Taxation theory, practice and law | Assignment Solution

TAXATION THEORY,
PRACTICE AND LAW

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Capital gain tax incidence for the year ended 30 June on sale of different assets..................1
Treatment of capital losses and gains..........................................................................................6
2. Calculation of Fringe Benefit Tax (FBT) liability of Rapid-Heat Pty Ltd for the year ending
31 March 2018............................................................................................................................6
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
This report comprises of Australian taxation system, Practice and law. As Australian
taxation system is very vast, so according to given questions only taxation of capital gain and
fringe benefit taxes (FBT) will be covered (Taylor and Richardson, 2012). Report will be
prepared taking into consideration that client is a tax consultant, antique collector and investor in
Mayfield, New South Wales. Capital gain taxes are levied on variation in the value of asset at the
time of buying and while selling. Fringe benefit taxes are levied on employers on rendering
certain extra benefits to employees other than salary payment. In first question provisions of
capital gain/loss related to block of vacant land, antique bed, painting, shares and violin will be
covered with FBT liability on providing car and loan to employee.
MAIN BODY
1. Capital gain tax incidence for the year ended 30 June on sale of different assets
(a) Block of vacant land:
Capital gain levies on sale of assets, property, or shares. When assets are sold, one can
suffer from capital loss due to decrease in value of asset at the time of disposal or can make
capital gain. Tax is imposed on capital gains/losses refer to as capital gains tax (CGT) and this is
mandatory to mention in income tax return not as a separate head but in the heading of income
tax. Capital loss can be adjusted against capital gain. CGT in Australia applies on asset at any
place in the whole world including vacant land (Saad, 2014).
As per section 104(35) of ITA act 1997, some contractual rights provide the calculation
method which is illustrated as below
Cost base Calculation on 3/06
Acquisition Cost of Vacant land 100000
Add Statutory Rates And taxes 20000
UN-indexed Cost Base 120000
Calculation of Sale Proceeds
Particulars Amount
Sale income from land 320000
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Particulars Amount
Less Index Cost of acquisition 120000
Gain for next year 200000
In this question, on 3rd June client entered in an agreement to sell a block of vacant land
for about $320,000 and purchased this land for $100,000 in January 2001. Payment of expenses
of about $20,000 were made in relation to that block on local council, water and sewerage, taxes
etc. According to agreement, deposit amounted to $20000 will be paid on 3 January of next year
at the time of registration (Van Long, 2011).
b) Antique bed
Calculation of index cost of bed
Particulars Amount Indexation Factor Net Amount
Cost of acquisition of Antique bed 3500 1.59 5565
Add Index cost of improvement
Additions
1500 1.55 2319
Indexed Cost Base 5000 7884
Index factor for cost of acquisition and cost of improvement as per Index reference base –
2011–12
Index value Year
Cost of bed 77.6 Quarter ending September 1986
Additional cost 79.8 Quarter ending December 1986
Index when bed was
stolen
123.4 On September ending 1999
Computation of taxable insurance claim
Particulars Amount ($)
Claim from Insurance Company 11000
Less: Indexed Cost bed -7884
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Particulars Amount ($)
Net Capital Gain/loss 3116
Interpretation: Long term capital gain registered through distinction between expense of
securing and the business continues. With the assistance of expense of securing we can getting
present esteem and that will be figured by increasing of the first expense of obtaining and pull
out cost swelling list to related offering year and separating by the cost expansion file identified
with buy year (Albu and et. al., 2013). For the change of the antique bed change to re-
establishing and any consumption, for the estimation will incorporate change of filed cost. Shape
the above estimation the record cost of stolen bed was considered 77.6 for Quarter finishing
September 1986 and 79.8 for Quarter finishing December 1986. Assessable capital gain was
figured as 3116.
c) Painting
As stated above, client is an antique collector thus client buy a painting on 2 May 1985
worth $2,000 from an Australian artist. But due to sudden death of that artist, price of painting
suddenly increased to $125000 and client sold that on 3 April of current fiscal year. Resultantly,
this painting will not be categorized in collectible portion because according to rules, collectibles
are purchased for the intention of collecting antiques and entertainment but in this case painting
is used for income generation (Bell and Hindmoor, 2014). For the purpose
Calculation of taxable capital gain or loss of painting
Particulars Amount
Sale proceeds from painting 125000
Less: Cost base -2000
Net capital gain/loss for next year 123000
Interpretation: According to address, customer acquired painting on 2 May 1985 for
$2000 from an outstanding Australian craftsman and sold that canvas for $125000 on 3 April in
year at workmanship sell off after the passing of craftsman as estimation of that graphics all of a
sudden ascent up. This work of art won't be placed in the classification of collectible since it was
bought as venture instead of for getting a charge out of reason. This transfer occasion of CGT
resource will fall under segment A1(s 104-10(1)). As indicated by this segment capital gain
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would be: $125000-$2000= $123000, yet this depiction was obtained before 20 September 1985
signified as Pre-CGT resource as per segment 104-10(5) and does not draws in capital gain.
Shares
1. Trade of Common Bank Ltd Shares
Purchase Cost of shares
Particulars Amount
Cost of Purchase per shares(a) 15
No. of shares purchased(b) 1000
Add Stamp cost on purchases(c) 750
Net purchase cost d=(a*b)+c 15750
Proceeds from sale of Shares
Particulars Amount
Sale Price per share (a) 47
No. of shares sold(b) 1000
Less Brokerage Paid(c) 550
Net sales value e=(a*b)-c 46450
Net Capital gain/Loss
Particulars Amount
Gain/Loss (e-d) 30700
Interpretation: As per the above calculations share of a company related to capital gain
tax asset under s 108-5, and after selling of shares owners will be change in the Event A1 s 104-
10(1) and shares sold on 4 July. According to shares purchase date after 21 September 1999 so
there is indexation does not apply on the basis of cost of shares.
Here is calculation of capital gain/loss -
Total Selling price of shares = $47*1000= 47000
Brokerage expenses for selling shares = $550 (according to the brokerage fees under s 110-35)
Stamp duty expenses = $750 ( according to the stamp duty cost under s 110-35)
Purchase of the share = $15*1000 = $15000 ( According to Acquisition cost under s 110-25(2))
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So capital gain according to under s 115-25(1) = $47000-16300 = $30700
2. Trade of PHB Iron Ore Ltd
Purchase Cost of Shares
Particulars Amount
Cost of Purchase per shares(a) 12
No. of shares purchased(b) 2500
Add Stamp cost on purchases(c) 1500
Net purchase cost d=(a*b)+c 31500
Proceeds from Sale of Shares
Particulars Amount
Sale Price per share (a) 25
No. of shares sold(b) 2500
Less Brokerage Paid(c) 1000
Net sales value e=(a*b)-c 61500
Net Capital Gain/Loss
Particulars Amount
Gain/Loss (e-d) 30000
Interpretation: As per the share of company is capital gain tax asset under s 108-5, and
shares was selling on 14 February after that ownership was change under event A1 s 104-10(1).
as per the rule shares were purchasing after 21 September 1999 so there does not apply
indexation on the cost of shares. The selling price of share are $25*2500 = 62500. calculations of
capital gain/loss-
Purchase price of shares - $12*2500 = $30000 (Acquisition cost under s 110-25(2))
Brokerage expenses on shares - $1000 (according to brokerage fees under s 110-35 )
Stamp duty expenses on shares - $1500 (stamp duty cost under s 110-35)
There client getting capital gain on these shares $62500 - $32500 = $30000. This amount is an
desirable discount capital gain under s 115-25(1).
3. Trading of Young Kids Learning Ltd
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Calculation for net capital gain/loss
Particulars Amount ($)
Sale proceeds as per current tax year 0.5*1200 600
Less: Cost of base ($5*1200) -6000
Less: Brokerage cost -100
Less: Stamp Duty -500
Net Capital Gain/loss -6000
Interpretation -
As per the calculations share of the company come under s 108-5, and after selling of
shares ownership change that was coming CGT event A1 s 104-10(1). Shares were selling on 14
February and Purchasing After 21 September 1999 so indexation does not apply on the cost of
shares. So calculated of capital gain/loss selling price of shares = $0.5*1200 = $600
4. Trading of Build Ltd.
Calculation for net capital gain/loss
Particulars Amount ($)
Sale proceeds as per current tax year 2.5*10000 25000
Less: Cost of base ($1*10000) -10000
Less: Brokerage cost -900
Less: Stamp Duty -1100
Net Capital Gain/loss 13000
Interpretation: It is analysed that the capital gain loss were analyse 13000 which was
analysed in terms of determining the price and cost base, brokerage cost and the Stamp duty.
e) Violin
Calculation for net capital gain/loss
Particulars Amount ($)
Sale proceeds form sale of Violin 12000
Less: Cost of base -5500
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Net capital gain/loss 6500
Interpretation: It is evaluated that the net capital gain and losses were evaluated as
$6500 gain from the net capital gain and losses.
Treatment of capital losses and gains
2. Calculation of Fringe Benefit Tax (FBT) liability of Rapid-Heat Pty Ltd for the year ending 31
March 2018
(a) In accordance with given problem, Rapid-Heat is a manufacturing company of electric
heaters, and it purchased a car worth $33,000 (including GST) on 1 May 2017. Company gave
car to its employee Jasmine, for attending meetings out of town and sales. But Jasmine used car
for personal tasks other than company's work (Liu, 2013).
Legislation for FBT liability covers under Fringe Benefits Tax Assessment Act 1986, and
this car provided to Jasmine by Rapid-Heat attracts FBT liability. FBT is levied on employer on
providing certain extra benefits to employer or his/her associate. According to the definition of
car which lies under FBT should include following:
 any car, station wagon
 any panel van or goods carrying vehicle having capacity of less than one tonne
 any passenger-carrying vehicle having capacity of less than 9 passengers
But if car provided by Rapid-Heat or any other employer does not meet this definition
then it will considered as car available for private use. In case if Rapid-Heat provides car for
personal use or Jasmine use it for personal chores then it will also considered as car available for
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private purpose. In this question, Jasmine parked the car on airport so it will come in the
category of private use. For tax purpose of FBT liability, Australia considers 1 April to 31 March
(Genschel and Schwarz, 2011).
Jasmine travelled about 10000 km from that car till 31 March 2018, and also expenses of
about $550 spent on car which were reimburse by Rapid-Heat will not be considered in FBT
liability (McGee and Ross, 2014). Car was parked on airport for about 10 days which will not be
counted while calculating period for FBT liability purpose. So total duration for FBT liability
from 1 May 2017 to 31 March 2018 is 335 days. And duration of 5 days will be reduced as in
this period car was taken for annual repairs. And 10 days will also be reduced from above
calculation as car was in private use of Jasmine so this will not counted. Net duration for
calculation will be 320 days.
Formula for calculating fringe benefit tax is as follows:
= (0.2 * base value of car * number of days provided in terms of fringe benefit tax in taxable
year) – Amount if any paid by recipient
Particulars Amount
Base value of car provided by Rapid-Heat $33000
Tax rate 20.00%
Number of days provided in terms of FBT 320
Total number of days in a FBT taxable year 365
Total fringe benefit tax 5786
Later, Rapid-Heat gave loan to Jasmine of $500,000 at an interest rate of 4.5%. But
according to problem Jasmine purchased a holiday home worth $450,000 and rest amount of
$50000 she gave to her husband to purchase interest free shares in Telstra. This will attract loan
fringe benefit tax liability to Rapid-Heat. Because if a company gives loan to employee at low
interest rate or interest free then it comes in the category of loan fringe benefit tax. Lower
interest rate refers to rate less than benchmark/statutory interest rate set by Reserve Bank of
Australia.
Tax liability of loan fringe benefit will be calculated through variation between:
 Interest that will be accumulated if statutory interest rate will be applicable on balance of
loan
 Actual interest payable on loan in taxable year
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Jasmine does not used loan fully for purpose of purchasing home but she lent some of
amount to her husband for purchasing shares. Shares are income bearing equity instruments
which will generate revenue. Here otherwise deductible rule will apply because employee used
loan for buying interest producing instruments (Worthington, 2012). This can be explained with
the help of an example, if employee of a company uses loan for purchasing shares or income-
producing assets then interest accrued on loan will be entirely deductible for FBT liability. Thus
under otherwise deductible rule, fringe benefit tax liability will be zero for Rapid-Heat.
After that Jasmine buy a electric heater from Rapid-Heat for personal purpose and paid
$1,300. Manufacturing cost of a electric heater for Rapid-Heat is $700 and it sell to customers at
a price of $2,600. Prevailing FBT tax rate for the year ended 31 March 2018 is 47% and this tax
is provided annually on net value of fringe benefits.
Particulars Amount
FBT rate for the year ended 31 March 2018 47.00%
Price at which Jasmine purchased electric heater $1300
Production cost of electric heater $700
Selling price to customers $2600
Total value for the purpose of fringe benefit tax $600
Total taxable amount of fringe benefit $282
Taxable amount is calculated by deducting purchasing price of electric heater
($1300) and production cost ($700) from selling price of electric heater ($2600). Calculation of it
is as ($2600-$1300-$700).
It is given that Rapid-Heat is eligible to take input tax credits regarding any payment made
including GST. So computation of fringe benefit tax liabilities of Rapid-Heat are done keeping in
mind this assumption (Megalogenis, 2012).
(b) In the case if rather than extending loan worth $50,000 dollar to her husband, Jasmine used
this amount in buying shares for herself then it will attract fringe benefit tax liability for taxable
year because employee purchased shares for herself not for her associate (husband). Shares are
income producing assets, in prior situation income from shares was of Jasmine's husband but in
this situation it is of Jasmine. So tax liability will be ascertained on $50000 and at the rate of
difference between interest rate on which Rapid-Heat provided loan and statutory interest rate
(James, 2015). Formula for calculating assessable value of loan fringe benefit:
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= (Loan amount*statutory rate of interest) – (Loan amount*actual interest rate levied by Rapid-
Heat) * time period for which loan has been taken/ total number of days in a financial year
Particulars Amount
Benchmark/statutory interest rate 5.30%
Interest rate at which Rapid-Heat provided loan 4.50%
Part of loan from which shares are purchased by
Jasmine $50,000
Time period from date of taking loan till 31 March
2018 212 days
Net fringe benefit tax liability $232
CONCLUSION
The above report summarises the taxation rules and legislations related to capital gain
and losses. Taxation rules are practical implemented in terms of analysing the various capital
products are evaluated in this report. Fringe benefits and taxes are considered in this context. The
overall analysis provides a cumulative information regarding taxation system.
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