Taxation Theory, Practice & Law: Understanding Tax Liability on Sale of Assets

This article explains the tax liability on sale of assets and provides insights on receipts classification, CGT exemption, capital gains derivation, and timing in CGT. It also provides an application of the law to a given scenario.

Taxation Theory, Practice & Law
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Question 1
Issue
The client has enacted sale of certain items and in wake of the same intends to obtain tax related
advice so as to ascertain the likely tax liability that would arise on account of the transactions
undertaken.
Law
Receipts Classification
In the event of any cash that may be derived by the taxpayer, the first concern that must arise is
in relation to the proceeds classification where essentially there are two choices i.e. revenue and
capital. This determination holds significance in the backdrop of revenue receipts making
contribution to taxpayer’s ordinary income in contrast with capital receipts that are completely
exempt from any taxation related liability (Barkoczy, 2017). However, even capital receipts are
taxed to an extent but the same is on account of capital gains being booked. With regards to
segregating the two, the key factor is the underlying intention with which the transaction is
enacted and the frequency of these transactions. A case in point is the transaction involving sale
of a flat by a builder which would bring in receipts of revenue nature since it is part of business.
However, for an individual, selling of flat that his parents lived in would amount to capital
proceeds owing to these transactions not being part of business. Hence, the critical aspect is to
decipher the nature of the transaction underlying the sale of asset or the trading stock depending
on the circumstance (Nethercott, Richardson and Devos, 2016).
CGT Exemption
In case of capital transactions, it is possible for CGT implications to result. In order to avoid the
same, certain statutory rebates are available. One of these is indicated in s. 149-10 which defines
a type of asset which is pre-CGT asset. In layman terms, this would refer to an asset which the
taxpayer acquires in the period when the underlying gains on asset sale were not taxable. Taking
iuto cognisance that CGT regime began as on September 20, 1985, therefore the assets for which
the buying was done before the above cut-off date would be categorised as pre-CGT asset. This
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classification has significance considering the fact that no CGT can be imposed on any pre-CGT
asset (Wilmot, 2014).
Additionally, there are certain other rebates, which are available for specific assets. In this
context, for an asset termed as collectable as per s. 118-10 would be levied CGT only if the price
paid at the time of purchase was higher than $ 500. However, in the context of personal use
assets as per s. 108-20(1), levying of CGT is permissible only if the price paid at the time of
purchase was higher than $ 10,000. In the event of the above conditions net met in regards to
two type of assets indicated above, no CGT liability would arise for the asset (Woellner, 2017).
Capital Gains Derivation
CGT would be applied only on the capital gains that are derived on the asset sale which is done
through the following process.
There is a CGT event which begins the whole process which first involves identification of the
appropriate event from the list of such events as detailed under s. 104-5 ITAA 1997. In this
scenario, the relevant CGT event is chosen as A1 which deals with asset disposal of various
kinds. The proper event identification has high relevance as any mistake in this regards would
result in use of wrong methodology for capital gains derivation eventually leading to wrong
estimation of tax burden (Gilders, et. al., 2015).
A critical input parameter which aids in this process is termed as cost base. The various
components of this are taken as per s. 110-25 and consist of costs besides those incurred for asset
purchase (Deutsch, et.al., 2015). This is apparent from consideration of the various components
indicated as follows.
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For every asset, it is not essential that all the components outlined above would exist and hence
the relevant elements are considered for cost base computation.
Taking the asset cost base in conjunction with proceeds obtained from asset sale, the underlying
gains or losses can be derived as applicable for a given asset. Before moving ahead, any capital
losses that may exist need adjustment against the existing gains. These losses are not restricted to
the current year and may also be obtained on account of the previous year transactions as the
capital losses are allowed to be rolled over till settlement with an equivalent amount of capital
gain (Coleman, 2016).
The adjusted gains can further be trimmed through the application of two approaches that are
provided namely indexation and discount. The former approach was inserted in the statute so as
not to impose tax on the nominal gains and thereby provides reduction through the adjustment of
cost base on account of inflation. Usually this adjustment is not very significant and also this
method is deployed only for assets bought prior to September 1999. As a result, the discount
approach is widely used (Wilmot, 2014). It is explained in s. 115-25 ITAA 1997 and prescribed a
discount of 50% assuming the underlying gains are long term and not short term. The necessary
condition for deriving the long term capital gains is that the asset under question must have been
held by the investor for atleast an year (Woellner, 2017).
Timing in CGT
In asset liquidation since the quantum of sales proceeds can be potentially large, hence often
there are two events which are separated in time. One event is the execution of contract between
the buyer and seller in relation to the underlying asset sale. The other event is the receipt of sales
proceeds from the asset (Nethercott, Richardson and Devos, 2016). Owing to this difference in
time frame between the above mentioned time frames, it may so happen that these two events lie
in different tax period. This leads to issue at the end of the taxpayer to decide so to in which
period must the capital gains ought to be taxed. The answer to this is provided by TR 94/29
which clarifies that the tax results from the transactions ought to be taxed in the year when the
sale contract execution takes place (Barkoczy, 2017).
Application
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Receipts Classification
The sale of asset by the client does not form part of any business as has been stated in the
information provided. This also gains further support from the fact that the client is an investor
besides being a collector. Hence, it is unlikely that the client is an asset trader or in such
business. The logical conclusion thereby derived is that the proceeds from asset sale would be
capital in nature. These proceeds would not be taxed since taxation is limited only to revenue
receipts. However, for capital receipts, there are potential capital gains also possible which may
not be exempt from the application of CGT.
CGT Exemption
The first step is to outline any pre-CGT assets as even though capital gains may be derived on
such assets, but these would not be considered taxable and thereby the computation of capital
gains on such assets may be avoided. The buying date for the given assets has been provided in
the question and by analysing those, conclusion may be drawn with regards to painting being the
sole asset to be placed under this category and hence exempted from CGT application under 1.
149(10).
A collectable asset present in the list of assets disposed by the taxpayer is antique bed which
would have CGT implications as the price at which it has been bought tends to be higher than the
minimum value required for application of capital gains tax. A personal use asset of significance
here is violin. The classification of this asset as personal use asset is derived from the behaviour
of client whereby the violin instead of being looked at as capital asset is used for entertainment
with high degree of regularity. Also, the purchase cost of this violin amounts to $ 5,500 which
falls short of the minimum requirement of $ 10000 and hence it can be thereby concluded that
violin sale would not produce any CGT consequence for the client.
Capital Gains Derivation
The assets remaining include land, antique bed and shares and as per the process described in the
law section, the taxable capital gains would be computed for these assets.
Block of vacant land
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Antique Bed
Shares
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Timing in CGT
In relation to the given asset (vacant land block), the information provided reflects that even
though sale contract has been entered into by client in the tax year finished but the money from
this sale would be obtained only in the upcoming tax year. However, this still does not deter the
taxpayer from including the consequences of land sale in the current year returns which would
consider the details of the sale agreement.
Conclusion
The taxable capital gains have been reported considering the three assets on which CGT would
be levied. For the remaining two assets, exemption from CGT is available resulting in no
contribution to taxable capital gains for the current tax year.
Question 2
Issue
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The given instance involves two main parties i.e. beneficiary which is the employee (Jasmine)
and provider which is employer (Rapid Heat). The central aim in the following discussion is to
consider the key facts related to fringe benefits that have been provided to Jasmine and work out
the potential liability of these benefits particularly the FBT tax burden.
Law
The various benefits that are potentially provided and the resultant tax implications need to be
outlined considered the main statute in the form of “Fringe Benefit Tax Assessment Act, 1986”.
 Car Fringe Benefit
The relevant statutory section dealing with the stated benefit is Section 7 (Coleman, 2016).
Required Condition – The pivotal requirement is the employee being able to use the car that is
employer owned for his/her personal needs and uses. This only would result in any economic
benefit to the employee as professional work related use of car is the entitlement of the
employee.
Computations:
.1) Considering the section 9 formula, the car fringe benefits enjoyed by taxpayer during the
given year need derivation.
In regards to car private usage time, the noteworhty aspects are marked below.
 Repairs would lead to days deduction only under the circumstance of these being major
such as those incurred from an accident.
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 Further, failure on the part of the employee to use car does not lead to the conclusion that
the car was not available.
2) The gross up factor acts as a key input leading to computation of the taxable value of the
concerned fringe benefit (Krever, 2017).
3) On the taxable value concerned with the given fringe benefit, there is application of the FBT
in accordance with the corresponding rate for the assessment year.
 Loan Fringe Benefit
The relevant statutory section dealing with the stated benefit is Section 16.
Required Condition – Discount offered by the employer in the interest rate charged for the loan
provided to the employee. The discount needs to be present relative to the benchmark rate that
RBA has announced for the relevant assessment year (Wilmot, 2014).
Computations:
1) The computation begins with determining the extent of savings considering the time for which
loan is assumed, amount of loan and the discount relative to the RBA interest rate (Sadiq, et.al.,
2015).
2) The gross up factor acts as a key input leading to computation of the taxable value of the
concerned fringe benefit.
3) On the taxable value concerned with the given fringe benefit, there is application of the FBT
in accordance with the corresponding rate for the assessment year.
There is provision for CGT related deduction which employer may be entitled to provided the
proceeds of loan lead to providing income that is assessable for the employee but not any
associates (Hodgson, Mortimer and Butler, 2016).
 Internal expense fringe benefit
The relevant statutory section dealing with the stated benefit is Section 20.
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Required Condition – Some part of an otherwise personal expense on part of employee must be
paid by the employer.
Computations:
1) The fringe benefit amount is linked to the savings that employee derives owing to employer
paying.
2) The gross up factor acts as a key input leading to computation of the taxable value of the
concerned fringe benefit.
3) On the taxable value concerned with the given fringe benefit, there is application of the FBT
in accordance with the corresponding rate for the assessment year (Nethercott, Richardson and
Devos, 2016).
Application
(a) The consequences in regards to tax burden in relation to FBT are derived in accordance with
the law in the previous section.
Car fringe benefit
Personal use is explicitly been allowed for jasmine at the time of car being extended to her.
Hence, the key requirement of this benefit has been complied with. The garage stay has arisen
owing to repairs of minor nature which do not warrant any deduction. Further, while the car was
parking at the airport for a 10 day period but the same could have been used and there was no
hurdle in using the car for personal use.
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Loan fringe benefit
The applicable RBA prescribed rate for the assessment year is 5.25% pa. but Rapid Heat has
offered a hefty discount to the extent of 100 basis points leading to presence of loan related
fringe benefits.
A portion of loan proceed is diverted for use of husband which does not provide any benefit to
employer. However, the key issue for the employer to be entitled to FBT deductions is whether
the holiday home which has absorbed 90% of loan amount would produce taxable income or not
for the employee (Jasmine).
Internal expense fringe benefit
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Jasmine here desires to buy the electric heater which is manufactured by employer Rapid Heat.
There is a sharing of the money by employer and employee since both end of paying $ 1,300
despite no compulsion on the employer to share this expense since it is personal for employee.
(b) The new arrangement benefits the employer since there is assured deduction in FBT of $ 500
since on investment amount of $ 50,000 in shares, dividends are certain to be produced
which would contribute to assessable income generation. The precise derivation of the $ 500
is demonstrated as follows.
Conclusion
No tax related liability has fallen on the employee despite being the beneficiary. All the liability
pertaining to FBT has to be borne by employer i.e. Rapid Heat. Only some deduction may be
claimed by employer to bring down cost burden which is contingent to the usage of loan amount
by employee for generation of income.
.
.
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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. (2017) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON
LAWBOOK Company.
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.
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 Select
Legislation and Commentary Curtin 2017. 2nd ed. Sydney: Oxford University Press Australia.
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