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

This article discusses the taxation implications of capital gains tax and fringe benefits in Taxation Theory, Practice & Law. It covers the disposal of assets, cost base, reduction of CGT liability, CGT exemption, and various fringe benefits such as car fringe benefit, loan fringe benefit, and internal expenses fringe benefit.

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Question 1
The main agenda of the given case study is to analyse the disposal of the assets of the taxpayer
which has been performed in the income year 2017/18. As the taxpayer is not associated with
any business related to trading of assets, therefore, the nature of the proceeds from the disposal
would be capital proceeds and therefore, the relevant taxation implications would be in the form
of Capital Gains Tax (CGT). Further, the key aspects along with their application on the
disposed assets (block of land, shares, antique bed, painting and violin) is analysed and
represented below.
Pre-CGT Asset
The provision of s. 149 (10), Income Tax Assessment Act 1997 describes that the assets that are
owned by taxpayer before September 20, 1985 are named as pre-CGT asset (Sadiq, et.al., 2015).
As the assets are purchased before the enactment of CGT consequences and hence, would not
attract any CGT liability.
CGT Event
All the above transactions are CGT events which are classified in the A1 sub class and therefore,
the cost base and proceeds from the disposal of the assets are the two main factors for computing
the capital gains or losses for CGT (Barkoczy, 2017).
Cost Base
The relevant provisions about the cost base of asset is highlighted in s. 110 (25) ITAA 1997
indicates that five main elements which includes various costs which are cumulatively paid by
taxpayer. These five elements of cost base are listed in table given below (Austlii, 2018).
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Capital loss Adjustment
The s. 102 (5) defines that the capital losses will be balanced against the capital gains produced
from the assets (Krever, 2017). The imperative aspect in this regards is that the capital losses on
account of collectables would be balanced against the capital gains produced from the sale of
collectables only (Sadiq, et.al., 2015). The unbalanced capital losses will be shifted to the next
year for future adjustment.
Reduction of CGT liability
Selection of suitable method would lower the net CGT liability of taxpayer. The indexation
method is enforceable only for the capital assets which are owned before 1999. Further, the
capital gains that are derived from assets which concerned taxpayer holds for more than a year
are categorised as long term capital gains (Barkoczy, 2017). A flat 50% discount is applied on
the capital gains which then provide only 50% of the capital gains for CGT implications. Further,
when this period is lower than one complete year then the short term capital gains would not get
any rebate and complete amount of capital gains will be taken for CGT implications (Reuters,
2017).
Realisation of Capital receipts
TR 94/29 defines that even if the payment for sale of a given asset is not received in a given tax
year but the contract of sale has been enacted, then the underlying tax implications would be
considered in the current year only (ATO, 1994) .
CGT Exemption
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CGT will not be imposed on the capital gains received when the following factors are incurred
(Deutsch, et.al., 2015).
 When taxpayer has sold a pre-CGT capital asset then CGT is exempted
 When the personal use asset has been acquired at lesser than $10,000 then also CGT is
exempted.
 When any collectable has been acquired lesser than $500 then CGT is exempted
Disposal of Block of Vacant Land
The CGT liability will be linked to the capital gains or losses computed in case of sale of land
block because the transaction is not related to a pre-CGT. Further, the nature of transaction for
selling the asset is CGT event of A1 subclass. The proceeds from the sale of the land will
actually be received in FY2019 while the sale contract has been made in FY2018 and hence, as
per the applicability of TR 94/29, the proceeds will be used for capital gains/losses computation
in FY 2018 only (Deutsch, et.al., 2015). Further, the losses from the previous years will also be
counterbalanced against the capital gains generated. Ownership period for land has exceeded one
year and therefore, 50% will be chargeable on the capital gains received so as to minimize the
net CGT liability for taxpayer.
Disposal of Antique Bed
Antique bed is classified as collectable (s. 118-10) and the CGT liability will be applied on the
capital gains/loss received from the disposal income because the owning amount is $3,500
whereas the threshold cut-off limit is more than $500 which is satisfied and hence, CGT will be
applicable. It is apparent that taxpayer has not voluntarily sold the antique bed and rather it has
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stolen and therefore, the sale proceeds would essentially be limited to insurance proceeds
received. The taxpayer’s capital losses resulted from disposal of sculpture (Collector) will be
balanced with the produced capital gains. Further, the long term capital gains would be subjected
to 50% discount. The step-wise computation of the capital gains or losses from antique bed is
discussed below in the tabular format.
Disposal of Painting
As highlighted in the summary table with regards to classification of pre-CGT asset. Painting is
classified as pre-CGT asset which implies that asset has been owned by taxpayer before the CGT
liability has started and hence, CGT liability linked to the capital gains or losses raised from
disposal of painting is zero.
Disposal of Shares
As per the provisions outlined in s. 104(5) ITAA 1997, shares sale is a CGT event of A1
category and hence, the cost base (sum of purchase cost and incidental costs) is computed for the
shares which then are taken for the final calculation of capital gains. Capital gains which are
derived from the assets for which the ownership period exceed one year would amount to 50%
concessions (s. 115-25).
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50% rebate has been applied only on long term capital gains.
Disposal of Violin
Taxpayer has separate collection for musical instruments which also includes violin. Further, the
violin would not be considered as collectable because she purchased the violin for personal uses
which is apparent from the facts that she holds interest in playing it frequently (almost each day).
It represented that the violin is an asset which is personal use of taxpayer. The taxpayer has spent
$5,500 to buy the violin. It can be seen that the amount spent for acquisition the personal use
asset does not meet the criteria required for CGT application for personal use asset as per which
the buying cost necessarily be in the excess of $10,000. The requisite condition for CGT
implication in case of personal use asset is not true for violin and hence, the conclusion can be
drawn that selling of violin and the received capital proceeds would be free from CGT
implications.
Net Capital Gains
The sum of all the derived capital gains would be considered as net capital gains from the
disposal of the assets.
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Question 2
(a) There are specific benefits that employers provide to employees which are named fringe
benefits. There are two key characteristics associated with these.
 These would not be presented in cash form and limited to non-cash form only.
 The benefits are not professional but rather personal in nature.
Another unique feature of fringe benefit which segregates it from other kind of employee
benefits is the unique pattern of taxation. For normal employee benefits (both cash and non-
cash), the employee would be levied personal income tax and employer would be able to gain
deduction on the expense. However, in case of fringe benefits, the beneficiary (i.e. employee)
is exempt from all concerned tax liabilities and only the benefit provider would be taxed. As
a result, the applicable statute for these benefits is “Fringe Benefit Tax Assessment Act
1986”(Wilmot, 2014). The discussion in regards to various applicable fringe benefits for
Jasmine is carried in the manner exhibited as follows.
Car Fringe Benefit
A common benefit that is often extended to employee is car fringe benefit. If the employer
provides conveyance in the form of car to the employee for conducting job duties, then it does
not lead to any fringe benefit since the car is only used for completing office work. However,
benefit is extended to employee only when the employee can use the car for personal use which
is indeed a benefit enjoyed by the employee (Sadiq, et.al., 2015).
The given case facts highlight that employer purchases a brand new car and hands it to the
employee (Jasmine). The usage of this car is not limited to professional reasons as the car also
remains with Jasmine on weekends and holidays when the office is closed. Owing to the
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arrangement indicated above, it becomes evident that Jasmine has been the recipient of car fringe
benefits and resultant FBT would be payable by the employer (Rapid Heat).
A key variable which impact the extent of car fringe benefit given to employee is the days in the
underlying assessment year for which private usage of car is allowed to the employee. Here, a
thirty day deduction would be available on account of the car being made available for use on
May 1 while the year commences from April 1. Additionally, deduction for 1st May is also
considered since it is assumed that the vehicle is provided by end of day and hence effective
usage begins from 2nd May onwards. Further, for the ten days on which Jasmine was not in town,
car was parked at the airport but it was available for use as nobody else was using the same. The
car was lying idle and could have been used by employee or any associate. Also, minor repairs
related deduction is not allowed.
Loan Fringe Benefit
Section 16, FBTAA states that employer extending loan at discount to the rate provided by the
RBA would amount to loan fringe benefits. The prime reason for this conclusion is that the
employee would save money on account of the lowering of interest cost. The rate provided by
RBA is known as “Benchmark Rate” and is revised annually (ATO, 2018 b). The employer
while granting financial assistance in form of financial loans need to comply with this rate to
avoid FBT liability (ATO, 2018 c). The providing of saving to employee would result in FBT
liability for the employer linked to loan fringe benefit.
The various details of this case are summarised below.
Total financial assistance provided = $ 500,000
Applicable interest rate at which the assistance provided by employer = 4.25% p.a.
Applicable interest rate given by RBA (2017/2018) = 5.25% p.a.
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The application of discount on the RBA rate to the extent of 1% is clear evidence of the loan
fringe benefit being extended to Jasmine.
The deduction rule outlined in section 18, FBTAA 1986 highlights that FBT reduction may be
possible for employer depending upon the utilisation of the loan and obtaining assessable income
by employer from the usage of loan proceeds (ATO, 2018 c). In this regards, a key aspect is that
possible deduction is available when the money is used by employee and not any associate.
Taking into consideration the usage of the loan proceeds, no deduction on $ 50,000 loan amount
would be available for Rapid Heat since this has been extended to Jasmine’s husband. The
possibility of FBT deduction for the employer depends on whether the holiday home that jasmine
has bought would generate taxable income probably in form of rent or not for Jasmine.
Internal Expenses Fringe Benefit
The private expenses of employees are not the responsibility of employer. However, if the
employer provides any contribution in this regards, then the underlying benefit would be called
as expense fringe benefit. One particular case which may arise in this regards is when the
employer lower the quote of a self-made product when the employer intends to purchase the
same. It is equivalent of the employer paying the discount amount while employee bearing the
remaining price (ATO, 2018 a).
In the given instance, Rapid Heater is a manufacturer of electric heater and Jasmine is interested
in buying one of these. The price to consumers is $ 2,600 but when Jasmine expresses her desire
to make purchase, the employer only takes $ 1,300 from her and thereby making the remaining
payment on her behalf.
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(b) Now, there has been a change in the loan proceed utilisation with 100% of the amount being
used by Jasmine only. This would be useful for the employer since the share related income
as dividends would ensure that deduction rule would be applicable. As a result, the employer
would be able to extract extra FBT deduction to the following extent.
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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: 30 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: 30
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: 30 September 2018)
ATO, (2018 c) Fringe Benefits Tax- Exemptions and Concessions.
https://www.ato.gov.au/general/fringe-benefits-tax-(fbt)/in-detail/getting-started/fbt-for-small-
business/?page=21 (Accessed: 24 September 2018)
Austlii, (2018 a) 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: 30
September 2018)
Austlii, (2018) 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: 30
September 2018)
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.
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Krever, R. (2017) 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.
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