Taxation Theory, Practice & Law: Capital Gains Tax and Fringe Benefits Tax Assessment

This article discusses the tax implications of various transactions for the taxpayer during the assessment year, including capital gains tax and fringe benefits tax assessment. It covers topics such as pre-CGT assets, antique pieces, shares, personal use assets, and loan fringe benefits. The article also provides a computation of cumulative capital gains/losses and FBT liability.

Taxation Theory, Practice & Law
STUDENT NAME
[Pick the date]

Question 1
The key objective here is to offer advice to client for the likely tax implication in the wake of the
various transactions which are acted on behalf of the taxpayer during assessment year. The
factual information indicates that client does not perform transaction for deriving ordinary
income from business course as she has not run a business of trading assets. Therefore, the scope
of the taxation rests on the capital receipts which are received from the disposal and highlighting
the Capital Gains Tax (CGT) consequences because the proceeds are not categorised as revenue
receipts and thus, income tax would not be applied on capital proceeds
Block of vacant land
The initial task is to determine whether the asset is pre-CGT asset or not because if the asset is
pre-CGT asset, then the CGT implication will be exempted on the capital gains/losses derived
from the liquidation of capital asset. Asset that are purchased before September 20, 1985 are
considered as pre-CGT asset (s. 149(10) ITAA 1997) (Austlii, 2018 a). The CGT implication
would only be raised on taxpayer when the acquisition date is after the September 20, 1985. The
sale of capital asset would be termed as CGT event of A1 type (s. 104(5) ITAA 1997). The
formula for determining the capital gains/loss requires two variables namely cost base and sale
proceeds. The cost base is comprises five elements which are furnished below under relevant sub
sections (s.110 (25) ITAA 1997) (Austlii, 2018 b).
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The capital receipts will be considered for the computation of capital gains/losses in the year in
which the contract has been formed. Besides, tax effects would still be enforceable if the actual
payment has not received in the same year (contract enactment year) and will be earned in next
year (TR 94/29) (ATO, 1994).. The capital losses which remain unbalanced in the previous year
would be balanced with the derived capital gains or else again rolled down to next financial year
(s. 102-5 ITAA 1997). Holding period of the asset exceeded 12 months implies that the sale
proceeds of the asset would be long term capital gains and hence, would be liable for rebate
which is 50% on the capital gains. In other words, only 50% of the total capital gains will be
considered for the implication of the capital gains tax (s. 115(25) ITAA 1997) (Reuters, 2017).
Land block has been sold by the concerned taxpayer who has signed the contract of sale in 2017-
18 but will be able to get the proceeds in 2018-19. However, as per TR 94/29 the proceeds will
be part of the capital gains computation for the year 2017-18 which is illustrated below.
Antique bed
Collectables also comprise antique pieces as per respective definition in s. 118-10 ITAA 1998
(Reuters, 2017). The CGT treatment in case of antique bed depends on the fact that taxpayer has
procured the respective antique bed for more than $500 (s. 118 (10) ITAA 1997) (Gilders, et.al.,
2015). The taxpayer has procured the antique bed after the CGT regime enactment and
therefore, the antique bed is not defined as pre-CGT asset (s. 149 (10) ITAA 1997) (Austlii, 2018
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a). Moreover, antique bed disposal is also CGT event of A1 type and cost base and income from
the asset disposal would be two main aspects of capital gains/loss calculation (Nethercott,
Richardson and Devos, 2016). The taxpayer has not sold the bed and hence, no income has been
received from the disposal. However, the taxpayer has got the payment from insurance company
because the bed was stolen and therefore, the only viable option to consider is the insurance
proceeds as income received from disposal. Also, the asset is deriving long term capital gains (s.
115(25) ITAA 1997) and thereby, 50% rebate is now be available on the capital gains for capital
gains tax liability.
Painting
The painting procurement date is before the CGT enactment date. It means that she has done the
payment for purchasing the painting on May 2, 1985 which is earlier than September 20, 1985.
As a result, the conclusion can be made that the asset (painting) is pre-CGT asset (S. 149 (10)
ITAA 1997 and it is evident that CGT will be exempted when there is disposal of pre-CGT asset
(Austlii, 2018 a). Clearly, painting belongs to pre-CGT asset and thereby, no CGT is imposed.
Shares
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The taxpayer has procured the shares after the CGT implication enactment and therefore, the
shares are not defined as pre-CGT asset (s. 149 (10) ITAA 1997) (Nethercott, Richardson and
Devos, 2016). Moreover, shares disposal is CGT event of A1 type and cost base and income
from the asset disposal would be two main aspects of capital gains/loss calculation (Gilders,
et.al., 2015). Common bank, PHB Iron Ore and also Yung Kids Learning shares are having the
holding period > 1 year and the long term proceeds will become halved for CGT implication.
But, Shares Built Ltd’s shares is holding for less than a year and the short term proceeds will not
get 50% rebate for CGT liability.
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Violin
CGT implication will only be valid when the personal use asset has been procured for more than
$10,000 (Nethercott, Richardson and Devos, 2016). The violin procured by the taxpayer is also a
personal use asset because she used to play it very frequently almost each day and also, possess
keen interest in collecting and playing violin. She plays violin proficiently and utilizes the violin
daily. Hence, this asset will be asset of personal use. Further, she has procured the disposed
violin for $5,500 which represents that the condition required for CGT implication validity for
personal use asset is not true and therefore, capital receipts incurred from the sale of the violin
would not create any capital gains tax liability on taxpayer.
Computation of cumulative capital gains/losses
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Taxpayer has received the net capital gains of $139,100 for the year 2017-18 from the liquidation
of the capital assets.
Question 2
(a) There are non-cash benefits which are provided to employees called as fringe benefits which
are personal or non-professional in nature. In order to highlight the underlying taxation
implications of these benefits, a separate statute exists which is called as Fringe Benefits Tax
Assessment Act 1986 (FBTAA). The existence of a separate statute is on expected lines as
the treatment of these benefits is unique in the sense that the beneficiaries are not taxed but
the complete tax liability falls on the employer which happens to the provider of fringe
benefits. The relevant benefits pertaining to the given scenario are highlighted as follows.
“Car Fringe Benefits”
The extension of car benefits has been highlighted by s. 7 FBTAA 1986. The necessary
condition for this benefit being granted to the employee is that the employer owned car can be
used by the employee for personal work and not limited to professional work (Barkoczy, 2017).
It is not necessary that such permission may be given directly by employer since it could be tacit
as well. This is indicated if the parking of car takes place at garage of employee or near
employee’s house, then it is assumed that permission for private use has been granted
(Hodgson,Mortimer and Butler, 2016).
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Personal use has been permitted in the presented scenario for Jasmine by Rapid Heat. The result
would be that FBT implications would arise for Rapid Heat on account of car fringe benefits
being given to Jasmine. The given car has been purchased on May 1, 2017 and given to Jasmine
for use. The purchase value of car is given as $ 33,000. Section 9 has been used to computed the
car fringe benefit provided to Jasmine.
 Base Value (Vehicle)
In order to derive the same, the cost price of the car must be takes and the deduction of repairs
that are paid by the employer are subtracted. Depreciation deduction is also permissible in case
of aged vehicles but this is not the case with the given car which has been possessed in
2017/2018 only (Barkoczy, 2017).
 Days of private use
Leaving aside the month of April, Jasmine has had the car in her possession for the complete
FY2018. Hence, 30 days would be subtracted from 365 days leading to 335 days. Also, the car
for the purpose of minor repairs spent five days in garage but no deduction can be claimed for
the same under s. 9 since deduction available only in case of repair being major one. Besides,
Jasmine was out of town for ten days and the car meanwhile was at the airport parking. The car
was available for use even though Jasmine was not here and hence deduction not permitted.
Key information to compute the relevant liability related to FBT computation is as exhibited
below (Hodgson,Mortimer and Butler, 2016).
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Using the information above, FBT to be levied on employer is calculated.
“Loan Fringe Benefits”
This is one of the types of fringe benefit that can be provided to the employee by the employer.
In accordance with s. 16, FBTAA 1986, the act of providing loan to employee at lesser interest
rate leads to creation of loan fringe benefit (Deutsch, et.al., 2015). The decision as to whether the
interest rate is lower or no, is taken after comparison with benchmark rate given by RBA. This is
because if the employer provides loan at rate lower than the RBA prescribed benchmark rate,
then it would imply interest savings for the employee and thereby receipt of benefit. Additional,
the extension of loan does not relate to professional reason and is indeed personal (Deutsch,
et.al., 2015).
In line with information provided, Rapid Heat has provided loan to Jasmine at a concessional
rate of 4.25% p.a. The quantum of loan given is $ 500,000. Also, the reference rate or benchmark
rate disseminated by RBA for the current year is 5.25% p.a. The presence of concessional
interest rate clearly implies extension of loan fringe benefit to Jasmine by employer.
 Days of loan availability
At the start of the financial year, loan extension has not happened. Contrary, the extension of
loan has taken place on September 1, 2017 and hence the savings in interest cost would also be
computed starting from this date and moving towards the year end (Barkoczy, 2017).
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Using the information above, FBT to be levied on employer is calculated.
As per the deduction rule specified in s. 19, deduction on the interest savings on the loan amount
is available to the employer to the extent the loan amount is deployed for income producing
purpose (Deutsch, et.al., 2015). Also, it is noteworthy that this extends only to the money used
by employee directly and does not extend to any money used by any associated. The
information on loan proceeds usage highlighted that $ 450,000 is used by Jasmine for making a
purchase of holiday home while the remaining amount is used by her husband for stock
investment. Deduction on the $ 450,000 amount would be availed by Rapid Heat if the holiday
home does provide assessable income to Jasmine.
“Expenses Fringe Benefits”
Personal expenses should be carried out by employees only. However, when employer meets
these personal expenses of employees, then it is said that expense fringe benefit has been
extended by the employer to concerned employee. In this regards, a particular car arises when
the employer provides discount in relation to the a product that is produced by the employer and
the resultant discount benefit is called internal expense fringe benefit.
The given circumstances clearly highlight that employer effectively provided $ 1,300 worth of
personal expense funding to the employee Jasmine by charging only half of the list price and
thereby ensuring that the remaining half are borne by the company or employer.
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Using the information above, FBT to be levied on employer is calculated.
(b) There is a change in the utilization of the loan proceeds which is apparent from the fact that
now the entire money is being used by Jasmine. Hence, incremental deduction can be
claimed by employer if the $ 50,000 tends to produce any income. The assessable production
income on $ 50,000 would happen in the form of dividends derived from Telstra stock. The
deduction computation is shown as follows.
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References
ATO, (1994) Taxation Ruling –TR 94/29 [Online]. Available at: Income tax: capital gains tax
consequences of a contract for the sale of land falling through.
https://www.ato.gov.au/law/view/document?DocID=TXR/TR9429/NAT/ATO/
00001&PiT=99991231235958 (Accessed: 24 September 2018)
Austlii, (2018 a) Income Tax Assessment Act 1997- SECT 149.10 [Online]. Available at:
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s149.10.html (Accessed: 24
September 2018)
Austlii, (2018 b) Income Tax Assessment Act 1997- SECT 110.25.General Rules About Cost
Base [Online]. Available at:
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.5.html (Accessed: 24
September 2018)
Barkoczy, S. (2017) Core Tax Legislation and Study Guide 2017. 2nd ed. Sydney: Oxford
University Press 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.
Nethercott, L., Richardson, G., & 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.
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