Taxation Implications of Asset Disposal and Fringe Benefits for Rapid Heat

This article discusses the potential tax implications of asset disposal and fringe benefits for Rapid Heat. It covers the relevant laws and regulations, including Revenue v Capital Proceeds, CGT Exemption, and Fringe Benefits Tax Assessment Act 1986. The article also provides a step-by-step guide to computing CGT and FBT liabilities, as well as deductions available to the employer.

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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transactions and is infact an investor. Thus, the given receipts would not be regarded as revenue
owing to the assets not being termed as trading stock. Thereby, the conclusion can be drawn that
the underlying proceeds would be capital in nature and hence non-taxable. Hence, the focus
shifts to determine the potential capital gains or losses arising from the asset sale.
CGT Exemption
The purchase date of various assets needs to be considered in order to segregate any pre-CGT
asset amongst the given transactions. Only one asset i.e. painting qualifies as a pre-CGT asset
owing to the purchase date belonging to the time when there was no tax on the capital gains and
losses derived by the taxpayer. All the other assets are purchased at a time when CGT did exist.
Hence, it can be concluded that no CGT implication would arise in case of painting.
Further, antique bed is a collectable as per s. 118-10 but the price paid to acquire this asset
exceeds the threshold limit of $ 500 and hence CGT exemption is not available for this asset. An
additional asset that requires consideration is violin. Based on the given information, it would be
appropriate to label this as a personal use asset considering the fact that client uses this violin and
others from her collection for playing and entertainment on a frequent basis. Thus, the minimum
purchase price should exceed 10,000 which is not the case with violin sold. Therefore, CGT
exemption can also be availed by the violin.
Process of CGT computation
The taxable capital gains calculation for the remaining assets i.e. land, antique bed and shares is
shown below. Further, the adjustment of carry forward capital losses is also depicted during
these computations.
Block of Vacant Land
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Antique Bed
Shares
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Timing of CGT computation
With regards to land sale, there is a mismatch between the date of signing of contract and the
proceeds of sale being received. The client has enacted a contract for land sale in the current tax
year but the proceeds from this would only be recovered by the client in the next year. In this
scenario, taking TR 94/29 as the reference point, it can be concluded that the computation of
CGT would be within the current year only with regards to land asset.
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Conclusion
The net result of the computation carried out above clearly reflects that the taxable capital gains
for the current tax year for the client would be $139,100 and the CGT would apply on the same.
Question 2
Issue
The key objective is to outline the Fringe Benefit Tax (FBT) payable that would arise for the
employer Rapid Heat on account of the various benefits that have been provided to employee
Jasmine. Also, the likely deductions possible particularly in terms of loan extended also need to
be discussed.
Law
In relation to fringe benefits, the underlying tax liability is governed by Fringe Benefits Tax
Assessment Act 1986. The underlying FBT implications on account of the various employee
fringe benefits would only extend on the employer while the employee would be completely
exempt from any FBT burden. The key fringe benefits which are relevant to the situation
presented are highlighted below (Sadiq, et.al., 2015).
1) Car Fringe Benefit
These benefits are extended as per s. 8 FBTAA 1986 whereby it is necessary that the employee
should have the permission to use the car given by employer in personal use (Gilders, et. al.,
2015). Limitation of usage to only professional reason would not constitute any fringe benefit.
To determine the FBT liability on the employer, the following three steps ought to be performed
(Woellner, 2017).
Step 1: Determine the car related fringe benefit value. A popular approach is to use statutory
method explained in s. 9.
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Base value of car provides deduction for repair related expense from the car buying price.
Adjustment to days of car fringe benefits is allowed for the period when car not available for
private usage or in garage for undergoing major repairs (Nethercott, Richardson and Devos,
2016). As a result, when car is available for private use and not being used, deduction does not
apply.
Step 2: Taxable fringe benefit related to car = Step 1 value * Gross up factor
Gross up factor is contingent on two aspects namely the tax year and whether GST is levied on
good or not.
Step 3: FBT payable by employer on car related benefit = Step 2 value * Rate of FBT
The above rate is not static and may alter for different tax year.
2) Loan Fringe Benefit
These benefits are extended to employee only when the employer provides low interest or zero
interest loan as mentioned in s. 16, FBTAA 1986 (ATO, 2018). To avoid any fringe benefit, the
interest rate must not be lesser than the benchmark interest cost which the RBA decides yearly. If
the loan rate is lower than the above rate, the taxable benefits in the form of fringe benefits on
account of loan are extended. To determine the FBT liability on the employer, the following
three steps ought to be performed (Krever, 2017).
Step 1: Compute the savings in interest payment that employee has realised during the tax year.
A key element would be the number of days for which loan has been extended to employee
during the year.
Step 2: Taxable fringe benefit related to loan = Step 1 value * Gross up factor
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Gross up factor is contingent on two aspects namely the tax year and whether GST is levied on
good or not.
Step 3: FBT payable by employer on loan related benefit = Step 2 value * Rate of FBT
The above rate is not static and may alter for different tax year
Also, in accordance with deduction rule, employer can make deduction claims in FBT payable to
the extent that the loan proceeds provided to the employer is used for taxable income production.
However, this deduction does not extend to case where the loan proceeds are deployed by an
associate of employee (Hodgson, Mortimer and Butler, 2016).
3) Internal expense fringe benefit (Electric heater)
Expense fringe benefit has been dealt with in s. 20 FBTAA 1986 and arises when the employer
meets some personal expense of employee (Sadiq, et.al., 2015). A special case is when a
discounted price is provided on a good that is internally manufactured. This is referred to as
internal type of expense fringe benefit (ATO, 2018).
Step 1: 75% of actual price minus cost savings would be fringe benefits
Step 2: Taxable fringe benefit related to expense = Step 1 value * Gross up factor
Gross up factor is contingent on two aspects namely the tax year and whether GST is levied on
good or not.
Step 3: FBT payable by employer on expense related benefit = Step 2 value * Rate of FBT
The above rate is not static and may alter for different tax year
Application
(a) The computation of the relevant FBT related liability on account of the various benefits has
been carried out in accordance with the discussion in applicable law.
Car fringe benefit
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There is extension of car fringe benefit as personal use of car is permitted to Jasmine. Also, days
deduction would not be availed in neither minor repairs related five days garage visit not airport
parking stay of ten days.
Loan fringe benefit
There is extension of loan fringe benefit as loan given to employee is at 4.25% p.a. against the
applicable benchmark rate of 5.25% pa.
Jasmine uses the 90% loan amount foe buying of holiday home and in the future if assessable
income results for Jasmine, then employer would be able to claim deduction in this regards.
However, no deduction on 10% loan amount used by husband.
Internal expense fringe benefit
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The price of electric heater that is charged by Rapid Heat is $ 2,600. However, the same is
extended to employee Jasmine as a lower price of $ 1,300.
(b) In wake of altered loan utilisation proceeds whereby 100% of loan amount is used by
Jasmine, the available deduction to employer would increase. This is because $ 50,000 is
invested in stock and dividend income would be generated which makes the employer
eligible for the following deduction.
Conclusion
The above computations clearly reflect that FBT liability would arise for Rapid Heat (employer)
on account of the above discussed benefits given to Jasmine. Further, some reduction in FBT
payable may also be expected for the employer on account of assessable income production from
loan proceeds for Jasmine.
.
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References
ATO, (1994) Taxation Ruling –TR 94/29 [Online]. Available at: Income tax: capital gains tax
consequences of a contract for the sale of land falling through.
https://www.ato.gov.au/law/view/document?DocID=TXR/TR9429/NAT/ATO/
00001&PiT=99991231235958 (Accessed: 29 September 2018)
ATO, (2018) Fringe Benefits Tax- A Guide For Employers.
http://law.ato.gov.au/atolaw/view.htm?DocID=SAV%2FFBTGEMP%2F00010 (Accessed: 29
September 2018)
Austlii, (2018) Income Tax Assessment Act 1997- SECT 110.25.General Rules About Cost Base
[Online]. Available at:
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.5.html (Accessed: 29
September 2018)
Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University Press.
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., & Devos, K. (2016) Australian Taxation Study Manual 2016. 8th
ed. Sydney: Oxford University Press.
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.
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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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