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

This article discusses the implications of Capital Gains Tax and Fringe Benefits Tax for various transactions and benefits. It explains how to calculate taxable value and FBT payable for car fringe benefits and loan fringe benefits. The article also covers the criteria for CGT applicability and calculation of net capital gains/losses.

HI6028 Taxation Theory,
Practice & Law
Student Name
[Pick the date]

Question 1
In the present case, client is an investor and also collects antique items and has made numerous
transactions involving disposal of various assets. Here, the main task is to find whether the
proceeds received from the disposal of assets would amount to Capital Gain Tax (CGT) or not.
Further, the net capital loss or capital gains would be calculated for the incurred capital gains or
losses for the given financial year.
1) Transaction made for the sale of block of vacant land
CGT would be applicable only for those assets which are categorised as post- CGT asset that are
purchased after 20 September 1985 under the provisions of s. 149(10) of Income Tax
Assessment Act 1997. Similarly, the assets that are acquired by the concerned taxpayer earlier
than 20 September 1985 are known as pre-CGT asset and are free from CGT implications.
Therefore, it can be said that acquiring date of asset is an imperative aspect for the validation of
CGT (Barkoczy, 2017). In the present case, taxpayer (client) has acquired a block of vacant land
in January 2001. The acquirement of block of vacant land is after 20 September 1985 and
therefore, the sale of CGT asset would amount to capital gains/loss. Further, as per s. 140-5, the
transaction occurred for the sale of CGT asset (block of vacant land) would be classified as A1
event. The capital gain/ loss can easily be calculated with the help of cost base of asset and the
income received from disposal under s. 110-25 ITAA 1997 (Reuters, 2017). The cost base of an
asset includes five essential elements which are defined in s. 110-25 (1) (Deutsch et. al., 2016).
 Under s. 110-25(2), amount paid by taxpayer to buy the asset.
 Under s. 110-25(3), incident costs paid by taxpayer to acquire or sell the asset.
 Under s. 110-25(4), expense occurred in regards to the ownership of asset which includes
interest on loan, land tax, sewerage tax and so forth.
 Under s. 110-25(4), capital expenses occurred for the asset value increment or/and for
preservation of asset.
 Under s. 110-25(5), capital expenses undertaken for the protection of title of the asset.
Amount paid by taxpayer to buy the block of vacant land = $100,000
Expense occurred in regards to the ownership of block of vacant land = $20,000
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Cost base of block of vacant land = (Expense occurred in regards to the ownership of block of
vacant land) + (Amount paid by taxpayer to buy the block of vacant land)
Here, one of key aspects is that she has enacted the contract for the sale of block of vacant land
in the existing tax year. However, the payment of contract has not been received by her as the
amount would be received in the next financial year. Hence, it is essential to determine whether
the proceeds would be taxed under CGT in the existing financial current year or in the next
financial year. The relevant provision is defined in TR 94/29 which highlights that proceeds from
the sale of asset would be utilized for CGT in the financial year on which contract of sale has
been enacted irrespective of the fact that taxpayer would get the payment in the next financial
year (Gilders et. al., 2016). Here also, the client would get the payment of $100,000 in net year
while she has signed the contract of sale in the current financial year only. Therefore,
Further, the net balance of capital gains/losses would be the amount that would be found after
settling the previous capital losses incurred (Woellner, 2014).
Client has capital losses of sum $7,000 and therefore, the losses would be settled with the current
year’s capital gains.
50% rebate would be claimed by the taxpayer for the disposal of long term (holding period >1
year) CGT asset. It is apparent that client buys the land in 2001 which indicates that holding
period of land is more than 1 year and hence, 50% rebate on the net capital gains would be
applied (Woellner et. al., 2017).
……………………………………………. (1)
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2) Transaction made for the sale of antique bed
Antique pieces are considered as collectables and as per TD 1999/4, the collectables would be
classified as capital asset and disposal of capital asset would lead to CGT liability on taxpayer
(Gilders et. al., 2016). Further, capital gains or losses subject to the sale of antique pieces would
not lead to CGT when the item has been acquired for lesser than or equal to $500. Further, as
per s. 140-5, the transaction occurred for the sale of CGT asset (antique piece) would be
classified as A1 event. In present case, client has acquired an antique bed on 21 July 1986 which
means the asset would be classified under post-CGT asset category and thus, CGT would be
payable by the taxpayer for the derived capital gains or losses (Barkoczy, 2017).
Under s. 118-25(1), amount paid by client to acquire the bed = $3,500
Under s. 118-25(5), amount spent in the alterations of bed in regards to increase the value =
$1500
Client has not sold the bed rather the bed has been stolen from her house. As a result, the
insurance amount received on the account of stolen of bed would be taken as proceeds from the
disposal of asset. Hence,
Capital gains =$6,000
Further, the net capital gains/losses would be found after settling the previous capital losses
incurred from the same CGT asset. Client has capital losses of sum $1,500 from disposal of
sculpture in previous year and therefore, the losses would be settled with the current year’s
capital gains (Coleman, 2016).
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50% rebate would be claimed by the taxpayer for the disposal of long term (holding period >1
year) CGT asset. It is apparent that client is holding the antique bed for more than 1 year and
hence, 50% rebate on the net capital gains would be applied (Hodgson, Mortimer and Butler,
2017).
…………………………………………………. (2)
3) Transaction made for the sale of painting
CGT would be applicable only for those asset swhich are categorised as post- CGT asset and that
are purchased after 20 September 1985 under the provisions of s. 149(10) of Income Tax
Assessment Act 1997. The purchase of painting was done on 2 May 1985 and therefore, painting
is classified as pre-CGT asset and disposal of painting (pre-CGT asset) would not lead to CGT
implication for taxpayer (Reuters, 2017).
4) Transaction made for the sale of shares
Further, as per s. 140-5, the transaction undertaken for the sale of CGT asset (shares) would be
classified as A1 event. The capital gain/ loss can easily be calculated with the help of cost base
of asset and the income received from disposal under s. 110-25 ITAA 1997 (Woellner, 2014).
(i) Sale of 1,000 Common Bank Ltd shares
Capital gains = Proceeds from sale – Cost base of share (Purchase cost + incidental cost)
(ii) Sale of 2,500 shares in PHB Iron Ore Ltd
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(iii) Sale of 1,200 shares in Young Kids Learning Ltd
For all the above three shares, the holding time is higher than 12 months and therefore, 50%
discount would be applied for the calculation of capital gains.
(iv) Sale of 10,000 shares in Share Build Ltd
In this case, taxpayer holds the share for lesser than 12 months and hence, the short term asset
would not be eligible for 50% rebate.
Capital gains from short term shares =$13,000
Hence,
…………….………………… (4)
5) Transaction made for the sale of violin
Personal use assets would not be considered as collectibles. However, the disposal of personal
use asset would give rise to CGT implication on the derived capital gains or losses only when the
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buying amount of the asset is more than $10,000 (Hodgson, Mortimer and Butler, 2017). It can
be seen that taxpayer has sold her violin which she was playing for entertainment and was for
personal usage only. Further, she has acquired the violin for $5,500 which is lower than the
threshold amount of $10,000 and hence, the capital gains or loss incurred for violin would not
lead for any CGT liability for her.
Therefore, it can be seen from the above that client would have a net capital gains of $139,100
for the year end June 30, 2018 on the account of various transactions.
Question 2
Benefits which are issued to the employees for private usage by the employer are termed as
fringe benefits. These benefits are extended to the employees and are taxed for employer under
Fringe Benefits Assessment Act 1986 (FBTAA86) (Wilmot, 2014). The main objective is to
find that the benefits issued to employee Jasmine by employer Rapid Heat are fringe benefits or
not. Further, the fringe benefits tax (FBT) payable for the fringe benefits will be determined for
Rapid Heat for the ending year 31 March 2018.
(a) FBT implication for benefits for the ending year 31 March 2018
Rapid heat has issued a car, loan of tune $500,000 and a heater at lower rate to Jasmine and thus,
the implications of these benefits needs to be discussed under FBTAA86.
Car
Section 8, FBTAA86 comprises the provisions with respect to providing car to employee for
personal usage. It implies that extension of car by employer to its employee for private usages
would be termed as car fringe benefit. Rapid heat has issued car to Jasmine and the usage of car
is not restricted to work purpose only, it means she can use car for her personal work. As a result,
the FBT would be applicable on Rapid Heat for issuing car fringe benefit (Barkoczy, 2017).
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(1) Capital value
Car had been acquired by Rapid Heat for a value of $33,000. Further, there was a total expense
of $550 on the repairing after the car was issued to Jasmine for private usage. Hence, the capital
value is calculated as shown below (Gilders et. al., 2016).
(2) Applicable statutory percentage
The date of acquisition of car is an essential parameter to find the statutory percentage. It is
because the car that is acquired by employer after 2011 would amount for a statutory percentage
of 20% with no reference to the total distance covered by car. Here, Rapid Heat Ltd has acquired
car in 2017 and hence, the statutory percentage for the calculation would be 20% (Reuters,
2017).
(3) Available days of car for employee
Car has issued to Jasmine on 1 May 2017 and therefore, the period of calculation of number of
available days would be counted from 1 May 2017. Hence, the day available days will be 335
days.
It is crucial to note that car required some repairing and thus, sent to the garage for five days.
These five days would not take away as the days involved in the minor repairs on car will not
contribute to the total available days for employee as well as the expenses occurred on repairing
will also not include in the tax deduction by taxpayer. Car was not used by Jasmine for 10 days
on which she was not present in town and car was parked at airport. However, car available for
her to use and thereby, these 10 days also will not be taken away from total available days
(Deutsch et. al., 2016).
(4) Grossed up factor
Car is a type I goods as mentioned in Goods and Service Act 1999 and thus, for the financial
year end 31 March 2018 the grossed up factor would be 2.0802. Rapid Heat may claim for the
tax rebate on GST input credit (Nethercott, Richardson and Devos, 2016).
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(5) Taxable value
It can be calculated based on the relevant formula as highlighted in s. 9F of FBTAA86.
Taxable value = capital value * statutory percentage * total available days * grossed up factor
(6) FBT rate
FBT rate is 47% for the financial year end 31 March 2018.
Loan
Loan fringe benefits would be issued when the employer has decided to provide loan at zero
interest or lower interest rate as compared with the interest rate set by Reserve Bank of Australia
(RBA). The interest rate defined by RBA is termed as statutory interest rate and any interest rate
below this rate would raise the extension of fringe benefits by employer. Rapid Heat extends
loan to Jasmine at 4.25% against the statutory interest rate of RBA is 5.25. Thus, the loan would
be classified as loan fringe benefits. The saving of interest because of discounted interest rate
will be taken into note for calculating the FBT payable (Nethercott, Richardson and Devos,
2016).
(1)Number of days
Loan has been issued to Jasmine on 1 September 2017 by Rapid Heat and thus, Jasmine has sum
of 213 days after taking the loan.
(2)Difference of interest payment
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(3)Grossed up factor
Loan is type II goods as mentioned in Goods and Service Act 1999 and thus, for the financial
year end 31 March 2018 the grossed up factor would be 1.8868.
(4)Taxable value
Taxable value = Difference of interest payment * grossed up factor
(5)FBT rate
FBT rate is 47% for the financial year end 31 March 2018.
Rapid Heat has FBT liability of value $2580.43 for loan fringe benefit. Further, the loan payment
has been used by Jasmine to acquire a holiday home. The tax deduction can be claimed by Rapid
Heat on the loan payment of $450,000 only for the event when the acquired holiday home
becomes source of assessable income for Jasmine (Wilmot, 2014).
Electric Heater
Rapid Heat is an electric heater manufacturing company and selling heaters to public for $2,600.
However, the car price given to Jasmine is only $1300. It represents that Rapid Heater is issuing
internal expense fringe benefits to Jasmine.
1) Internal expense fringe benefits =2600 -1300 =$1,300
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2) 75% of selling price of electric heater = 75%* 2,600 =$1,950
(3)Grossed up factor
Electric heater is a type I goods as mentioned in Goods and Service Act 1999 and thus, for the
financial year end 31 March 2018 the grossed up factor would be 2.0802.
(4)Taxable value
Taxable value = ($1,950-$1,300)*2.0802=$1352.13
(5)FBT rate
FBT rate is 47% for the financial year end 31 March 2018.
Rapid Heat has FBT liability of value $635.50 for internal expense fringe benefit.
(b)Jasmine herself used $50,000 to acquire shares of Telstra
Difference of interest payment on remaining $50,000 would also be taken into consideration for
tax deduction by Rapid Heat when Jasmine herself used $50,000 to acquire shares of Telstra.
The underlying reason is that the shares acquired by Jasmine would generate income for her and
thus, loan payment would be deductible on behalf of Rapid Heat (Woellner et. al., 2017).
The net FBT payable computed in part a) would be reduced by $500 when the shares have been
acquired by Jasmine.
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References
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.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016) Australian tax handbook.
8th ed. Pymont: Thomson Reuters.
Gilders, F, Taylor, J, Walpole, M, Burton, M. and Ciro, T (2016) Understanding taxation law
2016. 6th ed. Sydney: LexisNexis/Butterworths
Hodgson, H., Mortimer, C. and Butler, J. (2017) Tax Questions and Answers 2016. 6th ed.
Sydney: Thomson Reuters.
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
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.
Woellner, R., Barkoczy, S., Murphy, S. and Pinto, D. (2017) Australian Taxation Law 2017 27th
ed. Sydney: Oxford University Press Australia.
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