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

This study material from Desklib covers the computation of capital gains and fringe benefits tax. It explains pre-CGT assets, CGT events, cost base, capital loss adjustment, concessions in CGT, and exemptions for specific assets. The material also provides a detailed analysis of car fringe benefits, loan fringe benefits, and expense payment fringe benefits. The content is relevant for students studying Taxation Theory, Practice & Law and includes subject, course code, and college/university information.

Taxation Theory, Practice & Law
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Question 1
The information has been provided regarding a client and the various transactions that have been
implemented in 2017/2018. The focus of all these transactions has been sale of assets. Further,
information provided suggests that these sale transactions are not business transactions since the
taxpayer is not involved in any business related to these assets. Infact, the client is a collector and
investor and hence these assets were basically investments which have been now liquidated. This
points towards the underlying receipts of these transactions being labelled as capital and hence
being immune from any taxation burden. However, for any capital gains that the taxpayer
realises, CGT would be applicable.
Pre-CGT Asset
A particular asset classes which is immune from application of CGT is known as pre-CGT asset.
As is captured in the name, the essential feature of these assets is that these should have been
bought during a time period when CGT was not levied on any capital gains realised by the
taxpayer (Deutsch, et.al., 2015). This era belonging to the time period preceding the date
September 20, 1985. If ownership of asset is not assumed during the above specified period,
then the underlying asset would not be pre-CGT. Hence, the key criterion to decide if the asset is
pre-CGT is to consider the underlying purchase date. For the given assets sold by the client, the
summary of the respective acquisition date and underlying status is mentioned as follows
(Coleman, 2016).
CGT Event
The occurrence of a CGT event plays a crucial role in the process of capital gains computation.
There are various possible CGT events possible and hence by referring to s. 104-5, the first
objective is to rightly identify the concerned event (Gilders, et. al., 2015). The relevant event
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from the client perspective would be A1 which deals with the asset disposal which is precisely
what has taken place in the given case. The underlying formula for computation is also indicated
along with the corresponding event (Hodgson, Mortimer and Butler, 2016).
Cost Base
One of the key inputs required for capital gains related computation is cost base which in turn is
to be computed as per s.110-25 ITAA 1997. This requires that the various five components
related to the asset should be considered for the cost bas computation. Also, for a given asset it is
possible that there are only a few components that are present and same should be used. The key
components are illustrated below.
Capital loss adjustment
CGT is not applied to the capital gains which are the result of subtracting cost base from the
proceeds obtained on asset liquidation. Section 102-5 advocates that it is essential for any capital
losses that exist must be balance e against the capital gains obtained before it is put to taxation
(Hodgson, Mortimer and Butler, 2016). It is not necessary that these capital gains must be from
the same year and may as well can be from previous year. For capital losses, it is allowed that
they may be rolled over if sufficient capital gains are not available against which these can be
balanced (Krever, 2017).
Concessions in CGT
The net capital gains that are obtained from capital losses adjustment are not levied CGT but
instead rebates are provided as per two alternative approach namely indexation and discount. The
former aims at providing immunity to the taxpayer against any nominal gains on account of
inflation by providing inflation based adjustment in the cost base. However, the more popular
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method especially from the perspective of an individual taxpayer since this method offers
significant discount to the extent of 50% to the taxpayers provided one condition is satisfied
regarding the nature of the underlying capital gains (Wilmot, 2014). It is essential that these
gains must be of long term nature which would only arise for assets that the taxpayer had owned
for more than a year.
Capital receipts timing
In sale of capital assets especially fixed asset, there does occur time delay between the contract
for sale and the payment of actual money to the seller from the buyer. Owing to this, it can
happen that the in two different tax years, the above two events take place, thereby making it
difficult for the taxpayer to decide the year in which the underlying tax implications ought to be
represented in the tax returns (Deutsch, et.al., 2015). TR 94/29 deals with the given subject and
indicates that the tax returns would highlight the implications of the asset sale in the very same
year when the agreement for sale has been signed (Coleman, 2016).
CGT Exemption
Besides the exemption for CGT asset that is available in case of pre-CGT asset, other exemptions
are also available in case of specific assets such as collectible and personal use asset. The
minimum value for a collectible to be considered eligible for CGT levying is $ 500 while the
corresponding limit in case of personal use asset is $ 10,000 (Nethercott, Richardson and Devos,
2016).
Vacant Land
Referring to the purchase date of the vacant land, it is apparent that it is not a pre-CGT asset
which is indicative of the fact that CGT would apply on the relevant capital gains that are taxable
through the process discussed above. Also, in case of this asset, while the sale has been
concluded this year, the proceeds for the land would be received only in next year. However,
this really does not impact the taxation treatment which would be levied in the given year only.
Also, seeing that the client has held on this asset for more than one year, hence discount on
capital gains would be available as the underlying capital gains derived would be long term in
nature.
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Antique Bed
Referring to the purchase date of the vacant land, it is apparent that it is not a pre-CGT asset
which is indicative of the fact that CGT would apply on the relevant capital gains that are taxable
through the process discussed above. Also, the purchase price of the collectible (i.e. antique
item) exceeds $ 500 and hence the relevant capital gains that are taxable. Besides, it is known
that the client has not liquidated the antique bed but this has been stolen and thereby the
underlying proceeds of insurance would be considered as the price for which the asset is sold.
Also, seeing that the client has held on this asset for more than one year, hence discount on
capital gains would be available as the underlying capital gains derived would be long term in
nature.
Painting
In context of painting, the discussion highlighted earlier clearly establishes the asset as pre-CGT
asset with purchase date before the cut-off date for CGT introduction. As a result, no CGT can
be applied on the capital gains that may have been made by the buyer on the sale of the painting.
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Shares
The pre-CGT status of the shares has already been established and hence on this basis CGT
exemption would not be awarded. Further, the cost base for the shares would comprise the
incidental costs for buying selling which are captured in the computation. Also, for the shares
which have been held in excess of a year by the client, discount can be provided on the capital
gains as has been highlighted in the computations that are exhibited below.
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50% rebate has been applied only on long term capital gains.
Violin
A pivotal issue in the context of the violin is the precise identification of it between two possible
choices i.e. collectibles and personal use assets. Normally, a violin is a collectable under s. 118-
10 but in this case, the classification would be considered as personal use asset with the main
argument being the frequent basis use of the violin by the client with the intention of deriving
entertainment. Thereby, violin has been used by the client for personal use quite frequently. It is
imperative that the threshold value for such assets needs to be met which is $10,000 but the
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given violin does not have this high purchase price as it is only $ 5,500. The implication would
be exemption from CGT for any capital gains that may be derived from sale of violin.
Net Capital Gains
A summary of the cumulative taxable gains for the client for the current year is represented as
follows.
Question 2
(a) The case facts suggest that the employer (Rapid Heat) has given certain fringe benefits to the
employee (jasmine) in the given year i.e. 2017/2018. In wake of these benefits and the
relevant legislation, the key aim is to outline the potential tax implications for the benefit
provided for both the employer and employee. Also, the potential deduction for the employer
based on the pattern of loan usage also needs to be highlighted.
Before proceeding further, it is imperative to understand the nature of fringe benefits and how
these are different from the other employee benefits (Nethercott, Richardson and Devos, 2016).
For any benefit provided to employee, it would be categorised as fringe benefit only when the
underlying nature of benefit is personal instead of professional and the benefit ought to be
provided not in the form of cash. Also, a key characteristic of FBT is that it would be levied only
on the employer despite employer being the benefit provider. Contrary to normal understanding,
no tax would be levied on the employee despite being benefitted by the extension of benefits
(Coleman, 2016).
Car Fringe Benefit
It is a common practice that employees are provided cars by the employers. However, this car
use may be limited to professional use only which as per s. 7, FBTAA 1986 would not lead to
any car fringe benefit. For car fringe benefit to be availed by employee, there must be permission
by the employer for the private use of the car (Wilmot, 2014).
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.
Based on the given information, it becomes evident that employer has bought a Toyota car on the
first day of May 2017 and given it to Jasmine with permission of use for personal use. This was
especially the case for weekends when no official work was there but Jasmine still had the cart
and could use it in the manner she wished. This is testimony of car fringe benefit extension
which will levy liability related to FBT on the employer.
One of the key inputs of the statutory formula approach mentioned in s. 9, FBTAA 1986 is the
number of days for which the employee had the right to use the car for personal use (Woellner,
2017). In this regards, it is imperative to understand the difference between right to use and
actual usage. From the perspective of fringe benefit computation, the important aspect is the right
to use and not the actual usage. As a result, when Jasmine leaves the car in the airport parking,
the employer has not withdrawn the right to use the car for personal reasons but there was no
actual usage since Jasmine was not physically present in the town. Further, in context of repairs,
s. 9 clarifies that any visit to garage for the purpose of undergoing major repair would be
deductible but the same is not true for minor repairs. In the given case, the car has gone to garage
only for minor repair and hence deduction for the same would be disallowed. During the year,
deduction would be available only for April month since car extension did not take place at the
beginning of the year but rather after one month.
Considering the relevant input such as gross up factor and the appropriate FBT rate, the liability
arising in the context of FBT has been computed below.
Computation
Loan Fringe Benefit
A necessary condition that employer needs to comply with for extension of these benefits is that
the loan provided to the employee should be provided at a discounted rate in comparison to the
benchmark rate announced by the RBA (Reuters, 2017). It is critical to note that this benchmark
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rate applies for a period of one year and is announced in advance only. The fulfilment of this
condition would allow some interest related savings for the employee which is the benefit which
employee gains.
For computation of the precise amount of this benefit, the discount and the time for which loan
has been borrowed during the tax year need to be considered. Then using this, the taxable value
needs computation taking into cognisance the concerned gross up factor. Further, on this amount,
FBT would be applied which highlights the amount payable by the employer. If the loan
proceeds utilised by employee leads to some taxable income, then some FBT rebate is allowed to
employer as per s. 18, FBTAA 1986 (Nethercott, Richardson and Devos, 2016).
In the given case, considering 4.25% as the employer offered interest rate and 5.25% being the
RBA rate, it is apparent that a savings of 100 has been offered. Considering the relevant input
such as gross up factor and the appropriate FBT rate, the liability arising in the context of FBT
has been computed below.
Computation
A large chunk of the loan has been used by Jasmine for the purpose of holiday home purchase. It
is not known whether income is derived on this but if rental income is earned by Jasmine, then
Rapid Heat can claim certain deductions.
Expense Payment Fringe Benefit
In accordance with s. 20, this benefit would apply if employer makes contribution for any
personal expenses related to the employee (Barkoczy, 2017).
There is a desire on the part of jasmine to buy an electric heater. She intends to buy the one that
Rapid Heat produces. The company therefore decides to pool in 50% of the costs for the heater
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with jasmine bearing the remaining half. Jasmine gets the benefit since she is able to purchase
the heater for lower rate and hence saves on her personal expense.
Computation
(b) Earlier, a part of the loan was used by Jasmine’s husband for the purpose of investing in
shares on which no deduction for employer was available. But now the same investment is
carried on by Jasmine and on account of income in dividend form, rebate in FBT that is
applicable for the employer is highlighted as follows.
Computation
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References
Barkoczy, S. (2017) Core Tax Legislation and Study Guide 2017. 2nd ed. Sydney: Oxford
University Press Australia.
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters (Professional)
Australia.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2015) Australian tax handbook.
8th ed. Pymont: Thomson Reuters.
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016) Understanding taxation law
2016. 9th ed. Sydney: LexisNexis/Butterworths.
Hodgson, H., Mortimer, C. and Butler, J. (2016) Tax Questions and Answers 2016. 6th ed.
Sydney: Thomson Reuters.
Krever, R. (2017) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON
LAWBOOK Company.
Nethercott, L., Richardson, G., and Devos, K. (2016) Australian Taxation Study Manual 2016.
8th ed. Sydney: Oxford University Press.
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.
Wilmot, C. (2014) FBT Compliance guide. 6th ed. North Ryde: CCH Australia Limited.
Woellner, R., Barkoczy, S., Murphy, S. and Pinto, D. (2017). Australian Taxation Law Select
Legislation and Commentary Curtin 2017. 2nd ed. Sydney: Oxford University Press Australia.
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