Ch. 6 Capital Gains Taxation Flashcards
What are the classification of taxpayer’s properties?
- Ordinary assets
- Capital assets
Define what ordinary assets are?
Basically, ordinary assets are assets used in business, either held for sale or use.
Define what a business is?
Business is a habitual engagement in a non-commercial activity involving the regular sale of goods or services for a profit.
Do non-profit entities count as a businesses?
No they don’t count as businesses
Define what are capital assets
Are assets other than ordinary assets. Basically, capital assets are Personal assets of individual taxpayers and Business assets of any taxpayer which are: Financial assets, and Intangible assets
The classification of assets or properties as ordinary assets or capital assets depends upon?
The nature of the taxpayer business and its usage by the business
(T or F) A property purchased for future use in business is an ordinary asset even though this purpose is later thwarted by circumstances beyond the taxpayer’s circumstances
True
(T or F) Discontinuance of the active use of the property changes its character previously established as a business property to an capital asset
False, it does not change its character previously established
(T or F) Real properties used, being used, or have been previously used, in trade of the taxpayer shall be considered ordinary assets
True
(T or F) Properties classified as ordinary assets for being used in business by a taxpayer not engaged in the real estate business are automatically converted to capital assets upon showing of proof that the same have not been used in business for more than 2 years prior to the consummation of the taxable transaction involving such property
True
(T or F) A depreciable asset is an capital asset even if it is fully depreciated, or there is a failure to take depreciation during the period of ownership
False, it is an ordinary asset
(T or F) Real properties used by an exempt corporation in its exempt operations are considered ordinary assets. Exempt corporations are still business.
False, they are considered capital assets and exempt corporations are not business
(T or F) The classification of property transferred by sale, barter or exchange, inheritance, donation, or declaration of property dividends shall depend on whether or not the acquirer uses it on business
True
(T or F) For real properties subject of involuntary transfer such as expropriation and foreclosure sale, the involuntariness of such sale shall have no effect on the classification of such real property
True
(T or F) Change in business from real estate to non-real estate business shall change the classification of ordinary assets previously held
False, it should not change the classification
Types of gains on dealings in properties
- Ordinary gain
- Capital gain
Define an ordinary gain
arises from the sale, exchange and other disposition including pacto de retro sales and other conditional sales of ordinary assets
Define a capital gain
arises from the sale, exchange, and other disposition including pacto de retro sales and other conditional sales of capital assets
What are the capital gains that are subject to capital gains tax
- Capital gains on the sale of domestic stocks sold directly to buyer
- Capital gains on the sale of real properties not used in business
What is the tax rate used on the gain of sale, exchange, and other disposition of domestic stocks directly to buyer?
15% capital gains tax
What is the tax rate used on the sale, exchange, and other disposition of real property in the Philippines?
6% capital gains tax
What is the tax rate is used on gains from other capital assets
Regular income tax
Other than exchange for cash, capital gains tax also covers sales of domestic stocks in kind and other dispositions such as
- Foreclosure of property in settlement of debt
- Pacto de retro sales - sale with buy back agreement
- Conditional sales - sales which will be perfected upon completion of certain specified conditions
- Voluntary buy back of shares by the issuing corporation - redemption of shares which may be re-issued and not intended for cancellation
Under NIRC, are treasury share premium subject to capital gains tax?
No, they are not
Are exchange of stocks for services, considered a capital gain?
No, there are no gain or loss that can be imputed as it involves payment of expense in kind
Are redemption of shares in a mutual fund exempted from income taxation?
Yes
The value of stocks becoming worthless is considered a capital loss subject to the rules of?
Regular Income Tax
The gain of investor on redemption of redeemable preferred shares shall be subject to?
Regular Income Tax
The gain or loss realized by the investor on voluntary buy-back of shares by the issuing corporation is taxable under?
Capital gains taxation
The gratuitous transfer of stocks either by way of donation inter-vivos or donation mortis causa is subject to?
Transfer tax
What are the modes of disposing domestic stocks?
- Through the Philippine Stock Exchange
- Directly to buyer
The sale of domestic stocks classified as capital assets through the PSE is?
not subject to capital gains tax
What is the tax rate on domestic stocks disposed through PSE
It is subject to a stock transaction tax of 60% of 1% of the selling price
What are the nature of the Capital Gains Tax
- Universal Tax
- Annual Tax
What is an universal tax?
It applies to all taxpayers disposing stocks classified as capital assets regardless of classification of the taxpayer. By situs, the gain on sale of domestic stocks is within. The tax applies even if the sale is executed outside the PhilippinesH
What is an annual tax?
It is imposed on the annual net gain on the sale of domestic stocks directly to buyer
Selling price shall mean?
Total consideration, or fair value of property, or the combination of the two
Tax basis of stocks if acquired by purchase?
Tax basis is the cost of the property which will be determined by the following methods in descending order of priority
1. Specific Identification
2. Moving Average Method
3. First-in, First-Out Method
Tax basis of stocks if acquired by devise, bequest, or inheritance?
The tax basis is the fair value at the time of death of the decedent
Tax basis of stocks if acquired by gift
The tax basis is the lower of the fair market value at the time of gift and the basis in the hands of the donor or the last preceding owner by whom it was not acquired by the gift
Tax basis of stocks if acquired for inadequate consideration
The tax basis is the amount paid by the transferee of the property
Tax basis of stocks if acquired under tax-free exchanges
The tax basis is the substituted basis of stocks
What is the Capital Gains Tax Rate
The TRAIN law and CREATE law simplified the rate to a 15% flat rate
Will there be a capital gain tax payable in the final consolidated return if all transactions during the year resulted to a gain?
There would be none. Filing of BIR Form 1707A may not even be necessary.
Explain transactional capital gains tax
Stocks are registrable securities which requires BIR tax clearance prior to their transfer of ownership. Filing of tax returns is a pre-condition to tax clearance. The capital gains or losses are required to be reported after each sale, exchange, and other dispositions through the capital gains tax return, BIR Form 1707
Explain annual capital gains tax
The 15% capital gains tax is an annual tax. The CGT is recomputed on the annual net gains and reported through a final consolidated return (BIR Form 1707A) on or before the 15th day of the fourth month following the close of the taxable year of the taxpayer
What if there is a loss on domestic stocks?
If there are losing transactions, it is best to offset losses first with subsequent gains. Residual tax payable must be settled. No tax payment should be made until the same turns into a net gain.
Explain the installment payment of the capital gains tax
When domestic stock is sold in installments, the capital gains tax may also be paid in installments if the:
1. Selling price exceeds P1,000; and
2. Initial payment does not exceed 25% of the selling price
What are the Special Tax Rules in Capital Gain or Loss Measurement
- Wash sales of stocks
- Tax-free exchanges
What is the wash sales rule
Wash sale of securities is deemed to occur within 30 days before and 30 days after the losing sale of securities (also referred to as the 61-day period), the taxpayer acquired or entered into a contract or option to acquire the same or substantially identical securities. Capital losses on wash sales by NON-DEALERS IN SECURITIES are not deductible against capital gains because they are effectively unrealized. The taxpayer did totally let go of the shares. The immediate reacquisition of the shares make the loss a theoretical or a feigned loss
What is the rationale of the wash sales rule
The wash sales rule is intended to prevent taxpayers from feigning temporary losses which could enable them to manipulate their reportable taxable net gain. Hence, the prohibition against the claim of wash sales is not an absolute rule but is a form of deferral of loss intended to reflect the economic substance of the transaction
Why is the wash sales rule not applicable dealer in securities?
It is a normal way of business for them to buy and sell stocks and as a result realize gains or income within short duration of time
What are the types of tax-free exchanges?
- Corporate reorganization
- Initial acquisition of control
Persons not liable to the 15% capital gains tax
- Dealers in securities
- Investors in shares of stocks in a mutual fund company in connection with gains realized upon redemption of stocks in the mutual company
- All other persons, whether natural or juridical, who are specifically exempted from national revenue taxes under existing investment incentives and other special laws.
The sale, exchange, and other disposition of real property capital assets in the Philippines is subject?
to a tax of 6% of the selling price or the fair value, whichever is higher
Under the NIRC, the fair value of real property is whichever is higher of the?
- Zonal Value
- Fair Market Value
Nature of the 6% Capital Gains Tax
- Presumption of Capital Gains
- Non-consideration to the involuntariness of the sale
- Final Tax
Exceptions to the 6% Capital Gains Tax
- Alternative Taxation Rule
- Exemption Rules:
a. Under the NIRC
b. Under special laws
What is alternative taxation
An individual seller of real property capital assets has the option to be taxed at either:
a. 6% capital gains tax or
b. The regular income tax
Alternative taxation is only permissible when:
- The seller is an individual taxpayer
- The buyer is the government, its instrumentalities or agencies including government-owned and controlled corporations
Exemption to the 6% Capital Gains Tax under the NIRC
The sale, exchange and other disposition of a principal residence for the re-acquisition of a new principal residence by individual taxpayers is exempt from the 6% capital gains tax
Define what is a principal residence
Principal residence means the house and lot which is the primary domicile of the taxpayer. If the taxpayer has multiple residences, his principal residence is deemed that one shown in his latest tax declaration
Capital Gains Tax exemption under Special Laws
- Sale of land pursuant to the Comprehensive Agrarian Reform Program
- Sale of socialized housing units by the National Housing Authority
Payment of the 6% Capital Tax Gains in installment is permissible when?
The initial payment does not exceed 25% of the selling price. Initial payment refers to the collections in the taxable year the sale is made
Deadline for payment of the capital gains tax
The 6% capital gains tax will be filed through BIR Form 1706 and is due within 30 days from the date of sale or exchange. For foreclosure sales, it is due within 30 days from the expiration of the applicable statutory redemption period. When the tax on the sale is qualified for installment payment, it is due 30 days upon receipt of every installment
Documentary stamp tax on the sale of capital assets
The sale of domestic stocks is subject to a documentary stamp tax of P1.5 for every P200, or fractional parts thereof, of the PAR VALUE of the stocks sold
Documentary Stamp Tax on the Sale of Real Properties
The sale of real property capital assets is subject to a documentary stamp tax on the gross selling price or fair market value whichever is higher. The documentary stamp tax is P15 for every P1,000 and fractional parts of the tax basis thereof. However, if the government is a party to the sale, the basis shall be the consideration paid.
