This document provides information about Fringe Benefits tax and Capital Gains tax in Australia. It explains the computation methods and liabilities for these taxes. It also discusses the option of investing in superannuation funds for tax benefits.
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Australian Taxation
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Table of Contents Question 1..................................................................................................................................3 Question 2..................................................................................................................................6 Part A.....................................................................................................................................6 Part B......................................................................................................................................9 Part C......................................................................................................................................9 References................................................................................................................................11
Question 1 In Australia, Fringe Benefits tax is a tax applied in accordance with provisions applied by the Australian Taxation Office. It is the tax that is charged on the non-cash benefits provided by the owner to its employees. However, for the applicability of the fringe benefits tax, it is essential that benefit must be provided by the employer in terms of its employment. Sometimes employer apart from salary or wages provides several benefits to employees.A fringe benefit is the advantages provided by the employer to its employees in respect of the employment (Butler, and Calcott, 2018). With this aspect, there are several fringe benefits which are offered by the employer such as car fringe benefit, housing fringe benefit, property fringe benefit, Loan Fringe benefits and many others (Cooper, 2018). This tax is paid by the employer of the company. Moreover, it is charged even if any third party due to an preparation of same with the employer provides the benefits to the employee.This tax is distinct from the income tax,and it is computed on the taxable value of the fringe benefit. The employer should compute the value of the fringe benefit as per the rules approved by the government of Australia. In the present case, it has been stated that the boss provides a car to its employee for personal use. Thus, the same will be covered under the definition of the non-cash benefit provided by the employer to its employee in respect of employment. Therefore the definition of the fringe benefit is satisfied,and the tax should be paid by the employer.There are two methods for computation of fringe benefits tax liability in case of the car provided by the employer to its employees, such as the statutory formula method, and operating cost method. Calculation of Fringe benefit value Value of the benefit = Base Value of the car*statutory percentage *days vehicle available for personal purpose/days in the year – contribution by the employee In the given study Base value of car = $ 18000 Statutory percentage* = 20% Days vehicle was provided for personal use = 365
Contribution by employee = 1000 Value of the benefit = $18000*20%*365/365 – 1000 = $2600 Since, in the given study, it has been stated that distance traveled in the entire FBT year was 20000 Km. Therefore the statutory rate is 20% applicable. For the computation of FBT liability, the employer is required to gross up the amount of fringe benefit (Soled, and Thomas, 2016). Higher gross-up rate is applied by the employer in case if he/she is entitled to obtain the goods and service tax credit relating to the benefit of provision. On the other hand, the lowergross-up rate is applied by the employer is no credit is available for goods and service tax in respect of the provision of service (Shields, and North- Samardzic, 2015).In the given case, it has been assumed that no credit is available to the employer for provision of benefits, therefore reduced gross up rate will be applied. Gross-upthe value of the fringe benefit = 2600*1.8868 = 4905.68 FBT Liability = 4905.68*47% = $2305.35 Rate of FBT is considered for the year ended 18-19, that is 47% Operating cost formula method In this method, FBT is evaluated by taking operating cost of the benefits as base.In this, depreciationandtheinterestisconsideredasdeemedoperatingcost(Visser,2017). Depreciation is computed at the rate of 25% for computation of car fringe benefit as per the operating cost method. With aspect to the interest rates, FBT year ending 31 March 2019, the rate is 5.20% (Australian Taxation Office, 2019). Depreciation is charged on the basis of the actual cost of assets, and the interest is computed on the basis depreciated value of assets (Australian Taxation Office, 2019). Actual operating cost consists of repair, maintenance, insurance, registration, fuel,and many others. Formula = (total operating cost * percentage to private use) – contribution by the employee
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In the given case total operating cost is as follows Table1Computation of operating cost ParticularsAmount in $ Repair3300 Insurance2200 Fuel990 Depreciation*4500 Interest**936 Total Operating Cost11926 *Depreciation = 18000*25% = 4500 *Interest = 18000*5.20% = 936 Taxable Value = $11926*30% -1000 = $2577.8 It is given that, car is used 70% for business, and therefore the private use of car is 30% (100% 30 %). Gross up value = 2577.8*1.8868 = $4863.79 FBT Liability = $4863.79*47% = $2285.98 Summary Table2FBT Liability ParticularsAmount in $ FBT Liability as per the statutory method$2305.28
FBT Liability as per Operating Cost method$2285.98 On the basis of the above computation, it has been observed that the liability of fringe benefits tax under the operating cost method is lower than the liability computed under the statutory method. Therefore it is recommended that it is more appropriate for the employer to apply operating cost method. Question 2 Part A In accordance with provision specified in the Australian taxation system; capital gain is a tax applied in case capital gain has been incurred on the sale of the asset. A capital gain occurs in case sale price received on an asset is more than the cost base (cost of acquisition) of a specified asset. Cost base can be referred to as the price paid for the asset . Further, improvementinassetincreasesthecostbase,anddepreciationofassetdecreasesthe same.Capital gain earned on disposal of an asset is taxed in the year in which it was sold or disposed of. In accordance with provisions specified in section 102-5 (1) of ITAA 97 capital gains are required to the treated as part of assessable income. In case an asset is owned for more than one year than capital gain relating to the specified asset will be discounted to 50% for entity taxpayers and 33.3% for superannuation funds. A capital loss can be settoff against capital gain; however net capital loss cannot be adjusted against an ordinary business or other income but can be carried forward for indefinite income (Chapter 4: Loss carry forward, 2015) Short- Term Capital Gain The specified gain are relating to the assets which have been held for a year or loss (Capital Gains Tax. Timing of a real estate CGT event. 2019). The gain arising from stated assets in taxed as ordinary income. Thus, the rate applied on wages, interest, other income can be applied on the same. Long Term Capital Gain Above stated gains are relating to assets which are owned for a period of one year or more are required to be taxed as long term capital gain (Capital Gain Tax. Working out your capital
gain, 2018). The specified gains are taxed at more favorable tax rates. These rates variates from 0% to 20% in accordance with the income of the taxpayer. Working Note: 1 Sale of a house located at Doncaster (a suburb of Melbourne) In accordance with taxation ruling, 1999/19 CGT which provides specification relating to the accounting treatment of forfeited deposits in case the seller receives deposit by purchase and same is forfeited by him. Further, the judgment of case lawJosephine Binns v. the U.S., 385 F.2d 159 (6thCir. 1967) relating to the decision of tax treatment for federal income tax purpose can be applied in the present case. In the case of Josephine Binns, the issue rose relating to the sale agreement in which he agreed to sell 26000 shares of a company at the rate $43 per share. $ 75000 was paid as a down payment for the same. The stock was delivered and placed in escrow. However, after the end of week purchase stated that he is not able to complete the transaction and purchaser forfeited the amount received as a deposit. It was concluded that the amount of forfeited is required to be accounted for as ordinary income as the sale has not been completed.Thus, it can be assessed that as there is no sale or exchange transaction and hence no recognition of capital gain or loss . In the presentcase, as Daniel Ray forfeited the amount received at the time of auction from the purchaser as he was not able to continue the transaction. Thus, the same will be treated as ordinary income instead of capital gains. The amount paid to the real estate agent as sales commission can be deducted as an expense against the amount which has been forfeited and accounted as ordinary income. Working Note: 2 An artistic piece of painting Calculation of capital gain or loss ParticularAmount in $ ASale Proceeds125000 BCost of acquisition15000 Capital (A-B)110000
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Working Note: 3 Luxury Yacht Calculation of capital gain or loss ParticularAmount in $ ASale Proceeds60000 BCost of acquisition110000 Capital (A-B)(50000) Working Note: 4 Shares Calculation of capital gain or loss ParticularAmount in $ ASale of shares as on 5thJune 201980000 BPurchase shares as on 10thJanuary 2019 (the cost base)71000* Capital (A-B)90000 Stamp duty paid at the time of purchase as well as brokerage fees paid at the time of sale of shares will be added in the cost of acquisition in order to ascertain the cost of base (Faccio and Xu, 2015). Cost of the base can be referred to as the total amount paid by share acquirer relating to the transaction of sale. Cost base Cost of acquisition$70000 Stamp duty on purchase$ 250 Brokerage fees on sale$750 Total$71000 Interest on loan
In case loan has been taken in order to purchase shares; than assessee is able to make a claim relating to deduction of interest of loan only in case, it is reasonable to expect the assessable dividend to be derived from the investment of shares (Allowing deduction from dividend income, 2018). Further, in case loan is applied for the private purpose that interest can be claimed only for the part of the loan used in the acquisition of shares (Wallace,Hart and Evans,2013). The same situation is in case of a rental property. Claim relating to interest charged to loan can be made only in case the property available for rent purpose or actually rented (Alldridge, 2015). In case the property is used for private purpose than a claim relating to the interest of loan cannot be made in case the individual starts using it for private purpose (Barkoczy, 2016.). In the present case, as Daniel has invested in shares for the short term period, which asserts that there is no expectation relating to the accessibility of dividend. Thus, the interest incurred on loan is a non-deductible expense,and appropriate advice has been given by the tax advisor. Statement presenting net capital gain or loss for the year ended on 30thJune 2019 ParticularAmount in $ Long Term Capital Gain or loss House located at Doncaster (working note 1)- Artistic Piece of Painting (working note 2)110000 Luxury Yacht (working note 3)(50000) Total long term capital gain or loss60000 Taxable long term capital gain for the period (60000*50%)30000 Short Term Capital Loss Shares9000 Total taxable capital gain39000 Long term capital loss of the previous year(10000) Net capital gain29000 Part B The amount received by Daniel at the sale of investment can be invested in a superannuation fund (Investing. Disposing of shares, 2019). The amount transferred to superannuation can be taxed at three stages: while investing, while the amount is in the fund, i.e. investing period and while leaving the fund (Frecknall-Hughes and Moizer, 2015). In the present case as the
amount invested in a superannuation fund is personal contribution than same will be not taxed while they are transferred in the super fund. In the presentcase, as Daniel is making an investment in order to plan his retirement, this amount will be withdrawn only after he turns to 60. Thus, it is the best option for Daniel as the amount will withdrawn by a person having after attaining age of 60 years, it will not be taxed. Part C In the presentcase, long term capital gain has occurred. However, in case capital loss would have occurred than treatment of same would have been dependent on the nature of capital loss,i.e. whether it is long term capital loss or short term capital loss (Barkoczy.,2016). Australian taxation law allows carrying forward a loss for an indefinite period but at their nominal amount only (Losses. How to claim a tax loss, 2019). Thus, in case capital loss has been incurred as an investor (selling the asset after holding it for minimum one year) than individual will be able to set off the same against existing capital gain as well as can carry forward to offset against future capital gains.
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References Books and Journals Alldridge, P., 2015. Tax avoidance, tax evasion, money laundering,and the problem of ‘offshore.’Greed, Corruption, and the Modern State: Essays in Political Economy, p.317. Barkoczy, S., 2016.Core tax legislation and study guide. OUP Catalogue.New York Butler, C.,andCalcott, P., 2018. Optimal fringe benefit taxes: the implications of business use.International Tax and Public Finance,25(3), pp.654-672. Cooper, R., 2018. Recent changes to fringe benefits.TAXtalk,2018(71), pp.52-55. Faccio, M. &Xu, J.(2015).Taxes and capital structure. Journal of Financial and Quantitative Analysis.50(03). Pp.277-300. Frecknall-Hughes, J.,andMoizer, P., 2015. Assessing the quality of services provided by UK tax practitioners.eJournal of Tax Research,13(1), p.51. Shields, J.,and North-Samardzic, A., 2015. 10 Employee benefits.Managing Employee Performance and Reward: Concepts, Practices, Strategies, p.218. Soled, J.A.,and Thomas, K.D., 2016. Revisiting the Taxation of Fringe Benefits.Wash. L. Rev.,91, p.761. Visser, A., 2017. Tax and employee transport.Tax Breaks Newsletter,2017(376), pp.8-8. Wallace, M., Hart, G.,and Evans, C., 2013. An evaluation of the contribution of Justice Hill to the provisions for the taxing of capital gains in Australia. Austl. Tax F., 28, p.123. Online Allowingdeductionfromdividendincome.2018.Availablethrough <https://www.ato.gov.au/Forms/You-and-your-shares-2018/?page=11>.[Accessedon16th May 2019] Australian Taxation Office, 2019.Fringe Benefits Tax – rates and thresholds. (online). Availablethrough<https://www.ato.gov.au/rates/fbt/?page=1#Fringe_benefits_tax_rates> [Accessed on 16thMay 2019]
CapitalGainTax.Workingoutyourcapitalgain.2018.Availablethrough <https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/ Working-out-your-capital-gain/>. [Accessed on 16thMay 2019]. CapitalGainsTax.TimingofarealestateCGTevent.2019.Availablethrough <https://www.ato.gov.au/General/Capital-gains-tax/Your-home-and-other-real-estate/Timing- of-a-real-estate-CGT-event/>. [Accessedon 16thMay 2019] Chapter4:Losscarryforward.2015.Availablethrough <https://treasury.gov.au/publication/business-tax-working-group-final-report-on-the-tax- treatment-of-losses/final-report-on-the-tax-treatment-of-losses/chapter-4-loss-carry-forward>. [Accessed on 16th May 2019]. Investing.Disposingofshares.2019.Availablethrough <https://www.ato.gov.au/individuals/investing/investing-in-shares/disposing-of-shares/>. [Accessed on 16thMay 2019]. Losses.Howtoclaimataxloss.2019.Availablethrough <https://www.ato.gov.au/General/Losses/How-to-claim-a-tax-loss/>. [Accessed on 16thMay 2019]