Taxation Theory, Practice & Law

This document provides a detailed analysis of taxation theory, practice, and law. It covers topics such as fringe benefits tax, computation of taxable fringe benefits, identification of legal issues regarding tax benefits, and capital gains tax. The document includes case studies and calculations to illustrate the concepts. It is a valuable resource for students studying taxation or professionals working in the field.

TAXATION THEORY
PRACTICE & LAW

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................1
QUESTION 2...................................................................................................................................3
REFERENCES................................................................................................................................7

QUESTION 1
Material Facts
Perisher Pty Ltd is Ski equipment manufacturer operating in Victoria. On May 1, Nikita
employee of Perisher is provided with car due to travel for work purposes. Car is used for both
work and private use and is purchased for $44000 including GST and $2000 for delivery
charges.
Travelling of 12000 kilometres have been done from May 1, 2019 to March 31, 2020.
Repairs of $770 have been incurred which are also reimbursed. Car has not been in use for 10
days when Nikita was interstate and remained parked at airport. It was also not used for 5 when
it was under repairs. Perisher wants to identify for Fringe Benefits for the car and reimbursement
provided to Nikita.
Identification of legal issues regarding tax benefits
Fringe benefits refer to additional benefits given to employees over the stated salary for
performance of specific services. Fringe benefits such as health insurance and social security are
required by statute while other benefits are provided voluntarily by employers(Kennedy and
et.al., 2017). Examples of fringe benefits include lunch and breakfast, employee stock options,
gym membership, transportation benefits, childcare and such other benefits. Fringe benefits are
taxable under FBTAA, 1986. It lays the provision related to Fringe benefits provided to
employee.
In the present case Nikita has been provided with car for office work and also for private
use. Car is mainly used for the employment related travelling and not for private work. Company
has to pay tax over fringe benefits provided to the employees (Murphy, 2019). Perisher will be
paying tax only over the period for which it is used.
Generally statutory FBT method is used that is based over cost of vehicle instead of
identifying its private use. The method uses 20% flat rate taking into account number of days per
year vehicle is used for private use. FBT arises when the business vehicle is made available for
private use of employee. In this method tax could be payable on vehicle even when it is parked
in the Garage of employee.
Fringe benefits tax are paid by the employer and tax is paid by employee if the value of
benefits exceeds the threshold limits under ITAA, 1997. If the vehicle is used for travelling
between work and home fringe benefit is exempt.
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Computation of taxable fringe benefits.
Base value of the Car
V = Purchase price + Delivery charges
V = $44000 + $2000
V = $46000
Days for which car is provided to Nikita
- May 1, 2019 to March 31, 2020 = 304 days
Calculation of taxable fringe benefits
Taxable amount = 20% * Base Value of the car * No of days of Benefit – Expenses Incurred
365 days
= 20 % * 46000 * 304 / 365 – 770
= $ 6892
Perisher is liable to pay $6892 as tax for fringe benefit of car provided to Nikita.
Conclusion
It could be evaluated from the above calculations that Perisher would be paying $6892
for the car provided to Nikita for travelling for work purposes. FBT is payable on cars such as
motor cars, panel vans, station wagons and the utilities.
Car is available for the private use by employer if :
 Car is in use for private purpose : and/or
 Car is made available for the private use.
Car to employee is treated as under private use if :
 Car is not on premises and also is permissible to employees to use for the private
purposes and/or
 Car provided is garaged at home of employee overnight.
As general rule, travel between work and home is deemed as private use vehicle. Business car in
workshop for the extensive car repairs is deemed not to available for the private use . Business
car is deemed to be available for the private use if it is for routine service.
Private use of the motor vehicle is exempted from the FBT on satisfaction of following
conditions.
 Vehicle is panel van, other commercial or utility vehicle
 Private use by employee of the vehicle is limited over :
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 Travelling between work and home
 Travel which is incidental to the travel in course of the duties of the employment
 Non work related uses which are minor, irregular and infrequent
Business is allowed to claim the deduction for running the work expenses of work vehicle
if employee or associate uses vehicle for the private purpose (Woellner and et.al., 2016). As per
ATO guidance provide employees are allowed for private travel in company cars up to 1000
kilometres per annum, as long single return journey does not exceeds over 200 kilometres.
It could be cleared from the car benefit is taxable if the car is made available by company
for private use of employee. As per ATO guidance it has been provided that travel which are
incidental to performance of employment related travel are free from taxation.
In the above case Perisher has provided Nikita for work related travel however the car is
also used for private use. Considering the guidelines it could be stated if Nikita uses car mainly
for work related travel and private use is minor which is less that 1000 kilometres than the fringe
benefit is exempt for Perisher (Fringe Benefits, 2019). However Nikita uses car for private uses
which are above 1000 km than car is deemed to be available for private use and Perisher would
be required to pay fringe benefit tax of $6892. The repairs on cars are reimbursed by the perisher
and are considered under routine repairs therefore will not be excluded from fringe benefit
period.
Nikita would be required to pay tax on Car made available by employer to the extent car
is used for private purpose. Claims for repairs can not be made by Nikita as they are reimbursed
by the employer.
QUESTION 2
Taryn has opened new business of interior designer and for funding the business various
assets have been sold.
Capital Gain tax is levied under ITAA, 1997. It provides all the assets acquired after 20
September 1985 are liable for capital gain tax on sales.
1. Antique Painting
As per guidance provided by ATO every asset acquired after application of CGT are
subject to capital gain tax. The guidelines also states collectables acquired by the individual for
value $500 or less or which are worth $500 or less at the time of acquisition. Collectables include
jewellery, sculptures paintings, photographs or engraving, properties of similar descriptions,
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antiques, medallions or coins, postage stamps, first day cover, rare folios and books or
manuscripts.
The antique painting was acquired by the Father for $2500 which is above the threshold
exemption of $500 which makes the sales transaction taxable. However the antique painting was
purchased by father in August 20, 1984 and as per ITAA, 97 capital gain over the properties
which are acquired by the tax payer before 20 September, 1985 are exempted from payment of
capital gain tax (Braithwaite and Reinhart, 2019). Section 108-B, ITAA, 1997 provides for the
capital gains over collectable and capital gains over the capital assets acquired before 1985 are
exempted from capital gain.
Therefore as per above laws and guidelines Taryn is not required to pay capital gain tax
over the gain made on sale of antique painting.
2. Sale of Car (Toyota Corolla)
Capital gain tax has to be paid by the individual if the sale of capital assets result in
capital gains. Capital gain is applicable over all the assets that are acquired after September 25,
1985. Taryn acquired the car on 1st January, 2015 for $20000 and the car is sold for $15000.
As per ATO guidelines car of individual is considered as capital asset which is exempt
from capital gain tax. The rule does to applies to old vintage or sports car (Capital Gain Tax.
2020.). Taryn has made capital loss of $5000 over sale of car. The loss over sale of car is not
available for adjustment over any other capital gain as car is exempt asset on which capital gain
tax does not apply.
As per section 118.5 of ITAA, 1997 capital gain or loss over motor cycles, cars or the
similar vehicle is disregarded.
3. Sale of Harry Potter collection
Taryn sold collection of harry potter which was purchased for $350 on 10th October, 2018
and is sold for $1500. Taryn has capital gain of $1150 on sale of the collections.
As per ATO personal use assets are described as assets which are CGT assets and other
than the collectables that are kept or used for personal usage or enjoyment mainly of individual
or the associates. Personal use asset which are acquired by the individual for below $10000 are
disregarded for the purpose of tax.
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As per exemption rules gain over personal use assets is exempted only if the assets are
acquired by individual for less than $10,000. Capital loss made on personal assets is disregarded
that means capital loss on personal use assets could not be used for personal use.
Collection of Harry potter is personal assets as it is acquired for personal enjoyment it is
not considered as collectables (Barkoczy, 2016). The collection of Harry potter is acquired for
$1500 which is less than $10000 therefore the gain on sale of the collection is exempt. The
capital gain of $1150 is exempted under provisions of Section 118.10 of ITAA, 1997 therefore
no tax is payable by Taryn on gain from sales.
4. Sale of gold necklace
The guidelines provided by ATO states that the capital gains made over collectables are
exempt. The exemption guidelines provide for the exemption of collectables if they are
purchased for less than $ 500.
The description given by ATO for collectables includes antiques, sculptures, painting,
photographs or engravings, properties of similar descriptions, antiques, jeweller, coins, books
and postage stamps. As per guidelines Jewellery is also included in collectables. Tax law
provisions of collectables will be applicable on jewellery.
The necklace of Taryn has been purchased on 8th August 2018 for $1200 and sold for
$2000 on March 20, 2020. There is capital gain of $800 on the sale of necklace. As per provision
of capital gain the necklace is acquired by Taryn for more than $500 and therefore the gain made
on sale is taxable. Tax has to be paid over gain of $800 with the income tax for the year.
Provisions of Section 108-B of ITAA, 1997 are applicable over gain on collectables.
5. Sales of sculptures
In the description given by ATO for collectables sculptures are also included. The
sculpture was bought by Taryn in December 1994 and is sold for $6000. If sculpture is acquired
by Taryn for more than $500 then it would be liable for capital gain. As per guidelines provided
by ATO Taryn will have to pay tax over gain made on sale of sculpture. The gain is taxable
under section 108-B of ITAA, 1997 to sale of sculpture (Braithwaite, Murphy and Reinhart,
2019). Losses made over collectable tax is adjustable only over capital gains made from other
collectables.
Conclusion
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Taryn is required is to pay capital gain tax over assets which are not qualified for
exemption along with income tax. Capital gains are not charged separately but are charged along
with income tax. The capital gains are taxable as per marginal as per the marginal tax rate
applicable to the tax payer on the basis of taxable income of Taryn for the year.
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REFERENCES
Books and Journals
Murphy, K., 2019. Procedural justice and the Australian Taxation Office: A study of scheme
investors. Centre for Tax System Integrity (CTSI), Research School of Social Sciences,
The Australian National University.
Kennedy, T. and et.al., 2017. Does income inequality hinder economic growth? New evidence
using Australian taxation statistics. Economic Modelling 65.pp.119-128.
Woellner, R. and et.al., 2016. Australian Taxation Law 2016. OUP Catalogue.
Braithwaite, V. and Reinhart, M., 2019. The Taxpayers' Charter: Does the Australian Tax Office
comply and who benefits?. Centre for Tax System Integrity (CTSI), Research School of
Social Sciences, The Australian National University.
Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.
Braithwaite, V., Murphy, K. and Reinhart, M., 2019. The threat of taxation: management by
responsive regulation. Centre for Tax System Integrity (CTSI), Research School of
Social Sciences, The Australian National University.
Online
Fringe Benefits, 2019. [Online]. Available through : <https://semmensco.com.au/fringe-benefits-
tax-for-company-cars/>.
Capital Gain Tax. 2020. [Online]. Available through :
<http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/index.html#s32.20>.
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