Taxation Theory, Practice & Law

This report examines the principles of taxation theory, practice, and law in Australia, focusing on capital gains tax (CGT) and fringe benefits tax (FBT). It analyzes various case scenarios, including the calculation of net capital gain for a client and the assessment of FBT implications for an employee. The report provides insightful advice and legal references, offering a comprehensive understanding of these crucial aspects of Australian taxation.

TAXATION THEORY, PRACTICE
& LAW

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
Determining the net capital gain of client as on 30 June 2018...............................................1
QUESTION 2...................................................................................................................................2
Advising Jasmine in analysing FBT on various assets...........................................................2
Analysing the tax consequences as per loan amount will be used by Jasmine in purchasing
securities.................................................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................8

INTRODUCTION
Taxation practices and analysis has been based on considering various laws and regulation
which are in favour of bringing fair tax practices in economy. In Australia taxation practices and
regulation has been governed by two authorities such as Federal registrar of legislation and
Australian taxation office. In the present report, with the influences of these two authorities there
will be determination of taxable provision of various cases with reference to capital gain tax and
fringe benefit tax. Moreover, there will be fruitful suggestions awarded to the clients with proper
legal references and advices.
QUESTION 1
Determining the net capital gain of client as on 30 June 2018
Capital gain tax is one of the most important and beneficial technique which helps in
identifying the tax payable by an organisation with respect to their assets. Thus, these are the
assets which have been bought and sold in a certain period on which ATO have various rulings
and provision to charge taxes. In the below listed measurements there were various assets which
have been bought by the client and sold (Bajada, 2017). The taxable administration was made in
respect with the CGT provisions and rates which have been charged against it.
Block of Vacant Land
According to Australian Taxation Office if anyone has acquired a vacant land, it will be
considered as capital asset which is subject to capital gain tax (CGT) when the land is sold. But
in case if land is purchased for taking use in business or to conduct profit making activity that
deals with land, any sales proceeds would be considered as ordinary income and registration of
the same should be done for goods and services tax (GST).
Tax deductions may be claimed if vacant land is bought with the intension to build a
rental property on it.
Land as capital asset
Vacant land which is held as a capital asset is subject to the same capital gain tax rules as
other properties (Vacant land, 2018). These expenses cannot be claimed as income tax
deductions because the land is not generating any income instead of that, these expenses could be
added to the cost base of the land for the purpose of calculating capital gain or loss when it is
sold.
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Building a rental property in vacant land
If a land is bought with the intention of building a dwelling to rent, it may enable one to
claim tax deductions such as loan interest, other ongoing holding costs and council rates. To
assess these deductions, one must ensure active and genuine steps of undertaking dwelling and
make it available for rent as soon as it is completed.
Interpretation:
Client signed a contract to sell the house in current year on 3/06 for $3,20,000 which was
acquired by her in January 2001 for $1,00,000 and incurred expenses of water and sewerage for
$20,000 which would be payable to her only (Braverman, Marsden and Sadiq, 2015). So, by
subtracting non indexed cost base price with selling price of house i.e. 3,20,000-1,20,000. The
capital gained that was obtained will be 2,00,000, as the property was purchased after 11: 45 am
on 21st sept. 1999, the discount model will be applicable in the calculation of capital gain
taxation i.e. 50% of the capital gained will be charged to ta (50% * 2,00,000=1,00,000).
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Antique bed
These type of collectables includes items that are kept safe for personal use which
includes;
 Paintings, sculpture drawings,
 Antiques,
 Jewellery, etc.
All the capital gain or loss will not be considered if the collectables which are acquired
are of $500 or less. Section 104(20) states regarding loss and destruction of asset.
Interpretation
When insurance claim was received by due to loss by theft of Antique bed it
resulted in capital gain. As it was observed that property was purchased before 11: 45 am on 21st
sept. 1999, the method of indexation would be applied. The market value could not be
considered of the collectables because the cost of purchase is known to us of asset and asset will
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be eligible for capital gain/loss in the current year as insurance claim was received in the current
year only (Butler and Calcott, 2018). Received insurance claim of $11,000 is less than cost base
which is $14,169.09, so there is capital loss of $3,169.09 for the asset which could be set off with
any other income from collectables.
Painting
It is also a type of collectable so all the provisions that are applicable to Antique Bed are
also applicable for painting.
Interpretation:
Painting was also purchased before 11: 45 am like Antique Bed on 21st sept. 1999, so
indexation method will also be applicable. According to given data, sale of painting took place in
the current year on 3rd April the capital gain/loss will be calculated on the basis of this current
year. Here, the purchase price after applying indexation method is $5941.95 and the sale
proceeds are $125000, the capital gain would be $119058.05 for the current year from the sale of
this asset.
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Shares
These are treated as same as any other asset is treated for the purpose of capital gain.
Whenever there is sale of shares, CGT event occurs.
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Interpretation
In the above calculation in which shares are purchased after 11: 45 am on 21st sept. 1999
so the discount model will be applied (Harris, 2015). The purchase of asset and sale of it is done
within 12 months so "The others Method" will apply which says Net sale proceeds less net
purchase will be taxable capital gain. It will result in capital gain.
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Violin
Interpretation
Property purchase before 11: 45 am on 21st sept. 1999 the indexation model
would be applied so after indexing the net capital gain from violin will be $2906.02 (Dixon and
Nassios, 2016). It would be a capital gain of $2906.02.
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Interpretation:
Taxable capital gain/loss of the current year ended 30th June is taken out as $150194.98.
So, capital gain tax will be chargeable on this amount as per the ITAA 1997.
QUESTION 2
Advising Jasmine in analysing FBT on various assets
Car: As per Australia taxation Act 1997, car can be defied as a motor powered road vehicle
which is designed to carry a load of less than two tonnes and passenger fewer than 9 ( Car fringe
benefits statutory formula rates, 2018). in this motor cycles or similar vehicles are not included.
According to section 7 of fringe benefit taxation Act of Australia, there are two methods
for calculation of fringe benefit tax These are statutory method and cost method.
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As per statutory method a flat 20% rate is applied for calculation regardless the distance
travelled if fringe benefit is provided from 1st April 2014. As per cost method a slab is provided
by the ATO and on fringe benefit of car are charged as per that slab.
Section 9 of FBTA provides that if car is used for personal use no claim for the benefit taken
under that part can be claimed under this. Value of Car used for purpose of employment will
only considered as fringe benefits are deduction are liable on that expense only.
Any expenses incurred by employee for repair and maintenance of the car are liable to be
reimbursed by the employer.
Calculation of the days for which car is used:
Car is used from 1-5-2017 to 31-3-2018, and for 5 days it was in repair and maintenance.
Days from 1/5/17 -31/3/18 = 335
less: days in repair and maintenance: 5
total days for which car was used by Jasmine: 330
Interpretation: for calculation of fringe benefit in present case statutory method is used
and a 20% flat rate is applied for calculation of fringe benefit taxation on car used by Jasmine for
business purpose (Cars and tax, 2018). The expenses of $500 are already reimbursed by Rapid-
Heat Pty Ltd to Jasmine which was incurred by her for repair and maintenance of the car. The
car was used by Jasmine for 335 in total and 5 days spent for repair of car are deducted so actual
days for which car used by her is 330 days. Value of car is estimated to be $33000, with
application of statutory rate of 20% and calculating it for 330 days the tax amount come out to be
at $6058.
Loan:
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As per section 16 of fringe benefit taxation act, loan taken from an employer is taxable
under the law. The rate at which the loan taken is taxable is difference between interest rate of
government and rate of interest charged by the employer.
For e.g.:
interest rate charged by government= 1.5%
interest rate charged by employer 2.5 %
Rate of finger benefit tax will be= 2.5-1.5 = 1% on total loan amount.
Use of loan money:
For non-profitable activities/investment:
In case, loan money is used for any activities from which no income is generate, then not
fringe benefit tax will be charged on such loan amount (Companies Act, 2006.). Same is
applicable for investment which do not generate any income.
For income generation:
In case loan taken from the employer is used in activities or investment for income/profit
generation than same will be charged to fringe benefit tax which the rate defines in above
section. The income must be generated to the person directly form investment of land money, in
case the money is landed to relative or third person and income is generated to that person,
employee is not liable pay fringe benefit taxation.
a) Use of loan amount:
Purchase of holiday house:
In case scenario it is given that Jasmine took loan of $500000 from his employer and she
invested $450000 for purchasing of holiday house. In this case, it is assumed that, purchase was
for personals use and so there will be no income generation from that house, hence, it is not
liable for taxation under fringe benefit taxation Act.
Lending sum to husband:
Remaining amount of $50000 was landed by Jasmine to her husband as loan to purchase
securities. The loan was given interest free, hence it is not chargeable to tax under FBTA. The
income generated form investment of $50000 is related to husband, it does not belong to Janine.
(Fringe Benefits Tax Assessment Act. 2018). In this case, she landed money to her husband
interest free so she is not earning any income from loan amount rather his husband earning some
money from the loan of $50000 she borrowed from Jasmine.
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Electric Heater
Interpretation:
The heater is sold at low prices as compared to market price and it was sold to public, so
the loss $600 would be incurred. In this case, FBT would be charged @47% on $600 which is
$282.
As it is defined in GST act 1999 that input tax credit will be available for things that are
used for business like motor car, etc. (Yagan, 2015). So in the given situation, car that was
purchased for employee and expenses were also bearded by business so it would be easier for
company to claim input credit on both items.
Analysing the tax consequences as per loan amount will be used by Jasmine in purchasing
securities.
If Jasmine has used $500000 for purchasing shares which is an income bearing asset, so
FBT will be chargeable on interest of $50000.
Below mentioned is FBT that will be charged on interest of $50000.
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Interpretation:
If loan is used for income bearing activities, then FBT will be calculated for the
difference in the statutory rates of interest and the rates provided by the company i.e. 1.25% for
the days i.e. 212 which it has been used for that in fiscal year. So, the chargeable FBT will be
$363. Here, situation is given that remaining amount of $50000 was invested by Jasmine for
purchase of shares. In this case, income or profits generated from the investment are directly
linked to Jasmine, hence $50000 will be charged to fringe benefit taxation.
The interest rate charged by government of leading of loan in Australia is 4.25% and rate
at which Rapid-Heat Pty Ltd provided loan to Jasmine was at 5.5%. the rate at which tax will be
charged is 55-4.25= 1.25%. Loan was taken by Jasmine on 1 September 2017, so days from
1/9/2017 to 31/2018 are 212 days. The FBT on $50000 @ 1.25% for 212 days is computed as
$363. This can be clearly seen from the above two case scenarios that any loan borrowed from
employer by an employee is liable to fringe benefit taxation if that sum is invested or used for
generation of any income (Jones, 2016). In case that loan is used for personal or such investment
that do not generate any income or profits the whole amount is not chargeable to taxation. If
partial amount is investing in profit generating activity such amount will only be charged to tax
and remaining will not be charged to tax.
CONCLUSION
In the concluded report brief study of taxation and GST laws entitled in Australia are
stated. It was understood that Capital gain tax is one of the most important and beneficial
technique which helps in identifying the tax payable by an organisation of individual with
respect to the assets. In this research report, all the data has been analysed to calculate client's net
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capital gain or net capital loss for the year ended 30th June of the current taxable year. Further,
advice is given to Rapid Heat regarding its FBT consequences by taking assumption that it
would be entitled to input tax credits in relation to any GST. Although, it was also concluded that
economic growth has brought fast reforms in taxation system. Mentioned reports examine the
process of defining structure of tax payers by means of which taxable income is acquired.
Moreover, this report consist of fringe tax and capital gain analysis with their calculations
accompanied by income tax as required by client.
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REFERENCES
Books and journals
Bajada, C., 2017. Australia's Cash Economy: A Troubling Issue for Policymakers: A Troubling
Issue for Policymakers. Routledge.
Braverman, D., Marsden, S. and Sadiq, K., 2015. Assessing Taxpayer Response to Legislative
Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl. Tax'n. 17. pp.1.
Butler, C. and Calcott, P., 2018. Optimal fringe benefit taxes: the implications of business use.
International Tax and Public Finance. 25(3). p. p.654-672.
Dixon, J. M. and Nassios, J., 2016. Modelling the impacts of a cut to company tax in Australia.
Centre for Policy Studies, Victoria University.
Harris, P., 2015. Income Tax in South Africa and Australia Turn 100: A Letter from the Queen
for the Dizygotic Twins. British Tax Review. (1). p. p.93-109.
Jones, D., 2016. Capital gains tax: The rise of market value?. Taxation in Australia, 51(2), p.67.
Yagan, D., 2015. Capital tax reform and the real economy: The effects of the 2003 dividend tax
cut. American Economic Review. 105(12). p. p.3531-63.
Online
Car fringe benefits statutory formula rates. 2018. [Online]. Available through
:<https://www.ato.gov.au/Forms/Completing-your-2017-fringe-benefits-tax-return/?
page=10>.
Cars and tax. 2018. [Online]. Available through
:<https://www.ato.gov.au/Newsroom/smallbusiness/Lodging-and-paying/Cars-and-tax/>.
Companies Act 2006. [Online]. Available through
https://www.legislation.gov.uk/ukpga/2006/46/part/10/chapter/2>.
Fringe Benefits Tax Assessment Act. 2018. [Online]. Available through
:<https://www.legislation.gov.au/Details/C2013C00059>.
Vacant land. 2018. [Online]. Available through
:<https://www.ato.gov.au/General/Property/Land---vacant-land-and-subdividing/Vacant-
land/>.
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