Liability of FBT on Car Fringe Benefit - Taxation Law

This document discusses the liability of Fringe Benefit Tax (FBT) on car fringe benefit in Taxation Law. It explains the computation of FBT liability, including depreciation, interest, total operating costs, and taxable value. It also discusses the FBT payment for the employer and the tax implications for the employee. The document provides insights into the capital gains tax consequences of selling capital assets, such as a house, painting, luxury yacht, and shares. It explains the relevant sections and formulas for determining the capital gains and highlights the availability of CGT concessions and methods to limit CGT liability.

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Question 1
In the wake of the given facts, the aim is to highlight the liability related to FBT (Fringe
Benefit Tax) arising for the employer (Spiceco Pty Ltd) on account of extending car
fringe benefit to an employee Lucinda. These have been extended since the company
owned car has been provided for private usage by the employee and Lucinda has also
indulged in private use of the car. The computation of FBT liability requires the
computation of various aspects which has been done below.
Depreciation
The applicable formula for depreciation has been indicated in s. 11-1 FBTAA 1986
which is shown below along with the explanation of requisite inputs (Austlii, 2019a).
With regards to tax purposes, a permissible assumption for a car purchased after 2015
is that the effective life is taken 8 years and the depreciation can be applied using
diminishing balance method with the underlying rate being 25% p.a.
It is known that the employee (Lucinda) was presented the car for private use (along
with business use) on the first day of the financial year (April 1 2018). Also, the car has
been bought by the company for $ 18,000.
Interest
The interest expense can be computed based on the formula highlights in ss. 11-2
(FBTAA 1986) as has been indicated below (Austlii, 2019a)

Since this is first year for the year, hence A would be the car cost or $ 18,000. The
value of variable C & D would be equal to 365 days. Besides, in accordance with TD
2018/2, statutory interest rate is 5.20% p.a. The interest computation has been
performed based on the given data as shown below.
Total Operating costs
The computation of the total operating costs in relation to the given car has been
performed based on ss. 10-3 (FBTAA 1986) along with the intermediate computations
which is illustrated below (Austlii, 2019a)
The above computation has been carried on based on the assumption that the
insurance expense is for the current year only and does not include any payment for the
future tax years.
Taxable Value
In order to highlight the FBT associated with car, there are essentially two techniques
that are highlighted in FBTAA 1986 which are outlined below.
1) Cost basis

This approach has been indicated in ss. 10-2 (FBTAA 1986) and would be deployed to
determine the car fringe benefit taxable value. The applicable formula in this regards is
shown below (Austlii, 2019a)
Considering the definition of the above inputs, the respective values for this have been
outlined below following by the computation of the taxable value of the fringe benefit
extended.
2) Statutory Formula (s. 9 FBTAA 1986)
This approach has been highlighted in s. 9 (FBTAA 1986) with the applicable formula
for computation of taxable value of fringe benefit extended shown below (Austlii, 2019a)
Car base value = $ 18,000
Payment made by recipient (Lucinda) = $ 1,000

Since the employer would want to minimize the FBT liability, hence the method
preferred would be cost basis as it leads to a lower taxable value as compared to the
statutory method.
FBT
Before levying FBT, it is essential that the grossed up value of the taxable benefit ought
to be determined considering the gross up factor which would be applicable for the
underlying benefit the tax year. For 2018-2019, for a Type 1 good, the gross up rate has
been observed as2.0802. Type 1 goods are defined as those goods on whom GST is
levied (ATO, 2019).
FBT liability
The applicable FBT tax rate would be 47% which is rate of FBT applicable for the year
2018-2019. As a result, the FBT liability for the company on account of the car fringe
benefit provided to Lucinda is indicated as follows (Austlii, 2019a)
.
Conclusion
Based on the above computation, it is evident that the company (fringe benefit provider)
would have to make an FBT payment of $ 2,520.3 while the employee Lucinda would
have no tax implications even though she has received car fringe benefits from her
employer.
Question 2
(a) It is known that Daniel has sold a host of capital assets during tax year 2018-2019
and in this light the objective is to outline the capital gains tax consequences of the
same.
1) House sale
Sub-division 118-B is the relevant section which provides the main residence CGT
concession where no CGT would apply on any capital gains that are realised from the
sale of the main residence. However, complete exemption from CGT would only be
available if the underlying house serves as main residence during the complete period
of ownership. For this to happen, the following conditions ought to be satisfied (Gilders
et. al., 2016).
 The residence under consideration should continue to remain as main residence
for the complete time of ownership even though taxpayer may be absent.

 No assessable income has been produced from the house.
For the house sold by Daniel, it would be fair to categorise this has main residence
since for the complete ownership period, Daniel has resided in the house and has not
used the same for earning any assessable income. Hence, any capital gains realised
from the sale of the house would not attract any CGT. In relation to the advance of $
85,000 made by the previous buyer, the same would also be capital gains related to the
house which would be discarded for CGT purpose (Nethercott, Richardson and Devos,
2016).
2) Painting Sale
The painting as a asset belongs to a specific asset class known as collectibles which is
outlined in ss. 108-10 ITAA 1997. Considering that these assets are CGT assets, hence
the sale of this asset would lead to A1 CGT event as per ss. 104-5 ITAA 1997. Owing to
this event, there is a need to determine the capital gains/(losses) as per the formula
stated in ss. 104-10 ITAA 1997. This is illustrated as follows (CCH, 2013).
With regards to application of CGT, it is noteworthy that the current CGT regime came
on force on September 20, 1985 and hence any capital assets which the taxpayers
purchased before this date are termed as pre-CGT assets as indicated in ss. 149-10
ITAA 1997. This classification becomes vital considering that any capital gains are
exempt from CGT in case of pre-CGT asset (Deutsch et. al., 2016).
The painting has been purchased on the cutoff date (I,e, September 20, 1985) and
hence is not a CGT exempt asset. Thereby, using the information provided, the capital
gains realised by Daniel on the sale of painting has been computed below.
Sale price = $ 125,000
Price of purchase = $ 15,000
It is critical to note that all the above capital gains would not be taxable. This is because
relief in taxable amount would be provided under the discount method (s. 115-25
ITAA1997) as per which a 50% rebate is available for individual payments when the
capital gains are long term. These capital gains arise on assets whose holding period
for the taxpayer is atleast one year (Austlii, 2019b).
3) Luxury yacht sale
The relevant facts clearly indicate that the yacht that has been sold was not used to
derive business income but essentially was meant for personal enjoyment and usage.
Thus, in accordance with ss. 108-20(2), the given asset would be termed as an asset
for personal use (Nethercott, Richardson and Devos, 2016). In regards to this particular

asset, certain special rules with regards to capital gains/(loss) treatment tend to arise.
For these assets, the capital gains would be taxable under CGT regime only if the cost
base of the asset is higher than $ 10,000. Additionally, ss. 108-20 ITAA 1997 clearly
highlights that any losses made on these assets is discarded from the CGT perspective
without any adjustment or offsetting available (Barkoczy, 2018).
The capital gains (if any) would be taxable as per CGT rules since the cost base of the
current asset is higher than $ 10,000. The relevant computation for the asset based on
the formula in ss. 104-10 is highlighted below.
Sale price of asset = $ 60,000
Cost base of asset = $ 110,000
In the given case, the cost price of luxury yacht tends to exceed the selling price owing
to which capital loss would be incurred on disposal of the yacht. However, this capital
loss would be ignored for the purposes of CGT as explained previously.
4) Shares sale
One of the CGT assets is share whose sale would result in capital gains computation as
per the formula indicated in ss. 104-10. A key aspect to the noted is that the cost base
of asset consists of various elements which have been mentioned in ss. 110-25 ITAA
1997. These are summarized as follows (Sadiq et. al., 2016).
For the given transaction involving BHP shares, the various elements of the cost base
have been highlighted as follows.
Price of purchase for the shares = $ 75,000
Shares buying and selling related incidental costs = $750 (Brokerage) + $250 (Stamp
Duty) = $1,000
Ownership related cost associated with shares would include interest ($ 5,000) as the
same has not been deducted elsewhere.

Cumulative position (Daniel)
Painting related long term capital gains = $ 110,000
Losses arising on the sale of BHP shares = $1,000
Losses arising on account of AZJ shares which have been brought forward from
previous tax year = $ 10,000
Thus, capital gains resulting from all the given transactions after adjustment of capital
losses = 110,000 – $10,000 - $ 1,000 = $ 99,000
It is known that the painting asset is a long term asset and would lead to long term
capital gains. As Daniel is an individual taxpayer, hence, CGT concession to the extent
of 50% is available under s. 115-25 ITAA 1997 (Discount Method).
(b) If Daniel would derive capital gains for the given tax year as is the case here, then
the same would be subject to CGT with the applicable rate matching the marginal
tax rate that would be used for Daniel. However, in the process of determining the
taxable capital gains, taxpayer (Daniel) would have choice to apply cost indexation
or discount method in order to limit the CGT liability. The discount method has been
used in the part (a) to provide a 50% rebate for the capital gains. The cost indexation
adjusts the cost base for inflation and thereby reduces the CGT liability (CCH, 2013).
(c) If Daniel would derive capital losses for the given year which is not the case here,
then the first aspect would be to offset these against the capital gains which may be
available in the current tax year based on the applicable rules for the type of assets.
However, if this is not permissible due to non-availability of capital gains, then the
losses would be carry forwarded to the subsequent years so that these can be
adjusted against the gains. Particular attention should be paid to specific assets
such as collectibles and personal use assets which have special rules that must be
observed in offsetting the losses and determining the correct tax treatment of the
same ( Sadiq et. al., 2016).

References
ATO (2019) Fringe benefits tax – rates and thresholds, [online] Available at
https://www.ato.gov.au/Rates/FBT/ [Assessed May 31, 2019]
Austlii (2019a) FRINGE BENEFITS TAX ASSESSMENT ACT 1986, [online] Available at
http://classic.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/ [Assessed May 31,
2019]
Austlii (2019b) INCOME TAX ASSESSMENT ACT 1997 - SECT 115.25, [online]
Available at http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
s115.25.html [Assessed May 31, 2019]
Barkoczy, S. (2018), Foundation of Taxation Law 2018, 9thed.,NorthRyde: CCH
Publications,
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer,
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), 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,
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study Manual
2016, 4th ed., Sydney: Oxford University Press,
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A
(2016) , Principles of Taxation Law 2016, 8th ed., Pymont:Thomson Reuters,