Taxation Theory, Practice & Law: Capital Gains and Fringe Benefits

This article discusses the computation of capital gains and related CGT, pre-CGT assets, CGT events, cost base, discount method, and capital losses. It also covers the FBT implications of car, loan, and internal expenses fringe benefits. The article provides a detailed explanation of the tax implications of fringe benefits and how they are computed.

Taxation Theory, Practice & Law
STUDENT ID
[Pick the date]

Question 1
The situation presents involving offering tax advice to the client considering that there are certain
assets which have been disposed during the tax year 2017/2018. An important aspect to note is
that that given assets which are disposed does not constitute trading stock for the client since
these transactions are not part of normal business activity. As a result, the potential implications
of ordinary income can be ruled out and the proceeds derived from the asset sale can safety be
considered as capital proceeds. The focus thereby would be on the implications related to capital
gains and the resultant CGT that would be payable by the client.
For computation of capital gains and related CGT, certain basic contextual terms ought to be
defined for higher clarity.
Pre- CGT Asset
As the name implies, an asset which was purchased in the era when CGT did not exist is referred
to as pre-CGT asset. The significance of this term lies in the fact that in accordance with s. 140-
10 ITAA 1997, for these assets no CGT would be levied irrespective of the quantum of capital
gains or losses and the holding period by the underlying taxpayer (Sadiq. et.al., 2015).
CGT Event
Whenever a CGT event takes place, the computation of capital gains or losses is required. A
summary of CGT events is mentioned as per s. 104-5, ITAA 1997. A particular CGT event
which would be relevant from the context of the given task is event A1 (Woellner, 2014). This
event relates to the disposal of asset. Further, the resultant capital gains computation requires the
deduction of cost base of given asset from the sale price that has been fixed for the asset.
Cost Base
Considering the approach highlighted above, the asset cost base ought to be found. The same can
be found in accordance with s. 110-25 ITAA 1997. This section indicates that there are namely
five key costs related to the computation of cost base as has been explained below (Austlii, 2018
c).
 Cost Element 1: This comprises of the price that the asset is initially bought for.
1

 Cost Element 2: This comprises of the related costs which are spent by taxpayer during asset
selling or buying.
 Cost Element 3: This comprises of the ownership costs which are spent on the asset with
regards to meeting the tax obligations, interest amount of loan assumed and such related
expenses.
 Cost Element 4: This comprises of the expenses that taxpayer undertakes for increasing the
asset value or ensuring that the asset value does not fall.
 Cost Element 5: This comprises of the expenses that taxpayer undertakes in order to retain
the title over the asset under consideration.
Discount Method-Capital Gains
ITAA 1997 provides certain concessions with regards to long term capital gains to taxpayers so
as to induce them to hold the assets for a longer period. The relevant clause is s.115-25 as per
which only half of the long term capital gains would be taxed under CGT regime. However, this
method does not provide any discount in case of short term capital gains (Austlii, 2018 b).
Capital Losses Treatment
It is imperative to note that any capital losses which arise on account of asset sale cannot be used
to lower the taxable income of the individual but it can only reduce capital gains. Hence, if in a
given year when capital losses arise and no capital gains are present, the rolling over of the
capital losses would occur (Sadiq. et.al., 2015).
Block of vacant land
The vacant land block was purchased in 2001 and sold in 2017/2018 which clearly highlights
that the capital gains on the concerned asset would be long term. Also, the purchase date
signifies that the asset is not a pre-CGT asset and hence cannot be exempt from CGT. Another
issue which arises in the sale of land block is that there is difference in the tax years of contract
enactment and the proceed receipt. This issue can be resolved by referring to TR 94/29 which
highlights that tax liability would be borne in the year of agreement execution while the proceeds
can be received later (ATO, 1994). Hence, for the given client, CGT liability would be payable
in 2017/2018 only and not 2018/2019.
2

Capital Gains Calculation
Antique Bed
The acquisition of antique bed took place in 1986 while it has been stolen in 2017/2018 which
implies that the ownership period exceeds one year and thereby the capital gains would be long
term. Further, it is also confirmed that the given asset is not a pre-CGT asset and hence not
exempt from CGT liability. The relevant CGT even triggered is A1 which makes it necessary to
compute the relevant capital gains or losses. Also, considering that it is an antique bed, hence it
is a collectable. A noteworthy aspect in this regards is that CGT would be levied on capital gains
or losses derived only when the initial purchase price is in excess of $ 500 which is the case here.
Capital Gains Calculation
3

Painting
This particular asset would not have CGT implications owing to the date of purchase which falls
in the pre-CGT era which results in classification of this asset as a pre-CGT asset. In accordance
to s. 149(10) ITAA 1997, no CGT implications arise for pre-CGT assets (Austlii, 2018 a).
Shares
All the relevant shares acquired have been done so post CGT application which implies these are
not pre-CGT assets. Also, in regards to share disposal, A1 CGT event has been triggered which
requires the computation of capital gains using the approach highlighted in s. 104-5 ITAA 1997
(Sadiq. et.al., 2015).
Capital Gains Calculation
4

Violin
The asset on account of the purchasing date does not qualify as a pre-CGT asset. However, a
pivotal aspect of this asset is that it is not a collectable since it is used by the client for her
entertainment. This can be established by considering that she has good violin playing skills and
maintains a huge collection which she often uses for playing. This is thereby labelled as an item
of personal use and the requisite rule for such items is that the purchase price should not cross $
10,000 for CGT to be levied. This condition does not fulfil for the violin in consideration and
hence no CGT liabilities arise from liquidation of the concerned violin.
5

Cumulative Capital gains
The taxable capital gains for the client on account of the given transactions are reflected below.
Question 2
(a) Employers extend certain non-cash personal benefits to employees which are known as
fringe benefits. For the tax implications of the above outlined benefits, a separate statute
exists in the form of Fringe Benefit Tax Assessment Act (FBTAA) 1986. A noteworthy
feature of these benefits is that despite the employee being the recipient of economic benefit,
the tax is levied on the employer and the employee is 100% exempt from FBT. In the context
of the situation provided, the key fringe benefits as discussed as follows.
Car Fringe Benefit
This fringe benefit tends to arise in a scenario where employer owned car is provided to
employee for personal use. This is irrespective of the fact that the same car is professionally used
or not. The benefit extension to employee is apparent for the fact that car is being used for
employee’s personal use and the underlying costs are borne by employer (ATO, 2018 a).
In this case, employer (Rapid Heat Pty Ltd) has given a car to employee Jasmine and the same is
free to be used for her personal use especially on weekends. Clearly, car fringe benefits are being
provided to Jasmine by Rapid Heat. The net is that Rapid Heat would have to bear FBT arising
from car fringe benefits.
For computation of car fringe benefits, s.9 FBTAA 1986 provides a useful approach comprising
of the cost base of car and number of days for which private usage was allowed (Kreyer, 2016).
Based on the date of extension being May 1, 2017, deduction has been made for the period
starting from April 1, 2017 to May 1, 2017. However, there are other scenarios whose deduction
6

ought to be discussed. A ten day period when Jasmine had parked the car at the airport parking
does not provide any deduction because the car was available to use for Jasmine. A similar
conclusion could be drawn in respect of the car being in garage for minor repairs. Deduction on
account of repairs is only permissible when these are major.
Relevant gross up factor for car is 2.0808 for FY2018. Also, the FBT rate for the given year is
47%. The FBT computation is carried out below.
Loan Fringe Benefit
These benefits are extended to the employees when they tend to save money in the form of lower
interest payments on financial loans obtained from the employers. The reference rate to decide
whether the rate offered by employer is lower or not is BENCHMARK INTEREST RATE which
is given by RBA for each year. Providing the loan on an interest rate lesser than the rate
provided by RBA leads to loan fringe benefits to employee as he/she would save interest by
borrowing at cheaper rate. Further, like other fringe benefits, the tax implications of loan fringe
benefit would be borne by the employer with zero liability for employee. (ATO, 2018b)
The employer has provided Jasmine with financial assistance of $ 500,000. The applicable rate
of interest is 4.25% p.a. and is lesser than the relevant RBA rate which is 5.25% p.a. for
2017/2018. Relevant gross up factor for loan is 1.8868 for FY2018. Also, the FBT rate for the
given year is 47%. The FBT computation is carried out below (Barkoczy, 2017).
It is crucial to note that the usage of the loan proceeds may be carried by the employer or any
associate. However, from the perspective of the employer, it is imperative to consider the precise
breakup of the usage as tax deduction may be claimed by the employer for any interest saving on
7

the loan amount that the employee uses for generation of assessable income (Reuters, 2017). The
scope of this deduction is limited only to the employer and does not extend to the spouse or
associate. For the concerned employer Rapid Heat, Jasmine uses $ 450,000 for holiday home and
the deduction on this would be dependent on the derivation of taxable income for Jasmine.
However, the remainder amount has been extended to her husband for investment and hence no
deduction on the same is possible for the employer (ATO, 2018b).
Internal Expenses Fringe Benefit
A particular benefit enjoyed by employees is when their personal expense is borne by the
employer. A special case of this is when the employer provides internally manufactured product
at a steep discount despite the same being used for personal purpose by the employee. This is the
situation here where the company has decided to provide Jasmine the heater at a steep discount
of 50% to the retail price (ATO, 2018 a). The discount amount is essentially the expense benefit
given to Jasmine.
Relevant gross up factor for heater is 2.0808 for FY2018. Also, the FBT rate for the given year is
47%. The FBT computation is carried out below (Barkoczy, 2017).
(b) Unlike before, the $ 50,000 amount that was given to her husband is now instead used by
Jasmine herself for making stock investments. It is highly likely that this would produce
dividend income which contributes to assessable income under s. 6-5 ITAA 1997 (Wilmot,
2014). As a result, Rapid Heat would be able to lesser the FBT liability burden on account of
$ 50,000 being used by Jasmine, The computation is illustrated as follows.
8

References
ATO, (1994) Taxation Ruling –TR 94/29 [Online]. Available at: Income tax: capital gains tax
consequences of a contract for the sale of land falling through.
https://www.ato.gov.au/law/view/document?DocID=TXR/TR9429/NAT/ATO/
00001&PiT=99991231235958 (Accessed: 24 September 2018)
ATO, (2018 a) Fringe Benefits Tax- A Guide For Employers.
http://law.ato.gov.au/atolaw/view.htm?DocID=SAV%2FFBTGEMP%2F00010 (Accessed: 24
September 2018)
ATO, (2018 b) Loan Fringe Benefits https://www.ato.gov.au/General/Fringe-benefits-tax-
(FBT)/Types-of-fringe-benefits/Loan-fringe-benefits/ (Accessed: 24 September 2018)
Austlii, (2018 b) Income Tax Assessment Act 1997- SECT 115.25 [Online]. Available at:
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s115.25.html (Accessed: 24
September 2018)
Austlii, (2018 c) Income Tax Assessment Act 1997- SECT 110.25.General Rules About Cost
Base [Online]. Available at:
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.5.html (Accessed: 24
September 2018)
Austlii, (2018) Income Tax Assessment Act 1997- SECT 149.10 [Online]. Available at:
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s149.10.html (Accessed: 24
September 2018)
Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University Press.
Krever, R. (2016) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON
LAWBOOK Company.
Reuters, T. (2017) Australian Tax Legislation (2017). 4th ed. Sydney. THOMSON REUTERS.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., and Ting, A.
(2015) Principles of Taxation Law 2015. 7th ed. Pymont: Thomson Reuters.
9

Wilmot, C. (2014) FBT Compliance guide. 6th ed. North Ryde: CCH Australia Limited.
Woellner, R. (2014) Australian taxation law 2014. 8th ed. North Ryde: CCH Australia.
10