EAL Page 1 of 8 | TAX Handouts No. 05 EXCELLENCE | INCOME TAXATION REX 6. BANGGAWAN, CPA, MBA CAPITAL GAINS TAXATION REX B. BANGGAWAN, CPA MBA TYPES OF ASSETS The assets of the business are clas: Sifie 1. Ordinary assets — includes: ee @. stock in trade of the taxpayer, or other taxpayer if on hand at the end of the ta b. properties held by the taxpayer ©. properties used in trad 4. real properties used in trade or business io Examples: inventories, property, plant and e - Capital assets ~ any other assets that does not fall under the definition of ordinary assets Examples: investment properties, notes receivables and investment in equiy or debt securities (for a non-security dealer taxpayer) Property of a kind which would properly be included in an inventory of the the taxable year primarily for sale to customers in the ordinary course of trade or business; le or business of a character which is subject to allowance for depreciation; and 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: 15% 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 does not apply to: 1. Gains on sale shares of stock is that is traded in the Philippine Stock Exchange (PSE) => Thisis subject to a transaction tax (percentage tax) of 60% of 1% of selling price. 2. Gains under similar conditions by secunty brokers or dealers When to file the Capital Gains Tax Returns? 1. Per transaction basis: Within 30 days after each transactions 2. Annual basis: . For individuals ~ On or before April 15 of the following year b. For corporations — On or before the 15" 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 REO CPA REVIEW PHILIPPINESIN Effectiveness, Efficiency. Convenience Meese a " REAL EXCELLENGE ONLINE CPA REVIEW Detainee 201" 3K taeé Rexe.B CAPITAL REAL eB EXCELLENCE ttificate of obligation or stock Pera ck f the par value of due bill, certi! ee 0 On 2 par value stock: P1,50/P200 or fractional part o 1 neparstec: 2% of te cocoa samp ox aon theo Sod on ogi sue of onpar sok based on actual considera Limit: On one tax hal be colectd on each sale or ranser of stock or Sec regardless of whether or nota certificate of stock is issued or obligatio pursuance of such sale or ranser. Det pe laatehaa + Deadline: Documentary stamp tax return shall be filed with the man document vos mace, signed sued, ecceped or tansfred, andthe fax thereon shall e the return is pata 3 ee B. Sale, exchange or other disposition of real property inthe Philippines classified as capit Requistes : 2. The real propery is located inthe Philippines. . The property is classed as capital asset © The laxpayer isan 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 id IRC) the original issue of sai ee ora NI so aaare Bee, i set indorsed, ‘or delivered in when the taxable dat the same time Gross selling price ~ The amount of any money received plus the fair market value of any property received. Interest on the seling price shall be treated separately as Other Income taxable under regular income taxation, Excess Mortgage Assumed ZThe excess of the mortgage assumed over the cost of the property is included both itis a constructive receipt of income; in other words, it represents “extra consideration", tial payment and selling since ote fo Candidates: The basis of the taxis on the gross seling price or gross fair market value. This treatment Presumes the existence of gain and is applied regardless ofthe existence of actual gain COPE OF THE 6% CAPITAL GAINS TAX: Individuals Corporation Citizen 7 Alien Nor Location of Non- NR- | NR- "| Domestic | Resident | resident Real Property | Resident _| Resident _| Resident | ETB | NETB Philippines v v v v v v | Not Applicable Abroad 3 * 3 * ¥ * * ® 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 [he taxis 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 {exis withheld at source in installments when the taxpayer qualifies and opted to be taxed on installments. Alternative Taxation: ‘The clual net gain on the sale of real property may be included under progressive income taxation. REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience ‘www [Link] REAL EXCELLENCE ONLINE CPA REVIEW. © (074) 905.9774 @ 0916 8400001 suppon@[Link] 2023 CPA REVIEW SEASON= Page 3 of 8 | TAX Handouts No. 05 EAL EXCELLENCE pox, panacawan, cha oR j GAPITAL GAINS Paes Fr soler is an individual the buyer is the government, its political subdivisions or agencies or GOCCs ‘tax Exemption: The sale may be exempted from the payment ; {._ The seller is an individual nite ec eee gains tax provided the following conditions are met 2. The real property sod i his principal residence. Penal Realzwyce the Bias where an individual person resides comprising of the house and the lotto where ft erect n cae te nares on he nd componente lh le eens ‘aly the dwelling house is considered he date of sale is conclusive ‘The residential address indicated in the latest income tax return immediately before t iministrator Certification in the presumed to be the true residence. The Barangay Capt . iain Certification or Building Ad case of condominium residences is no longer revere. The full proceed of the sale is utilized in acquiring another residence. ‘Anew residence must be acquired or constructed within 18 calendar months from the date of sale. ‘The BIR is duly notified by the taxpayer of his intention to aval of the tax exemption within 30 days from the date of sale through a prescribed return. ‘The capital gains tax thereon is held in escrow in favor of the government. ‘The exemption can only be availed once every 10 years. The historical cost or adjusted basis of the real property (principal principal residence built or acquired gae J residence) sold shall be carried over to the new exe ‘Should there be any portion ofthe proceeds of sale not utlized for the reconstruction of @ new residence, the same shall be taxable. The tax on the unutiized portion shall be determined as follows Gross selling price or Fair Unutilized portion Market Value at the date of X x 6% ‘sale, whichever is higher Gross saling price Tax Basis of New Prin« Tax Basis refers tothe cost or adusted cost ofa property for tax purposes and hence fhe ‘amount deductible for tax purposes in determining gain or losses in disposal ofthe related property it Whe related transaction is taxable under the vrogressive system of taxation. Generally, when a property Is acquired by purchase, the cost is the tax basis. ‘Atax basis reduction may resultf the proceeds of the disposition ofa principal rescence is fot fully utlized in the ‘acquisition or construction ofa 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. = Utiized Seling Basis ofthe old principal residence Gross Selling Price More than full utilization of proceeds: Basis of the old principal ‘Additional expenditure in Newcost basis. = residence + excess of the proceeds REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www [Link] REAL EXCELLENCE ONLINE CPA REVIEW © (074) 0556774 @ 0916 840.0081 © suppont@[Link] 2023 CPA REVIEW SEASONEX B. REAL r EXCELLENCE ad Documentary Stamp Tax + Amount 7 ie {seling price ater allowance for encumbrances does not exceed P1,000 Dean’ x 2 €2ch P1,000 or fractional excess above P1000 of coh SiS 8 cers cavities the * Deadline: Documentary stamp tax retum shail be filed and the tax thereon paid pale 10 do ‘month when the taxable document was made, signed, issued, ‘accepted or transfer DRILL PROBLEMS: ORDINARY OR CAPITAL ASSETS Mustration 1: Relative classification Classify the folowing assets by indicating OA for Ordinary assets or CA for capital assets: Realty Developer | Security Dealer (Vacant lot Om ~ [Office supplies 03 om Domestic stocks 3 cA on Bonds. T Accountsinotes receivables ox IK Office building Office equipment Om oA DA Land where the office building stands | perso car of the business propretortaxpayér Personal house and lot ofthe proprietortareeees Gx Jewelry ofthe proprietor-taxpayes Mustration 2: Classification 1. The term “capital assets” includes 3 Stock in trade or other property included in the taxpayer's inventory. 2 Real Property not used in the trade or business the taxpayer. G Rat Property primarily used for sale to custorsers {he ordinary course of trade or business, Property used in the trade or business ofthe taxpayer and subject to depreciation 2. Lots being rented wh 2. Capital assets b. Liquid assets 'en subsequently sold are classified as ©. Ordinary assets 4. Fixed assets cn OA 3. Anon-proft schoo! has afchoo! buicingjand a Barking Glthatis leased Out to the public fora fee. It placed some {und in aJpond ivestment out of ts ext cose ond of the period, ithas uncolected P400.000 foes Tale hee Require: Identity the ordinary assets and capital assets ca 4. In transferring properties, which asset Classification prevails? @. Classification to the transferor § assifcation ofthe transferor if the transfer is taxed b. Purpose of use of the transferee & Classification of the transferor ifthe transfer exempt 5. Identity the asset classification OA a. A lot purchased to be used as a future bulding site for his business but remsined unused for 5 years due to Politcal instability in the area A Ana current unused back-up equipment A c. Abuilding that i¢ converted as residence of the taxpayer CA 8. Aused equipment that mance ‘unused for more than 2 years CA ©. Awarehouse building that ¢ ‘abandoned for more than 2 years REO CPA REVIEW PHILIPPINES Effectiveness, Efficiency, Convenience wenw reocpareview ph REAL EXCELLENCE ONLINE CPA REVIEW ‘Spereviewph 2023 CPA REVIEW SEASONREAL Page 6 of 8 | TAX Handouts No. 05 EXCELLENCE REX B, BANGGAWAN, CPA CAPITAL GAINS TAKAT ‘ 7. Abrand new machinery acquired for the business but remained unused for more than two years due to delays in the acquisition of permits for the business fok g. A fully depreciated truck that is stil in use n ‘An unsold open lot of a real estate developer who changed business to a hotel and restaurant business i k Construction equipment of a real estate d ee jeveloper that remained unused for more than two years A foreclosed collateral property held by the bank DRILL PROBLEMS: CAPITAL GAINS ON THE DISPOSAL OF DOMESTIC STOCKS A. Transactional Capital Gains Tax For each of the following scenarios, compute the c: ta (ustrative Cases . compute the capt geist ost 239 SS3asgs ne 4. Andy sold domestic stocks through the PSE at a gain of ‘400,000. Zz “}, [2. Andy, a security dealer, sold domestic stocks through the PSE at a gain of. 400,000. 0 fir [3 Andy. a security dealer, sold domestic stocks directly to a buyer ata gain of P400,000.. 2 4.—Andy a really dealer, sold domestic common stock to DEF, Inc. at a gain of P300,000. $5 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. o 7._ABC, Inc. exchanged the shares of DEF, Inc. it acquired for PiM for a lot ‘valued at P1.4M. Gok aT 8. Andy sold domestic[bonds|directly to buyer at a gain of ‘400,000. Oo 9. ABC, Inc. acquired DEF stock rights for ‘200,000. It disposed this rights for P400,000. OK 10. Andy purchased a stock option which he sold at a gain of P50, 000. TSK 71 Andy purchased domestic common stock for P1M and sold the same for P1.8M. At the date | 0% of sale the stock has a fair market value of, P2.4M. woe’) TAS Ge Rit 12. Andy purchased ordinary shares for P200,000 from DEF, Inc., a resident ‘corporation. After 2 ° years, he sold the same to buyer for P300,000 when the fair market value was 280,000. : RSs MREAC B. Annus d Capital Gains Tax Allen, resident alien, taxpayer made the following dispositions of shares of ‘stock during 2020: ‘Date Security Selling price Cost Settlement mode cc 1/18/20 Domestic common stocks Gf P_400,000 P120,000 | Directly to buyer |#ax 2/12/20 Domestic bonds AT 200,000 180,000 | Directly to buyer 3/14/20 ‘Domestic preferred stocks ST 280,000 250,000 Through PSE. 4/22/20 Resident corp. stocks Ret 180,000 420,000 | Directly to buyer 6/18/20 Domestic stock options GaT_ 150,000 420,000 | Directly to buyer_|4rK 8/15/20 Resident corp. bonds RT 200,000 240,000 |” Directly to buyer 9/2/20 Domestic common stocks S17 310,000 320,000 “Through PSE_ 9/24/20, Domestic preferred stocks O77 280,000 300,000 |” Directly to buyer_| © |)? 40/28/20 _| Domestic stock rights_Car 150,000 110,000 | Directly to buyer Ik 12/11/20 | Domestic preferred stocks CT 400,000 380,000 | Directly to buyer_|2A* ‘Assume all capital gains or losses on stocks and other equiy securities are short-term while those on bonds are long term. The taxpayer has other regular income of P400,000 and P'150,000 in deductible expenses. Required: Compute the following: 1. Capital gains tax payable per transaction STI 2. Stock transaction tax withheld by brokers 3590 3. Taxable net income of Allen REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www reocpareview ph REAL EXCELLENCE ONLINE CPA REVIEW @ (074) 605.6774 @ 0916 8400661 © suppert@[Link] 2023 GPA REVIEW SEASONREAL EXCELLENCE ui ©. Installment coT 260,000 and ac Pacts 2020, Andy sold his domestic stocks with aggregate par value or cigned a note forthe §.200.000 to Betty for P500,000. Betty made a downpayment of P50,000 a jocumentary stamp t@X. o sem-annual instaiments staring December 31 2628, Andy paid for he GOCu ition cost of ne balance payable in Required: A 1 Compute the 2020 capital gains tax we 2° Compute the documentary stamp tax on the cole D. Special cases, tic corporation, \ Veiko Acebo is @ security dealer. He had 10,000 ordinary stock of San Miguel Corporation, a domeate Oorporetrey Which he acquired at P100 per share Meiko sold his stock investment to Zeus Millan on April 30, Share, how much is the capital gains to Payable on the transaction? @. P5,000 ©. P5,750 ». P10,000 aPO 2. Mr: Bosun disposed various stocks ata total ‘Consideration of P400,000 and paid thereon stock transactions tax of £2,000. Aggregate gains realized totclca °98,000 after the stock transaction tax What isthe capital gains tax? 2 Po ©. P9,800 b. P4,900 4. P 14,700 SA certain taxpayer had the following gains and losses in dealing domestic stocks directly to buyer: 2019 2020 Capital gains 200,000 300,000 Capital losses 250,000 100,000 Required: Compute the capital gains tax in 2020, wy &. Wash sales Romeo had the following transactions in he stocks Of ABC Corporation: Date ‘Transaction Shares Net price 711712020 Buy 20,000 P30 9/28/2020 Sell 16,000 28 10/13/2020 Buy 12,000 24 1212712020 Sell 10,000 32 Required: Compute the capital gains tax for 2020. _ SYeD iF. Tax free exchanges Raymund exchanged his A Company shares pursuant toa plan of consoldation where A Company will be integrated with B Company. The following relates to the exchange: Basis of A Company shares given P> 1,200,000 Cash paid to B Company 100,000 Fair value of A Company shares given 1,300,000 Fair value of B Company shares received 1,100,000 Fair value of other properties received from B Company 350,000 Required 1. Compute the capital gains tax a PO © P.22,500 b. P.20,000 4. P 37,500 W PHI NES Effectiveness. Efficiency. Convenience Direc eo REAL EXCELLENCE ONLINE CPA REVIEW e e 2023 CPA REVIEW SEASONPage 7 of 8 | TAX Handouts No. 05 REAL EXCELLENCE REX 8 BANGGAWAN, CPA ‘2 What is the tax basis of the B Company received by ee 7° 3 bute = igo mn? d. P1,350,000 3. Whats the basis of the “boot” 7 C > What he be "oF the other properties received by Raymund? b. P-250,000 a pate , 4. P400,000 > 4. Whats the basis of the A Company shares received by B Company? ‘ PO . P1,200,000 P 1,100,000 4d. 1,350,000 DRILL PROBLEMS: CAPITAL GAINS TAX ON THE DISPOSAL OF REAL PROPERTY ‘A. Scope of the 6% Capital Gains Tax Capital Gains Tax 1. ABC, Inc. disposed afacant jatlcosting P2,000,000 at a gain of PT,000,000. The lot has a fair value of P2,500,000 at the date of disposal. HoK po | ‘ABC, Inc. disposed its|old warehouse with a carrying ‘amount of P2,000,000 at a gain of | p 1,000,000. The lot hae a fair value of P2,500,000 at the date of disposal gar |® DEF Inc, alfesident foreign corporation! disposed its investment in ‘condominium units | fer P3,000,000, The units have far value of P4,000,000 atthe date of disposal. 2 pean [4% Andy, a dealer of cas, sold 2 Vacant lot in Baguio City ata Joss. The lot has an 7al aoe ees fat value and zonal value of 800,000 and 1,200,000, respectively. i pat [So Andy sold one of his house and IotinfJapanlfor POM pit [6 ABC Realty Corporation sold an undeveloped lot costing P2M for P3M. ° OA B, Special Cases ‘Scope of Exemption Seon Srmation for the property with the following valves [Zonal value 2,500,000 | Properly appraisal value | P $000,000 | [Assessor's fair value —land 7,500,000 | Acquisition costs 2,000,000 [Assessors fair value - bulding | 1,000,000 i pendent cases, indicate the capital gains tax cat For each of the following indey Mlustrative Cases: residence for PAM. He immediately repurchased a new > aan 7. Andy sold his principal residence for P4.2M. patel 2. Andy sold his principal Tesidence for P2.5M. He immediately repurchased a new \dak residence for P2M. eal sold his principal residence for P2.56 He immedi jay repurchasedanew |p residential lot for P2M. Andy soldfone of his residentialjproperty for PAM. He immediately repurchased a new |pyoi residence for P4.2M. %. Andy sold his residential lot for PAN He Immediately repurchased anew residence [ik for P4.2M.__- Andy's house and lot was expropriated by The government. Andy leased his residence |ok L after receiving P3M settlement. Andy. opted to be ‘subjected to capital gains_ tax. seclosed after his failure to pay the P2M mortgage on the [gk 7, Andy's house and lot was for |” property. The bank paid him P1.6M after the auction sale. REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience [Link] ‘ - REALEXCELLENCE ONLINE CPA REVIEW CPA REVIEW SEASON @ (074 005.6774 @ 0916 6400081 © support@reocrarevew ph 2023Page 8 of 8 | TAX REAL EXCELLENCE ae Cer acOnney 2. Andy na house ang ‘ot with fair value of P3,600,000 for P3,000,000 on July 1, 2019. The house and lot, which re) eublect to @ mortgage was acquired for P1,500,000 in 2017, The buyer assumed the mortgage on the ‘and signed a note payable for the balance payable in semi-annual installments starting Decenber 31, are Required: Compute the following under the following mortgage ‘assumptions: Mortgage is P1,000,000 | Mortgage is P2,006,000 initial payment ok [Rooke 'b. Contract price an 150 ©. Capital gains tax due in2019 [74k PAD +150) = AS we 4. Documentary stamp tax Rid SEED 3. After long years of ownership, Ms. Shiela Longboan sold her residential lot to a foverament-owned and controlled corporation at 20% discount of its fair value under the following terms: {Ex@rapreation ewe OST = Ler Cash received, January 10, 2019 P 200,000 Amount received, July 1, 2019 200,000 Installment due, July 1, 2020 1,200,000 Additional Information: Cost of the land 300,000 Mortgage assumed by the buyer 400,000 Mortgage on the land executed by the buyer in favor of the seller to guarantee payment 1,200,000 Required: Compute the following: eae 4. Selling price LOH sok =a 2. Contract price Ea 3. Initial payments 10K 4. Capital gains tax in 2019 Wis 5. Reportable gain if Shiela opted to regular tax SO 6. Documentary stamp tax ‘e 4 Mark, a resident of Baguio City, sold his second house in Angeles, Pampanga for P 4,000,000 to a buyer who is fing business in Makati City. The lot has an assessed value of P500,000 and zonal value of 2,000 000" the house has a fair value of P2,000,000. 59% 0% gothn Required: Determine the following pave anys! 1. Capital gains tax aK 2. Venue where to file BIR Form 1706 A*2¢ky \Rorgong 3. Net proceeds of the sale 40950 Pe — END OF HANDOUTS —- | iy = File @ ROD Teanspame/Peer recap Owrction e orem = Location oF — Prgerty - 2 GPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenic REAL EXCELLENCE ONLINE CPA REVIEW wespareview ph 2023 CPA REVIEW SEASON SS