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

Taxation Theory, Practice & Law
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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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