Taxation Theory, Practice & Law

The article discusses the computation of capital gains tax for various assets and the implications of CGT on the taxpayer. It also explains the concept of fringe benefits tax and its consequences for the employer and employee. The article further elaborates on the tax deductions that can be availed by the employer and the factors that determine the same. The subject matter is covered under Taxation Theory, Practice & Law and is relevant for students pursuing courses in accounting and taxation.

Taxation Theory, Practice & Law
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Question 1
Issue
The taxpayer in the scenario provided is an investor and also collects collectables. She has made
various transactions with respect to the disposal of assets in the financial year 2017/2018. The
objective is to determine the total capital gains or loss that may arise from the disposal of the
assets. Further, the Capital Gains Tax (CGT) implication would also be taken into consideration
for the capital gains derived from the sale.
Law & Application
Section 149(10) ITAA 1997 defines the pre-CGT assets as assets that are purchased before
September 20, 1985. Additionally, CGT implication will not rise on taxpayer for the capital
gains received from disposal of pre-CGT assets (Reuters, 2017).
Land Block
The computation for the capital gains would be done based on the type of transactions as the
transaction for the sale of land block is considered as A1 event as per s. 104-5, ITAA 1997 and
therefore, the capital gains/loss will be calculated by subtracting cost base from the proceeds
derived from sale. Furthermore, s. 110-25(1) defines the five elements of cost base of an asset
that are highlighted in the tabular format as show below (Gilders, et.al., 2016).
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In context of the sale proceeds received by the taxpayer the relevant tax ruling is TR 94/29. It
defines that sale proceeds that would be received in the upcoming year will also be considered
for capital gains calculation for the year only in which the contract of sale has been signed by
taxpayer with the buyer party. The net capital gains will be calculated after balancing the
previous capital losses incurred from the same assets. Also, if the proceeds from the sales are
long term capital gains(holding for more than a year) then 50% discount will be for capital gains
under s. 115-25(1), ITAA 1997 (Wilomot, 2014).
Taxpayer has a block of land which he bought in the year 2011. Cleary, this asset of taxpayer
does not belong to pre-CGT asset. Also, if the asset is liquidated in the current year, then the
holding period would be in excess of one year which implies that the resultant gains would be
long term. Besides, even though the proceeds from the sale of the land would be realised in the
next year, since the contract for sale has been enacted in the current tax year, hence the
implications of CGT would also be borne in the current year only. Hence, the CGT implication is
raised and the net capital gains/losses in regards to block of land is computed below.
Antique Bed
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Tax determination TD 1999/40 defines that antique items and the fact that these come under the
category of collectables and thus, termed as capital assets (Gilders, et.al., 2016). The
computation of the capital gains in case of antique bed disposal transaction needs to be carried
out in accordance with A1 capital event as mentioned in s. 104 -5, ITAA1997. Further, the CGT
implication would be exempted for the capital gains/losses which are bought for the price lower
than or equal to $500 as defined in s. 118-10(1), ITAA 1997 (Deutsch, et.al., 2015).
Taxpayer has an antique bed which he bought on July 21, 1986. Cleary, this asset of taxpayer
does not belong to pre-CGT asset. Further, the taxpayer has purchased it for $3500 which is
higher than $500 and hence, the CGT implication is raised and the net capital gain/loss in regards
to antique bed is computed below.
The asset has not been sold by taxpayer rather it has been stolen and hence the sale proceeds
would be the amount received from insurance claim of taxpayer. The insurance amount for the
antique bed is $11,000. Also, the proceeds is long term capital proceeds (holding for more than a
year) then 50% discount will be for capital gains under s. 115-25(1), ITAA 1997. Clearly, the
given asset is eligible for discount method of capital gain concession owing to the capital gains
being long term.
Painting
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Section 149(10) ITAA 1997 defines the pre-CGT assets which indicates that any asset that are
purchased before September 20, 1985 are considered as pre-CGT. Additionally, CGT implication
will not rise on taxpayer for the capital gains or losses received from disposal of pre-CGT assets.
Taxpayer has a painting which the client bought on May 2, 1985 (Deutsch, et.al., 2015). Cleary,
this asset of taxpayer does belong to pre-CGT era as the period of acquisition is before
September 20, 1985. Therefore, the capital gains realised through sale of the painting by the
taxpayer will not be subject to CGT implication because the capital gains or losses raised from
the sale will be discarded.
Shares
Section 149(10) ITAA 1997 mentions the pre-CGT assets which indicates that any asset that are
purchased before September 20, 1985 are considered as pre-CGT. Additionally, CGT implication
will not rise on taxpayer for the capital proceeds received from disposal of pre-CGT assets
(Reuters, 2017). Taxpayer has bought four shares in different companies and all of them are
having acquisition date after September 20, 1985 (Barkoczy, 2017). Cleary, share asset of
taxpayer does not belong to pre-CGT asset. Thereby, the CGT liability will be borne by taxpayer.
The capital gains for all the shares would be computed in line with the approach highlighted in s.
104-5 under the CGT event A1. Besides, the holding period of three shares is more than one year
implying the underlying gains would be long term and hence eligible for 50% concession in
capital gains.
Share 1 (long term capital proceeds)
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Share 2 (long term capital proceeds)
Share 3(long term capital proceeds)
Share 4 (not long term capital proceeds)
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Violin
It is essential to differentiate between the personal use assets and collectables as the provisions
for determining the capital gains/loss would be different for each of the above case. The personal
use asset would be subject to CGT liability on taxpayer when the acquisition payment is higher
than $10,000. In other words, if the taxpayer has personal use asset (purchase for personal
enjoyment or use) and paid more than $10,000 for purchasing it, then the CGT will be levied.
It is apparent from the given information that taxpayer has keen interest in collecting musical
instruments. In this regards only, she has a plethora of violins in her musical instrument
collection (Barkoczy, 2017). Additionally, she plays violin on daily basis and also plays it well
and therefore, the conclusion can be made that violin is an asset of personal use. However, no
CGT liability would be levied on the capital gains/loss that will be found on the capital proceeds
earned from disposal of a violin as she has purchased for $5,500 (lower than $10,000).
Therefore, from the definition for personal use asset, the net capital gains/loss would not be
subjected for CGT.
Therefore, it can be seen based on above computation that taxpayer has capital gains from three
assets namely block of land, antique bed and shares. The sum of these three capital gains would
be the total capital gains of the taxpayer for year ended on June 30, 2018.
Capital Gains= ( 96500( block of land)+ 2250(antique bed )+40350 ( shares ) )
Capital Gains=$ 139 , 100
Conclusion
Taxpayer has net taxable capital gains of $139,100 for the year end June 30, 2018. The CGT
implication would be implied on taxpayer for the computed net capital gains only for the given
asset’s disposal.
Question 2
Issue
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The key issue is to comment on the FBT consequences for the three benefits which are given by
Rapid Heat Ltd to Jasmine during the income tea year. Further, the issue is also to comment on
the tax deductions on the fact when the extended benefit is provided to associate by Jasmine.
Law & Application
Employer may extend benefits for personal use of the employee during the employment term of
employee. It is noticeable that employer may also provide the benefits to the family members of
employee for their own personal interest. These benefits are extended to employee but are held
taxable for employer not on employee and are termed as fringe benefits and the underlying tax is
termed as Fringe Benefits Tax (FBT) (Wilomot, 2014). Further, any personal benefits given to
employee by employer produces assessable income (either ordinary or statutory) for the
employee, then the employer has the right to claim the tax deduction. The various factors related
to the fringe benefits and FBT liabilities are referenced from Fringe Benefits Tax Assessment
Act 1986.
Car fringe benefit: According s.8, FBTAA1986 employer would provide car fringe benefit to
employee when the car is given for personal use of employee. It is also possible that car would
be allowed to employee to use for her/his own personal purpose along with the office work and
hence, the scope of utilization of the car for personal purpose would be considered for the
computation of FBT payable. It is also imperative to note that the days for which car is sent for
repairs (only for minor repairs) will also be part of available days for employee (Sadiq, et.al.,
2015). Similarly, when the car is present for the use and employee does not use it for some
reason such as she/he is outside and car is parked at home or at airport would also be part of
available days for employee. Also, the car is a TYPE I good as shown in Goods and Services Act
1999 and the gross up factor would be taken for TYPE 1 goods only as per the relevant income
year. Also, the GST inputs can be demanded by taxpayer in order to avail the rebate on tax
(Krever, 2016).
Jasmine works for Rapid Heat Pty Ltd and also does loads of travelling for office purposes.
Rapid Heat makes the car availability to Jasmine that she can use for her own personal work. It is
apparent that providing car to employee for personal work is car fringe benefits. Therefore, the
FBT payable will be determined using the calculations that are illustrated below.
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Loan fringe benefit: Any monetary help in form of loan provided to employee to complete their
personal work such as paying debts, purchasing home, acquiring shares and so forth would be
termed as loan fringe benefit only when the interest rate is inferior to the statutory interest rate.
Every year, Reserve Bank of Australia declares the minimum interest rate for loan which is
termed as statutory interest rate. The deduction would be provided to employee for the interest
payment when loan is used such as way that generates assessable income to employee. Further,
when employee issues the extended loan to his/her family members to do any work which results
in assessable income then no tax deduction will be availed by employer (Hodgson, Mortimer and
Butler, 2016).
As per TD 2017/3, Reserve Bank of Australia declared statutory interest rate as 5.25% per
annum for the year 2017/2018 while Rapid Heat offered loan at 4.25% per annum. It is evident
that lower interest rate loan has been offered to employee and hence, loan fringe benefit is
extended.
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Jasmine has utilized the total loan amount for two ways.
 $450,000 to purchase holiday home
The tax deduction will be availed on $450,000 because it may be assumed that Jasmine will rent
the holiday home that would generate rent income (assessable income) for her.
 $50,000 provides to husband to purchase shares in Telstra
The tax deduction will not be availed on $50,000 because Jasmine herself does not purchase the
shares as when employee issues the extended loan to her family member to do any work which
results assessable income then no tax deduction will be availed by employer.
Internal expenses fringe benefit:
The expenses which are borne by employer on behalf of the employee would be termed as
expense fringe benefits only when the expense is of personal nature of employee (Reuters, 2017).
Further, any internal expense paid by employer on behalf of employee will be classified as
internal expense fringe benefit (Coleman, 2016). For example: if the employer is offering any
service to public for a price of $1000 and when the employee wanted to avail the service from
employer and the employer has offered concessional price , say $800 for employee, then there is
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an internal expense fringe benefit. This is because the employer would be borne the remaining
$200 amount which should be paid by employer only.
Jasmine purchased the heater from Rapid Heat ¿ $ 1300
Rapid Heat offered the heater to normal customers (regular rates) ¿ $ 2600
The company has halved the price for the heater when they offer the heater to its employee
Jasmine. Hence, the internal expense fringe benefits has been issued to Jasmine because the rest
amount $1300 will be borne by employer only which is a personal nature expense of Jasmine.
Expenses borne by employer = Rapid Heat offered the heater to normal customers (regular rates)
- Jasmine purchased the heater from Rapid Heat ¿ $ 1300
Internal expense fringe benefit = 75% of the regular rates - Expenses borne by employer =
(0.75*2600) -1300 =$650
Heater: TYPE I GOODS
Grossed up rate ¿ 2.0802
Taxable amount under this benefit ¿ 2.0802∗650=$ 1352.1
Fringe benefits payable ¿ 1352.1∗0.47=$ 635.5
(b) Jasmine has utilized $50,000 to purchase shares in Telstra
The tax deduction will be availed on $50,000 if it is used by Jasmine to buy the shares. This is
because when employee does any activity which results in assessable income production, then
tax deduction will be availed by employer. In this case, Jasmine herself purchases the shares and
hence she would derive the income.
Deduction = (5.25%-4.25%)*50000 =$500
As a result of this purchase, the net tax deduction will be issued to employer which lowers the
total FBT liability for the respective income year i.e. FY2017 (Coleman, 2016).
Conclusion
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It would be fair to conclude that Rapid Heat has FBT liability for all the three fringe benefits car,
loan and internal expense which are $5823.70, $2575.35 and $635.5 respectively. Further, FBT
liability would be lowered on part of employer, if Jasmine instead of her husband would invest in
shares.
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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. (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. (2014) Australian taxation law 2014. 8th ed. North Ryde: CCH Australia.
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