Taxation Theory, Practice & Law

This assignment provides a detailed analysis of taxation theory, practice, and law, covering capital gains tax, fringe benefits tax, and GST provisions. It includes calculations for various tax scenarios, such as the sale of assets, employer-provided benefits, and loans. The assignment is a valuable resource for students studying taxation.

TAXATION THEORY,
PRACTICE & LAW

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
Determine Net Capital Gain/Loss for year ended 30th June.......................................................1
QUESTION 2 ..................................................................................................................................9
Employer Provided Car to Employee.........................................................................................9
Calculation of Fringe Benefit as Loan......................................................................................11
FBT charged as goods sold to Jasmine at low cost ..................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Federal Government Levies and collects Taxes in Australia through Australian Taxation
Office. ATO manages all laws and regulations that are levied on the different sections of society.
The Law which covers income tax in Australia is Income Tax Assessment Act 1936 followed by
Tax Assessments Act 1997. Goods and Service tax governed by Goods and Services Tax Act
1989 are taxes that are levied on Sales of Goods and Services, collected by Federal Government.
In this project, the client wants analysis of data given of calculation of taxable capital gain loss
for current year on various assets and also to provide GST' s provisions if applicable. In this case
study, client needs calculation regarding Fringe Benefits that are provided to employees under
FBT Act 1986.
QUESTION 1
Determine Net Capital Gain/Loss for year ended 30th June
Various asset provided by client where capital gain tax, is need to be calculated under
Income Tax Assessment Act 1997. All gains and loss regarding capital asset are levied on
purchase and sales of property (Wilkins, 2015). The law covers various methods to calculate tax
by different basis of utilization of asset.
(a) Vacant Land
Treatment on sales of land depends upon that it is used as a capital asset or is kept for
commercial purpose. Mostly block of land are treated as capital asset so it is charged as CGT but
if they are used as stock in real estate business then any income from that will be ordinary
income and will be charged for taxes as business income (Capital Gains Tax. 2018.).
Land acquired before 11:45 am on 21st September 1999 and is held for more than 12 months then
Indexation Method will be applied and if not then “Discount Method” will be used. To calculate
cost base, we need to include all expenses which are related to acquisition of asset that may be
brokerage, stamp duty etc. (Chardon, 2016).
The Contractual rights of asset are described by Section 104(35) of ITA act 1997.
1. the timing of event will be when you enter into contract or acquiring rights are
created for other persons.
2. Disposing of asset will be deemed as event when owner transfers right to others
person.
1

Cost base Calculation on 3/06
Purchase Price of Vacant land 100000
Add Statutory Rates And taxes 20000
Unindexed Cost Base 120000
Calculation of Sale Proceeds
Sale proceeds from land 320000
Less Unindexed Cost Base 120000
Gain for next year 200000
2

Taxable CGT for Capital Gain Tax for next year
Land was acquired after 11:45 am on 21st September 1999, so “Discount Method” will
apply and CGT will be calculated as 50% of Capital Gain/Loss. So Capital Gain/Loss for next
year will be $100000(200000*50%).
Interpretation
Chargeable Capital Gain Tax will be of next year as because land ownership was
transferred in next year on 3/01. The provision which is stated above states that the contractual
rights will have to be transferred for completion of event of sale. So here in given case advance
received for sale of land doesn't mean that transaction had been completed because right of
transfer is not created for buyer. It has also been said as that, if the amount is being received in
installments, it doesn't affect CGT event tax will be charged on date of sale of contract that is
next year 3/01.
(b) Antique Bed
They are types of Collectables mentioned under ITA act 1997. These items are mostly
used for personal purposes and kept for enjoyment. They include-:
1. Antique items
2. Drawings, Sculptures, Paintings
3. Jewelry etc.
Capital Gain / loss will not be considered on collectables if asset that was purchased for less than
or Equal to $500. Laws and Regulations regarding Loss or destruction of asset are described
under section 104(20) of the ITA act 1997. Timing of event will be considered as when you first
receive compensation for any damages or theft or destruction from any insurance company or
others (Supanti, 2015).
Cost Base Calculation for current year on 12/11
Particulars Amount Indexation Factor Net Amount
Antique purchase price 3500 2.90 10157.22
Add Value Additions 1500 2.67 4011.88
Unindexed Cost Base 5000 14169.09
3

CGT event because of Theft
Particulars Amount
Claim from Insurance Company 11000
Indexed Cost Base 14169.09
Net Capital Gain/loss -3169.09
Indexation Table for calculation of Index Factor
Year Rates of Indexation
July 85 38.8
July 86 42.1
Jan 18 112.6
Interpretation
The Indexation Method has been applied because asset was purchased before 11:45 am
on 21st September 1999. The Capital event for loss by theft will be considered when collectables
here antique bed, insurance claim has been received on asset. Market value will not be taken into
consideration because purchase cost of asset has been provided by client. Insurance company has
provided claim in current year, so event will be considered for current year and tax will be
charged in this year eligible for CGT in current year, Amount received from insurance company
is lower by indexed cost base so there is capital loss to client in this case and it can be set off
with other capital profits from collectables.
(c)Painting
The asset (painting) is also a collectable, so all provisions which are applied to Antique
Bed will also be taken into consideration for this asset.
Capital Gain/ Loss Calculations
Calculation of Cost Base
Purchase Price 2000 2.97 5941.95
Sales Price 125000 125000
4

Net Capital Gain/loss 119058.05
As property purchase before
11.45 am on 21st sept 1999 the
indexation model will be applied
Indexation Table
May 85 37.9
Apr 18 112.6
Interpretation
The Collectable was purchased after 11:45 am on 21st September 1999, Indexation
Method has been applied. The contractual obligation has taken place in current year dated 3rd
April so CGT will be also be of same year. Indexed purchase price after taking into consideration
of index factors has been calculated as $5941.95 and sale proceeds received are $125000, So
there is Capital gain of $119058.05 and will be charged in current year.
(d)Shares
The Shares will also be treated as in same manner as other capital asset as they are also a
type of property as defined by ITA act 1997. The event of capital gain will be considered when
there is sale or transfer of shares.
(i)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
5

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
(ii)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
6

(iii)Trading of Young Kids Learning Ltd
Purchase Cost of shares
Particulars Amount
Cost of Purchase per shares(a) 5
No. of shares purchased(b) 1200
Add Stamp cost on purchases(c) 500
Net purchase cost d=(a*b)+c 6500
Proceeds from Sale of Shares
Particulars Amount
Sale Price per share (a) 0.5
No. of shares sold(b) 1200
Less Brokerage Paid(c) 1000
Net sales value e=(a*b)-c -400
Net Capital Gain/ Loss
Particulars Amount
Gain/Loss (e-d) -6900
(iv)Trading of Build Ltd.
Purchase Cost of Shares
Particulars Amount
Cost of Purchase per shares(a) 1
No. of shares purchased(b) 10000
Add Stamp cost on purchases(c) 1100
Net purchase cost d=(a*b)+c 11100
Proceeds from sale of shares
7

Particulars Amount
Sale Price per share (a) 2.5
No. of shares sold(b) 10000
Less Brokerage Paid(c) 900
Net sales value e=(a*b)-c 24100
Net Capital gain/Loss
Particulars Amount
Gain/Loss (e-d) 23000
Interpretation
In above cases (i)(ii)(iii) the shares are purchase after 11:45 am 21st September 1999
“Discount Method” will be applied and taxable CGT will be 50% of capital gain/loss.
Net Capital Gain/Loss for the 1st three points will be as follows-:
Particulars Amount
Total Capital Gain or loss will be 53800
Taxable capital gain will be
(53800*50%)
26900
But as shares of Build Ltd in point (iv) are traded within 12 months that means transactions of
sales and purchase has taken place within twelve months, so “Other' s Method” will be applied.
This method states that Net Sales Proceeds Less Net Cost of Purchase will be taxable capital
gains.
Particulars Amount
Sales Value point iv 24100
Purchases Cost in point iv 11100
Taxable Capital Gain/Loss 13000
(e)Violin
This is also a type of collectable, all provision that are taken into consideration for
antiques and paintings will also be applied to Violin.
8

Net Capital gain/ loss will be-:
Particulars Amount Indexation factor Net Amount
Indexed Cost of Purchase 5500 1.65 9093.98
Net Sales Proceeds 12000 12000
Taxable Capital gain 2906.02
Indexation Table
Year Index rates
1999 68.1
2018 112.6
Interpretation
Collectables was purchased before 11:45 am on 21st September 1999, So “Indexation
Method” had been applied. So taxable capital gain after indexing is $2906.02.
Taxable Capital Gain/ Loss
Total Taxable Capital Gain/Loss of Current year before setting off 158694.98
Set of Carried Forward of Losses
Collectables Losses can be set off only by profits of these types of asset that can be even
past year losses and can be carried to infinite no. of years has been prescribed by Section 102 Of
ITA act 1997.
Particulars Amount
Capital losses from past year 7000
Collectables losses of current year 1500
Total Losses that can be set off 8500
Setting off Collectables loss with their profits are priority so firstly they need to set off that
losses.
9

Particulars Amount
Total Capital gain From Collectables in current year 118794.98
Less setting off Capital losses from collectables 1500
Net Taxable Capital gain from Collectables 117294.98
Net Capital gain/Loss after setting off losses from collectables are $157194.98.
Now Past Year Losses can be set off with left over profits-:
Particulars Amount
Net capital gain after setting off losses from
collectables
157194.98
Less setting off Capital losses of past year 7000
Net Taxable Capital Gain 150194.98
Interpretation
After taking into consideration of all provisions of ITA Act 1997 and information given
by client taxable capital gain/loss for current year ending 30th June is $150194.98.
QUESTION 2
Employer Provided Car to Employee
(a) Rapid Heat Pty Ltd. an Electric Heaters Manufacturer provides Fringe Benefits to their
employees. They have provided different benefits so in this question there is need to calculate
Fringe Benefits Tax which is governed by Fringe Benefit Act 1986.
The car provided as benefit will be treated as private use when vehicle is not parked in premises
of business and had been parked at home of employee is mentioned under section 7 of FBTA act
(Car Fringe Benefits Tax. 2018.). The Definition of car is also provided by act. They include-:
1. Vehicle that carry passenger less than 9.
2. Loading Capacity of Vehicle should not be more than 1tonne.
3. Station Wagons, Vans, Motors cars etc.
FBTA act also provides different methods to calculate Fringe Benefits under Section 9, that are-:
1. Cost Method-: Gross taxable Value has been shown as actual value
2. Statutory Method-: Actual value of cars has not been shown as Gross taxable value
10

If Repairs and maintenance, fuel or any expense related to car in holiday period are documented
and evidence is shown to employer than that expense will be borne by Rapid Heat, prescribed in
Section 9 of FBTA.
In this case study where jasmine employee of Rapid Heat has been provided car for travelling
purpose and that vehicle is not restricted for official use.
So expense of fuel of $500 had to be borne by employer as Jasmine had provided documented
evidence for that. In this given case, Rapid Heat already reimbursed expenses of fuel.
Motor Vehicle that has been scheduled for its yearly repairs and maintenance will not be
treated as private use but car that been parked at airport for Ten Days will be deemed to be used
as personal use.
Statutory Method
In this method government had provided flat statutory deduction of 20%(Cummings,
2016), the distance that had been traveled will be of no use but if benefit is provided before 1st
April 2014 than schedule regarding kilometer distance had been provided and should be
followed only if there is any preexisting commitment that had been placed before 7:30 pm on
10th May 2011 to provide motor vehicle,
Calculation No. of days
The period for which Fringe benefits are needed to calculate is mentioned I.e 1/05/2017
to 31/03/2018.
Total No. of days in given period 335 days
Less Days for repairs and maintenance 5 days
Net no. of days 330 days
Expenses that are incurred had already been reimbursed by employer that is of $500.
Fringe Benefit tax that had to be paid will be (33000*20%)*330/365=$5967.13
Calculation of FBT
Particulars Amount in $
Base value of Motor Vehicle 33000
Statutory rate prescribed by act 20.00%
11

Period that car had been used 330 days
Net FBT payable for car 5967.13
Interpretation
FBT of motor vehicle that had to be payable will be $5967. The days that had been
calculated has been as per FBT act so days of repairs and maintenance are subtracted from the
actual period, net days left 330 days. The rate of 20% as a standard deduction had been taken
which had been prescribed by statue.
Calculation of Fringe Benefit as Loan
Jasmine had been provided loan from Rapid Heat Pty Ltd of $500000 at an interest rate
of 4.25%. So that loan will be chargeable under FBT Act.
FBT will be charged if employer provides loan to their employee’s at a lower rate of
interest other than that are provided by Reserve Bank of Australia (Dixon, 2016).
The taxable value of FBT will be from this event of transaction will be-:
1. Any difference that had been occurred in the interest rates of statutory rates and
rates that been provided by employer.
2. Accrued Interest is there if any.
FBT act also specifies that if loan provided by employer is not used for any income bearing
assets than there will be no FBT charged by them, this had been described in Section 16. For
Ex-: A loan taken that had been used to purchase shares and securities than they are income
bearing activity so FBT will be charged.
Interpretation
In this given case study loan had been provided for $500000 in which $450000 had been
used to purchase a holiday home as provided in question and $50000 had been given as
borrowing to her husband but that are interest free, So FBT will not be charged from both
activities as all of them are not income bearing activities.
FBT charged as goods sold to Jasmine at low cost
Calculation of FBT
Particulars Amount in $
Price of Electric Heater charged to jasmine(a) 1300
12

Manufacture cost for Rapid Heat(b) 700
Market Value of Electric Heater (c) 2600
Fringe Benefit Provided by Rapid Heat d=c-(a+b) 600
FBT rate @ 47% 282
Interpretation
The Loss that had been to Rapid Heat because of product sold to Jasmine will be the
Fringe Benefits that is $600 and tax rate on that is 47% so FBT payable will be $282.
A new tax system (GST) act 1999 provide guidelines for availing input tax credit. It
states that credit will be available when any asset that had been purchased is used for business
purposes. So in this case, GST paid on car or expenses related to it can be claimed as input tax
credit as both are used for business purposes (Faccio, 2015).
(b) It states that loan that had been provided to jasmine in which $50000 is used to purchase
shares, so this amount will be chargeable for FBT.
Calculation of FBT of Loan that had been used for purchasing shares
Particulars Amount
Interest rate provided by Rapid Heat 4.25%
Reserve Bank Statutory Rate 5.50%
Difference rates charged to FBT 1.25%
Period for which FBT will be charged
1st September 2017 to 31st March 2018
212 Days
Amount that had been used for income generation $50000
FBT payable will be (50000*1.25%)212/365 $363
13

Interpretation
Loan amount that had been used for generating revenue will be charged to FBT and
difference in interest rate that is 1.25%, and period for which that had been charged for 212days.
So chargeable FBT for current accounting year will be for sale of heater will be $363.
CONCLUSION
This report examines how tax payer will pay taxes for a specific period for different
items. The Structure through which taxable income is acquired is presented in this project report.
The project report calculates various capital gains on different assets and taxable income on that
after setting off losses of current and past year. The second part of report represents fringe
benefits that are provided by employer to its employee and calculated Fringe Benefit Tax
payable in current fiscal year.
14