Tax Implications of Asset Liquidation and Fringe Benefits for Rapid Heat Pty Ltd

This article discusses the tax implications of asset liquidation and fringe benefits for Rapid Heat Pty Ltd. It covers the computation of taxable gains and FBT liability for car, loan, and expense payment fringe benefits. The article also provides guidance on pre-CGT assets, CGT concessions, and timing of capital receipts. The subject covered is taxation, and the course code is not mentioned. The college/university is not mentioned.

TAXATION
STUDENT NAME/ID
[Pick the date]

Question 1
In wake of the information provided, the key concern is to highlight the tax implication of the
proceeds that the client has derived from asset liquidation. It is noteworthy that these proceeds
would be capital and not revenue which is confirmed by the fact that the taxpayer has not sold
these assets as part of any business transaction. This is reflective of the fact that the current client
does not deal with any of the liquidated assets as trading stock but instead has ownership of the
assets as a collector or investor. The capital proceeds are not taxable but could lead to creation of
taxation burden by resulting in capital gains which would be taxed using CGT (Capital Gains
Tax).
Pre-CGT Asset
The definition of these assets is offered by s. 149-10 ITAA 1997 and this definition has special
relevance considering the fact that these assets would be immune from CGT impact (Austlii,
2018 e) . This implies that irrespective of the underlying capital gains realised from the sale of
these assets, no CGT liability would arise (Wilmot, 2014). The ley criterion for these assets is the
date of ownership which must lie in the period when the underlying capital gains were not taxed
which was the case before September 20, 1985. For the given client, an analysis of the assets
liquidated during the year has been carried so as to determine if any asset is pre-CGT asset or
not. The summary of this is presented in the tabular manner below (Hodgson, Mortimer and
Butler, 2016).
CGT Event
The need to compute the underlying gains and loss pertaining to an asset arises owing to the
CGT event taking place (Nethercott, Richardson and Devos, 2016). In this regards, the
identification of the relevant event is crucial since there is attached methodology for computation
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of gains which acts as the first step in the taxable gains computation process. The relevant event
for the client is A1 which is triggered when an asset is disposed (Krever, 2017).
Cost Base
In order to determine the gains or losses, a vital input in the form of cost base is required which
needs to be compared with the sales proceeds (Sadiq, et.al., 2015) . This term has been defined as
per s. 110-25 and it is highlighted that there are primarily five elements including the initial cost
to buy the underlying asset. The various elements pertaining to cost base are summarised in the
table illustrated as follows (Austlii, 2018 a).
Adjustment of Capital loss
From the capital gains that are derived from comparison of cost base and sales proceeds, there
need to be an adjustment of prevailing capital losses as advised by s. 102-5 ITAA 1997. These
losses may be from transactions enacted during the assessment year or may belong to past
transactions. This happens since capital gains can be rolled to the future till there is availability
of capital gains for balancing (Woellner, 2017).
CGT Concessions
After the above step is done, the taxpayer can lower the remaining capital gains by adopting one
of the two approaches i.e. discount and indexation. The former approach is more useful in the
given case considering the high amount of capital gains. This approach is outlined in s. 115-25
and provides an exemption of 50% on the capital gains thereby reducing the CGT burden only on
the remaining capital gains (Austlii, 2018 b). However, the rebate is available only for a
particular type of capital gains called as long term capital gains. This type of capital gains are
realised on sale of assets where the owner had a holding period of greater than one year.
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Timing of Capital receipts
In capital asset liquidation, potential timing difference between sale contract and resultant
proceeds may arise. At times, this lands the taxpayer is a confusing position when the above two
incidents do not converge in the same tax year. In such cases, it is advisable that the taxpayer
must consider the potential tax implications of the asset sale in the year when the sale contract
gets enacted as has been validated by tax ruling TR 94/29 (ATO, 1994).
CGT Exemption
One case of CGT exemption has been introduced with regards to pre-CGT asset. Certain other
cases in this regards are summarised below (Hodgson, Mortimer and Butler, 2016).
 Purchase price of collectable asset is not higher than $ 500 (s. 118-10) (Austlii, 2018 d)
 Purchase price of asset of personal use is not higher than $ 10,000 (ss. 108-20(1))
Vacant Land
It has already been cited that the land is not a pre-CGT asset and hence cannot claim any CGT
exemption on this ground. The sale contract for land has been enacted in 2017/2018 while the
buyer would provide the agreed proceeds only in next tax year. With reference to TR 94/29, the
CGT implications would be taken into consideration in the current year only. The relevant CGT
event in this case is A1. From the capital gains that result on the asset, the previous year capital
losses would also be adjusted. Further, the concession under s. 115-25 would be available in the
case of this asset considering the long term holding period which would imply CGT application
only on half of the capital gains.
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Antique Bed
Considering that antique bed is an example of collectable item, hence it needs to adhere to the
minimum price threshold for CGT to apply. The given asset succeeds in complying with the
requirement as the money spent on purchasing the asset is $ 3,500. The relevant CGT event in
this case is A1. From the capital gains that result on the asset, the previous year capital losses
would also be adjusted. The losses adjusted are of sculpture since capital losses associated with
collectable items can only be balanced against the gains made on same category asset. Further,
the concession under s. 115-25 would be available in the case of this asset considering the long
term holding period which would imply CGT application only on half of the capital gains.
.
Painting
The given asset is a pre-CGT asset as has been already pointed in the summary above. The
implication of this is that irrespective of the capital gains that painting sale generates, these
would not be taxed as the asset was purchased at a time when these gains were not levied any
CGT and this treatment would continue.
Shares
All the shares that the client are sold are not pre-CGT assets and hence CGT exemption would
not be extended. As a result, the capital gains would be determined on each of the share using the
methodology indicated by CGT event A1. Further, the concession under s. 115-25 would be
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available in the case of those shares where the long term holding period would be there which
would imply CGT application only on half of the capital gains.
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50% rebate has been applied only on long term capital gains.
Violin
The key issue in relation to taxation of this asset sale is whether this needs to be classified as
collectable or personal use asset. In order to determine the appropriate choice, the underlying
facts provided ought to be taken into cognisance. Key among them is the fact that client uses
each of the violins from her collection to derive personal entertainment and this does not happen
sporadically but rather is a regular occurrence. Under such circumstance, it is opportune to
consider the violin sold as an asset that is of personal use. This requires the underlying violin to
have a cost price greater than $ 10,000 so as to be eligible for levying of CGT on the derived
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capital gains. The cost price of the selected violin is only $ 5,500 and hence CGT exemption
would be applicable for this violin.
Net Capital Gains
The summary of the final tally of taxable capital gains for the client considering the given
transactions is provided below.
Question 2
(a) Rapid Heat Pty Ltd provides a car, loan ($500,000) and heater (at low cost) to Jasmine at
different point of time in the tax year 2017/18. The objective is to examine the nature of the
underlying benefit and make a decision regarding the aspect that whether the given benefits
would be categorised as an extension of fringe benefit or not. Further, if the benefit is
classified as fringe benefit then the relevant fringe benefit tax liability will be determined.
There are certain benefits which an employer extends to employee during their relationship with
the company. These benefits are considered as fringe benefits only when the below highlighted
characteristics is present in the benefit (Coleman, 2016).
 Benefit must not be issued for fulfilling the professional liabilities but rather for the personal
interest of the employee.
 The extension of the benefits should not be in terms of direct cash benefits
A separate statute has been put in place which provides detailed information about the fringe
benefits and their associated taxation implications which is termed as “Fringe Benefit Tax
Assessment Act 1986.” The key factor extracted from the provisions of FBTAA 1986 is
application of tax liability (Wilmot, 2014). The tax liability would be charged on employer based
on the fringe benefit amount and the nature of the benefit. However, employee is not held liable
for any fringe benefit tax liability.
Car Fringe Benefit
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Many employers allow the employee to take the car in order to complete professional
work/obligations, in such cases the benefit of using the car for professional duties will not be
considered as car fringe benefit. However, when the employer has provided the car or issued the
permission to utilize the car for his/her personal usage, then it would be said that car fringe
benefit has been issued to employee.
Rapid Heat Pty Ltd has bought a new Toyota car for a net amount of $33,000 on May 1, 2017
and hands over to Jasmine for personal work. The car was available to her on weekends as well
as the period when she was not in the city. Based on these circumstances, it can be concluded
that Jasmine is utilizing a car fringe benefit which has led the FBT liability on Rapid heat Ltd.
The total days of the assessment year on which the car is in the hands of Jasmine for personal
utilization is an imperative factor. Based on the information provided, it is apparent that jasmine
had access to car from May onwards and hence deduction for the April month would be made
which would bring down the days to 335 days. Further, the scenario when the car is actually sent
for minor repairs and the total period spent in minor repairing in five days. These five days from
total 335 days will not be deducted as the car is held for minor repair only. Further, there are 10
days for which the Jasmine herself parked the car at airport and went to another place. In this
case also, the 10 days will not lower the total available days because the car remained available
for Jasmine only no other person is using the car for professional work and thus, the car would
be said available to Jasmine.
The payment for the minor repairing which has been borne by employer would also be deducted
from net procurement amount of car. Additionally, the relevant gross up factor and FBT value
applicable for the assessment year would be applied to yield the following FBT.
Computation
Loan Fringe Benefit
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Section 16, FBTAA 1986 defines that loan offered at discounted interest rate would amount to
loan fringe benefit when the discounted rate is lower than statutory rate which is prescribed by
RBA with respect to the relevant tax year. This is because discounted interest costs would imply
lower interest outflow and hence realisation of savings by the employee (Austlii, 2018 c).
The first step of loan fringe benefit tax liability computation is to find the exact amount which
has been saved by employee while taking the discounted loan. Further, the taxable value
computation based on the applicable gross up rate (ATO, 2018 b). The final taxable value would
be taxed by 47% which is the FBT rate for FY 2018. The deduction would also be issued to
employer for the case where the loan income would result in assessable income for employee
(ATO, 2018 a).
The rate of interest which has been prescribed by RBA = 5.25% per annum
Rapid Heat has taken the rate of interest for loan = 4.25%
The discount of 1% in the interest rate has resulted the summary that loan fringe benefit is
issued. Additionally, the relevant gross up factor and FBT value applicable for the assessment
year would be applied to yield the following FBT.
Computation
$450,000 from loan has used by Jasmine to own a holiday home. If the assumption is made that
holiday home will be used for assessable income making process by Jasmine, then the interest on
$450,000 will bring FBT deduction for the employer i.e. Rapid Heat.
Expense Payment Fringe Benefit
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The s. 20, FBTAA 1986 defines that personal expenses which actually must be paid by employee
if paid by employer, then expense payment fringe benefit issuance is the result (Deutsch, et.al.,
2015).
Jasmine wanted to purchase a heater from Rapid Heater which has a normal sale price of $2600.
It implies that Jasmine has to pay $2600 for heater. However, Rapid Heat has provided the heater
to her only for $1300 which indicates that rest $1300 has been paid by Rapid Heat. As the
expense has been borne for their own product and therefore, it will be considered as internal
expenses payment fringe benefit.
Computation
(b) According to the new arrangement, Jasmine has decided to use $50,000 to own the share
which would produce dividend income and thus, becomes part of assessable income of
Jasmine. Hence, the FBT liability will be reduced by $500 (computed below) for the
employer under this scenario.
Computation
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References
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consequences of a contract for the sale of land falling through.
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ATO, (2018 a) Fringe Benefits Tax- Exemptions and Concessions.
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business/?page=21 (Accessed: 1 October 2018)
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Austlii, (2018 a) Income Tax Assessment Act 1997- SECT 110.25.General Rules About Cost
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October 2018)
Austlii, (2018 c) FRINGE BENEFITS TAX ASSESSMENT ACT 1986- SECT 148.[Online]
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