Discuss these questions with a partner.

1. What are different ways in which companies can earn money?

2. What is ‘disposal of assets’?

3. What are capital assets?

4. Why do governments impose Excise Taxes?

5. What form of taxation do governments use to protect domestic products?

 

A company or individual can generate income in a number of ways – through sales of merchandise, provision of services, renting property, trading securities or lending money to other enterprises. In addition to its core activities, a company can also earn income through disposal of assets other than inventory, or capital assets.The profit made by the sale of capital asset is called capital gain. The tax levied on profit which is a result of sale of capital asset is called Capital Gains Tax.

    Capital Gains Tax is levied when a taxpayer disposes of an asset that is worth more on disposal than when it was acquired. The most common capital gains are realized from the sale of stocks, bonds, land, property and business assets such as goodwill.

    For example, when a company or individual buys securities for $ 1,000 and later sells them for $ 2,000, the difference ($ 1,000) is subject to Capital Gains Tax. There are several ways in which a disposal can be made, including when an asset is sold, given away or exchanged. For Capital Gains Tax purposes an asset can be any form of property, unless local tax legislation stipulates otherwise.

    The amount of Capital Gains Tax is computed by deducting the acquisition costs of an asset and enhancement expenditurefrom the consideration (or sale proceeds) received from a disposal.

    Not every increase in price of assets held by a company or individual results in tax liability. If the price of security held by a company increases, but the company decides not to sell, the gain is not realised and, therefore, nor subject to taxation. Capital Gains Tax are only triggeredwhen an asset is realised, not while it is held by a company or individual. An entity can own shares that appreciateevery year, but still not be liable for paying Capital Gains Tax on the shares until they are sold.

    However, the price of securities or property does not always go up. When the price of securities goes down, a company or individual that holds securities incurs losses. Capital losses are then used to offset capital gains of the same type in order to reduce a company’s tax liability. If the losses exceed the gains of the same year, the excess amount may be carried forward against the gains of later years.

        

Exercise 1.

In the text, find the answers to the following questions.

1. What are capital gains and losses?

2. When is Capital Gains Tax activated?

3. How is Capital Gains Tax calculated?

4. How can the liability for Capital Gains Tax be reduced?

5. What happens when a company’s capital losses exceed its capital gains of the same year?

 

Exercise 2. Find a word in the text that matches each definition below. The words appear in order.

1. (three words) A sale of an asset or any other transfer of ownership ______

2. (two words) A long-term asset, such as land, building, equipment, used to produce income for a company                                            ________________

3. (two words) Profit realized from the disposal of a capital asset for a price that is higher than the purchase price                                 ________________

4. Part of a company’s value that includes things that cannot be directly measured, for example, its good reputation or its customers’ loyalty              ________________

5. (two words) An expense incurred for the purpose of enhancing the value of an asset                                                                       ________________

6. To activate                                                                   ________________

7. To gain or increase in value                                                   ________________

8. (two words) Responsible for paying something       ________________

9. To balance one effect against an opposing effect          ________________

10. (two words) To move to a later accounting period            ________________

 

GRAMMAR FOCUS:

Present Perfect Continuous

Exercise 3.

You are a head of a Tax Accounting Department. Your superiors think that your employees are not efficient enough and take too much time doing their jobs. You are interviewing each member of your staff to find out how much time they have spent today for each individual task. Use the prompts below, as well as your own ideas, to ask questions.

prepare a tax return                                       analyse financial statements

advise clients on company formation issues             write a tax due diligence report

negotiate an engagement with a client            have lunch with a client

Example: How long have you been writing the tax due diligence report?