MODULE 5 UNIT 1 CAPITAL GAIN (capital assets transaction)

INCOME:
 Compensation Income
 Business income
 Passive Income
 Capital gain
ASSETS OF THE BUSINESS:
 Ordinary Assets:
• Inventories that are available for sale in the conduct of business
• Item of Property, plant and equipment that are used in the production activities of
the business.

 Capital assets , assets other than ordinary assets of the business of the taxpayer.

SALES

 Of ordinary assets = Business Income or business loss

 Of capital assets = Capital gain or capital loss

APPLICATION
1. For the period the following sales were made by the taxpayer:
 Sale of production equipment with carrying cost of P400,000 for P240,000.
 Sale of investment in equity securities of a closely held corporation with carrying cost of P500,000 for
P650,000
 Sales of inventory for P1,200,000 cost of sale of P750,000
How much is the net increase in assets of the taxpayer for the above?
ANSWER, Value Received Value given away
- Sale of equipment 240,000 400,000
- Sale of investment in securities 650,000 500,000
- Sale of inventory 1,200,000 750,000
- Total 2,090,000 1,650,000
- Increase in assets 440,000
2,090,000
How much is its business income?
ANSWER, Value Received Value given away Income /(loss)
- Gross profit on Sale of inventory 1,200,000 750,000 450,000
- Ordinary loss, disposal of equipment 240,000 400,000 ( 160,000 )
- Ordinary business income (returnable in 1701 or 1702) 290,000

How much is its capital gain (loss)?

ANSWER, Value Received Value given away Capital gain
Sale of investment in securities 650,000 500,000 150,000
(subject to capital gain tax of 15% on gain if sold over the counter, TAX RETURN FORM 1707 )
CAPITAL GAIN THAT ARE EXEMPT FROM INCOME TAX

gains realized from the sale, exchange or retirement of bonds with maturity of more than 5 years.

Gains in a corporate reorganization (merger/consolidation) where exchange is purely in kind (shares of stock).

Sale of family home where the proceeds is fully utilized in acquiring new family residence w/i 18 months
from ate of sale.

Capital Gain on sale of Investment in Securities sold inside stock exchange.

gains realized upon redemption of investment in mutual fund company.

APPLICATION
X holder of P1,000,000 bond with maturity of 10 years sold the bond investment for P1,100,000 inclusive of
one year P60,000 accrued interest.
How much is the total income from the sales?
ANSWER, Total income = 1,100,000 – 1,000,000 = P100,000
How much of the above income is tax exempt?
ANSWER, Only the gain of P40,000 gain is exempt, but the interest income of P60,000 is
taxable.
CAPITAL GAIN THAT ARE EXEMPT FROM INCOME TAX

APPLICATION
X Corporation acquired 100% interest of Y corporation for P10,000,000. The fair value of Y corporation acquired
by X is 8,000,000. To effect the acquisition X issued 80,000 ,P100 par regular shares selling at date of issue at
P125/share in exchange for the 50,000 outstanding shares of Y
How much is the gain of Y stockholders in the exchange?
ANSWER, Capital gain = P10,000,000 - P8,000,000 = P2,000,000

How much of the P2,000,000 gain of Y’s stockholders is taxable?

ANSWER, None, the gain is exempt from income tax because it is arising from exchange of
purely shares of stocks ( X shares were issued in exchange of Y’s shares)
X Corporation acquired 100% interest of Y corporation for P10,000,000. The fair value of Y corporation acquired
by X is P8,000,000. To effect the acquisition X issued 70,000 ,P100 par regular shares selling at date of issue at
P125/share + P1,250,000 cash in exchange for the 50,000 outstanding shares of Y
How much is the gain of Y stockholders in the exchange?
ANSWER, Capital gain = P10,000,000 - P8,000,000 = P2,000,000

How much of the above income is liable to capital gain tax?

ANSWER, The P1,250,000 gain in form of cash as part of the exchange is taxable, reportable in
form 1707.
CAPITAL GAIN THAT ARE EXEMPT FROM INCOME TAX

APPLICATION
X sold his official residence (as certified by the barangay) for P5,000,000. Within 18 months he was able to acquire
a 100 sq. meter land for P1,000,000 and constructed his new house at total cost of P3,000,000.
How much of the above sale of capital asset is exempt from capital gain tax and how much is taxable?
ANSWER, Selling price P5,000,000
Utilized for acquisition of new residence 4,000,000 exempt from capital gain
Un-utilized 1,000,000 Taxable, reportable in form 1706

APPLICATION
X is holder of P500,000 shares of a domestic corporation acquired at cost of P5,000,000.
Eventually X sold 50% of his investment inside stock exchange at price of P3,000,000 and the half was sold to
direct buyer over the counter for P2,800,000.
How much is X’ total capital gain from the sales?

ANSWER, Capital gain = (3,000,000 +2,800,000) - P5,000,000 = P800,000 gain

How much of the total gain is taxable with capital gain tax?
ANSWER, The gain of P500,000 for shares traded in the stock exchange is exempt from capital
gain tax, but liable to transaction tax of 1/6 of 1% of the selling price.
Taxable with capital gain tax of 15% and reportable in 1707 = P300,000.
CAPITAL GAIN THAT ARE EXEMPT FROM INCOME TAX

APPLICATION

X invest in 50,000 units of irrevocable mutual fund at P2/unit. At maturity date, X collected a total of P135,000
from his investment.

How much is X’s capital gain?

ANSWER, Capital gain = P135,000 - (50,000 x P2 ) = P35,000

How much of the capital gain is taxable?

ANSWER, None