Taxation Theory, Practice & Law: CGT Implications and FBT Assessment

This article provides insights into the CGT implications of various assets such as vacant land, antique bed, painting, shares, and violin. It also covers the FBT assessment for car and loan fringe benefits provided by an employer to an employee. The article discusses the computation of FBT payable and the factors affecting it. The subject covered is Taxation Theory, Practice & Law with course code HI6028. The article is relevant for students pursuing courses in taxation from any college or university.

Taxation Theory, Practice
& Law
HI6028
Student Name
[Pick the date]

Question 1
The given information clearly highlights that the client is not engaged in any business related to
antiques or land and hence the resulting implications of the transactions highlighted by the client
need to be outlined. Further, based on the individual analysis of each asset, the relevant CGT
implications need to be outlined so that the cumulative capital gains for the client for the given
tax year may be highlighted.
Block of Vacant Land
For CGT to be applicable on the capital gains arising from a capital event, it is imperative that
the underlying asset should not be a pre-CGT asset. This assets are those that the taxpayer
acquires on or before September 20, 1985 since before this data, CGT was not applicable on the
capital gains. Therefore, in accordance with s. 149(10) ITAA 1997, pre-CGT assets would not
involve any liability related to CGT (Gilders et. al., 2016).
For taxable capital gains to arise, it is imperative that a capital event must take place. The various
capital events have been classified in s. 104-5 ITAA 1997. This classification of the capital event
is essential since the capital gains computing methodology is also linked with the capital event
classification. Any capital asset disposal results in event A1 whereby the gross capital gains are
calculated by deduction of relevant asset cost base from the selling price of the concerned asset
(Woellner, 2014).
The asset cost base ought to be computed as per s. 110-25 ITAA 1997 which lists down five
elements comprising the cost base which are listed as follows (Sadiq et. al., 2016).
First element: Cost incurred on the asset acquisition
Second element: Incidental costs during the purchase and sale of assets
Third element: Asset related ownership costs that are spent by the taxpayer (key examples for
vacant land are water and sewerage taxes, local council taxes etc.)
Fourth element – A capital expenditure incurred for the purpose of either appreciation of asset
value or preservation of asset value.

Fifth element – Title preservation related capital expenditure in the form of lawsuits and other
legal expenses.
The cost base of vacant land block is computed in the manner illustrated as follows.
First element: Cost price of land block = $ 100,000
Third element: Ownership expenses (local council taxes, water tax, sewerage tax)= $ 20,000
Cost base: First element + Third element= $ 120,000
A pertinent issue which arises in this transaction is regarding the tax year in which CGT would
be levied. This dilemma arises as there is a time lag between the sale contract enactment and
receipts of requisite proceeds. At times, the time lag is such that these two events tend to lie in
separate tax years. Advice in such cases is provided by TR 94/29 which highlights that CGT
needs to be levied in that tax year when the agreement for sale of asset is enacted and not when
then the receipts are received (Deutsch et. al., 2016). Taking the above into cognizance, in the
given case also since contract for land block sale has been enacted, hence the CGT would be
applicable in the current year. The asset related capital gains as per A1 capital event is illustrated
as follows.
Further, the previous year capital loss of $ 7,000 would be brought to the current year to adjust
against the land based capital gains. Hence, the net capital gains derived from sale of land after
considering the previous losses = 20000 – 7000 = $ 193,000
Another crucial aspect is that for assets being held more than one year, the underlying capital
gains are tagged as long term and provided a 50% rebate before CGT is applied as per s. 115-25
ITAA 1997 (Nethercott, Richardson and Devos, 2016).
Antique Bed

The concerned capital event when the antique bed is disposed is A1 in accordance with s. 104-5
ITAA 1997. Any capital asset disposal results in event A1 whereby the gross capital gains are
calculated by deduction of relevant asset cost base from the selling price of the concerned asset
(Krever, 2017).
Taking the post 1985 purchase date, it is not a pre-CGT asset and therefore capital gains that the
client has realised from the asset sale need to be considered. The cost base of antique bed is
computed in the manner illustrated as follows.
First Element: Buying price of antique bed = $ 3,500
Fourth Element: Capital expenditure undertaken with intention of value increase of antique bed =
$ 1,500
Cost base: First Element + Fourth Element = $ 5,000
It is noteworthy that the antique bed has not been sold voluntarily but has been stolen for which
the taxpayer has derived insurance proceeds to the tune of $ 11,000 which would serve as the de-
facto selling price (Reuters, 2017).
Further, the previous year capital loss of $ 1,500 (related to sculpture) would be brought to the
current year to adjust against the land based capital gains. Hence, the net capital gains derived
from antique bed disposal after considering the previous losses = 6000-1500 = $ 4,500
Another crucial aspect is that for assets being held more than one year, the underlying capital
gains are tagged as long term and provided a 50% rebate before CGT is applied as per s. 115-25
ITAA 1997 (Coleman, 2016).
Painting
The pivotal factor to consider in relation to painting is the date of acquisition of this asset which
is before September 20, 1985. Considering s. 149-10 ITAA 1997, such assets are termed as pre-

CGT assets and are considered to be free from any CGT related liability. Thereby, it is
appropriate to conclude that CGT related liability would not arise for the client on disposal of
painting owing to its pre-CGT asset status (Barkoczy, 2017).
Shares
One of the assets that can be disposal under A1 event listed under s. 104-5 ITAA 1997 is shares.
The underlying capital gains in this regards would be derived by deduction of cost base of shares
(i.e. sum of purchase price and incidental costs) from the proceeds generated from share
disposal. Based on this, the taxable capital gains are computed below (Nethercott, Richardson
and Devos, 2016).
(i) First Element: Share purchase cost= $15*1000 = $ 15,000
Second Element: Costs related to stamp duty and brokerage= $ 1,300
Cost base: First Element + Second Element = 15000 +1300 = $ 16,300
Proceeds generated from sale of shares = 47*1000 = $ 47,000
Capital gains linked to share sale = 47000 – 16300 = $ 30,700
The above share has been held in excess of one year and hence the resultant capital gains are
classified as long term.
(ii) First Element: Share purchase cost = $12*2500 = $ 30,000
Second Element: Costs related to stamp duty and brokerage = $ 2,500
Cost base: First Element + Second Element = 30000 +2500 = $ 32,500
Proceeds generated from sale of shares = 25*2500 = $ 62,500
Capital gains linked to share sale = 62500 - 32500 = $ 30,000
The above share has been held in excess of one year and hence the resultant capital gains are
classified as long term.

(iii) First Element: Share purchase cost = $5*1200 = $ 6,000
Second Element: Costs related to stamp duty and brokerage = $ 600
Cost base: First Element + Second Element = 6000+600 = $ 6,600
Proceeds generated from sale of shares = 0.5*1200 = $ 600
Capital losses linked to share sale = 6600 – 600 = $6,000
(iv) First Element: Share purchase cost = $1*10000 = $ 10,000
Element 2: Related incidental costs = $ 2,000 (1100 on stamp duty and 900 brokerage related
fee).
Cost base: First Element + Second Element = 10000+2000 = $ 12,000
Proceeds generated from sale of shares = 2.5*10000 = $ 25,000
Capital gains linked to share sale = 25000-12000= $13,000
The above share has been held for less than one year and hence the resultant capital gains are
classified as short term. This classification of the capital gains as long term or short term is
imperative since s.115-25 discount is only available for long term gains and not short term gains
(Sadiq et. al., 2016)
Violin
In accordance with the scenario information provided, it seems evident that client is an avid
player of violins and maintains a collection of violins which are played regularly deriving
entertainment. Under such circumstances, it would be apt to label the given guitar as a personal

use item. In relation to these items, the CGT related implications are ignored if the underlying
price of acquisition is less than $ 10,000. For the guitar under question, the purchase price is only
$ 5,500 and thereby does not violate the above $ 10,000 (Gilders et. al., 2016). The net result is
that the sale of the given violin would not result in any CGT liability arising for the client.
Cumulative Capital Gains
Question 2
(a) Fringe Benefits
Fringe benefits are taxable personal benefits which an employer provides to their employee
or/and to family members of employee during the employment. These benefits are taxable on
behalf of the employer only under the provisions of Fringe Benefits Assessment Act 1986
(FBTAA 1986). The computation of Fringe Benefit Tax (FBT) payable for the given assessment
tax year comprises three main steps (Wilmot, 2014).
 Computation of respective fringe benefit amount
 Computation of taxable value or grossed up value of fringe benefit
 Computation of FBT payable
The given information indicates that employer is Rapid Heat Ltd (or Rapid Heat) and has offered
three benefits during the income tax year 2017/2018 to employee Jasmine. The FBT implications
need to be discussed based on FBTAA 1986.
First benefit to Jasmine – “Car”
Offering a car to employee by employer will lead to FBT liability on employer only if the scope
of utilization of car is comprised of the personal work (Sadiq et. al., 2016). Here, Jasmine has
received a car from Rapid Heat that she can take for personal work and the car remains available
for her for private purposes such as weekends and so forth. It represents that car fringe benefit

has been granted which raises FBT liability on Rapid Heat. Section 8, FBTAA 1986 indicates
that providing car for personal work to the employee would raise FBT payable on employer
which would be computed based on the given factors (Woellner, 2014).
 Capital value of car
The actual worth of car after eliminating the minor repairs expenses incurred would be termed as
capital value of car.
Rapid Heat buys car for $33,000 and also pays the minor repair expenses of value $550.
 Statutory percentage
The date on which car is purchased on the part of employer would be essential aspect for
statutory percentage. Car that has been acquired after year 2011 would provide to use 20% as
statutory percentage (Deutsch et. al., 2016).
 Accessibility of car
It is apparent that Rapid Heat provided car to Jasmine on May 1, 2017 and thus, the days count
(between September 1, 2017 to 31 March 31, 2018) would be termed as accessible days of car
for Jasmine which comes out to be 335. Further, it is noticeable that five days (Car at garage)
would not reduce the accessible days since deduction in days available only for major repairs.
Furthermore, ten days on which Jasmine had parked car at airport and left the town would also
not reduce the accessible days as she had car available for private usage (Krever, 2017).
 Gross up factor
2.0802 would be applicable gross up factor for type I goods as car is an item which does attract
GST.
 Fringe benefits tax rate
The applicable FBT rate is 47%.
Now,

Second benefit to Jasmine – “Loan”
Loan offered to employee in terms of providing financial help would only be classified as loan
fringe benefits when employer offered loan at concessional interest rate. Hence, it is essential to
determine that which rate would be termed as concessional rates. In this regards, interest rate
which is not equal to or more than the benchmark interest rate declared by Reserve Bank of
Australia would be termed as concessional rates. The benchmark interest rate for 2017/2018 is
5.25% per annum (Reuters, 2017). However, Jasmine has received the offer of loan for 4.25%
per annum on May 1, 2017. Therefore, it can be concluded that 1% concession has been given to
Jasmine which indicates that loan fringe benefits has been provided to her. Further, if the loan
payment is utilized by employee for any assessable income production, then the tax deductions
will be requested by employer on the interest amount (Wilmot, 2014).
 Interest saving for Jasmine would be the loan fringe benefits
Loan fringe benefits = loan amount * (total days of loan to Jasmine/FBT days) * (RBA’s rate –
Rapid Heat’s rate)
Computation of loan fringe benefit amount
 Gross up factor
1.8868 would be applicable gross up factor for type II goods as loan is listed in this group in
GST Act 1999.

Computation of taxable value or grossed up value of loan fringe benefit
 Fringe benefits tax rate
The applicable FBT rate is 47%.
Computation of FBT payable
Jasmine has divided the loan amount for two purposes which is $450,000 to buy home and rest
$50,000 given to her husband to buy shares. Here, the part of amount i.e. $450,000 would be
taken for tax deduction claim only when the home would be rented by her for assessable income
generation purpose. Further, this is not applicable for the amount which is given to her husband
(Barkoczy, 2017).
Third benefit to Jasmine – “Electric Heater”
Employer may provide non-income benefits to employee related personal expenses which would
lead to applicability of internal expense fringe benefits. It contains offering lower cost of product
as compared with the normal prices (Deutsch et. al., 2016).
Jasmine has received a special price for the electric heater which is $1300. However, the normal
price of heater was $2600 and hence, it can be said that company is providing personal expense
benefit to Jasmine.
Internal expense fringe benefits = 75% of normal price * (Normal price – special price)
Computation of loan fringe benefit amount
2.0802 would be applicable gross up factor for type I goods as car is listed in this group in GST
Act 1999.

Computation of taxable value or grossed up value of fringe benefit
 Fringe benefits tax rate
The applicable FBT rate is 47%.
Computation of FBT payable
(b) The tax deduction would be increased when $50,000 would be realised by employee only
rather than providing to their respective associate to purchase the share. In present case, if
Jasmine herself uses the loan money to purchase Telstra shares, then Rapid Heat would claim
for extra tax deduction and therefore, the overall FBT payable will be minimized (Hodgson,
Mortimer and Butler, 2016).
Tax deduction
Therefore, the final conclusion can be furnished based on the underlying analysis that Rapid
Heat has extended car fringe benefits, loan fringe benefits and internal expense fringe benefits to
Jasmine during the year and in all the three fringe benefits the FBT would be payable. Moreover,
tax deduction would be increased if Jasmine purchases the shares of Telstra.

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. (2016) 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.
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