Computation of Capital Gains Tax and Fringe Benefits Tax for Rapid Heat

This article explains the computation of Capital Gains Tax and Fringe Benefits Tax for Rapid Heat. It includes the law and application of Fringe Benefits Assessment Act 1986 and relevant provisions for Capital Gains Tax. It also includes the calculation of FBT liability for car fringe benefit, loan fringe benefit, and expenses fringe benefit.

Taxation Theory, Practice & Law
STUDENT NAME/ID
[Pick the date]

Question 1
CAPITAL GAINS TAX
Issue
The task is to do computation for the capital gains/losses which would be resulted from the
disposal of the capital assets of the taxpayers for FY 2018.
Law
For given scenario, the taxpayer does not carry a business of trading the assets and hence, the
implication of ordinary income generation would not be applied here and thus, the disposal of
capital assets is deriving capital proceeds only (Nethercott, Richardson and Devos, 2016).
The key elements required for calculating the capital gains/losses are discussed below based on
the relevant provisions.
 It is essential to take note of the fact that Capital Gains Tax (CGT) will not be valid or apply
for the capital gains which are resulted from the liquidations of a pre-CGT asset. Thus, only
those assets which do not fall under the category of pre-CGT asset would be considered for
CGT liability. It can be easily be determined based on the date of buying of the capital assets
as any capital asset which has bought before September 20, 1985 is termed as pre-CGT asset
and capital gains from such type of assets will not be considered for CGT liability (Krever,
2017).
 Capital gains produced from the transaction made for capital asset’s disposal is termed as
CGT event A1 (s. 104-5, ITAA 1997) (Sadiq, et.al., 2015). The main procedure of
determining the capital gain from the capital asset’s disposal would involve two main
parameters which are sale proceeds and cost base.
 Sale proceed is the amount which would be derived from the disposal of capital asset
whereby, the cost base is the total amount which has been paid by taxpayer on the assets in
the form of five elements which are highlighted below (Wilmot, 2014).
1

 Income from the sale would be part of the capital gains in the year in which the sale contract
has been signed between the parties (taxpayer and buyer) irrespective of the underlying
factor that income proceeds would not be received in the same income year (TR 97/29)
(Reuters, 2017).
 According to TD 1997/40, any antique item will be known as collectable. Further, the CGT
liability will only be applicable when the purchasing amount of the antique item paid by
taxpayer is more than a benchmark amount which is $500 in case of collectables (Woellner,
2017).
 The items which are known as the personal use asset of taxpayer will only be taken for CGT
liability after disposal when the purchasing amount paid by taxpayer is more than a set
amount which is $10,000 (Gilders, et. al., 2015).
 For both collectables and personal use asset the benchmark buying cost paid by taxpayer is
essential condition because the CGT applicability will be valid only when the amount would
be more than $500 and $10,000 respectively (Sadiq, et.al., 2015).
 Long term capital gains are those which are produced through capital assets which are held
by taxpayer for more a year (s. 11525(1), ITAA 1997. It is imperative aspect to differentiate
between long term and short terms capital gains because when there is a long term capital
gains, then the taxpayer will receive the discount to halve the total amount of capital gains
subject to CGT liability as per s. 115-25 ITAA 1997 (Hodgson,Mortimer and Butler, 2016).
Application
Taxpayer has sold five capital assets during the FY 2018 which needs to be examined based on
the above understanding. Further, the determination of the assets which belongs to pre-CGT
asset (before September 20, 1985) is pre-requisite before applying other relevant provisions.
2

It is apparent from the above table that Painting is a pre-CGT asset and as per above
understanding the CGT liability will not be imposed on the capital gains/losses produced from
the disposal of paining. However, all the other four assets are not pre-CGT asset and the
respective transaction for capital asset sale is capital A1 event and therefore, the CGT liability
will bed impose and capital gains/losses are furnished as given below.
Block of vacant land
Purchase cost paid on January 2001=$ 100,000 ,
Signed contractual sale income that would receive in next year ¿ $ 320,000
Ownership payment would be incidental cost ¿ $ 20,000
Cost base ¿ 100,000+20,000=$ 120,000
Hence,
Capital gains ¿ 320,000 – 120,000=$ 200,000 (deducting cost base)
Capital losses = $7,000 (Previous years)
Net capital gains,
Capital gains ¿ 200,000−7,000=$ 193,000(Balancing capital losses)
Capital gains for CGT ¿ 0.5∗(193,000)=$ 96,500(long term capital gains because 50% rebate
will be applicable)
3

Antique bed
According to TD 1997/40, antique bed will be known as collectable (Reuters, 2017). Further, the
CGT liability will be applicable because purchasing amount of the antique bed paid by taxpayer
($3,500) is more than a benchmark amount which is $500.
Purchase cost paid on July 21, 1986 ¿ $ 3,500
Capital expenditure for improvement of bed condition ¿ $ 1,500
Cost base ¿ 3500+1500=$ 5,000
Insurance income will be taken as sale income from disposal ¿ $ 11,000
Capital gains ¿ 11,000 – 5,000=$ 6,000
Capital losses ¿ $ 1500 ((Previous years) from sale of Sculpture)
Hence,
Capital gains ¿ 6000−1500=$ 4,500 (Balancing capital losses)
Capital gains ¿ 0.5∗( 4500)=$ 2,250 (long term capital gains because 50% rebate will be
applicable)
Painting
Capital gain tax liability will not impose on taxpayer as it belongs to pre-CGT asset.
Shares
Capital gain tax liability will be imposed on taxpayer as they do not belong to pre-CGT asset.
Also, transaction for the capital asset (share) sale is an A1 event.
4

Violin
There is sufficient evidence to conclude that violin is an asset of personal use (Barkoczy, 2017).
 Taxpayer has keen attraction for musical instruments.
 Taxpayer has several different types of violins in collection.
 She plays violin regularly for personal entertainment.
Hence, the violin which she has disposed belongs to personal use asset. Further, no CGT liability
is taken applicable on taxpayer because the taxpayer has paid taken the violin for $5,500 and
thus, the central condition of CGT implication validity for personal use asset that the amount
must be more than $10,000 is not fulfilled. Hence, CGT liability will not be imposed on taxpayer
as it does not satisfy the condition.
Conclusion
5

Taxpayer has net capital gains of $139,100 as on June 30, 2018 after adjusting previous capital
losses and applying discount on long term capital gains. Thus, the CGT liability will be
considered on the net capital gains of $139,100.
Question 2
FRINGE BENEFIT TAX
Issue
The issue is to extend advice to Rapid Heat regarding their Fringe Benefits Tax payable (FBT
payable) for the consideration of offered fringe benefits in income year.
Law and Application
The relevant fringe benefits and its tax consequences are outlined in Fringe Benefits Assessment
Act 1986. The main understanding has been drawn from the act and it includes that fringe
benefits are for personal interest of employee provided by the respective employer, utilized by
the employee and taxed on behalf of the employer. No personal fringe benefit liability is attached
on employee or associates of employee for the utilization of the fringe benefits (Barkoczy, 2017).
Car fringe benefit
The employer may issue car as in the process of providing personal benefits to employee because
giving car for private use of employees is known as the car fringe benefits (s. 7, FBTAA 1986).
The capital value of car comprises purchasing cost along with the potential deduction for paid
minor expenses of the employer (Coleman, 2016). Further, the car availability defines the total
duration for which the car held present to employee for private utilization. The deduction would
not be available from the total duration for which the car is held present for personal usages
when the car is shifted to the garage in order to do some minor repairing and also when the car is
parked by the taxpayer at certain parking and taxpayer is away. Similarly, the car which is being
available for use when the employee is going out for work will not deducted from total duration
of car availability (Deutsch, et.al., 2015).
6

Moreover, GST is also held imposed on car and hence, the gross up factor for type I goods is
also taken into account which is 2.0802. Likewise, the fringe benefits tax rate (FBT rate) for
March 31, 2018 is flat 47% on the derived taxable value of the fringe benefit (Hodgson,Mortimer
and Butler, 2016).
Rapid Heat is the concerned employer and Jasmine is the concerned employee in the given
situation in which a car is being extended by employer for personal work of Jasmine. FBT
liability calculation for Rapid Heat is given below.
Loan fringe benefit
Extension of loan to employee at an interest rate, which is not same as the benchmark interest
rate of loan defined by RBA so that the personal interest liability of employee can be lowered,
then loan fringe benefits is given to employee (Wilmot, 2014). Providing loan at lower cost
indicates that employer is taking low interest amount as compared with the amount which would
be surely higher than the amount when the employees take loan from other sources that provides
loan at RBA’s interest rate. The FBT liability would only be raised on the concerned employer
not on employee (Nethercott, Richardson and Devos, 2016).
7

The current situation is for FY2018 and the bench mark rate of interest of loan defined by RBA
is 5.25% annually.
Rapid Heat has selected one percentage less rate of interest compared with the RBA’s interest
rate and thus, the rate of interest is 4.25% annually.
It is evident from the above two factors that Rapid Heat is taken one percentage less interest rate
and therefore, the loan fringe benefits is issued to Jasmine.
In this regards, the employer will receive tax deductions on the account of the assessable income
that may be received by the employee as a result of deployment of the loan amount. Further, if
the loan amount has been provided to associate of employee to make the decision or work that
generate the source of assessable income, no deduction will be available for employer.
Expenses fringe benefit
The personal expense which should have been paid by the employees but the employer has paid
the same would lead to extension of an expense fringe benefit (Nethercott, Richardson and
Devos, 2016). Further, the expenses of personal interest of employee have been reduced when
there is expense fringe benefit is given by employer for that respective work. When the expenses
are paid for the goods/service of the company then it is categorised under internal expense fringe
benefits (Krever, 2017).
8

Rapid Heat Pty Ltd is electric heater manufacturer which sells heater to retail customers for
$2600. Jasmine buys an electric heater from employer just for $1300. The employer is providing
internal expenses fringe benefits to Jasmine so as to reduce the personal nature expenses burden
on Jasmine. The total liability of personal nature to buy the electric heater has been reduced to
halved. This is because if any other customer will purchase the heater than the price of heater
would be $2600. However, when Jasmine has purchased it then the price becomes halved
because the remaining expenses have been borne by employer only. The GST will be applicable
on electric heater. The FBT liability is only be applicable on Rapid Heater.
(b) Considering the case where $ 50,000 is sued by Jasmine for share investment in place of her
husband, it may be concluded that the employer will receive tax deductions on account of the
assessable income that would be received by the employee (Jasmine) in terms of dividend that
would be generated from shares which she purchased from $50,000. The extra deduction would
amount to $ 500 as has been indicated below.
Conclusion
The Rapid Heat extends three fringe benefits namely car fringe benefits, loan fringe benefits and
expenses fringe benefits and hence, in each of the three cases the fringe benefits tax liability has
been computed. Further, deduction can be availed by Rapid Heat if loan is taken for
9

consideration of assessable income generation but the same has to be done by Jasmine and not by
her husband.
10

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. (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. (2016) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON
LAWBOOK Company.
Nethercott, L., Richardson, G., & 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 2017 27th
ed. Sydney: Oxford University Press Australia.
11