HI6028 Taxation Theory, Practice & Law: Capital Gains and FBT Analysis

This assignment solution analyzes a taxation scenario involving capital gains tax (CGT) and fringe benefits tax (FBT). It begins with a detailed examination of CGT on various assets, including a vacant plot of land, an antique bed, paintings, shares (Common Bank, Share Building, Young Kids, and PHB Iron Ore), and a violin. The analysis includes calculating capital gains or losses for each asset based on acquisition costs, disposal proceeds, and relevant expenses. The solution then transitions to FBT, focusing on a scenario involving a car loan and other benefits provided to an employee. It calculates the FBT liability for car usage using the statutory method and discusses FBT implications for a loan provided to an employee at a below-market interest rate. The document provides calculations and explanations to illustrate the application of tax laws and regulations in these scenarios.

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HI6028 Taxation Theory, Practice & Law

Tax
Question 1
Income tax assessment act 1997 is primarily based in Australia and the companies must
follow the same in relation to determination of capital gain taxes. Such capital gains taxes are
generally paid by companies when they are to dispose their assets which are under the head
capital gains assets. Furthermore, to determine capital losses or capital gains of an asset, the
difference betwixt cost base and proceeds from sale of the asset can be performed. Moreover,
if such capital gain tax has not been separately taxed in the return of companies, the same
may be incorporated or added in the general income (De Cogan, 2015). Nonetheless,
ascertainment of applicability of capital gains is benevolent in relation to an asset because it
plays a pivotal role in deriving the net capital loss or gain associated to the same.
i. Vacant plot
If an organization has procured a plot of land for proper utilization, it will not come under the
boundary of capital gains but if the same has not been taken into use, it will be signified as a
capital gains asset, thereby attracting taxes on the same (section 108.5 of the ITAA 97).
Furthermore, the reason behind this is that such inadequate usage of land will result to asset
disposal in general sense. Moreover, it is not necessary that a capital gains asset must be fixed
asset, it can be equitable rights, legal rights, etc as well. Based on the requirements of section
108.5 under the Income Tax Assessment Act 1997, if a vacant plot of land has remained
unutilized, the same will be regarded as a capital asset (Raymond, 2002). In contrast to this,
the same will not be exempted from the applicability of CGT or shall be regarded as a pre-
GST asset.
In this situation, the disposal of vacant plot of land amounted to $320,000 and the same has
been considered as a capital gains asset. Nevertheless, such land was acquired at a value of
$100000 in the year January 2001. In addition, the incidental expenses related to the land
together with the taxes has amounted to $20000 under the third component of the act.
Thus, net capital gain or loss = Disposal cost of asset – incidental or associated expenses
= $320,000 – (acquisition value + water, sewerage, etc costs)
= $320,000 – (10000+20000)
= $200,000
ii. Antique bed/collectibles
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Tax
This collectible has also been considered as a capital gains asset that attracts taxes based on
ITAA 97. Therefore, in relation to an antique bed, the same will also come under the purview
of CGT. Moreover, in association with the given situation, the Louis XIV is an antique
collectible under section 108.5 and after the date of cut-off, it is attained and therefore, it will
not be exempted from the applicability of CGT (Nethercott, Richardson & Devos, 2013).
Nonetheless, it is observable that the bed had been stolen on 12th of November that becomes
the major disposal date of such asset. In addition, the taxpayer also complained regarding the
same so that the insurance company can guarantee and take over the loss amount. However,
the insurance company only received an amount of $11000. Nonetheless, the taxpayer also
incurred a cost of $3500 for procuring such antique bed under section 110.25. In addition,
such alteration expense under the fourth component is the primary incidental or associated
expense that must form part of the cost base (Woellner et. al, 2017).
Quarter index value when sale of asset is facilitated
--------------------------------------------------------------- * Cost base or incidental expense
Quarter index value during purchase of asset
 The index number in the loss of antique bed acquired on 12 November 2017= 112.1
 The index number in procurement of bed on 21st July 1986 = 43.2
 The index number in the occurrence of incidental costs on 21st October 1986 = 44.4
Indexation base cost = 112.1 / 43.2 = 2.595
Indexation of incidental cost= 112.1 / 44.4 = 2.525
The net capital loss or gain for such antique bed can be computed in the following way:
After indexation of incidental expense= 2.525*1500 = $3787.5 (i)
After indexation of purchase expenses= 2.595*3500 = $9082.5 (ii)
Hence, the net cost base = (i) + (ii) = $12,870. However, the insurance company only offered
an amount of $11000 in relation to such cost.
Hence, the total loss (capital) = $12870- $11000 = $1870
iii. Paintings
The paintings have come under the purview of capital gains asset as per the provisions of
section 108.5 of the ITAA 97. From the mentioned scenario, the painting has been procured
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Tax
for $2000 on May 2, 1985. However, since this tenure is prior to September 20, 1985, it
highlights that the painting cannot be exempted from the CGT applicability (Singh & Singh,
2018).
iv. Shares
The company’s shares also come under the purview of capital gains tax. Since, these shares
were not utilized for trading, these come under CGT and in contrast to this, if these shares
were utilized for trading, these would attract section 6 and would form part of the general
income (De Cogan, 2015). Therefore, in the present case, it is observable that many shares of
PHB Iron Ore, Young Kids, and Common Bank Ltd has been sold on the date of event and
has been acquired on September 21, 1999. Nonetheless, a half discount rate will also be
facilitated because these shares of companies have been acquired for more than a year.
Furthermore, in relation to Share Building Ltd, since all the shares have been procured and
sold in the same year, hence no discount will be incurred on such (Nethercott et. al, 2013).
a. Estimation of profit from sale of Common Bank shares
Net capital gain or loss = value disposed less (cost of purchase plus stamp duty costs)
= (47000-550) – (15000+750) = $30,700
b. Estimation of profit from sale of Share Building Ltd
Net capital gain or loss = value disposed less (cost of purchase plus stamp duty costs)
= (25000-9000) – (10000+1100)
= $13000
c. Estimation of profit from sale of Young Kids Learning Ltd
Net capital gain or loss = value disposed less (cost of purchase plus stamp duty costs)
= (600-100) – (6000+500)
= $6000
d. Estimation of profit from sale of PHB Iron Ore Ltd
Net capital gain or loss = value disposed less (cost of purchase plus stamp duty costs)
= (62500-1000) – (30000+1500)
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Tax
= $30000
Therefore, total capital gain in relation to the aforesaid shares = 30700+13000+6000+30000=
$67,700
v. Violin
This is the company’s property that has been accounted for private purposes and is based
under section 108.5 of the capital gains tax asset. Thus, in the present scenario, such asset
was procured in the year 1999 on June 1, and when it is disposed, the gain expectation from
the same is depicted below:
Total capital loss or gain = amount of asset disposal – cost base of the asset (violin)
= $12000 – (rate of procurement + associated or incidental expense)
= $12000 - $5500
= $6500
Assessment of total capital loss or gain that can be incorporated in the general income
Particulars ($)
Capital loss or gain on the disposed vacant land 200,000
Capital gain or loss on the bed’s disposal 6,000
Capital gain or loss on the shares that have been disposed 67,700
Capital gain or loss in association with painting’s disposal ---
Capital gain or loss on the violin’s disposal 6,500
Total capital gain or loss 280,200
Capital set off 8,500
271,700
Discount (50%) 135,850
Amount forming part of general income 135,850
Part - B
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Tax
FBT (fringe benefits tax) is the tax that is expended by an employer to the employees on the
value of benefits offered to them. Further, it can be referred as the advantage or payment of
non-wages that the employer has provided to the employees or workforce of the company.
Nevertheless, Rapid Heat Pty Ltd is the manufacturer or producer of bathtubs who has
offered fringe benefits to one of their employees. During the year 2017 and 2018, Jasmine
was offered a car loan and other products that had been produced by the company. Therefore,
in relation to this situation, it is notable that the company must be bound to expend such
fringe benefits tax to the government (Singh & Singh, 2018). Nevertheless, the calculation of
FBT can be undertaken in the following manner:
Fringe benefits tax on car utilization
The employer of the company has been subject to such fringe benefits tax when Jasmine has
been provided a car loan for personal purposes. In relation to this, the employer is bound to
pay such FBT to the government. Moreover, if such car has not been able to address the
description of car, then residual fringe benefits may come into reflection. In addition, there
are several scenarios wherein the usage of car has been exempted from the applicability of
fringe benefit (Renton, 2005). Nevertheless, calculation of fringe benefit can be performed
through two ways that is operating costing method and statutory method.
Such statutory method of computing the fringe benefits tax has been used due to the
requirement of operating cost method that necessitates log books with enhanced information
of travelling implemented based on personal motives and kilometres on a whole. Moreover,
in the current phase, the company has offered a car on May 2017 to Jasmine for an amount of
$33,000 that was bought on the same date. Further, such costs have been incurred on the part
of Jasmine has reported at $550 on the reimbursed car by the company and such car travelled
approximately for ten thousand kilometres. In addition, it must be noted that the company
was incapable of using the car for a tenure of fifteen days during the year. Thus, in the
absence of details, the calculation of fringe benefits tax will be undertaken based on the
statutory method. Hence, statutory method can be computed in the following manner:
Value of benefit =
6
A*B*C
D E-

Tax
Where, A= cost of car, B=statutory percentage, C=vehicle that was utilized for private needs,
D= number of days in year, E= contribution of employees. The following information can be
collected in relation to the given case.
A = 33000, B = 0.20, C = 320, D = 335 and E = 0
Therefore, the calculation can be performed through the following way:
Overall, value of benefits = (33000*0.20*320)/335-0 that gives 6304
Hence, the grossed-up value comes at 6304*2.1463 that gives 13531
Overall, the FBT calculation can be performed through the previously mentioned methods
and hence, the fringe benefit tax on the car usage can be observed through this analysis.
Fringe benefit tax on the loan
Such fringe benefits tax on loan is chargeable when the employer fails to charge interest or
has charged a lesser level of interest in the loan amount. When the rate of interest is lesser
when compared to the rate of benchmark, then such interest rate is regarded as a lower rate of
interest (Latimer, 2012). If the employee is liable to the employer and he or she has become
incapable of making timely payments and further, the employer has not even asked for the
same, then it shall be treated as a fringe benefit that does not attract the fringe benefit tax. In
the given scenario, it is observable that the company has offered Jasmine with a loan of
$500,000 at an interest rate of 4.45%. Apart from this, an amount of $450,000 was used to
buy a holiday home and the rest value was provided to the husband of Jasmine and he was
permitted to purchase a Telstra share without any segment of interest. Nevertheless, based on
the present standard, the rate of threshold stood at approximately 5.95%. Thus, the fringe
benefit that can be incurred on such loan amount is = (Rate of benchmark minus rate that is
charged by the employer) * the amount of loan
It is observable from the given study that the fringe benefits value on loan = (5.95%-4.45%) *
500000*7/12 = 4375
Grossed-up amount= 4375*1.9608= 8579
When the loan has been provided by the employer to Jasmine (employee) and if the amount
has been utilized for the buying of assets that generates income, such value is deductible for
the calculation of fringe benefit tax. Moreover, in the present situation, the shares have been
procured by Jasmine’s husband and therefore, deduction in this phase cannot be claimed by
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Tax
the employer. Hence, such value is deductible for the calculation of fringe benefits (Latimer,
2012).
a. Fringe benefits tax on products
Fringe benefits tax on the products of the organization is chargeable when it sells the items to
the employees at a rate that is lesser than the present price of market. In this situation, the
company’s employer is subject to expend the fringe benefits tax on the variations that
prevails in the amount at which the items have been sold to the employees (Sadiq et. al,
2017). Moreover, in the current environment, the company has sold its products to Jasmine at
a value of $1300 whilst its products have been sold in the market at an amount of $2600.
Therefore, in this scenario, the company must be bound to pay the fringe benefits tax on the
variations that prevails betwixt $2600 and $1300 respectively. In other words, the company is
liable to pay the fringe benefits tax on the difference that exists between $2600 and $1300.
Therefore, value of fringe benefit tax on the products = $2600-1300 = $1300
Thus, the company’s grossed-up amount is 1300 * 2.1463 that gives 4078
The aggregate amount of fringe benefits tax that is chargeable on the part of the company:
Grossed-up car value= 13531
Grossed-up value of loan= 8579
Grossed-up products’ value = 4078
Net total = 26188
Fringe benefits tax at the rate of 49.25% will give the amount of $12897 respectively.
Therefore, the fringe benefits tax on products of the company shall be such value and it must
pay the same to the regulatory bodies.
b. Furthermore, if Jasmine has utilized the value of $50,000, the loan that was attained
by the employer to buy the shares of Telstra, then the company’s employer will
become entitled to receive an interest deduction of a value of $50000. The new value
of FBT can be undertaken in the following manner:
Value of loan’s fringe benefits = (5.95-4.45%) * 450000 * 7/12 = 3938
Grossed-up amount is equal to (3938*1.9608) that gives 7721
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Tax
Nevertheless, the net fringe benefit tax that would become chargeable can be noted through
the following formula:
Grossed-up car value = 13531
Grossed-up loan value = 7721
Grossed-up products’ value = 4078
Net total = 25,330
Fringe benefit tax in relation to this will become chargeable at the rate of 49.25% that gives
$12475. Therefore, this must be paid by the company in relation to FBT.
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Tax
References
De Cogan, D. (2015) A changing role for the administrative law of taxation. Social & Legal
Studies, 24(2), pp.251-270. Doi: https://doi.org/10.1177/0964663915572672
Latimer, P. (2012) Australian Business Law 2012. Sydney, NSW: CCH Australia Limited.
Nethercott, L., Richardson, G.,& Devos,K.. (2013) Australian Taxation Study Manual.
Oxford university Press
Raymond H. P. (2002) Accounting for Fixed Assets. John Wiley and Sons, Inc
Renton N.E. (2005) Income Tax and Investment, 2nd Ed. Oxford University press
Sadiq, K, Coleman, C , Hanegbi, R, Jogarajan,S, Krever, R, Obst, R, Teoh, J & Ting,
A. (2017) Principles of Taxation Law 2017. Law book Australia
Singh, H.S. and Singh, P. (2018) Command-and-Control to Responsive Regulation: Taxation
Administrations. GST Simplified Tax System: Challenges and Remedies, 1(1), pp.223-227.
Retrieved from: http://www.austlii.edu.au/au/journals/eJlTaxR/2007/4.html
Woellner, R, Barkoczy, S, Murphy, S, Evans, C & Pinto, D, (2017) Australian taxation law
2017. Oxford University Press Australia
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