Fringe Benefits Tax (FBT) Liability Calculation and Capital Gains Tax (CGT) Analysis

This document provides a detailed explanation of how to calculate Fringe Benefits Tax (FBT) liability for extended car fringe benefits. It also analyzes the capital gains tax (CGT) implications for various transactions, including the sale of a house, painting, luxury yacht, and shares. The document covers the necessary elements for FBT calculation and the statutory laws for CGT. It is a valuable resource for students studying Taxation Law.

TAXATION LAW
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Question 1
Fringe Benefits Tax (FBT) liability needs to be computed on the account of extended car
fringe benefits on behalf of Spiceco Pty Ltd (Employer) to Lucinda (Employee) during the
FBT year 2018 -19. The necessary elements required for FBT payable would also be
analysed based on the given information.
Element 1: Depreciation
The relevant formula for calculating the depreciation has been discussed in s. 11-1 Fringe
Benefit Tax Assessment Act, 1986 (FBTAA 1986) and a brief summary regarding the
variables of the formula is shown below (Reuters, 2017).
Applicable depreciation percentage (B) = 25%,
Cost of car (A) = $18,000
Car issued to Lucinda = April 1, 2018
Car available days (C) = 365
Total days in FBT year (D) = 365
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Depreciation = ABC
D = ൬18000 ∗25% ∗365
365൰= $4500
As a result, the annual depreciation in the car value is $ 4,500 for the FBT year under
consideration.
Element 2: Interest
The relevant formula for calculating the interest has been discussed in s. 11-2 FBTAA 1986
and a brief summary regarding the variables of the formula is shown below (Krever, 2017).
Interest rate (B) (TD 2018/2) = 5.20%
Cost of car (A) = $18,000
Car issued to Lucinda = April 1, 2018
Car available days (C) = 365 (assuming private usage allowed on all days of the year)
Total days in FBT year (D) = 365
Interest = 𝐴𝐵𝐶
𝐷 = ൬18000 ∗5.20% ∗365
365൰= $936
Element 3: Operating cost of car
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The relevant formula for calculating the operating cost has been discussed in s. 10-3 FBTAA
1986 and is computed below (Barkoczy, 2018).
Cost of repair = $3300
Insurance cost (Paid for 2018/19) = $2200
Fuel cost = $990
Depreciation amount = $4500
Interest amount = $936
Total operating cost = 3300+2200+990+4500+936 = $11,926
Element 4: The taxable value of car
Cost basis approach and statutory formula approach are the two main techniques to determine
the taxable value of the car for FBT computation. The computation through both these
methods is presented below and eventually the one which would lead to lower FBT liabilities
would be preferred so that tax liabilities of the company can be minimised.
 Cost basis
The relevant formula for calculating the taxable value has been discussed in described in ss.
10-2 FBTAA 1986 and a brief summary regarding the variables of the formula is shown
below (Gilders et. al., 2016).
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It is known that the operating cost for the car amount to $11,926. Further, the extent of
business usage of the car is 70% and amount spent by the employee (Lucinda) on the car is $
1,000. Using this information, the computation is performed below.
Taxable value = ሼ11926 ∗ሺ100% − 70%ሻሽ− 1000 = $2,578
 Statutory formula
The relevant formula for calculating the taxable value has been discussed in described in s. 9
FBTAA 1986 and a brief summary regarding the variables of the formula is shown below
(Sadiq et. al., 2016).
Lucinda has also contributed $1000 to acquire the car.
Taxable value = ൬0.2 ∗18000 ∗365
365൰− 1000 = $2600
Method that results in minimum taxable value would be preferable one. Here, cost basis
technique results minimum value and hence, it would be selected for FBT computation over
statutory method.
Element 5: FBT payable
It comprises two main factors which are gross up factor of car and FBT rate for the respective
tax year. Car is classified under type 1 GST good which attracts a gross up factor of 2.0802
for FBT year 2018-19 (ATO, 2019).
Grossed up value of car = Gross up factor of car * Taxable value of car
Grossed up value of car = 2.0802 * 2578 = $5362.34
Further, the FBT rate would be imposed on the computed grossed up car value.
FBT rate for FBT year 2018-19 = 0.47
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Now,
FBT payable = Grossed up value of car * FBT rate
FBT payable = 5362.34 ∗0.47 = $2520.3
The net FBT payable for Spiceco Pty Ltd comes out to be $2520.3 with respect to the
provided car fringe benefit to Lucinda.
Question 2
(a) Net capital gains or losses will be determined for the transactions enacted by taxpayer
Daniel during the tax year 2018-19 has sold a host of assets for raising the capital in order
to invest in his super fund. The various aspects of the transactions would be analysed
under the light of the appropriate statutory law.
Transaction involving sale of house
Capital Gains Tax (CGT) implication would not be applied on the capital gains generated
from the disposal of the main residence of the taxpayer under the main residence exemption
highlighted in Sub-division 118- B. It means 100% exemption on the CGT can be availed on
the capital gains when the taxpayer has sold his main residence. The home must be classified
as the main residence of the taxpayer for the entire ownership duration as highlighted in ss.
118-10(1) b ITAA 1997. Further, the main residence must not be used for any assessable
income generation process by the taxpayer. Also, it is essential that taxpayer must not have
shifted their main residence anywhere else during the ownership period of the concerned
house (CCH, 2013).
Daniel has stayed in a house located in Doncaster during the entire period of the ownership.
Further, he has not made any assessable income from the house and also not shifted the main
residence anywhere else. Therefore, it can be concluded that the house would be the main
residence of Daniel. It means the disposal of the main residence would permit the
applicability of the main residence exemption provision under Sub-division 118- B
(Woellner, 2014). Hence, the capital gains/losses derived from the disposal will not be taken
for CGT purposes.
Transaction of sale of the painting
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CGT would be applied on the capital gains/losses received from disposal of collectibles.
Painting is also classified as collectible as outlined in ss. 108-10(15) ITAA 1997. Further, the
transaction of disposal of painting is termed as A1 CGT event as apparent from ss. 104-5,
ITAA 1997. Cost base of asset and the net sale proceeds derived through the sale of asset
would be taken into account for deriving the capital gains/losses from transaction (Gilders et.
al., 2016).
Capital Gains/(Losses) = Sales proceeds from liquidation – Cost base of the liquidated asset
Another imperative fact in CGT implication is that it must not belong to the pre-CGT asset of
the taxpayer. In other words, the disposed asset of the taxpayer must not be purchased before
‘September 20, 1985.’ Assets that are purchased before this time will be pre-CGT asset and
no CGT liability will be levied on the capital gains/losses as highlighted from the provisions
of ss. 149-10 ITAA 1997 (Barkoczy, 2018).
The date of purchase of painting is not before September 20, 1985 which represents that the
painting does not belong to the pre-CGT asset of the Daniel. Hence, the net capital
gains/losses would be liable for CGT purpose.
Sale proceeds = $125,000
Cost of painting = $15,000
Capital gains from painting = $125,000 - $ 15,000 = $110,000
According to Division 15 ITAA 1997, the long-term asset (Holding period >1 year) will
attract 50% rebate on the capital gains under discount method after adjusting the current or
previous capital losses derived from the sale of the collectibles (Sadiq et. al.,2014).
Transaction involving sale of the luxury yacht
Assets which are not used for any business-related purposes but are used for personal
enjoyment would be categorised as personal use asset under ss. 108-20(2) ITAA 1997. The
capital gains which resulted from the disposal of the personal use asset of taxpayer will only
be considered for CGT implication when it has been acquired for more than $10,000
(Reuters, 2017). Further, it is a noteworthy aspect that when the disposal of personal use asset
result incapital losses then these losses would be ignored and would not be considered for any
CGT implications under ss. 108-20(1) ITAA 1997(Krever, 2017).
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Daniel has a personal luxury yacht which he used only for personal enjoyment and thus, it
can be said that luxury yacht is categorised as personal use asset of Daniel. Also, he has
purchased it for more than $10,000 which implies that the necessary condition required for
validity of the personal use asset is fulfilled. Further, CGT implication would be imposed on
the capital gains derived from sale and if it results capital losses then it would be ignored.
Sale proceeds = $60,000
Cost of painting = $110,000
Capital gains/losses = $60000-$110000 =$50,000
Capital losses = $50,000
Therefore, it can be concluded that the loss ($50,000) would be ignored and no CGT
implications would be imposed under ss. 108-20(1) ITAA 1997.
Transaction involving sale of the shares
The disposal of the shares is categorised as A1 CGT event under the provisions of ss. 104-5
ITAA 1997. The formula for finding the capital gains/losses would require sale proceeds and
cost base of asset under ss. 104-10 ITAA 1997. The cost base of the asset is combination of
certain costs which are listed below under s. 110-25(2) ITAA 1997 (Deutsch et. al., 2016).
 Cost of assets
 Incidental cost during sale and purchase of the asset
 Cost associated in continued ownership of the asset (tax, interest and so forth)
 Capital expenditure involved in the process of improving the asset value
 Capital expenditure involved in the process of the maintaining the legal entity of asset
For the given scenario, Daniel has purchased BHP sales for $75,000 and has sold for
$80,000. Incidental cost includes $250 as stamp duty and $750 brokerage. The cost
associated with ownership of asset includes interest cost of $5000.
Cost base (BHP shares) = $ 75,000 + $ 1,000 + $ 5,000 = $ 81,000
Sale proceeds = $80,000
Capital loss (BHP) = $81,000 - $80,000 = -$1000
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Net Capital Gains / Losses FY 2018/19
Capital gains (Painting) =$110,000
Capital losses (BHP Share) =$1000
Previous year capital loss from
shares (FY2017-18)
=$10,000
Adjustment of previous capital losses =$110,000 - $10,000-$1000 =$99,000
Net Capital Gains =$99,000
The assets were long-term capital asset and therefore, the capital gains would be taken for
50% rebate under discount method. Therefore, the taxable capital gains for taxpayer Daniel
for 2018/19 are computed below.
Taxable capital gains = ሺ50%ሻ∗99000 = $44,500
(b) If for a given financial year, there is derivation of capital gains, then the same would be
subject to capital gains tax that would be paid by taxpayer Daniel with the underlying tax
rate being equal to the marginal tax rate which is applicable on him. Before levying
capital gains tax on the derived capital gains, it is essential that minimisation of the
capital gains should be done using either the discount method or cost indexation method.
In cases when capital gains are quite high and are derived from long term assets, discount
method would be favourable as it provides a 50% discount for individual taxpayers as
indicated above (Woellner, 2014).
(c) However, if the capital losses are derived in the given tax year, then these would be
moved ahead to future years where they need to adjusted against the capital gains. Under
any circumstances, the capital losses derived cannot be adjusted against the revenue
receipts whether in the current year or in the future. This is the reason why capital losses
are passed on in the future if at the present there is no availability of suitable capital gains
that can be adjusted against the outstanding losses. Further, in regards to certain assets
like collectibles, the derived capital losses may only be adjusted against the capital gains
derived on the sale of collectible assets only as outlined in ss. 108-10(1) ITAA 1997
(Woellner, 2014).
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References
ATO (2019) Fringe benefits tax – rates and thresholds, [online] Available at
https://www.ato.gov.au/Rates/FBT/ [Assessed May 30, 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,
Krever, R. (2017) Australian Taxation Law Cases 2017.2nd ed. Brisbane: THOMSON
LAWBOOK Company,
Reuters, T. (2017) Australian Tax Legislation (2017).4th ed. Sydney.THOMSON REUTERS,
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,
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia,
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