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

This article discusses the computation of capital gains and the relevant taxation treatment associated with the same. It also covers the taxation treatment of fringe benefits extended to employees by the employer.

Taxation Theory, Practice & Law
STUDENT ID
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Question 1
The key agenda in the given scenario is to consider the transactions enacted by the taxpayer
involving asset sale and provide advice to client on the manner in which the requisite
transactions would be dealt with regards to tax implications. One of the key facts to be noted that
for all the given transactions, the client does not have a related business and hence these would
not give rise to ordinary income, thereby implying the discussion would be restricted to
discussion of respective capital gains and the taxation of the same.
It is imperative to define certain key terms with regards to computation of capital gains and the
relevant taxation treatment associated with the same.
Pre- CGT Asset
This term has been defined by s. 149(10) ITAA 1997 and refers to those assets which are
purchased in the pre-CGT era (i.e. before September 20, 1985). The significance of these assets
lies in the fact that no CGT would be levied on any capital gains or losses that arise from the
liquidation of these assets (Austlii, 2018 a).
Capital Event
The capital gains computation needs to be carried out whenever there is a capital event, The
various capital events have been outlined in s. 104-5, ITAA 1997. One of these events is A1
event which relates to the asset disposal. In accordance with this event, the asset disposal related
capital gains can be computed by finding the difference of the capital proceeds and the asset cost
base (Barkoczy, 2017).
Cost Base
The cost base of an asset is defined as per s. 110-25 ITAA 1997 which highlights the inclusion of
the following five elements for the cost base computation (Kreyer, 2016).
 The first element is the purchase price or asset acquisition price.
 The second element corresponds to the incidental costs which tend to be incurred by taxpayer
while asset purchase or asset sale.
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 The third element includes the ownership costs related to the underlying asset in the form of
various non-deductible taxes along with interest on the loan taken for asset acquisition.
 The fourth element includes the capital expenditure that the taxpayer undergoes for either
preserving the asset value or enhancing the same.
 The fifth element includes the capital expenditure that the taxpayer undergoes for
maintaining the title on the property.
Discount Method-Capital Gains
Section 115-25 ITAA 1997 highlights that for long term capital gains, discount method of
taxable capital gains computation may be used for individual taxpayers which allows for 50%
concessions. Long term capital gains would only arrive when the underlying capital asset was
held in excess of 12 months before disposal (Kreyer, 2016).
Treatment of Capital Losses
The capital losses derived on asset sale cannot be adjusted against the taxable income of the
concerned taxpayer but instead can only be used to reduce the capital gains to the extent of the
capital loss. However, if the relevant capital losses cannot be adjusted in a given tax year, they
can rolled over for five years till capital gains are available (Kreyer, 2016).
Asset 1: Block of vacant land
The information given highlights that the land block acquisition took place in 2001 which
implies that the asset is not a pre-CGT asset. Therefore, CGT would not be exempted. The sale
of land triggered the A1 capital event. Additionally, tax ruling TR 94/29 highlights that the
capital gains arising from a capital event must be taxed in the year of execution of sale contract
of the asset irrespective of when the actual cash receipt takes place (ATO, 1994). Therefore, the
CGT on the capital gains derived from land block sale would be levied on the client in the
returns of the current year only.
Calculation of Capital Gains
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Asset 2: Antique Bed
The antique bed was acquired by the taxpayer in 1986 and hence cannot be classified as a pre-
CGT asset. The act of the bed being stolen amounts to capital event A1 in accordance with s.
104-5. The given asset is recognised as a collectable item as has been highlighted by TD 1999/40
(ATO, 1999). With regards to collectables, CGT would be applicable only if the underlying asset
has been bought for a price greater than $ 500. In the given case, the antique bed purchase has
been made for a higher price than $ 500 and hence corresponding capital gains cannot be ignored
from the CGT ambit.
Calculation of Capital Gains
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Asset 3: Painting
This particular asset has been acquired in the pre-CGT era and hence as per s. 149(10) ITAA
1997, no CGT would apply on the corresponding capital gains or losses that tend to be derived
from the underlying disposal of painting (Austlii, 2018 a).
Asset 4: Shares
The shares that have been bought by the client have been acquired after the introduction of CGT
and further the disposal of these shares corresponds to the enactment of capital event A1 in
accordance with s. 104-5 (Barkoczy, 2017).
Calculation of Capital Gains
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Asset 5: Violin
The given violin is not a pre-CGT asset as the underlying date of purchase lies in the time period
when CGT was already present. Therefore, CGT cannot be ignored on violin on this account. In
the given case, the client is a keen player of violins and has a huge collection of violins and each
of these is used by her for own entertainment purpose whereby the violin is played (Woellner,
2014). As a result, instead of being a collectable, the violin would instead assume the nature of a
personal use item. For the personal assets, if the purchase price is lower than $ 10,000, then the
respective capital gains or losses are disregarded for CGT computation.
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Summary of Capital gains
Question 2
(a) Fringe benefits refer to the personal benefit extended not in the form of cash to employees or
their associates by the employer. The underlying taxation treatment of these benefits is as per
the relevant provisions of Fringe Benefit Tax Assessment Act (FBTAA) 1986. The key
provision of this Act is that for the fringe benefits availed by employees, the relevant tax
burden in the form of FBT would be completely borne by the employers with no liability
extending to the employees in this regards (Wilmot, 2014). The various fringe benefits that
are relevant in the underlying situation are highlighted as shown below.
Car Fringe Benefit
This is one of the widely extended fringe benefits whereby the employer provides a car to the
employer for his/her personal use. This car can also be used for professional use but the key
aspect is the personal use. This is because for professional use, the employer ought to provide a
vehicle but the extension of the same for personal usage amounts of extension of benefit to
employee (Austlii, 2018 b).
Based on the scenario outlined, it is apparent that the employer (Rapid Heat Pty Ltd) has
extended an employer owned car to Jasmine (employee) which she can use consider for personal
usage as well besides professional use. Considering the above arrangement, it would be
appropriate to conclude that Rapid Heat would have to bear FBT related liability. Further, in
determining the car cost base, deduction for minor repairs which has been paid by the employer
would be made from the purchase price of the car.
.
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Based on the information provided, it becomes evident that employer has extended the car to
employee and allowed the same for personal use on May 1, 2017. It has been assumed that she
can use the car for personal use from May 2, 2017. As a result, the total days in the 2017/2018
tax year for which car is available for private usage excludes the month of April along with one
day in May and accordingly a deduction of 31 days has been made. Further, deduction for the
period when the car was left at the airport parking has not been considered as the car was
available for private usage but Jasmine could not use it since she was out of town. Additionally,
in relation to the minor repairs days spent in garage, deduction is not permissible as the repairs
were not major and hence availability of car would not be impacted (Reuters, 2017).
As transactions involving car are levied GST, hence the relevant gross up rate for the year ending
March 31, 2018 would be 2.0808 with the underlying FBT rate being 47%. Using the given data,
the FBT liability for Rapid Heat Pty is computed as follows.
Loan Fringe Benefit
Financial help is extended by employers to employees as loans which can be used by the
employee for income generation purpose or to purchase any asset or meet some personal
expense. It is imperative that these loans must be extended at the benchmark interest rate which
is provided by the RBA on an annual basis (ATO, 2018). However, if the employer does provide
loan to employee and the underlying interest rate is lower than the RBA benchmark rate, then
savings on interest would be realised by the employee and it would be concluded that loan fringe
benefits have been extended to the employee. On account of these fringe benefits being extended
to employee, FBT liability would be levied on the employer and no liability on employee would
arise (Coleman, 2016).
Considering the given scenario, a loan of $ 500,000 has been extended by Rapid Pty Ltd to
Jasmine. The rate of interest charged on the same is 4.25% p.a. which is 100 basis points lower
than the benchmark interest rate given by the RBA. Hence, FBT liability would arise. For the
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computation of the same, the non-GST gross up rate of 1.8868 has been considered along with
the underlying FBT rate being 47%. Using the given data, the FBT liability for Rapid Heat Pty is
computed as follows.
The loan amount extended to employee may be used by employee only or his/her associate. The
exact usage of loan by employee is critical for the employer since as per FBTAA 1986,
deduction in FBT would be provided to the employer if the underlying employee uses the
proceeds of the loan for assessable income generation (Coleman, 2016). However, if this amount
is used by the associate for income generation, then employer cannot claim any deduction. In the
given case, only $50,000 is extended by Jasmine to her husband. The remaining amount of $
450,000 has been used by her and if the underlying house does produce assessable income, then
deduction would be available for Rapid Heat.
Internal Expenses Fringe Benefit
The employer can also provide benefit in regards to meeting the private expense of employees
and such actions may give rise to expense fringe benefit. The employee Jasmine wanted to buy a
heater made by her employer (ATO, 2018). The retail price is $ 2,600 but Rapid Heat provided
the employee the same heater as half the retail cost. This led to savings on the part of the
employee to the tune of $ 1,300 and hence expense benefit is extended.
Jasmine buys heater from employer company Rapid Heater for $1300 while the market price of
heater is $2600. It implies that employer gives low rate to Jasmine as she works for them and
hence, internal expense fringe benefit has extended to Jasmine. Using the given data, the FBT
liability for Rapid Heat Pty is computed as follows.
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(b) In the given scenario, the loan amount which was previously extended by Jasmine to her
husband is instead now being used by Jasmine herself for shares which would lead to
assessable income production in the form of dividends. Hence, employer can now obtain
deduction on this amount which would lower the FBT liability. The amount by which FBT
liability is lowered is as calculated below.
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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, (1999) Taxation Determination –TD 1999/40 [Online].
http://law.ato.gov.au/atolaw/view.htm?locid=%27TXD/TD199940/NAT/ATO%27 (Accessed:
24 September 2018)
ATO, (2018) 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 a) 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)
Austlii, (2018 b) FRINGE BENEFITS TAX ASSESSMENT ACT 1986- SECT 148.[Online]
http://classic.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/s148.html (Accessed: 24
September 2018)
Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University Press.
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters (Professional)
Australia.
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.
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.
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