferred, and the tax thereon shall be paid at the same time the return is paid.

B. Sale, exchange or other disposition of real property in the Philippines classified as capital asset Requisites: a. The real property is located in the Philippines. b. The property is classified as capital asset. c. The taxpayer is an individual or a domestic corporation. d. The taxpayer is other than a foreign corporation. Tax Rate and Tax Basis: 6% x (the higher of Gross Selling Price or Fair

Market Value) The fair market value for purposes of the capital gains tax is whichever is higher of: 1. Zonal value as prescribed by the Commissioner of Internal Revenue 2. Assessed value as determined by the Provincial or City Assessor’s Office Gross selling price – The amount of any money received plus the fair market value of any property received. Interest on the selling price shall be treated separately as Other Income taxable under regular income taxation. Excess Mortgage Assumed The excess of the mortgage assumed over the cost of the property is included both in initial payment and selling since it is a constructive receipt of income; in other words, it represents “extra consideration”. Note to Candidates: The basis of the tax is on the gross selling price or gross fair market value. This treatment presumes the existence of gain and is applied regardless of the existence of actual gain. SCOPE OF THE 6% CAPITAL GAINS TAX: Individuals Citizen Alien Location of NRNonReal ETB Reside Reside Reside Property nt nt nt Philippines     Abroad × × × ×

Corporation NRNETB

Domest ic

 ×

 ×

Reside nt

Nonresiden t Not Applicable × ×

Note to Candidate: Regular income taxation, being the general rule, applies where the 6% final capital gains tax do not apply. Under regular taxation, the actual net gain is subject to regular income tax. How is the capital gains tax paid? 1. The tax is withheld at source – the seller and buyer files a joint capital gains tax return (one return per sale or foreclosure sale). 2. Installment (one return for each installment payment receive) The tax is withheld at source in installments when the taxpayer qualifies and opted to be taxed on installments. Alternative Taxation: The actual net gain on the sale of real property may be included under progressive income taxation. Requisites: a. the seller is an individual

Driven for real excellence!

TAX by Rex B. Banggawan, CPA, MBA

2 TAX – 6th

Batch – HQ05

Northern CPAR: Taxation – Capital Gains Taxation b. the buyer is the government, its political subdivisions or agencies or GOCCs Tax Exemption: The sale may be exempted from the payment of capital gains tax provided the following conditions are met: 1. The seller is an individual citizen or resident alien. 2. The real property sold is his principal residence. Principal Residence – the place where an individual person resides comprising of the house and the lot to where it erects; in case the interest on the land component is held by other persons, only the dwelling house is considered principal residence. The residential address indicated in the latest income tax return immediately before the date of sale is conclusive presumed to be the true residence. The Barangay Captain Certification or Building Administrator Certification in the case of condominium residences is no longer honored. 3. The full proceed of the sale is utilized in acquiring another residence. 4. A new residence must be acquired or constructed within 18 calendar months from the date of sale. 5. The BIR is duly notified by the taxpayer of his intention to avail of the tax exemption within 30 days from the date of sale through a prescribed return. 6. The capital gains tax thereon is held in escrow in favor of the government. 7. The exemption can only be availed once every 10 years. 8. The historical cost or adjusted basis of the real property (principal residence) sold shall be carried over to the new principal residence built or acquired Should there be any portion of the proceeds of sale not utilized for the reconstruction of a new residence, the same shall be taxable. The tax on the unutilized portion shall be determined as follows: Gross selling price or Fair Market Value at the date of sale, whichever is higher

x

Unutilized portion

x

6%

Gross selling price

Tax Basis of New Principal Residence: Tax Basis refers to the cost or adjusted cost of a property for tax purposes and hence the amount deductible for tax purposes in determining gain or losses in disposal of the related property if the related transaction is taxable under the progressive system of taxation. Generally, when a property is acquired by purchase, the cost is the tax basis. A tax basis reduction may result if the proceeds of the disposition of a principal residence is not fully utilized in the acquisition or construction of a replacement. Likewise a tax basis increase results when additional expenditures were incurred by the taxpayer in securing a replacement principal residence. Less than full utilization of proceeds: New cost basis

=

Utilized Selling

Gross Selling Price More than full utilization of proceeds:

x

Basis of the old principal residence

Additional expenditure Basis of the old New cost = principal residence + in excess of the basis proceeds Documentary Stamp Tax • Amount:  P15 – if selling price after allowance for encumbrances does not exceed P1,000  P15 – for each P1,000 or fractional excess above P1,000 of such selling price • Deadline: Documentary stamp tax return shall be filed and the tax thereon paid within 5 days after the close of the month when the taxable document was made, signed, issued, accepted or transferred. DRILL PROBLEMS: ORDINARY OR CAPITAL ASSETS

Driven for real excellence!

TAX by Rex B. Banggawan, CPA, MBA

3 TAX – 6th

Batch – HQ05

Northern CPAR: Taxation – Capital Gains Taxation Realty Developer

Security Dealer

Merchandiser

Vacant lot Office supplies Domestic stocks Bonds Accounts/notes receivables Office building Office equipments Land where the office building stands Personal car of the business proprietor-taxpayer Personal house and lot of the proprietor-taxpayer Jewelry of the proprietor-taxpayer DRILL PROBLEMS: CAPITAL GAINS ON THE DISPOSAL OF DOMESTIC STOCKS A. Transactional Capital Gains Tax For each of the following scenarios, compute the capital gains tax: Illustrative Cases 1. Andy sold domestic stocks through the PSE at a gain of P400,000 2. Andy, a security dealer, sold domestic stocks through the PSE at a gain of P400,000 3. Andy, a security dealer, sold domestic stocks directly to a buyer at a gain of P400,000 4. Andy, a realty dealer, sold domestic common stock to DEF, Inc. at a gain of P300,000. 5. ABC, Inc. sold domestic stocks though the PSE at a gain of P400,000 6. ABC, Inc. issued its shares of stock at P300,000 in excess of its par value. 7. ABC, Inc. exchanged the shares of DEF, Inc. it acquire for P1,000,000 for a lot valued at P1,400,000. 8. Andy sold his investment in domestic stocks to the issuing Company, ABC, Inc. The transactions realized a gain of P300,000. 9. Andy sold domestic bonds through the PDEX at a gain of P100,000. 10.Andy sold domestic bonds directly to buyer at a gain of P400,000 11.Andy sold his interest in a partnership for P400,000. His interest had a tax basis of P300,000 at the date of sale. 12.ABC, Inc. acquired DEF stock rights for P200,000. ABC subsequently disposed this rights for P400,000. 13.Andy purchased a stock option from DEF, Inc. Subsequently, Andy sold this options at a gain of P50,000. 14.Andy purchased domestic common stock for P100,000 and sold the same for P180,000. At the date of sale the stock has a fair market value of P210,000. 15.Andy purchased ordinary shares for P200,000 from DEF, Inc., a resident corporation operating in the Philippines. After 2 years, it sold the same directly to buyer for P300,000 when the fair market value was P280,000.

Capital Gains Tax

B. Annualized Capital Gains Tax Andrix, resident alien, taxpayer made the following dispositions of shares of stock during 2009: Capital Date Security Selling Cost Mode of Gains Tax price settlement 1/18/9 Domestic common P P120,0 Directly to stocks 400,000 00 buyer 2/12/9 Domestic bonds 200,000 180,00 Directly to

Driven for real excellence!

TAX by Rex B. Banggawan, CPA, MBA

4 TAX – 6th

Batch – HQ05

Northern CPAR: Taxation – Capital Gains Taxation 0 buyer Domestic preferred 300,000 250,00 Through PSE stocks 0 4/22/9 Resident corp. 180,000 120,00 Directly to stocks 0 buyer 6/18/9 Domestic stock 150,000 120,00 Directly to options 0 buyer 8/15/9 Resident corp. 200,000 240,00 Directly to bonds 0 buyer 9/2/9 Domestic common 300,000 320,00 Through PSE stocks 0 9/24/9 Domestic preferred 280,000 300,00 Directly to stocks 0 buyer 10/28/9 Domestic stock 100,000 120,00 Directly to rights 0 buyer 12/11/ Domestic preferred 400,000 380,00 Directly to 9 stocks 0 buyer Assume all capital gains or losses are long-term and that the taxpayer has other regular income of P300,000. 3/14/9

Required: Compute the following: 1. Capital gains tax payable at year-end ___________ 2. Total percentage tax paid ___________ 3. Total regular income of the taxpayer ___________ C. Special Cases 1. ABC, Inc., a domestic non-security dealer, had the following transactions involving the securities of non-listed domestic corporations during 2010: Date 2/4/9

Purchas e 10,000

Sale

Price

3/6/9 4/5/9

1,000 -

10,000

4/15/9 10/28/ 9 11/15/ 9 11/23/ 9 12/5/9 12/14/ 9

10,000

600 -

-

400

-

10,000

500 8,000

-

-

Security

Capital Gains Tax

P 10 1,000 21

GSM common stocks PLDT bonds GSM common stocks 1,100 PLDT bonds 16 GSM common stocks 980 PLDT bonds 12 GSM common stocks 950 PLDT bonds 13 GSM common stocks

ABC, Inc. had P300,000 operating income. GSM and PLDT are both domestic corporations. Required: Compute the following 1. Capital gains tax per transactions where applicable 2. Annual capital gains tax payable or (refundable) _________ 3. 2010 taxable income of the taxpayer _________ 4. Tax basis of the GSM common stocks _________ 5. Tax basis of the PLDT bonds _________ 2. Andy exchanged his DEF, Inc. shares which he previously acquired at P200,000 for the shares of ABC, Inc. valued at P300,000 in pursuant to a merger agreement between DEF, Inc. and ABC, Inc. Compute the capital gains tax. __________ 3. On July 1, 2010, Andy sold his domestic stocks with aggregate par value of P250,000 and acquisition cost of P300,000 to Betty for P500,000. Betty made a downpayment of P50,000 and signed a note for the balance payable in 9 semiannual installments starting December 31, 2010.

Driven for real excellence!

TAX by Rex B. Banggawan, CPA, MBA

5 TAX – 6th

Batch – HQ05...