Northern CPAR: Taxation – Capital Gains Taxation
NORTHERN CPA REVIEW th
4 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 15 th 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
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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 NonNRReal Reside Reside Reside ETB 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
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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 Gross selling price
x
6%
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
Basis of the old Additional expenditure 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
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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
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Northern CPAR: Taxation – Capital Gains Taxation 0 buyer 3/14/9 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. 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.
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Northern CPAR: Taxation – Capital Gains Taxation Required: 1. Compute the 2010 capital gains tax 2. Compute the documentary stamp tax
on the sale
__________ __________
DRILL PROBLEMS: CAPTIAL GAINS TAX ON THE DISPOSAL OF REAL PROPERTY A. Scope of the 6% Capital Gains Tax Illustrative Cases: 1. ABC, Inc. disposed a vacant lot costing P2,000,000 at a gain of P1,000,000. The lot has a fair value of P2,500,000 at the date of disposal. 2. ABC, Inc. disposed its old office building with a carrying amount of P2,000,000 at a gain of P1,000,000. The lot has a fair value of P2,500,000 at the date of disposal. 3. DEF, Inc., resident foreign corporation, disposed its headquarter with carrying amount of P2,000,000 at a gain of P1,000,000. The headquarter has a fair value of P4,000,000 at the date of disposal. 4. Andy sold his old residence for P4,000,000 to finance his business. His old residence has an appraisal value of P5,000,000, assessed value of P3,000,000 and zonal value of P4,500,000. 5. Andy, a dealer of personal property, sold a vacant lot in Baguio City at a gain of P400,000. The lot cost him P600,000 and has an assessed value and zonal value of P800,000 and P1,200,000, respectively. 6. Andy wishes to expand business. He sold his warehouse consisting of a lot and building for P5,000,000. The lot and building has assessed value of P4,000,000 and zonal value of P4,500,000. 7. Andy sold one of his house and lot in Japan at a gain of P2,000,000. This property has an appraised value of P5,000,000 and were acquired at P3,000,000. 8. ABC Realty Corporation sold an undeveloped lot in Pangasinan. The lot cost P2,000,000 and were sold at its current fair value of P3,000,000.
Capital Gains Tax
B. Special Cases 1. Scope of Exemption Information for the property disposed of: Zonal value P 3,000,000 Assessed value 2,500,000 Appraised value 3,500,000 Cost 2,000,000 For each of the following independent, indicate the capital gains tax: Illustrative Cases: 1. Andy sold his principal residence for P4,000,000. He immediately repurchased a new residence for P4,200,000. 2. Andy sold his principal residence for P2,500,000. He immediately repurchased a new residence for P2,000,000. 3. Andy sold his principal residence for P2,500,000. He immediately repurchased a new residential lot for P2,000,000. 4. Andy sold one of his residential property for P4,000,000. He immediately repurchased a new residence for P4,200,000. 5. Andy sold his residence lot for P4,000,000. He immediately repurchased a new residence for P4,200,000. 6. DEF, Inc. sold a vacant lot for P4,000,000. Within 18 months, it used the proceeds to purchased residential houses for its directors and officers. 7. Andy’s house and lot was one of the several properties to be expropriated by the government to build on an airport. The government paid Andy P3,000,000. Andy leases his residence since then. Andy opted to be subjected to capital gains tax. 8. Andy’s house and lot was foreclosed after his failure to pay the
CGT
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Northern CPAR: Taxation – Capital Gains Taxation P2,000,000 mortgage on the property. The bank paid him P500,000 for after the auction sale. 2. With mortgage Andy sold his house and lot with fair value of P2,500,000 for P3,000,000 on July 1, 2010. The house and lot, which was subject to P2,000,000 mortgage was acquired for P1,500,000 in 2005. The buyer assumed the mortgage on the property and signed a note payable for the balance payable in 5 semi-annual installments. Required: Compute the following: 1. Initial payment _________ 2. Contract price _________ 3. Capital gains tax in 2010 _________ 3. Installment Ms. Shiela Longboan sold her residential house under the following terms: Cash received, January 10, 2006
P 100,000 100,000 600,000
Amount received, June 10, 2006 Installment due, June 10, 2007 Additional Information: Cost of the land Mortgage assumed by the buyer Mortgage on the land executed by the buyer in favor of the seller to guarantee payment
P 150,000 200,000 600,000
Required: Compute the following: 1. Selling price a. P 750,000 b. P 800,000
c. P 850,000
d. P1,000,000
2. Contract price a. P 750,000
b. P 800,000
c. P 850,000
d. P1,000,000
3. Initial payments a. P 100,000
b. P 200,000
c. P 250,000
d. P 150,000
4. Capital gains tax in 2006 a. P15,000
b. P17,647
c. P22,333
d. P 60,000
5. Documentary stamp tax a. P12,000
b. P12,750
c. P14,325
d. P15,000
CPA EXAM DRILL PROBLEMS: 1. The term “capital assets” includes a. Stock in trade or other property included in the taxpayer’s inventory. b. Real property not used in the trade or business of the taxpayer. c. Real property primarily use for sale to customers in the ordinary course of trade or business. d. Property used in the trade or business of the taxpayer and subject to depreciation. 2. Lots being rented when subsequently sold are classified as a. Capital assets b. Liquid assets c. Ordinary assets Fixed assets
d.
3. Which is an ordinary asset for a realty developer? a. Accounts receivables c. Real property held for development and subsequent sale b. Construction machineries d. Head office building of the developer 4. Which of the following accounting assets is not an ordinary asset? a. Investment property c. Property, plant and equipment b. Inventory d. Trading securities by a stock brokerage firm 5. On July 1, 2009, Crislyn Riego sold shares of stock for P200,000. The shares which were acquired for P140,000 acquire on June 1, 2007, have a par value of P150,000, were held as investment, and were sold to a buyer under the following terms: Downpayment, July 1, 2009
P
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Northern CPAR: Taxation – Capital Gains Taxation 20,000 30,000
Installment due, October 10, 2009 Installment due, October 10, 2010 Installment due, October 10, 2011
75,000 75,000
How much was the capital gains tax due in 2009? a. P 500.00 b. P 450.00 c. P625.00 6. How much was the documental stamp tax due? a. P 600.50 b. P 525.25 c. P 562.50
d. P750.00 d. P 612.50
7. To facilitate the disposal of his shares, Freddie sold his shares for P360,000 at 10% discount from its fair value. Even at discounted price, Freddie reports a gain of P160,000. Compute the capital gains tax on the transaction. a. P 21,000 b. P 11,000 c. P 16,000 d. P 15,000 8. Which of the following is not a requisite of installment payment of capital gains tax in installment involving the sale of personal property? a. Downpayment must not exceed 25% c. The item sold is not inventoriable b. Selling price must exceed P1,000 d. Initial payment must not exceed 25% 9. Abdul Rhamanam Ahmin, a non-resident alien disposed his stock investments in a domestic corporations to Juan dela Cruz, a non-resident citizen, at a gain of P300,000. Which statement is correct? a. The sale is not subject to capital gains tax since the property involved is a personal property is deemed located abroad. b. The sale is not subject to capital gains tax as Juan dela Cruz, the buyer, is a nonresident individual. c. The sale is subject to capital gains tax even if the sale occurred outside the Philippines. d. None of these. 10.Meiko Acebo is a stock broker and holds 10,000 ordinary stock of San Miguel Corporation, a domestic corporation, acquired at P100 per share. His valuation for San Miguel Corporation indicates that San Miguel’s stocks will decline in the near future. If Meiko sells his stock investment directly to a buyer, Zeus Millan, at P115 per share, how much is the capital gains tax payable on the transaction? a. P5,000 b. P10,000 c. P5,750 d. P 0 11.Mr. Acebo, a non-security broker or dealer, made the following dispositions directly to buyer: Date 2/4/8
Domestic securities Abacus ordinary shares
5/8/8 7/15/8
PLDT bonds Globe preferred shares
9/20/8 11/15/8
Globe common shares Metrobank ordinary shares
Gain/(Loss) P 150,000150,000( 80,0 00) 50,00080,000-
Compute the amount of capital gains tax payable (refundable) of Mr. Acebo for the year 2008. a. (P1,500) b. P15,000 c. P 0 d. P38,000 12.Which of the following entities is not exempt to the final capital gains tax imposed on the sale, exchange and other disposition of real property? a. Banks on their sale real and other assets acquired in the Philippines b. Resident corporations on their land not used in business in the Philippines c. Real estate developer or dealer on their sale of condo units d. Resident citizen on his sale of one of his residence under foreclosure sale 13.The actual capital gain derived by an individual taxpayer may be included to all income subject to progressive income tax when
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Northern CPAR: Taxation – Capital Gains Taxation a. b. c. d.
It It It It
involves involves involves involves
sales of real property to non-residents sales of real property to the government sales of personal property to non-residents sale of domestic stocks directly to taxpayer
14.Ms. Janet Ranillo, a real estate dealer, sold a real property for P200,000 on October 29, 2007 in installment. The cost of the property was P150,000. The terms of the sale agreed upon by Ms. Ranillo an the buyer were: Downpayment P 40,000 Balance, payable in monthly installments of P10,000 160,000 beginning November 29, 2007 until fully paid How much income will be reported in 2007? a. P12,500 b. P15,000
c. P50,000
d. P75,000
15.Ms. Lyn Rosales, a real estate dealer, sold a real estate for P2,000,000 on November 29, 2007. The cost of the property was P1,500,000. The terms of the sale were as follows: Downpayment P 400,000 Balance, payable in monthly installments of P100,000 1,600,00 beginning December 29, 2007 until 0 fully paid How much was the income to be reported in 2007? a. P100,000 b. P112,000 c. P125,000 16.Compute the capital gains tax in the above case. a. P 30,000 b. P 40,000 c. P120,000
d. P140,000 d. P 0
The following problems relates to numbers 17 through 20: 17.Raff Escuela sold his principal residence for P5,000,000. His principal residence was acquired at P2,000,000 and has a fair market value of P6,000,000 at the date of sale. Within 18 months, Raff reconstructed his new principal residence for P4,500,000. Compute the capital gains tax to be deposited in escrow. a. P 270,000 b. P 300,000 c. P360,000 18.The cost basis of the new residence is a. P1,800,000 b. P1,500,000 P4,500,000
d. P 0
c. P3,750,000
19.The amount of capital gains tax to be released to Raff is a. P240,000 b. P270,000 c. P300,000
d.
d. P324,000
20.Compute the cost basis of the new residence if it was acquired for P5,200,000. a. P2,000,000 b. P2,200,000 c. P1,733,333 d. P4,333,333 21.Which is not a requisite of the wash sales rule of securities? a. The sale or other disposition of securities resulted to a loss b. There was an acquisition or contract or option for acquisition of stock or securities within 30 days before the sale or after the sale. c. The stock or securities sold were substantially the same as those acquired within the 61-day period. d. The seller must be a dealer in securities in a short sale transaction. 22.The following are not substantially identical securities, except one a. Common stock and preferred stock b. Voting and non-voting common stock c. Bonds with different interest rates or secured and unsecured bonds d. Similar bonds with different maturity dates 23.To which of the following is the capital gains tax required to be filed? (Select the exception.) a. Authorized Agent Bank under the jurisdiction of the RDO where the seller is required to register
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Northern CPAR: Taxation – Capital Gains Taxation
b. Revenue collection officer c. Duly authorized City or Municipal Treasurer of the RDO where the seller is required to register d. Office of the Commissioner of Internal Revenue --- End of Handouts ---
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