Taxation Implications of Asset Disposal and Fringe Benefits for Rapid Heat

Taxation Theory, Practice & Law
Student Name
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Question 1
Issue
The major issue is to tender advice with regards to the potential tax implications of the assets that
have been disposed by the client. In regards to consulting the client on the tax treatment, the
various given information need to be critically analysed in the wake of applicable legislations
coupled with taxation rulings.
Law
Revenue v Capital Proceeds
The proceeds from sale of an item could be revenue or capital based on whether the underlying
good is trading stock or not. In order to determine the precise nature, it is of utmost importance
that it needs to be determined if the underlying seller is engaged in a business transaction or a
capital transaction (Deutsch, et.al., 2015). The proceeds from the business transaction would be
revenue and hence considering ordinary income as outlined in s. 6-5 ITAA 1997 (Sadiq, et.al.,
2015). On the other hand, capital transactions regarding the items would yield capital proceeds
which even though non-taxable may still lead to taxes in the form of Capital Gains Tax (CGT)
that is levied on the gains derived in the process.
CGT Exemption
One category of assets that get CGT exemption is known as pre-CGT assets. These refer to the
asset class which were purchased at a time when the capital gains were not taxed. Hence, even
though now CGT exists but for these assets whose ownership dates back to pre-CGT period, the
CGT exemption continues (Nethercott, Richardson and Devos, 2016). The pre-CGT period refers
to time period prior to September 20, 1985. This is a blanket exemption which is available to all
the assets irrespective of their type, gains or losses, holding period, owner type.
Additionally, there are certain specific exemptions that are available on some particular asset
types only. For instance, s. 118-10 ITAA 1997 outlines that the threshold value of purchase price
for a collectable to be applied CGT is in excess of $ 500 (Barkoczy, 2017). The corresponding
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value in case of an asset of personal use is $ 10,000 as per s. 108-20(1) ITAA 1997. It is
imperative to consider the same while applying CGT on these select items (Gilders, et. al., 2015).
Process of CGT computation
There are several steps to the computation of CGT on a given capital transaction as highlighted
below (Woellner, 2017).
Step 1: The first step which requires capital gains to be calculated is the taking place of a CGT
event. There are various kinds of CGT events with disposal of asset being one of these. The
summary of these is outlined in s. 104-5 ITAA 1997 (Nethercott, Richardson and Devos, 2016).
The event that is of relevance to the problem at hand is A1 which corresponds to the asset
disposal. The appropriate method that this event endorses for capital gains computation is to find
cost base and subtract the same from the receipts of asset sale.
Step 2: To apply the formula illustrated above, a key requirement is to highlight the cost base
which is complicated that the purchase price only. This can be computed in accordance with the
components associated to cost base mentioned in s. 110-25 ITAA 1997 as exhibited below
(Austlii, 2018).
It is noteworthy that every asset would not have all the above mentioned components and hence
cost base computation should be carried out on the basis of the available components.
Step 3: Once the cost base of asset is computed, the capital gains or losses can be computed in
line with the method highlighted in A1 event. However, these gains are not subject to CGT
(Krever, 2017). It is essential to ascertain if there are any capital losses either from the capital
transactions in the given year or capital losses brought forward from previous years. These must
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be adjusted against the gains in accordance with s. 102-5 ITAA 1997 (Barkoczy, 2017). In this
regards, a key noteworthy point is that capital losses arising from transactions involving
collectables (as defined in s. 118-10) must be adjusted against capital gains against the same
type. No such restriction exists for other asset types (Nethercott, Richardson and Devos, 2016).
Step 4: The adjusted capital gains is still not subject to CGT. This is because concessions are
available under ITAA 1997 in order to lessen the burden. One of the commonly used methods in
this regards is the discount method which has been outlined in s. 115-25 ITAA 1997 (Woellner,
2017). This section allows a flat 50% reduction in the capital gains subject to one condition
which is that the underlying capital gains must be long term. This can be ascertained by
considering the holding period of the underlying asset before selling. If this period exceeds one
year, then the resultant gains would be termed as long term capital gains and eligible for discount
under this section.
Step 5: CGT is applied on the resultant taxable capital gains that result from the step 4 explained
above.
Timing of CGT computation
In case of asset liquidation, there may a arise a situation when there is significant time difference
between the contract enactment with regards to asset sale and the proceeds being received from
the asset sale. At times, this time difference becomes more critical since these two events happen
to fall in different tax years (Hodgson,Mortimer and Butler, 2016). As a result, this provides a
choice before the taxpayer so to when the CGT consequences on the asset sale ought to be
considered in the tax return. To resolve this issue reference, needs to be made to TR 94/29 which
clearly hints that irrespective of when the sale proceeds are recovered by the seller, the CGT
consequences ought to be considered in the same year as the underlying contract for asset sale is
enacted or executed between the seller of asset and corresponding buyer (ATO, 1994).
Application
Revenue v Capital Proceeds
In wake of the information provided, relevant discussion needs to be initiated with regards to the
nature of proceeds. It is known that for the given assets, the client does not conduct any business
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