Taxation Theory, Practice & Law: Advice on Tax Burden for Asset Sales

This article provides tax-related advice for clients on the backdrop of various asset sales that have been concluded in the given tax year. It outlines the nature of receipts, CGT exempt assets, taxable capital gains, and timing aspects in CGT. It also discusses the FBT implications for employers providing fringe benefits to employees.

Taxation Theory, Practice & Law
Student Name
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Question 1
Issue
The key objective is to outline tax related advice for the client on the backdrop of various asset
sale that have been concluded in the given tax year. In this regards, the given information would
be utilised so as to hint at the potential tax burden on the client.
Law
Receipts Nature
Whenever a taxpayer receives some cash, the pivotal concern from the tax perspective is to label
these proceeds either within the category or revenue or capital. These two are possible and the
precise determination of the correct nature of the proceeds would require consideration to the
underlying circumstances and taxpayer motive. An example of this could be provided through
the property sale which if done by builder would result in revenue receipts while the same
transaction if done by investor would result in capital receipts (Woellner, 2017). Thus, a key
understanding derived from the above example is that revenue receipts are essentially obtained
when the underlying taxpayer is involved in normal business activity. The tax treatment to the
two types of proceeds shows significant difference with revenue receipts contributing to
assessable income while capital receipts being tax exempted. However, any capital gains or
capital losses linked with capital proceeds would attract Capital Gains Tax (CGT) (Nethercott,
Richardson and Devos, 2016).
CGT Exempt Assets
A blanket exemption of CGT can be availed if the underlying asset is part of pre-CGT asset. A
unifying character of these assets is these have been acquired at a time when the Australian
government had not decided to tax the capital gains or losses (Coleman, 2016). Since, no CGT
was applicable at the time of acquisition of these assets, hence even today these assets would be
considered CGT exempt. The date on which CGT was enforced is September 20, 1985 and hence
it automatically becomes the cut-off date to decide the pre-CGT assets (Hodgson, Mortimer and
Butler, 2016).
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While the above exemption is quite broad in scope considering that it applies to all possible
assets, there are specific exemptions available for certain particular asset type. The first
noteworthy exemption is for the class of assets known as collectables (s. 118-10) where for CGT
to apply, the minimum purchase price must be higher than $ 500 (Krever, 2017). Another
noteworthy exemption is for the class of assets known as items of personal use (s. 108-20(1))
where for CGT to apply, the minimum purchase price must be higher than $ 10,000. Failure on
the part of respective assets to comply with these thresholds would result in CGT exemption
without any regards to the underlying gains and holding period (Gilders, et. al., 2015).
Taxable capital gains
For the computation of the CGT liability, the critical aspect is to compute the net capital gains
that are taxable.
In order to arrive at the net capital gains, a series of steps ought to be adhered to. The beginning
of the process is done with the occurrence of a CGT event. There are several possible CGT
events as per s. 104-5 but A1 CGT event is relevant for the discussion in this case. The
identification of the appropriate capital event is also essential since there is an attached
computation methodology of capital gains with each event (Sadiq, et.al., 2015).
For A1 CGT event, a pivotal input that is required is known as cost base and contains other costs
besides the purchase price that the client has spent on the underlying asset. The list of
components contributing to the asset cost base is enumerated below (Hodgson, Mortimer and
Butler, 2016).
The above list is an exhaustive list and hence it may be possible that for certain assets there are
only selected few elements which would then be added to reach the cost base.
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Using the cost base computed for the asset along with the selling price, capital gains or
associated losses may be computed (Barkoczy, 2017). However, these needs to be capital losses
related adjustment as the capital losses cannot be balanced against taxable income and instead
can be adjusted only against capital gains (s. 102-5). These capital losses would comprise of both
current year losses as well as past year capital losses. Capital losses do not expire and can be
carried forward year on year till they are adjusted against the available capital gains (Deutsch,
et.al., 2015).
Post the process, concessions in capital gains need to be provided using either the indexation
approach or discount approach. The latter is more popular especially when the capital gains are
high since the underlying discount is higher. The indexation approach has limitations in terms of
being useful for assets bought prior to 1999 with limited utility for those assets born post 1999.
The discount method does not suffer from this demerit. It allows for a 50 % decline in the
capital gains value before the same is subject to CGT (Coleman, 2016).
The only condition to be met for application of this discount is that the asset should have been
held by the taxpayer for a time period in excess of one year. Only then would the capital gains be
long term or else these would be short term. The net capital gains arrived after application of
concession using appropriate approach would then be levied CGT and determine the net tax
payable for the taxpayer (Gilders, et. al., 2015).
Timing aspect in CGT
In certain cases, a unique problem may arise due to the innate timing gap between the date on
which the contract for asset sale is executed and the date on which the related proceeds are
gained by the seller of the asset (Barkoczy, 2017). Hence, in such cases, problem arises with
regards to the correct tax year when the tax implications of the capital asset must be included. In
this context, TR 94/29 provides resolution of the situation by highlighting that irrespective of the
timing of the proceeds, the tax implications must be captured in the tax returns of the same year
when the sale contract regarding the asset is enacted (Reuters, 2017).
Application
Receipts Nature
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The information provided clearly highlights the fact that the transactions involving the asset sale
are non-business transactions. This is indication of the client not having any business related to
trading of assets. Further, evidence is available considering the fact that the client is an investor.
The net result would be that the underlying proceeds that arise from the sale would be termed as
proceeds having capital nature. Owing to this classification, there would not be any application
of tax on the proceeds, however the capital gains would not be exempt and CGT liability would
suitably be computed.
CGT Exempt Assets
Considering possible exemption for pre-CGT assets, hence it is worthwhile to take into
consideration the respective dates of asset acquisition in order to analyse if any asset is pre-CGT
or not. Considering these dates, it is apparent that a particular asset painting is recognised as a
pre-CGT asset as the asset purchase predates the application of CGT by the government. The
result is that CGT liability in connection with painting sale is zero.
The antique bed falls within the sub-category of collectables but will not have exemption from
CGT owing to $ 3,500 being the purchase price which satisfies the threshold limit. Another asset
worth consideration is the violin. If this asset was not regularly used by client for deriving
satisfaction coupled with entertainment on personal level, then this could have well being
classified as a collectable. The violin has cost of $ 5,500 and hence this is lower than $ 10,000
which implies in zero CGT implication on account of violin sale.
Taxable capital gains
For the assets that are not CGT exempt, the requisite computations are carried out below.
Block of Land
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Antique Bed
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Shares
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Timing aspect in CGT
For the land asset sale, the given information clearly hints at the contract of sale already been
enacted in 2017/2018 while the sales proceeds to be obtained by buyer only in next year.
However, the respective CGT consequences related with land asset would be represented in the
current year tax return only as indicated in TR 94/29.
Conclusion
There are two assets which emerge as being exempt from CGT namely violin and painting.
Taxable capital gains have been computed for the remaining assets and precious capital losses
have also been adjusted resulting in taxable capital gains to the rune of $ 139,100.
Question 2
Issue
The scenario presented has two parties, Jasmine (employee) and Rapid Heat (employer). During
the course of employment, certain benefits have been extended to employee on behalf of the
employer which would give rise to FBT implications and these need to be computed considering
applicable legislation (i.e. Fringe Benefits Tax Assessment Act 1986).
Law
In wake of the fringe benefits details provided, a discussion of the relevant fringe benefits is
carried out below.
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 Car Fringe Benefit
Applicable section – Section 7, FBTAA 1986
Necessary Condition – Employer owned car should be allowed for private usage by employee.
Permission for professional use would not amount to any fringe benefit since employee would
not get any benefit as for professional work, employee has an entitlement to conveyance
(Wilmot, 2014).
Calculations:
.1) Calculate the extent of car fringe benefit using approach endorsed in s. 9.
A critical aspect to note is that days would not be dedcuted when employee is not able to use car
because of his/her own reasons. Additional, garage visit for minor repairs does not impact car
availability (Nethercott, Richardson and Devos, 2016).
2) For the given fringe benefit, taxable value ought to be computed using gross up factor.
3) For the given fringe benefit, FBT liability ought to be computed using taxable value of
benefit.
 Loan Fringe Benefit
Applicable section – Section 16, FBTAA 1986
Necessary Condition – Loan given to employee at rates which are at a discount to the RBA
benchmark rate. Higher the discount, higher the savings in interest, higher the fringe benefits
provided to the employee (Sadiq, et.al., 2015).
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Calculations:
1) Considering the discount in interest rate, amount of loan, and time period, the interest saving
ought to be computed which forms the value of fringe benefit (Krever, 2017).
2) For the given fringe benefit, taxable value ought to be computed using gross up factor.
3) For the given fringe benefit, FBT liability ought to be computed using taxable value of
benefit.
Section 18 provides for a deduction rule whereby CGT deductions can be taken by employer to
the extent the loan amount is utilised by employer only for taxable income production (Hodgson,
Mortimer and Butler, 2016).
 Internal expense fringe benefit
Applicable section – Section 20, FBTAA 1986
Necessary Condition – Employer to contribute in paying for personal expenses of employee so as
to lower the spending by employee (Gilders, et. al., 2015).
Calculations:
1) The amount of personal expense that employer pays for is the extent of fringe benefit which is
modified owing to internal benefit.
2) For the given fringe benefit, taxable value ought to be computed using gross up factor.
3) For the given fringe benefit, FBT liability ought to be computed using taxable value of benefit
(Deutsch, et.al., 2015).
Application
(a) In wake of the relevant law, the fringe benefits provided by Rapid Heat ought to be discussed
to work out the FBT consequences for the employer.
Car fringe benefit
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There is fulfilment of necessary condition in the sense that car provided by Rapid Heat is
available for personal use of Jasmine. Time deduction can only be availed for April month when
car was not provided. The stay of the car at the airport parking did not restrict usage of car by
employee. Similarly, FBTAA does not allow minor repairs related deductions.
Loan fringe benefit
The necessary condition is fulfilled as Jasmine is saving interest on discount to RBA benchmark
rate that has been provided by Rapid Heat. The discount is 100 basis points i.e. (5.25% -4.25%)
A part of the loan is being utilised by husband of Jasmine which would not yield any deduction.
Hence, the deduction hope for the employer rests on the generation of rental income by holiday
home that Jasmine has acquired using 90% of loan proceeds.
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Internal expense fringe benefit
The necessary condition is fulfilled as half of the price related to the electric heater is being
borne by the employer despite the spending on electric heater being a personal expense for
Jasmine. The resultant savings that Jasmine realised amount to $ 1,300.
(b) The alternate utilisation is beneficial for employer as the $ 50,000 share investment is being
carried out by Jasmine as against her husband previously. On account of dividend income,
entitlement is available to Rapid Heat to lower the FBT payable by $ 500 as has been
captured below.
Conclusion
The FBT related liability falls on Rapid Heat in context of the fringe benefits that Jasmine has
availed. Deductions in FBT would be contingent on the holiday home producing income as rent
and share purchase being carried out by Jasmine in place of her husband.
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References
Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University Press.
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters (Professional)
Australia.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2015) Australian tax handbook.
8th ed. Pymont: Thomson Reuters.
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016) Understanding taxation law
2016. 9th ed. Sydney: LexisNexis/Butterworths.
Hodgson, H., Mortimer, C. and Butler, J. (2016) Tax Questions and Answers 2016. 6th ed.
Sydney: Thomson Reuters.
Krever, R. (2017) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON
LAWBOOK Company.
Nethercott, L., Richardson, G., and Devos, K. (2016) Australian Taxation Study Manual 2016.
8th ed. Sydney: Oxford University Press.
Reuters, T. (2017) Australian Tax Legislation (2017). 4th ed. Sydney. THOMSON REUTERS.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., and Ting, A.
(2015) Principles of Taxation Law 2015. 7th ed. Pymont: Thomson Reuters.
Wilmot, C. (2014) FBT Compliance guide. 6th ed. North Ryde: CCH Australia Limited.
Woellner, R., Barkoczy, S., Murphy, S. and Pinto, D. (2017). Australian Taxation Law Select
Legislation and Commentary Curtin 2017. 2nd ed. Sydney: Oxford University Press Australia.
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