Taxation Theory, Practice and Law

This article discusses the Australian law in regards to businesses and taxation theory, practice and law. It also includes a case study on asset disposal and fringe benefit tax liability for an employer.

RUNNING HEAD: TAXATION THEORY, PRACTICE AND LAW
Taxation Theory, Practice and Law
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RUNNING HEAD: TAXATION THEORY, PRACTICE AND LAW
Introduction
Australian law in regards to businesses has a national statutory and framework for fair
trading between businesses and its consumers or investors (Tiley & Loutzenhiser, 2012).
Working as a tax consultant in Mayfield, NSW there are various clients, who have made
multiple types of transactions. In the current discussion various sale of various assets have
taken place which have to be treated in their income statements as discussed below. The tax
computation has been conducted for the ascertaining capital gains or loss for the year ended
30 June of the current tax period. In the second question Fringe benefit tax liability for Raid
Heat Pty Ltd has been conducted, which has provided a car for its employee Jasmine.
Question 1
Asset disposal along with some other types of transactions were conducted by the
client. There was also an attempt on the part of the client to present crucial information and a
thorough understanding of this information clearly reflect on the fact that asset disposal
cannot be considered as contributed to business activity (Gitman, Juchau & Flanagan, 2015).
So, it can be said that these transactions will result in capital generation instead of revenue
generation. It is a fact that taxation is highly linked to revenue and not capital. One of the
major aspects that are associated with capital receipts is that the CGT (capital gains tax) can
only be applied to those capital gains tax which is realised by the taxpayer. Therefore, the
discussion will be solely based on the significance of capital gains in terms of the transaction.
For proceeding with the implications of taxation, there will be an attempt and in this
study to deal with some of the important components.
Pre-CGT Asset
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RUNNING HEAD: TAXATION THEORY, PRACTICE AND LAW
The section 149(10) of the ITAA 1997 have stated that if a taxpayer owns an asset on
or before 19th September, 1985 then it will be treated as pre-CGT asset. One of the reasons
for defining a pre-CGT asset is because the assets that were bought or sold on this particular
date are unable to obtain any CGT liability. This non-application of the CGT is not affected
by the loss or gains obtained from sale.
CGT Event
In order to compute capital gains it is quite essential to give emphasis on CGT events
as capital gain or loss is linked to it. The ITAA 1997 have given a list of the CGT events in
section 104-5. An important event that helps in transpiring as soon as asset disposal is
reported and it is A1 event. It can be discerned that for calculating capital gains one can rely
upon A1 event. The capital gains can be received by deducting cost of assets from price
obtained after selling the asset.
Cost base
While calculating capital gains with help of A1 event, cost base perhaps plays the major role.
It has been defined in the section 110-25 (Mehrotra & Ott, 2015). The section 110-25(1)
evaluates the fact that cost base refers to the combination of five major constituents and it is
termed as elements.
1st Component: Cost at which the taxpayer had bought the asset.
2nd Component: Costs related to agent fees, stamp duties or legal fees that are obtained by a
taxpayer at the time of disposing or procuring an asset.
3rd Component: It takes into consideration the cost of ownership that includes capital interest
or taxes that are incurred while owning an asset.
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RUNNING HEAD: TAXATION THEORY, PRACTICE AND LAW
4th Component: Capital expenditure made by a taxpayer in order to preserve the value of the
asset.
5th Component: In order to preserve property the taxpayer tries to spent an amount of capital.
Retaining concession on the capital gains
It is to be understood that the CGT is not to be applied for deriving capital gains from
A1 event. If a taxpayer is intended to decrease the CGT liabilities then they need to take help
of two methods (Mirrlees & Adam, 2010). Discount and indexation method are those two
types of methods that can be applied for reducing CGT liabilities. Indexation asset has a
somewhat limited usage as it can only be utilized for those assets which have been bought
before September 1999. On the contrary, discount method is able to give a taxpayer rebate of
about 50% in capital gains. The underlying gains have been categories by the section 115-
25(1) of the ITAA 1997 under long term gains. Capital gains were incurred from the assets
whereby holding period of the taxpayer is longer than a year then it is called long term capital
gains.
Loss of capital
Capital losses can be registered in case the computation provided in A1 event is
applied. In such a situation, it becomes quite difficult to understand the proper way to
approach to this problem (Lanis & Richardson, 2012). One need to give special attention on
the fact that capital loss can never be utilized for nullifying taxable income. However, it
might get adjusted to the capital gains which as a result decrease intensity of capital loss. If
capital gains are not reported then the capital loss is to be carried forward to the next taxation
year and it will continue for five years.
First Transaction: Vacant Land
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RUNNING HEAD: TAXATION THEORY, PRACTICE AND LAW
The facts that have been gathered from the asset, it can be said that the asset is not
considered to be pre-CGT asset and no exemptions will be given in this connection. The A1
CGT event has been associated with the contact for land sale that is being signed. The
underlying contract is to be executed in a given year for the purpose of land sale. However,
the proceeds will be paid in the next tax year. As per TR 94/29, it will have no significant
impact over the charging of CGT at the time of execution of the sale contract. An important
aspect that is found in this transaction is that the taxpayer ‘s holding period is passed one year
and so according the section 115-25, the client will be able to obtain concessions on the
capital gains.
Computation of capital gains
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RUNNING HEAD: TAXATION THEORY, PRACTICE AND LAW
Second transaction: Antique Bed
The scenario reflects upon the fact that in the year 1986 the bed acquisition process
has been conducted and therefore, CGT exemption seems to be impossible (Dempsey &
Partington, 2008). It has been found that the bed was not sold by the client rather it was stolen
and as a result of A1 event the need for computation of capital gain and losses seems to be
viable. As the bed is antique and so it can be treated as a collectible and hence, it need to have
an initial price of purchase that exceeded $500 for application of CGT on its sale. So,
exemption of CGT is not worthy here. The transaction period have exceeded by one year and
so as per section 115-25 concession will be obtained by the client.
Computation of capital gain-Antique Bed
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RUNNING HEAD: TAXATION THEORY, PRACTICE AND LAW
Third Transaction: Painting
This scenario for painting is clearly indicating towards the fact that this painting
cannot earn CGT as per the details provided in it. The reason for such a verdict is totally
connected with the date of purchase. This painting was purchased before 19th September,
1985 so, this painting turns out to be a pre-CGT asset and as a result excluded from CGT and
it is in accordance to the section 149-10 of ITAA 1997.
Fourth transaction: Shares
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RUNNING HEAD: TAXATION THEORY, PRACTICE AND LAW
In term of share, CGT is not excluded due to the purchase dates as the shares were
purchased after 19th September, 1985 (Pattenden & Twite, 2008). One of the crucial aspects
that can be associated with the transaction is that section 115-25 seems to be applicable here
as holding period is found to be exceeded by a year. Hence, concession will be obtained by
the client.
Computation of capital gains-Shares
Fifth transaction: Violin
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RUNNING HEAD: TAXATION THEORY, PRACTICE AND LAW
In case of violin, it can be said that it will not fall under the category of pre-CGT
asset. The remarkable information that can be obtained from the given scenario is that this
violin is basically used by the client for personal use (Burman, 2010). Here comes the
concept of asset for personal use. While entitling violin as personal asset it can be discerned
that the taxpayer is quite skilful in playing the violin and that he has host of such violins. So,
violin is to be regarded not as a collectible rather as a personal asset. CGT application can
well be associated with personal use asset and the purchase price will be more than $ 10,000.
However, the given transaction fails to fulfil this condition and hence CGT exemption is
made available for the violin.
Capital gains (cumulative)
Net Capital Gains = 96500+2250+40350= $139,100
Question 2
a) There are some benefits that an employer offers to his employees other than salary
and it is referred as fringe benefit. The different aspects and provisions regarding
fringe benefit has been explained vividly in the FBTAA 1986. One of the main
characteristics of this type of benefit is that the tax burden befalls on employee and
the employer. However, recipients remain exempted from tax payment. The below
section will held a discussion on the benefit which is provided by Rapid, an employer
to his employee Jasmine.
Car Fringe Benefit
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RUNNING HEAD: TAXATION THEORY, PRACTICE AND LAW
As per the section 7 of FBTAA 1986, it has been demonstrated that car fringe benefit
refers to offering a car by an employer to their employees for personal use (Nerré, 2008).
If the employee extended on car usage time then it will not considered as part of car
fringe benefit because such benefits will only be applicable in case the employer has
allowed the employee to enjoy its benefits.
In the given case scenario, whereby Rapid Heat has given a Jaguar car to Jasmine for
personal use, FBT liability will be applicable for Rapid Heat in the specified tax year. In
order to calculate the car fringe benefit the section 9 of FBTAA 1986 can be of immense
help to the employer as it carries the guidelines for such benefits. While computing for
car fringe benefit, cost base is taken as one of the components. There is another factor that
will also be applied on the employer those days when the car was not used and employer
has not put any restrictions on the employee. In the computing formula of car fringe
benefit, deduction regarding small repairs or maintenance is exempted. Jasmine will not
have to pay for any deduction as car was in garage for minor repair work. In fact,
deduction will not be conducted for leaving the car in the parking area despite of not
using it.
For computation, gross rate is taken as 2.0808 by taking into consideration the tax year
2017/2018 and GST is to be levied. The calculation for FBT liability is given below.
Loan Fringe Benefit
It is often found that mostly employees take loan from their employers with some
concessions. The interest rate which is charged by an employer that is lower than that of
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RUNNING HEAD: TAXATION THEORY, PRACTICE AND LAW
the actual rate then it is termed as concession rate. By extending loan to the employees at
concession help them to save on interest costs and so it is considered as fringe benefit.
The scenario shows that jasmine had borrowed $500,000 from Rapid Heat with an
interest of 4.25% p.a. RBA had specified the interest rate for a tax year and it is 5.25%
p.a. Hence, it can be said that the loan given to Jasmine is extended at concession rate and
it is likely to attract FBT liability.
The calculation of the FBT liability which is to be paid by the employer has been
represented below.
It is to be noted that in case loan proceed are utilised by employees for generation of
income then tax deduction is not provided to an employer. So, Rapid Heat will likely to
get deduction on the interest rate given to jasmine on a loan of $45,000. Remnant of
$50,000 will not be subjected to deduction as it will be utilized by her husband.
Internal Expense Fringe benefit
The benefits that are provide by an employer to their employees that is used for
private expense is called expense fringe benefit (Braithwaite, 2017). This type of benefit
has been explained with the help of the case of Rapid Heat and Jasmine. Jasmine wish to
buy heater that was made by rapid Heat. For purchasing it she need to spent $2600. So,
Jasmine has to pay half of the total amount and rest will be paid by rapid heat. It can be
said that private expense cash flow for Jasmine has been lowered down to $1300.
The FBT liability has been calculated and it has been given below.
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RUNNING HEAD: TAXATION THEORY, PRACTICE AND LAW
b) As given in the scenario it is seen that $50,000 that Jasmine had earlier given to her
husband is now being utilized by her for purchasing shares. Jasmine will obtain
dividend income which will ultimately be used for giving deduction to her employer.
It can be calculated in the following manner.
Tax Deduction = 50000 * (5.25% - 4.25%) = $500
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RUNNING HEAD: TAXATION THEORY, PRACTICE AND LAW
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