Finance Case Study: Capital Gains Tax and Fringe Benefit Analysis

This document presents a comprehensive taxation case study, focusing on capital gains tax and fringe benefits tax (FBT) in the context of Australian taxation. The case study involves a resident assessee, Fred, who sold a holiday home, and analyzes the capital gains tax implications, including the calculation using both discount and indexation methods, considering costs, and capital losses from share sales. It also delves into FBT, examining various fringe benefits such as car benefits, property benefits, and loan benefits, and calculates the FBT liability. The FBT section includes detailed calculations for each type of benefit, referencing relevant legislation and guidelines. The document provides detailed explanations and calculations for each scenario, along with references to relevant academic sources and legal frameworks.

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Contents
Capital gains tax case study.........................................................................................................................2
Fringe Benefits Tax Case study....................................................................................................................7
References.................................................................................................................................................12
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Capital gains tax case study
Case facts:
The resident Assessee is Fred. In the S.2 (7) of the Income Tax, Assessee is that person to whom
any sum of money or any tax is payable under the Income tax Act. So, in this case, the money or
any tax is payable to Fred. The Holiday home has been sold by Fred and he has his own
residence as the main residence where he lives. The location of the holiday home is in Blue
Mountain. In 2015, in the month of August, the agreement to sell the Holiday home happened.
But, the consideration of the sale was received in February 2016 which was $8, 00,000. The cost
which was borne for selling the home was almost $1100 and $9900. This included the legal
charges and the GST and also the commission of the sale agent. The year in which the property
was purchased was in March 1987 and it was bought for $100000. Along with this amount, the
buyer also paid a stamp duty of $2000 and $2000 as the legal fees. Apart from this, there was a
capital loss of $1000 to Fred because of the sale of the shares.
Assumptions made for solving the case:
The place where the Assessee lives is his Main Residence and it is different from the Holiday
Home. The property to be sold comes within the Taxation Authorities. The year for assessment
will be considered from 1st July to 30th June. The seller has not attempted to save the tax by
making any investment apart from the consideration of sale.
Solution:
Regarding the Taxation of August 2015: The Income Tax Assessment Act of 1937 says that
when the real estate property is sold, the agreement of the contract is valid when it gets registered
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with the local authorities but this is not in the case of the property which is sold or purchased for
the personal use. The Assessee, who is Fred in this case, needs to see the taxation point in the
event of the capital Gain. As per the facts of the case, the contract of the sale got registered in
the month of August 2015; therefore, the liability of the capital gain tax will begin from the year
2016-17. But, when the settlement will happen, then only the liability for the tax will be paid.
Since, in February 2016, the settlement is done, so, the tax of the capital gain will be paid in the
year 16-17.
For computing the tax for the house property, the discount method and the indexation method
will be used:
Discount method
Sale consideration 800000
Less Cost incurred for
Selling
Legal Expense (1100)
Agent’s commission (9900)
Net sales consideration A 789000
Cost Base
Cost of Acquisition 100000
Stamp Duty 2000
Legal Fees 1000
Total cost base B 103000
Capital Gain Income A-B 686000
Less 50% Discount 343000
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Discounted Capital Gain
income
343000
Indexation Method
Sale consideration 800000
Less Cost incurred for
Selling
Legal Expense (1100)
Agent’s commission (9900)
Net sales consideration A 789000
Cost Base
Cost of Acquisition 100000
Stamp Duty 2000
Legal Fees 1000
Total cost base 103000
CPI * 108.2 / 45.3 = 3.3885
Indexed Cost B 349015
Capital Gain Income A-B 439985
In the above table, two methods have been used to calculate the capital gain tax. But, out of the
two methods, the Assessee should use the first method because in this method, the taxable
income is less than the other method. It has also been observed that there is loss on the sale of the
shares and this loss can be recovered by selling the house property. The income from the capital
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gain is $343000 and the loss is $10000. So, it will get recovered easily. So, the net gain will be
$333000.
The loss had been incurred due to sale of the shares and also due to the sale of the antique vase
that are part of the collectables. These are the exempted assets and thus there will not be any
capital gain on them. But, then also the value of $10000 has been assigned to the asses as the
collectable. This act says that the assets that are lesser in value are not capital gain tax. This is
excluded in the purview of the capital gain. Since the Assessee has suffered from a loss in case
of collectables, so this is the exception to the clause of exemption. The person is liable for the
capital gain tax. The loss is counted in the income from the capital gain. Since Fred is gaining
$343000, so he can set off the loss. The loss incurred on selling the vase is not relevant to the
capital gain because it is taxable as per the law.
If the case is scrutinized by the revenue authorities, then the Assessee will need to produce the
documents that could justify the consideration for sale and the cost of purchase for the
assessment of the capital gain. If the documents are not shown to the authorities, then he can be
penalized so, Fred should jeep the records safe regularly so that if any problem occurs in the
future, then he could justify his tax payment and tax liabilities. As per the law too, Fred is
required to maintain the documents.
The documents that the Assessee has to maintain are:
1. The receipts for the acknowledgement had to be kept when the property is purchased and
it is transferred.
2. When the money is borrowed, the interest related to the sale of asset has to be expended.
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3. The papers that support the payments to agents, legal advisors etc. like the bills have to
kept safe.
4. The receipts of the insurance premium and the other taxes and the rates have also to be
kept safe.
5. The reports related to the valuation by Income tax.
6. The statements of the bank have to be kept that support all the transactions mentioned
above.
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Fringe Benefits Tax Case study
The fringe benefits tax is paid on the value which is given to the employees and its family
members according to the Australian law (Smailes et al., 2013). The list of fringe benefits
includes various categories such as: Entertainment and fringe benefit, Car fringe benefit, loan
fringe benefit, board fringe benefit and others. Following is the calculation of fringe benefits tax
liability:
FBT Liability:
Particular Amount
Type 1 benefits × 2.146
= (270 [Car fringe benefit]+650[property
benefit])×2.146
1975
Fringe Benefits Taxable amount 9916×49% (FBT rate)
Type 2 benefits × 1.960
=(550 [employee payment fringe benefit]
+3500 [loan fringe benefit])×1.960
7941
Liability amount 4,859
The problems were arises in the fringe benefits tax which is shown from the available
information and the calculation of Fringe Benefits Tax liability is provided below:
 Car
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The car given by the employer to the employee is considered as the car fringe benefit, and the
fringe benefits tax is paid on the benefits. The car becomes the fringe benefit from the first day
of its usage, and the car is for the personal use of an employee. The statutory formula or
operating cost methods is used for calculating yield. The method which provides lowest taxable
value is selected. The adequate records are required to be maintained in the operating cost
method (Raftery et al., 2013). The less information is used in the statutory formula method.
The statutory formula is as follows:
(A × B × C) / D – E
Where
A= base value of car
B= Statutory percentage. If the car fringe benefits are given after 10 May 2011, then the flat
statutory rate is approximately 20 percent is applied.
C= the total number of days when employees are given a car for private use.
D = the total number of days
E= Amount of employee contribution which is (33000×20/100×15 days)/366 days – 0 = $270
The employer has reimbursed the concerned expenses, so the employee contribution is not
considered.
Property Fringe Benefit
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When the property or any product is given to the employee by an employer for the personal use
without any charge, then this fringe benefit is considered as a property fringe benefit. The
property is defined as the real property and the right to the property is given to an employee such
as bonds with securities. The liability of fringe benefit and its calculation is based on two factors,
namely, in-house property fringe benefit and external property fringe benefit (Zelenak, et al.,
2014). The in-house property fringe benefit is based on the situation of sale, for example, the
purpose of a product was resale or it was internally manufactured by an employer or it is the
same property which is sold by an employer in the business dealings or it is sold to the
consumers.
If the employer has produced the property, then the fringe benefits tax is calculated on the basis
of its retail or wholesale value in the market. If the employer trades the goods, then the taxable
income is calculated 75% of the selling price provided in the market. The fringe tax benefit is
reduced by the actual price when the employee receives or brought the goods. Following is the
calculation of fringe benefits tax:
$2,600×75% = 1950 – 1300 (employee amount)
= $650.
Loan fringe benefits
When the certain amount of money is given by the employer to an employee as a token of the
loan with some charge on it or not, the employer is giving loan fringe to the employee. The
benchmark interest rate is 5.65% according to the guidelines of ATO for the fringe benefits tax
year ending (Pearce et al., 2015).
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The taxable amount of the loan fringe benefit is considered different from the interest which can
also be accrued at the statutory interest rate and it is applicable in 2016, so the interest is accrued
according to the section 18 of the Fringe Benefits Assessment Act, 1986. So, the calculated
taxable income is $3,500. It is calculated below:
Calculation Amount
$500,000 × 5.65%×7/12 16,479
$500,000 × 4.45%×7/12 12,979
FBT Amount 3500
Expense payment fringe benefit
It is defined as an expense which is paid by an employer to the third party on behalf of an
employee which is known as reimbursement or expenses (Shields et al., 2015). These expenses
are incurred by an employee irrespective of the purpose. The expense paid by an employer is
considered as the fringe benefit. In this case, the amount of fringe benefit expense is $550.
a. FBT Liability
In case of shares purchased by Emma
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Calculation Amount
Type 1 × 2.146
= (270+650)×2.146
1974
Type 2 × 1.960
=(550+2202)×1.960
5394
FBT amount 7368 X 49%
FBT Amount 3,610

In this case, the loan amount is used for purchasing the shares by Emma. The shares are
purchased for herself so through using interest attributable the liability of fringe benefits tax can
be deducted. The deduction is considered as an allowable deduction under section 8-1 of ITAA,
1997. According to ATO ruling 2004/294, under section 24 the fringe benefit expense payment
and taxable value can be deducted under the category of ‘otherwise deductible’ (Butler, et al.,
2014). These benefits are applied only when the employee is the receipt. Following is the
calculation of loan fringe benefit, and the amount is taxable:
= $3500 – ($50,000×4.45%×7 months/ 12 months)
= $2,202
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