Taxation Law: Capital Gains Tax and Fringe Benefit Tax Liability

This study material covers the concepts of Capital Gains Tax and Fringe Benefit Tax Liability in Taxation Law. It provides answers to questions related to the sale of vacant land, antique bed, painting, shares, and violin. Additionally, it also discusses the fringe benefit tax liability of Rapid Heat Pty Ltd for the income year ended 31st March 2018, including car fringe benefit, expense payment fringe benefit, and loan fringe benefit. The taxable value of these fringe benefits can be calculated using the statutory method, operating cost method, and concessional rates rules.

Running head: TAXATION LAW
Taxation Law
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Table of Contents
Answer to question 1:.................................................................................................................2
Answer to Question 2:................................................................................................................5
Answer to question 2 B:...........................................................................................................10
References:...............................................................................................................................11

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Answer to question 1:
Introduction:
As stated in “section 102-20, ITAA 1997” capital gains or loss only happens due to
the CGT event. Referring to “section 104-10 (1), ITAA 1997” CGT event A1 happens when
the when the asset is disposed (Stiglitz and Rosengard 2015). The commissioner of taxation
in “FC of T v Sara Lee Household” expressed its opinion by stating that CGT event is
necessary when a contract is entered into by the taxpayer. Capital gains tax cannot be
regarded as the separate system of taxation, instead it forms the part of the income tax
regimes of the taxpayer.
Answer to A: Sale of Vacant Land:
Vacant land that is purchased by the taxpayer for the private or investment propose is
treated as the capital asset and will attract capital gains tax upon the disposal of vacant land
(Becker, Reimer and Rust 2015). The evidences suggest from the present situation that an
agreement was reached by the taxpayer for disposal of vacant land. The cost base of land was
$100,000 with other expenses such as water, council rate etc. was incurred by the taxpayer
that amounted to $20,000.
The interpretative view of ATO makes it clear that vacant land is treated is similar to
any other capital asset for CGT purpose. According to the ATO the holders of vacant land
should maintain the record of date when the land was acquired and expenses incurred while
acquiring the land (Faccio and Xu 2015). The expenses include the council rates and
insurance on loan. Case facts obtained reveals that outlays on water, local council rates and
land taxes were incurred during the period of ownership. The ATO does not allows claiming
deductions for such expenses however they can be added up with the cost base of vacant land
to determine the CGT while disposing the land.

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Answer to B: Antique Bed:
The explanation of collectables is given under “section 108-10(2) of the ITAA
1997”. As per “section 108-10(2), ITAA 1997” collectables refers to the artwork, jewellery,
antiques or coin that are kept by the taxpayer for their own use and satisfaction. There are
certain rules that is applicable on collectables (Tan, Braithwaite and Reinhart 2016). Capital
gains and losses made from collectables that costs less than $500 will be excluded. The case
study provides that the taxpayer held an antique bed but the antique bed was stole from the
house of taxpayer. In the insurance list the antique bed did not formed the part of the taxpayer
specified items which resulted the insurance company in paying the taxpayer a sum of
$11,000.
CGT event C1 takes place under “section 104-20(1), ITAA 1997” when the asset is
lost or destroyed that is owned to the taxpayer (Snape and De Souza 2016). Receipt of
compensation from such asset give rise to CGT event C1. Similarly the compensation
received by the taxpayer from the insurance company relating to the loss of antique bed gave
rise to CGT event C1.
Answer to C: Painting
Capital gains tax is usually applied on the assets that is acquired or on after 20
September 1985. It is worth mentioning that Pre-CGT and Post CGT is generally used to
refer the assets that is obtained or events that taking place before or after that date (Robin
2017). For an individual taxpayer it is necessary to work out the capital proceeds from the
CGT events. The primary step of ascertaining whether the transaction will attract CGT is to
ascertain the whether the CGT event has taken place.

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The painting was bought by the taxpayer from the well-known Australian Artist on 2nd
May 1985 for the sum of $2000. With the rise in the value of the painting it was sold for
$125,000 in auction on 3rd April in current tax year. The painting can be classified as the Pre-
CGT asset because it was acquired before the introduction of CGT on 20th September 1985
(Maley 2018). Therefore, the capital gains made from the paintings will be exempted from
CGT.
Answer to D: Shares:
Shares that are held by the taxpayer in company are treated as CGT asset. On the
happening of CGT event, capital gains tax is applied to determine the net capital gains or
shares from the sale of shares (Johnston 2017). As understood the taxpayer reported capital
gains from the disposal of PHB Ltd shares, Build Ltd and Common Ltd shares. But also
reports net capital loss from the sale of Young Kinds shares. The capital loss can be offset
against the capital gains made from the sale of shares.
Answer to E: Violin:
The definition of personal use asset stated under “section 108-20 (2)” refers to the
asset that are non-collectables. These personal use assets are held for the personal enjoyment
and usage by the taxpayer. They include the electrical goods, household items, furniture and
boats. The personal use assets under “section 108-20 (3)” does not include the land buildings
(Chardon, Brimble and Freudenberg 2017). An explanation stated under “section 118-10
(3)” states that capital gains derived from personal use asset that has the cost of $10,000 or
less is excluded from CGT.
The cost base of the violin that was kept for the taxpayer personal use amounted to
$5,500. The violin was later sold for $12,000. Mentioning the elucidation of “section 118-10
(3)” capital gains derived from personal use asset that has the cost of $10,000 or less is

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excluded from CGT (Barnes 2018). Hence, capital gains made from sale of violin should be
disregarded by the taxpayer.

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Particulars Amount ($) Amount ($)
Net Capital Gains on Sale of Vacant Land
Proceeds from sell of Vacant Block of Land 320000
Cost base 100000
Add: Ownership Expenses 20000
Add: Deposit 20000
Total Cost base 140000
Gross Capital Gains 180000
50% CGT Discount 90000
Capital gains on sale of shares
Proceeds from Common Ltd Shares (1000@ $47 per
share) 47000
Less: Cost Base (1000@15) 15000
Less: Brokerage fees 550
Less: Stamp Duty 750
Gross Capital gains 30700
50% CGT discount 15350
Shares in PHB Iron Ore Ltd
Sales Proceeds 62500
Less: Cost Base 30000
Less: Brokerage Fees 1000
Less: Stamp Duty 1500
Gross Capital Gains 30000
50% CGT Discount 15000
Shares in Young Kids Learning Ltd
Sales Proceeds 600
Less: Cost base 6000
Less: Brokerage Fees 100
Less: Stamp Duty 500
Loss on Sale of Shares -6000
Share Build Ltd
Sales Proceeds 25000
Less: Cost Base 10000
Less: Brokerage Fees 900
Stamp Duty 1100
Gross Capital gains on Sale of Shares 13000
Total Capital gains 1,27,350
Less: Capital Loss Carryforward 7000
Total Net Capital Gains 1,20,350
Calculations of Capital Gains Tax
For the year ended June 2018

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Answer to Question 2:
Issue:
The case study involves the issues that is associated with the fringe benefit tax
liability. The case would be addressing the issue of Rapid Heat Pty Ltd relating to the fringe
benefit tax consequences and by determining the fringe benefit tax liability for the income
year ended 31st March 2018.
Laws:
According to the ATO the fringe benefit tax is generally paid by the employer. An
individual is held as employer for the fringe benefit tax purpose given that a payment is made
to the employee, holder of the office or the director of company that are subjected to
withholding obligations, or if the employer provides the benefit in lieu of such payments
(Hodgson and Pearce 2015). As the employer an individual is required to pay the fringe
benefit tax notwithstanding whether the taxpayer is operating the business of sole trader,
corporation, trustee, partnership or government authority. The benefit provided is regardless
of whether the employer or any other party provides the fringe benefit. An individual is
accountable of paying the fringe benefit tax whether they are paying or not paying any other
taxes such as the income tax (Braverman, Marsden and Sadiq 2015). An individual taxpayer
can claim the deduction for income tax purpose for the expenses incurred in providing the
fringe benefit and the amount they pay to employee.
A fringe benefit signifies the payment that is made to the employee but it is different
from the salary or wages. As defined under the legislation of the FBT, a fringe benefit is
given to the employee based on their employment. This signifies that benefit is given to a
person because they are employee (White and Townsend 2018). The employee can be either
the future or former employee as well.

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As per the “section 7, FBTAA 1986” a benefit that most commonly occurs is the car
fringe benefit when the employer gives or makes the car available for the employee’s private
use (Pearce and Hodgson 2015). The employer makes the car available for the employee
personal use actually when the car is available for the private purpose of the employee. A car
is treated available for the personal use during any day when the car is either used by the
employee for private purpose or the employer makes the car available to the employee’s
private use.
When the car is kept at the garage at employees home, the car is treated to be
available for the private use of the employee irrespective of whether they have the permission
to use. The federal court in “FC of T v Lunney (1958)” passed its verdict by explaining that
travel to and from the place of work should be viewed as private use of car (Young and Miles
2015). When the car is kept in the workshop for the extensive repairs then it is not available
for the employee’s private use. Conversely, the car is regarded to be available for the
employee private use when the car is for the routine service or maintenance. The employer
can compute the taxable value of the car fringe benefit by using either the statutory method or
the operating cost method.
As stated in “Subdivision B 22A, FBTAA 1986” whenever the employer reimburse
the employee relating to the expenses that they occur it give rise to the expense payment
fringe benefit (Shields and North-Samardzic 2015). The expense payment fringe benefit
happens in two ways. Generally when the employer reimburses the expense that is incurred
by employee or they pay the third party in satisfaction of the expenditure that is incurred by
the employee. In either of the above stated cases the expense can be business or private
expense or the combination of both. The taxable value of the expense payment fringe benefit
represents the amount that the employer reimburses or pays the employee. The concessional
rates rules can be applied to determine the taxable value of the fringe benefit.

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Very broadly speaking under “Sub-Division B 39C, FBTAA 1986” a fringe benefit
relating to car parking can happen during any day when the employer offers the employee
with a car parking space exclusively for the employee use (Seymour 2017). Precisely, fringe
benefit relating to the car parking happens during the fringe benefit year given that all the
below stated conditions are met. This includes;
a. The parking of car is made near the primary place of employee’s employment during
that day.
b. The car is parked for no less than four hours during that day.
c. The car is leased, owned or controlled by the employee or the car the provided to
employee.
d. The car is parked at the place or leased by or under the control of the employer
e. The car is inside the one kilometre area of premises or there is an existence of the
commercial parking station that charges fees for all day parking.
As per the “Division 4 of the FBTAA 1986” when the employer provides the
employee with the loan and a lower interest rate is charged then in such a situation the loan
fringe benefit happens during the FBT year (Barkoczy 2016). A noteworthy fact of loan
fringe benefit is that the lower rate of interest is less than the statutory rate of interest. The
taxable value of the loan fringe benefit reflects the difference between the interests which
may have been accrued during the FBT year given the statutory rate of interest is applied on
the outstanding balance of the loan.
Application:
The situation from the case study provides that the Rapid Heat Pty Ltd is the
manufacturer of electric heaters and one of its employee, Jasmine is provided with the car as
majority of her work requires travelling. Quoting the instance of “FC of T v Lunney (1958)”

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the case study further adds on that the Jasmine use of car is not limited to work only as she
has the permission of using the car for private purpose as well (Fisher 2015). Citing the
“section 7, FBTAA 1986” a car fringe benefit arises for Rapid Heat Pty Ltd when the
company gave or made the car available for the Jasmine’s private use. The car fringe benefit
is given to the Jasmine based on her employment with Rapid Heat Pty Ltd. Therefore, Rapid
Heat Pty Ltd will be liable for the taxable value of the car fringe benefit during the FBT year.
Evidences gained suggest that the Jasmine used the car to travel 10,000 km and
occurred the expenses for conducting minor repair which was reimbursed by Rapid Heat Pty
Ltd. Based on “Subdivision B 22A, FBTAA 1986” the reimbursement by Rapid Heat Pty Ltd
relating to the expenses that Jasmine occurred on minor repair gave rise to the expense
payment fringe benefit (Foster 2016). In whichever of the above stated case the expense
incurred by Jasmine can be business or private expense or the combination of both. The
taxable value of the car repair expense payment fringe benefit represents the amount that the
Rapid Heat Pty Ltd reimburses or pays Jasmine. The concessional rates rules can be applied
by Rapid Heat Pty Ltd to determine the taxable value of the fringe benefit.
In the following part of the case it is noticed that Jasmine parked the car at the airport
when she was out of state. The car was further parked at the work station for another five
days due to scheduled repairs. Referring to “Sub-Division B 39C, FBTAA 1986” a fringe
benefit relating to car parking did not arise for Rapid Heat Pty Ltd (Young and Miles 2015).
The reason for this is that the parking of car was not made near the primary place of
employee’s employment during those 10 days. Neither the car was parked at the place that
was under the control of the employer. Therefore, Rapid Heat Pty Ltd will not be held liable
for the car parking fringe benefit in such circumstances.

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In the other instances obtained it is noticed that Rapid Heat Pty Ltd provided Jasmine
with the loan of $500,000 for purchasing the holiday home at 4.25% interest rate. Citing the
“Division 4 of the FBTAA 1986” making of loan by Rapid Heat Pty Ltd to Jasmine gave rise
to the loan fringe benefit during the FBT year (Seymour 2017). The lower rate of interest that
is charged by Rapid Heat Pty Ltd is less than the statutory rate of interest. The taxable value
of the loan fringe benefit for Rapid Heat Pty Ltd reflects the difference between the interests
which may have been accrued during the FBT year given the statutory rate of interest is
applied on the outstanding balance of the loan.
Conclusion:
The above stated analysis can be concluded by stating that the benefit provided by
Rapid Heat Ltd constitute fringe benefit for Jasmine under “S 7, FBTAA 1986”. Rapid Heat
made the car available for employee’s private use and the other benefits that was provided
was in respect of the employment. Rapid Heat will be held taxable for the value of fringe
benefit under the “FBTAA 1997”.

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Particular Amount ($) Amount ($)
Base value of the car 33000
Statutory rate @20%
Car Available for Private use (Days) 350
Number of days in the FBT year 365
Taxable Value of the Car Fringe benefit 6328.77
Particular Amount ($) Amount ($)
Taxable value of fringe benefits of car $6,328.77
Taxable value of fringe benefits for car reimbursement expense $550.00
Taxable value of total fringe benefits $6,878.77
FBT rate 49%
Taxable Value of Fringe Benefit $13,487.78
Fringe Benefit Tax $6,609.01
Computation of Fringe Benefit Tax
Computation of Fringe Benefit Tax under Statutory Method
Statutory method
Taxable value of fringe benefits
Answer to question 2 B:
In the alternate hypothetical situation if it is noticed that Jasmine used the amount of
$50,000 to purchase the shares herself rather the lending the amount to her husband. She
would have been able to claim a permissible deductions under the general provision of “s 8-
1, ITAA 1997” for the interest on loan that is accrued on her. However, the she lend the
amount of $50,000 to her husband at interest free rate. Therefore, in such circumstances she
will not be entitled to claim an allowable deductions under the general provision of “s 8-1,
ITAA 1997”.

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References:
Barkoczy, S., 2016. Core tax legislation and study guide. OUP Catalogue.
Barnes, J., 2018. On the ground and on tap—law reform, Australian style. The Theory and
Practice of Legislation, pp.1-32.
Becker, J., Reimer, E. and Rust, A., 2015. Klaus Vogel on Double Taxation Conventions.
Kluwer Law International.
Braverman, D., Marsden, S. and Sadiq, K., 2015. Assessing Taxpayer Response to
Legislative Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl. Tax'n, 17,
p.1.
Chardon, T., Brimble, M. and Freudenberg, B., 2017. Tax and superannuation literacy:
Australian and New Zealand perspectives [Part 1]. Taxation Today, (102), pp.17-25.
Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and
Quantitative Analysis, 50(3), pp.277-300.
Fisher, D., 2015. Mid market focus: No joy regarding FBT on travel expenses for FIFO
arrangements. Taxation in Australia, 49(7), p.377.
Foster, D., 2016. Executive share incentives at the crossroads: fringe benefits. Tax Breaks
Newsletter, 2016(371), pp.7-8.
Hodgson, H. and Pearce, P., 2015. TravelSmart or travel tax breaks: is the fringe benefits tax
a barrier to active commuting in Australia? 1. eJournal of Tax Research, 13(3), p.819.
Johnston, V., 2017. An Australian Road Transport Carbon Price: A Comparative Analysis.
Maley, M.N., 2018. Australian Taxation Office Guidance on the Diverted Profits Tax.

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Pearce, P. and Hodgson, H., 2015. Promoting smart travel through tax policy. The Tax
Specialist, 19, pp.2-8.
Robin, H., 2017. Australian taxation law 2017. Oxford University Press.
Seymour, E., 2017. Taxation: strategies for financial planners. Financial Planning in
Australia, pp.383-416.
Shields, J. and North-Samardzic, A., 2015. 10 Employee benefits. Managing Employee
Performance and Reward: Concepts, Practices, Strategies, p.218.
Snape, J. and De Souza, J., 2016. Environmental taxation law: policy, contexts and practice.
Routledge.
Stiglitz, J.E. and Rosengard, J.K., 2015. Economics of the public sector: Fourth international
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Tan, L.M., Braithwaite, V. and Reinhart, M., 2016. Why do small business taxpayers stay
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guidance. Taxation in Australia, 52(11), p.608.
Young, W. and Miles, C.F., 2015. A spatial study of parking policy and usage in Melbourne,
Australia. Case Studies on Transport Policy, 3(1), pp.23-32.

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