Taxation Law: Fringe Benefit Tax and Capital Gains Tax

This document discusses the Fringe Benefit Tax and Capital Gains Tax in Australia. It covers the definition of fringe benefit tax, calculation of FBT, and capital gains tax on assets like main residence, painting, luxury yacht, and shares.

Running head: TAXATION LAW
Taxation Law
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Table of Contents
Answer to question 1:.................................................................................................................2
Facts of the case:........................................................................................................................3
Answer to question 2:.................................................................................................................6
Answer to A:..........................................................................................................................6
Case facts:..............................................................................................................................7
Sale of Main residence:..........................................................................................................7
Sale of Painting:.....................................................................................................................7
Sale of Luxury Yacht:............................................................................................................8
Sale of Shares:........................................................................................................................8
Answer to question B:............................................................................................................9
Answer to question C:............................................................................................................9
References:...............................................................................................................................10

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Answer to question 1:
The fringe benefit tax is defined as the regime that is fundamentally treated as the tax
on the wide range of benefits that is provided to the employer or the employee. According to
the subsection 136 (1) FBTAA 1986 a fringe benefit tax is regarded as the benefit that is
provided to the employee by the employer during the taxation year in relation to the
employment of the employee (Barkoczy 2014). Section 136 (1)) explains that the word
benefit comprises of the any form of rights, privilege, service or the facilities that is provided
to the employee under the arrangement with respect to the performance of the work.
The court of law in “J & G Knowles & Associates Pty Ltd (2000) v FCT (2000)”
held that there should be adequate and material relationship to the benefits that is provided in
relation to the employment. There should be a casual relation with the employment to qualify
as the fringe benefit (Grange, Jover-Ledesma and Maydew 2015). The taxpayer should
denote that the benefit by reason or by virtue in respect of directly or indirectly to the
employment. As per “section 136 (1), FBTAA 1986” there are certain benefits that are
excluded or does not falls inside the purview of this act. This includes the salaries or wages,
payment for super funds, benefits in relation to employee share scheme and payment upon
the termination of the employment.
According to the “section 7 (1), FBTAA 1986” a car fringe benefit originates under a
situation where the employer offers the car to the employee for making private use of it.
Section 136 of the FBTAA 1986 explains that private usage of the car implies that the usage
of car is not the exclusively during the course of generating taxable earnings (Jover-Ledesma
2015). In addition to this, the original use is regarded immaterial, a fringe benefit originates
when the car is available for the usage such as the car is garaged at the home of the employee.

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There are two methods that are employed in calculating the chargeable value of the
car fringe benefit. According to the section 10 (1), FBTA Act 1986 statutory method is
computed automatically except when the employer decides to use cost method of calculating
the car fringe benefit of the car. The employer is permitted to use either of the method for that
results in the fringe benefit. Subsection 10A and subsection 10B explains that the cost
method requires the records of log books and odometer record for calculating the car fringe
benefit.
Facts of the case:
The case facts that is obtained suggest that Spiececo Pty Ltd has gave his employee
Lucinda the car for their private use. All through the year of 2018/19 Lucinda used the car
and incurred cost on the repairs that amounted to $3,300. In addition to this, expenses such as
Insurance and fuel costs were occurred by the taxpayer. The taxpayer here Lucinda also made
the contribution of $1,000 towards the price of the car.
The case study also provides that Lucinda used the car 70% of the time for the
business while the rest of the 30% of the car usage was dedicated towards the private use of
the car. By gauging into the situation of Lucinda it can be stated that under section 7 of the
FBTA Act 1986 car fringe benefit happens where the employer gives the car to Lucinda for
her private usage. This implies that Spiececo Pty Ltd has given the car to Lucinda for her
private usage and it is not exclusively limited to the production of the taxable under the
section 136 (Kenny 2013). In the situation of Lucinda it can be stated that the actual use of
the car is irrelevant for her because the car fringe benefit originates when Spiececo Pty Ltd
provided the car for her available use.
In addition to this, with reference to the case of “J & G Knowles & Associates Pty
Ltd (2000) v FCT (2000)” providing the car to Lucinda by Spiececo Pty Ltd clearly explains

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the nexus with the employment (Krever 2013). In other words, the car was provided to
Lucinda in respect of the employment. The car qualifies as the fringe benefit in respect of
“section 136” as the benefit that is provided by virtue of or in relation to the direct or indirect
employment.
The calculation of fringe benefit tax in the situation of Spiececo Pty Ltd is entirely
dependent on the two formula that is provided in the “section 9 of the FBTA Act 1986”. As
evident in the case of Lucinda the car travelled 20,000 kilometres. A statutory rate of 20%
has been considered to determine the fringe benefit of the car. To determine the taxable value
of the fringe benefit under the statutory method the base value of the car is multiplied with
the statutory rate. It should be noted that the portion of private use of car made by the
employee is considered while calculating the fringe benefit tax.
In addition to this, to calculate the chargeable value of the fringe benefit with respect
to the operating cost method formula the overall running expenditure such as fuel, insurance,
repairs etc are considered. While calculating the fringe benefit value the overall running
expenses is segregated from the business and private use. Below is the fringe benefit tax
calculated;
Computation of FBT under the Statutory Formula

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Computation of FBT under the operating cost method:
Computation of FBT for 2018/19:
Computation of the Deemed Depreciation:

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Computation of Deemed Interest:
The calculation that is done above explains that the deemed interest is computed with
reference to the formula that is given in the section 11 (2). In addition to this, the deemed
interest rate for the year 2018/19 is 5.25%. The above stated calculation explains that the
assessable value of the fringe benefit of the car is lower under the operating cost formula. An
advice can be given to Spiceco Pty Ltd the use of the operating cost method will be helpful in
reducing the FBT liability.
Answer to question 2:
Answer to A:
According to the “section 108-5, ITA Act 1997” a CGT asset is defined as any form
of property or the legal or equitable rights that does not amounts to property. Property is
generally defined as something that has the control over the shares, land or the interest in the
trust. The property can be either the tangible or the intangible shares or rights in the unit.
There are some of the situations where the capital gains tax is not applied on the capital gains
since there are other provisions in the tax law that is applicable instead (Morgan, Mortimer
and Pinto 2015). It is noteworthy to denote that the capital gains or capital loss is only made

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if the CGT event happens under the “section 102-20 of the ITAA 1997”. As noted in “sec
104-10 (1))” when the taxpayer sells the CGT asset then the CGT event A1 happens. It
should be noted that the time of CGT event is considered relevant when the change in the
ownership happens. The court in “FCT v Sara Lee Household (2000)” explains that if there
is no contract then the change in ownership does not occurs.
Case facts:
The case study of Daniel highlight the facts that Daniel Ray during is presently in his
late 50s and he is planning for the retirement. Daniel presently has the different assets of
worth $1 million and he is planning to see these and contribute the same in his
superannuation fund. During the year several assets were sold by Daniel and the capital gains
tax consequences for the same are as follows;
Sale of Main residence:
Any kind of capital gains or capital loss that is made from the dwelling or the main
residence of the taxpayer then it is disregarded if the taxpayer is regarded as the individual,
the taxpayer was regarded as the owner of the main residence all through the period of
ownership and the ownership of the main residence is not passed to the taxpayer being the
beneficiary of the estate under section 118-110 (Sadiq 2019). However, it should be noted
that main residence exemption does not apply in certain situations if the dwelling was not the
main residence of the taxpayer during the part period or the property has been used with the
objective of generating. As evident in the current situation of Daniel a house was sold by him
on which he is dwelling for a period of thirty years. He bought the house for a sum of
$70,000. The house was exclusively used by Daniel for his residential purpose and no part of
the house was used for generating assessable income. With respect to the main residence
exemption rules stated in “section 118-110 (1) of the ITAA 1997” Daniel will be permitted

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to obtain the main residence exemption from the capital gains that will be made from the
disposal of house.
Sale of Painting:
As explained in section 108-10, ITAA 1997 collectable can be defined as the asset
that are mainly used by the taxpayer or kept by the taxpayer for their private usage and
enjoyment of the taxpayer. Accordingly in sec 108-10 (2), collectables mainly include the
antiques and jewellery, art work, rare stamps, coins etc. As understood in the current state of
Daniel it is understood that he bought an artistic painting during 20th September 1985.
Accordingly, it can be explained that the painting is a post-CGT asset that is bought
following the introduction of CGT regime (Woellner et al. 2014). The sale of painting has
resulted in CGT event A1 under section 104-10 (1), ITAA 1997. The capital gains that is
made by Daniel following the sale of painting is the taxable gains and under the section 102-
5, ITAA 1997 the gains will be included into the net income of Daniel.
Sale of Luxury Yacht:
As explained in sec 108-20, ITAA 1997, CGT asset is regarded namely the personal
use asset that are mainly used or kept for the private enjoyment of the taxpayer under sec
108-20 of the ITA Act 1997. There are some kinds of special rules that is applied on the
private use assets (Sadiq 2019). Any kind of capital gains that is made for the asset that is
purchased for less than the $10,000 then the capital gains should be ignored. On the other
hand section 108-20 (1), explains that the capital loss that are made from the sale of the
private use assets should be regularly ignored.
The case study explains that a luxury yacht was purchased by the Daniel for a cost of
$110,000. However on the 1st June 2019 the Yacht was eventually sold by Daniel for a sale
value of $60,000. As understood that there has been a loss from the sale of yacht. Making the

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reference of section 108-20 (1) the capital loss derived from the personal use asset should be
simply ignored by Daniel.
Sale of Shares:
Section 108-5, ITAA 1997 also explains that the CGT asset also comprises of the
shares in the company and the units in the unit trust. The capital gain or capital loss that is
made from the sale is simply taxed as the other CGT assets. A capital gains was made from
the sale of BHP shares but it has the carry forward loss from the AZJ shares. The loss has
been offset to reduce the net capital gains from the shares.
Particulars Amount ($) Amount ($)
Net Capital Gains on Sale of Painting
Proceeds from sell of Painting 125000
Cost base 15000
Gross Capital Gains (proceeds less cost base) 110000
50% CGT Discount 55000
Taxable Capital Gains 55000
Capital gains on sale of shares
Gross Proceeds from Shares in BHP 80000
Less: Brokerage Fees 750
Net Proceeds 79250
Cost base
Less: Acqusition Cost 75000
Add: Stamp Duty on Purchase 250
Total Cost Base 75250
Capital gains on sale of BHP shares 4000
Less: Carryforward loss 10000
Net capital loss -6000
Net Capital gains 49,000
Calculations of Capital Gains Tax
For the year ended June 2019
Answer to question B:
The net capital gains that is derived from selling the residence is excluded from
capital gains tax regimes because it is an exempted asset. However, the capital gains that is

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derived from the disposal of painting can be used by Daniel to fund it in his superannuation
fund.
Answer to question C:
A capital loss is also reported from the disposal of Yacht and a carry forward loss of
AZJ shares has been used to offset the gains from BHP shares. An advice can be given to
David that capital loss can be carried forward by Daniel to subsequent years as no capital
gains has been reported from personal use asset.
References:
Barkoczy, S. 2014. Foundations of taxation law 2014.
Grange, J., Jover-Ledesma, G. and Maydew, G. 2015. Principles of business taxation.
Jover-Ledesma, G. 2015. Principles of business taxation 2015. [Place of publication not
identified]: Cch Incorporated.
Kenny, P. 2013. Australian tax. Chatswood, N.S.W.: LexisNexis Butterworths.
Krever, R. 2013. Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.
Morgan, A., Mortimer, C. and Pinto, D. 2015. A practical introduction to Australian taxation
law. North Ryde [N.S.W.]: CCH Australia.
Sadiq, K. 2019. Principles of taxation law 2019.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2014. Australian taxation
law 2014.