Taxation Implications on Disposal of Capital Assets and Fringe Benefits Tax (FBT) Liability for Employer

This article explains the taxation implications on disposal of capital assets and Fringe Benefits Tax (FBT) liability for the employer. It covers key elements related to CGT implications on transactions and computation of capital gains/losses. It also explains FBT liability for car, loan and expense fringe benefits.

Taxation Theory, Practice & Law
STUDENT NAME/ID
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Question 1
The client is investor along with the collector of musical instruments mainly violins and has
disposed given capital assets and therefore, the task is to analyse the transaction type and derived
proceeds so as to find the taxation consequences.
Further, it is evident that taxpayer does not run a business of trading assets and hence, the
disposal of capital assets would not result in generation of assessable income of ordinary concept
and rather generate capital income. These capital proceeds would be examined and would be
taken for the computation of any incurred capital gains/losses which are then taxed under the
applicability of Capital Gains Tax (CGT). Therefore, the main focus of the given situation is to
do analysis of the transactions incurred for the sale of vacant land block, antique bed, shares,
painting and violin (Coleman, 2016).
There are key elements related to CGT implications on the respective transactions and are
discussed below. These elements are pivotal and need to be considered so as to determine the net
cumulative capital gains/loss that would arise from the disposed capital assets during the
assessment income tax year (Barkoczy, 2017).
Key element 1: Pre-CGT Asset
Relevant section- s.140-10, ITAA 1997
The concept which can be derived from the above highlighted section is that all the respective
assets of the taxpayer that he/she acquires before the enactment of CGT liability (September 20,
1985) are known as pre-CGT asset. This element is the initial aspect for the determination of
CGT payable because any asset that is a pre-CGT asset will not result in any CGT implication on
taxpayer when being disposed by taxpayer irrespective of the significant gains which are derived
from the sale (Gilders, et. al., 2015).
Key element 2: CGT event
Relevant section- s. 104-5, ITAA 1997
This element is crucial because the calculation of capital gains/losses will be done based on the
underlying method discussed for the relevant CGT event. The taxpayer’s transactions for the
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selling of the capital assets are part of CGT event of type A1. This method illustrates that capital
proceeds received from the sale of the capital asset will be used to deduct the total cost base of
the capital asset in regards to compute the net capital gains/losses subject to CGT liability of the
taxpayer (Barkoczy, 2017).
Key element 3: Asset Cost Base
Relevant section- s. 110-25, ITAA 1997
As highlighted above in key element 2, the essential variable for the computation of capital
gains/loss from the disposed asset is cost base. It comprises the combination of five components
which are defined as shown below. It is not necessary that taxpayer has made the transactions of
all the five components and hence, the sum of the available components which is termed as cost
base of the capital asset and are paid by the taxpayer only (Austlii, 2018 c).
 Cost of buying the asset
 Incidental Cost paid for increment works during the liquidation as well as at the procurement
time of the asset (legal fees, brokerage fee, stamp duties and so forth)
 Capital expense for the ownership related works (taxes, interest on loan or on investment and
so forth)
 Capital expenses for maintaining or appreciating the asset value
 Capital expense for maintaining the ownership (this is essential when the asset is a property)
Key element 4: Balancing capital losses
Relevant section –s.102-25, ITAA 1997
There may arise a case where the concerned taxpayer has received capital losses from the
disposal of the capital asset. In such situation the taxpayer’s capital losses will be adjusted with
the received capital gains. Further, if the taxpayer does not receive the capital gains, then these
capital losses would not be taken to negate the total taxable income of the taxpayer and rather
would be shifted to next financial year (Krever, 2017). This process would be continued to five
consecutive years and still there be no capital gains received by taxpayer to adjust the capital
losses then the capital losses would be terminated.
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Key element 5: Discount on Capital Gains
Relevant section- s. 115-25(1), ITAA 1997
Indexation method and discount method are the two methods which are used to reduce the total
CGT liability on the capital gains. The indexation is assumed to be useful when there is an asset
bought before September 1999 while the discount method is quite popular and would be applied
only on the long term capital gains received from sale of capital asset. In discount method, 50%
discount would only be used for the capital gains taxation purpose. Further, the simple way to
define the long term capital gains is that any asset which is having higher than 1 year of holding
period will generate long term capital gains (Nethercott, Richardson and Devos, 2016).
Block of Land
It would be fair to make the decision that block of land is not a pre-CGT asset of the taxpayer as
the taxpayer has purchased it well after the enactment of CGT implication and as a result, CGT
will not be exempted for this transaction. Moreover, the sale of land is a CGT event of type A1
and the relevant method which includes sale income from the asset and cost base of the asset will
be taken into consideration (Nethercott, Richardson and Devos, 2016). It is also imperative to
note that as per TR 94/29, agreed payment of the sale would be realised in the year in which the
agreement of sale of the block of land has been signed by taxpayer despite that the payment
being collected by the taxpayer in the next year (ATO, 1994).
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Antique Bed
According to TD 1999/40, the antique items come in the domain of collectables (as capital
assets). Also, the transaction for selling an antique item is CGT event of type A1. Further, the
taxpayer purchases the bed after the CGT threshold date and hence, the CGT will be imposed on
the act of disposal of antique bed (Nethercott, Richardson and Devos, 2016). Further, the
essential condition for the CGT implication of collectable is that it must be purchased for an
amount exceeded than $500 as per s. 118-10 ITAA 1997 which is true in present case because
she purchased the bed for $3500. 50% rebate will also be true and would be applied after
compensating the capital losses raised for sale of sculpture in year 2016/2017.
Painting
Capital proceeds received from liquation of painting will be exempted from application of CGT
as it falls within the category of a pre-CGT asset.. It is because purchase of the painting was
made on May 2, 1985 and the CGT implication has come into existence on September 20, 1985
and therefore, no CGT will be charged (Gilders, et. al., 2015).
Shares
It would be fair to make the decision that shares are not pre-CGT asset of the taxpayer as the
taxpayer has purchased it well after the formation of CGT implication and as a result, CGT will
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not be exempted for this transaction. Moreover, the sale of shares is a CGT event of type A1 and
the relevant method which includes sale income from the shares and cost base of the shares will
be taken into account (Barkoczy, 2017). The first three shares are deriving long term capital
gains and hence liable for 50% rebate on CGT implication while the last share is short term
capital gains and hence, no rebate is provided for CGT.
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Violin
It would be fair to make the decision that violin is not pre-CGT asset of the taxpayer as the
taxpayer has purchased it well after the formation of CGT implication and as a result, CGT will
not be exempted for this transaction (Sadiq, et.al., 2015). However, violin which she has
liquidated in income year 2017 is personal use asset because she acquires several violins in
collections and has learned it so that she could play it well. Furthermore, she used to play it every
day which indicates that she has violin which would be categorised as personal use asset. The
CGT will be only be levied when she purchased it for a value exceeded $10,000 as per s. 108-
20(1) ITAA 1997. However, she purchased the violin for less than $10,000 and hence, the
imperative condition has not been fulfilled. Hence, no CGT consequence will be validated on
this.
The Capital gains for taxpayer for FY2018 is computed as show below.
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Question 2
(a) The Fringe Benefits Tax (FBT) payable needs to be furnished for the given fringe benefits to
employee Jasmine by employer Rapid Heat Pty Ltd during her employment period with the
company.
Fringe benefits are set of benefits of personal nature given to employee which are extended by
the employer and are taxed on behalf of the employer only. The tax liability in case of fringe
benefits is termed as FBT and is not applicable on employee even if the utilization of the fringe
benefits is done by employee only (ATO, 2018 a). The employer who is liable for FBT payable
will also receive the tax deduction on the provided loan if employee uses the same to produce
assessable income. Further, this is not applicable in the situation when the extended loan amount
which has been extended to employee would then be issued to respective associated to conduct
work of generating assessable income (Nethercott, Richardson and Devos, 2016).
Car Fringe Benefits
According to the provisions of s.7 Fringe Benefits Tax Assessment Act 1986, a car which is
initially owned by the company but is issued to employee to utilize for personal purposes such as
taking the car on weekends or for travelling for own work would result in extension of benefits
termed as car fringe benefits. This is because employer has issued a car to employee for personal
work of employee. Due to this, the FBT liability will be imposed on employer (ATO, 2018 a).
The total tax burden is applied on the employer only and employee is free and no liability is
extended on employee. Moreover, if the car which is used for work related purposes will be
extended to use for personal work also then the scope of usage of car of personal work of
employee will also be taken into consideration for FBT calculation. The key factors related to car
fringe benefits are discussed below (Gilders, et. al., 2015).
 Base value of car (difference between the purchasing cost and expense on minor repairing
given by employer only)
 Goods and service tax is applicable on car and the employer is also liable for claim the GST
credit inputs.
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 Available days of car private usage of employee which will not be reduced for two cases
when the car itself left by employee at the airport and the car is s taken by employee for
minor repair works.
Rapid Heat issued car to Jasmine that she can use for her own personal use. It is clear indication
that car fringe benefit is issued to her. The FBT liability for the given information is computed in
the table show below.
Loan Fringe Benefits
Loan is a type of financial support to the employee so that the respective employee can satisfy
their personal need by purchasing assets or home. The essential factor in relation to the loan is
that employer must choose the rate of interest which is defined by the Reserve Bank of Australia
(RBA). Further, if the loan is given at the discounted rate which is lower than the benchmark rate
defined by RBA, then the loan would come under the category of loan fringe benefits. As a
result, the interest saving of the employee will be considered for the establishment of the FBT
liability (ATO, 2018 b).
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Rapid Heat the employer of Jasmine issues loan to the tune of $500,000 on September 1, 2017.
The loan fringe benefit will be considered when the employer has taken discounted rate of
interest when compared to the applicable RBA’s rate. It is apparent as per TD 2017/3 that the
rate of interest for loan should have been 5.25% while Rapid Heat’s rate of interest is 4.25%.
This provided evidence to the conclusion that Rapid Heat has saved the interest amount of the
employee by issuing loan fringe benefits (ATO, 2017).
Jasmine used the loan fringe benefit’s amount to purchase the home for herself. If the home is
used by her for personal residence purpose, then $450,000 will not amount to any tax deduction
for Rapid Heat. However, if she offers the purchased home to other party so that the rent income
can be earned, then the rent income would be part of the assessable income of the employee and
hence, tax deduction can be claimed on behalf of the employer (ATO, 2018 a).
Further, Jasmine used the net remaining amount $50,000 to extend to husband with zero interest
payment so as to purchase the shares. This is noteworthy that dividend income derived from
$50,000 will not extend tax deduction claim for employer because Jasmine herself does not
purchase shares.
Expense Fringe Benefits
Any act of the employer which directly/indirectly limits the personal level expense liability of
the employee would be considered under expense fringe benefit (Krever, 2017). Moreover, the
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same can be reflected by the fact that paying any expenses for the product of company would
reduce the personal expenses of employee and therefore, the employee has to pay lesser amount
and is the process receives the internal expense fringe benefit. The FBT liability will only be
charged on employer (Coleman, 2016).
The circumstances define that Rapid Heat is manufacturing company of electric heater and also
sold it to customers for a set price of $2600. However, they provided concession to Jasmine and
sold her for $1300. The company is providing internal expense fringe benefits because they
would not reduce the price of heater if the customer is not Jasmine (Employee). Hence, the
discount is offered so that the personal expense of Jasmine could be decreased.
(b) Jasmine used the net remaining amount $50,000 to purchase the shares. This is noteworthy
that dividend income derived from $50,000 will extend tax deduction claim for employer
because Jasmine herself does purchase shares which may result in deriving of ordinary
income in terms of dividend. The deduction from this case is computed below.
The FBT payable will be reduced of Rapid Heat because of the deduction computed above.
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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: 26 September 2018)
ATO, (2017) Taxation Determination –TD 2017/3 [Online].
http://law.ato.gov.au/atolaw/view.htm?docid=%22TXD%2FTD20173%2FNAT%2FATO
%2F00001%22 (Accessed: 26 September 2018)
ATO, (2018 a) Fringe Benefits Tax- A Guide For Employers.
http://law.ato.gov.au/atolaw/view.htm?DocID=SAV%2FFBTGEMP%2F00010 (Accessed: 26
September 2018)
ATO, (2018 b) Loan Fringe Benefits https://www.ato.gov.au/General/Fringe-benefits-tax-
(FBT)/Types-of-fringe-benefits/Loan-fringe-benefits/ (Accessed: 26 September 2018)
Austlii, (2018 b) FRINGE BENEFITS TAX ASSESSMENT ACT 1986- SECT 148.[Online]
http://classic.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/s148.html (Accessed: 26
September 2018)
Austlii, (2018 c) 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: 26
September 2018)
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.
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016) Understanding taxation law
2016. 9th ed. Sydney: LexisNexis/Butterworths.
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Krever, R. (2016) 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.
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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