Taxation Law: Calculation of FBT Liability and Net Capital Gain/Loss

This document discusses the calculation of FBT liability and net capital gain/loss under taxation law. It includes rules, application, and conclusion for each scenario. The document also covers the definition of CGT asset, CGT event, and collectible.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Author Note

1TAXATION LAW
Question 1
Issue
The issue arising from the given situation is the calculation of the FBT liability for
Spiceco Pty Ltd for the 2018/19 FBT year, assuming Spiceco Pty Ltd would like to minimise
its FBT liability. Whether there is more than one method of calculating the FBT liability.
Which method will be more appropriate in the given set of situations.
Rule
U/s 136 of the Fringe Benefits Tax Assessment Act 1986, fringe benefit is defined as any
advantage that an employer extends towards his employer or to a person associated with the
employee or even a third party with respect to an arrangement with the employee within the
year of taxation in relation to the employment. This includes a right or an interest towards a
personal or real property or even any facility or services. The employer will be imposed with
the tax liability for such a fringe benefit extended to the employee. The employee can be a
current, past as well as future employee (Woellner et al. 2016).
U/s 7 of the Fringe Benefits Tax Assessment Act 1986 a car fringe benefit is said to have
accrued when the employee has been provided with a car by the employer for the purpose of
being used in a personal capacity. There are two approaches that can be used for the purpose
of computing the taxable value of the car fringe benefit.
U/s 9(1) of the Fringe Benefits Tax Assessment Act 1986 the Statutory formula for the
calculation of the car fringe benefit has been provided. The formula is as follows:
[0.2 * BV * (n/ tn)] - A
BV = Base value of the car

2TAXATION LAW
n = no. of days during the income tax year for which the car fringe benefit was provided
by the person providing
tn = no. of days in that income tax year
C = contribution of the recipient
U/s 10(2) of the Fringe Benefits Tax Assessment Act 1986 the Operating Cost Method
formula for the calculation of the car fringe benefit has been provided. The formula is as
follows:
[C * ( 100% - BP)] – R
C = operating cost during the period of holding, which includes maintenance, insurance,
registration and fuel.
BP = business percentage
C = contribution of the recipient.
After the calculation of the car fringe benefit the tax liability of the same needs to be
calculated by applying the FBT rate.
Application
In the present situation, On 1 April 2018, Spiceco Pty Ltd provided a car to their employee
Lucinda for her private use. This can be treated as a fringe benefit u/s 136 of the Fringe
Benefits Tax Assessment Act 1986 and the same will be categorised a car fringe benefit u/s 7
of the Fringe Benefits Tax Assessment Act 1986. This will be taxable in the hands of Spiceco
Pty Ltd.
Throughout the FBT year 2018/19, the cost of the car was $18,000, repairs $3,300
Insurance $2,200, Fuel $ 990 (all above expenses are GST inclusive). Distance travelled

3TAXATION LAW
20,000 km (for the entire 2018/19 FBT year), Business use 70% Lucinda contributed $1,000
towards the cost of the car.
FBT Liability under Statutory Formula section 9(1):
[0.2 * BV * (n/ tn)] - A
= [0.2 * 18000 * (365/365)] – 1000
= $ 2600
[BV = $ 18000
n = 365 days
tn = 365 days
A = $1000]
FBT = $ (2600 * 2.0802 * 47%) = $ 2542
FBT Liability under Operating Cost Method Formula section 10(2):
[C * (100% - BP)] – R
= [6490 * (100% - 70%)] – 1000
= $ 947
[C = $ [3300 + 2200 + 990] = $ 6490
BP = 70%
R = $ 1000]
FBT = $ (947 * 2.0802 * 47%) = $ 925.87

4TAXATION LAW
The FBT liability using the Statutory Formula is more than the FBT liability using the
Operating Cost Method Formula. Hence, as the objective of the Spiceco Pty Ltd is to
minimise the FBT liability, the use of Operating Cost Method Formula would be appropriate.
Conclusion
Operating Cost Method Formula should be used.
Question 2
Issue
The issue arising from the given situation is the determination of the net capital gain or
loss for the year ended 30 June 2019 pertaining to Daniel Ray.
Rule
A CGT gain arise when a Capital asset is permanently disposed off, the acquisition of
which has been effected after the date of 20/09/1985. Any asset that has been acquired prior
to the mentioned date will be regarded as a pre-CGT asset and will be excluded from being
assessed as a CGT event. For the purpose of the liability under CGT, two requisites are to be
satisfied. Firstly there needs to be a post-CGT asset and secondly a CGT event u/s 104.5 of
the ITAA 97. Disposal of a CGT asset falls under the A1 category u/s 104.10 and any
proceed from the same needs to be deducted by its cost base or acquisition cost for the
purpose of arriving at the CGT gain which will be taxed under the CGT regime. However, for
the imposition of a Capital gain tax, the occurrence of a CGT event is necessary. This would
require the contract for the transfer of the asset being formed or the taxpayer ceasing to be the
owner of the same. Again, the proceeds from the disposal of a main residence will be
exempted from CGT u/s 118.10 of the ITAA 97.

5TAXATION LAW
When an item is owned and used by an individual solely for the enjoyment and use for
personal purposes will be treated as a collectible as per the definition provided u/s 108.10 of
the ITAA 97. This covers items like jewellery, artwork, coin, antique, medallion, rare folio,
manuscript, book, postage stamp or first day cover. A proceed from the sale of a collectible is
to be regarded as a CGT gain and the collectible as a CGT asset. If the worth of the
collectable exceeds $500, the CGT event related to the same will be subjected to CGT.
However, any CGT asset below that price will be treated as exempted to be assessed under
the CGT regime u/s 110.10 of the ITAA 97.
The definition of a CGT asset has been provided u/s 108.5 of the ITAA 97, which defines
CGT asset as a property of any kind as well as any equitable and legal right. This include
land, building, shares, debts owed to the taxpayer, options, enforceable contractual rights as
well as foreign currency. The sale of the same will be considered as a CGT event of A1
category.
For the purpose of arriving at a CGT gain or loss, the lower of the cost base and the
proceeds from the CGT event needs to be deducted from the higher of these two. In this
respect, cost base includes five elements u/s 110.25 of the ITAA 97. The first element is the
acquisition cost, the second one is the costs which is incidental, the third is the owning cost,
the fourth is the capital expenditure and the fifth is the expense for preserving the title of the
asset.
The sale of share is required to be treated as a CGT event and the proceed from the same is
CGT receipt. Any gain or loss in this furtherance will be treated as a CGT gain or loss. In
case of capital loss, the reduced cost base is required to be taken in case of CGT loss. U/s
110.55 the reduced cost base does not include the third element, which is the owning cost.

6TAXATION LAW
This will not include any interest as including interest would lead to a CGT loss but the
transaction has actually earned a benefit for the taxpayer (Barkoczy 2016).
Application
In the present case, the first transaction effected by Daniel is the proposed sale of his
house acquired for $70000, which has been treated by him for 30 years as a main residence.
The house would be treated as a CGT asset as the same has been acquired post-CGT.
However, the sale of the same at $865000 would have been treated as a CGT event A1
category u/s 104.5 of the ITAA but the same will be treated as an exempt under CGT u/s
118.10. Moreover, he paid $15,000 to the real estate agent for the sales commission and the
buyer deposited $85,000 on the property. Again, after 14 days the buyer advised the real
estate that he did not have enough money for proceed with the contract of purchase, therefore
forfeiting his deposit to Daniel on 1st May 2019. Hence, it can be contended that there has
not been any CGT event formed in the present situation as the contract for the transfer of the
house has not been formed and the Daniel has not yet ceased to be the owner of the same.
Hence, this transaction will not be treated as a CGT event.
The second transaction effected by Daniel is the sale of an artistic piece of painting by
Margaret Preston, which he purchased this on 20 September 1985 for $15,000. The painting
was sold for $125,000 at an auction on 31 May 2019. This can be treated as a collectable u/s
u/s 108.10 of the ITAA 97 as it is an artwork used and owned for personal purposes. The
price of the same is also in excess of $500. The same needs to be treated as a CGT asset and
the sale of the same as a CGT event as the same has been acquired on 20/09/1985. Hence, it
will be treated as a CGT event.
CGT Gain = Cost Proceed - CB (e 1 + e 2 + e 3 + e 4 + e 5) [CP>CB]
CP = $125000

7TAXATION LAW
CB = $15000
CGT Gain = $ (125000 – 15000) = $110000
The third transaction effected by Daniel is the sale of a luxury yacht that he has since he
was active member of Port Melbourne Yacht Club. He purchased the yacht in November
2004 for $110,000. Daniel sold the luxury yacht on 1st June 2019 for $60,000. This needs to
be treated as a CGT event and the proceeds of the same is required to be treated as a capital
receipt. For the purpose of computing CGT gain from the same, acquisition cost being higher
is required to be deducted by the proceeds from the sale of the same. The acquisition cost is
the first element of the acquisition cost.
CGT Loss = Cost Base (e 1 + e 2 + e 3 + e 4 + e 5) – Cost Proceed [CB>CP]
CB = $110000 (e1)
CP = $60000
CGT Loss = $ [110000 – 60000] = $50000
The third transaction effected by Daniel is the sale of the shares in BHP mining company.
Daniel had shares in BHP mining company, which he has purchased these shares on 10
January 2019 for $75,000 and sold all of these shares on 5 June 2019 for $80,000. In this case
the cost proceed is $80000 and the first element of cost base is $75000. However, 50%
discount will not be available as the shares has not been held for more than 12 months. He
got a loan of $70,000 in order to buy these shares and incurred $5,000 interest on the loan.
Daniel has paid $250 for stamp duty on the purchase, and $750 of brokerage fee on the sale
of these shares. The $250 and the $750 will be included in the cost base as the second
element but the interest will not be included as the same is a reduced cost base. This is

8TAXATION LAW
because the inclusion of the interest would lead to a CGT loss but in actuality, the Daniel has
accrued a profit from the transaction.
CGT Gain = Cost Proceed - RCB (e 1 + e 2 + e 3 + e 4 + e 5) [CP>RCB]
RCB = $ [75000 + 750 + 250] = $76000
CP = $80000
CGT Gain = $[80000 – 76000] = $ 4000
Particulars Amount $ Amount $ Amount $
Net CGT Gain 64000
CGT gain from sale of an artistic piece
of painting
110000
CGT gain from sale of the shares in
BHP mining company
4000 114000
Less: CGT loss from sale of a luxury
yacht
50000
Conclusion
Hence, it can be concluded that, the net capital gain or loss for the year ended 30 June
2019 pertaining to Daniel Ray is as discussed above.

9TAXATION LAW
Reference
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
The Fringe Benefits Tax Assessment Act 1986 (Cth)
The Income Tax Assessment Act 1997 (Cth)
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation
Law 2016. OUP Catalogue.