Taxation Theory, Practice & Law Assignment: CGT and FBT Analysis

This assignment solution addresses two main issues in taxation law: calculating net capital gains or losses and commenting on fringe benefit tax (FBT) liabilities. The first part analyzes capital gains tax implications for various assets, determining whether they are pre-CGT assets and calculating capital gains based on acquisition dates, cost bases, sale incomes, and previous capital losses. The analysis includes assets like vacant land, antique beds, shares, and violins, applying relevant tax laws to determine the final capital gains subject to CGT. The second part examines FBT liabilities for an employer, Rapid Heat, who provides fringe benefits to an employee, Jasmine. It covers car fringe benefits, loan fringe benefits, and internal expense fringe benefits (electric heaters). The solution calculates the taxable value and FBT liability for each benefit, considering factors like car availability, loan interest rates, and the value of internal expenses. The solution also explores tax deductions for the employer based on the employee's actions, and the conclusion summarizes the tax liabilities for both CGT and FBT.

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

Question 1
Issue
The issue is to determine the net capital gains or net capital losses for the transactions completed
by client during the income tax year.
Law
Assets which are purchased before September 20, 1985 will be classified as pre-CGT assets and
no Capital Gains Tax (CGT) implications would be raised on taxpayer for the capital gains
derived from liquidation of the assets. Therefore, it is essential that asset should not be
categorised as pre-CGT asset. Further, s. 104-5, defines that the transaction for the sale of assets
would be classified as A1 event (Sadiq, et.al., 2017).
In accordance of s. 110-25, ITAA 1997 cost base of an asset is another imperative aspect. It
includes five main factors which are as shown below as per s. 110-25(1) (Reuters, 2017).
It is noteworthy that contractual payment for the sale of the asset would be considered for the
computation of capital gains even if the taxpayer has not received the respective contractual sale
proceeds as per TR 94/29 (Nethercott, Richardson and Devos, 2016).
Antique items are collectables and defined as capital asset as per TD 1997/40. Received capital
gains or losses would be considered for CGT treatment only when the buying cost of the antique
1

item is either higher than $500 Barkoczy, Mortimer and Butler, 2016). Also, in regards with the
personal usage asset, the sale proceeds would held taken for CGT computation only if the buying
cost is higher than $10,000. It is essential to note that 50% discount would be availed on the net
capital gains or losses when the holding period is higher than 1 year as the proceeds would be
termed as long term under s. 115-25(1) (Krever, 2016). The net capital gains would be
determining after balancing the forwarded previous capital losses on the asset (Gilders, et.al.,
2016).
Application
The first step is to determine which of the asset belong to pre-CGT asset as no CGT implication
would be applicable in that case. Hence, the date of acquisition would be taken into
consideration and it should be on or after September 20, 1985 for CGT purposes.
Asset Acquisition date Pre-CGT or Non Pre-CGT
Asset
Block of vacant land January 2001 Non- Pre- CGT Asset
Antique Bed July 21, 1986 Non- Pre- CGT Asset
Painting May 2, 1985 Pre-CGT Asset
Shares All shares after 2011 Non- Pre- CGT Asset
Violin May 1, 2018 Non- Pre- CGT Asset
It can be seen from the above that taxpayer has purchased painting before September 20, 1985
and hence, the CGT implication would not be applicable as the painting would be categorised
under pre-CGT asset.
Block of vacant land
Transaction – A1 event
Purchase cost = $100,000
Sale income = $320,000
Ownership payment (Incidental cost)= $ 20,000
2

Cost base = 100,000 + 20,000 = $ 120,000
Capital gains = 320,000 – 120,000 = $ 200,000
Previous years capital losses = $7,000
Capital gains = 200,000 -7,000 = $193,000
Long term proceeds and therefore, 50% discount would be taken for net capital gains.
Capital gains subject to CGT = 0.5*(193,000) = $ 96,500
Antique Bed
Transaction – A1 event
Purchase cost = $ 3,500
Capital expenditure (value enhancement) = $1,500
Cost base = 3500 + 1500 = $ 5,000
Sale income = $11,000
Capital gains = 11,000 – 5,000 = $ 6,000
Previous years capital losses =$1500 (Sculpture)
Capital gains = 6000-1500 = $ 4,500
Long term proceeds and therefore, 50% discount would be taken for net capital gains.
Capital gains = 0.5*(4500)= $ 2,250
Painting Pre-CGT Asset
(No CGT Implication)
Shares
Transaction – A1 event
(i) “Common Bank Ltd”
Purchase cost = $15*1000 = $ 15,000
Incidental costs = 750 +550 = $ 1,300
Cost base = 15000 +1300 = $ 16,300
Selling price = 47*1000 = $ 47,000
3

Capital gains = 47000 – 16300 = $ 30,700
(ii) “PHB Iron”
Purchase cost = $12*(2,500) = $ 30,000
Incidental costs = 1,500 + 1,000 = $ 2,500
Cost base = 30000 +2500 = $ 32,500
Selling price = 25*(2,500) = $ 62,500
Capital gains = 62,500 – 32,500 = $ 30,000
(iii) “Young Kids Learning”
Total purchase = $5*1200 = $ 6,000
Incidental costs = 500 + 100 = $ 600
Cost base = 6000+600 = $ 6,600
Selling price = 0.5*1200 = $ 600
Capital losses = 6600 – 600 = $6,000
(iv) “Share Build Ltd”
Total purchase cost = $1*10,000 = $ 10,000
Incidental costs = 1100 + 900 = $ 2,000
Total cost base = 10000+2000 = $ 12,000
Total selling price = 2.5*10,000 = $ 25,000
Capital gains = 25,000-12,000= $13,000
Capital gains = 0.5* (30700 + 30000-6000) + (13000) = $40,350
Violin
Taxpayer has many violins in her collections which she plays regularly for entertainment and
hence, it can be said that violin would be asset of personal use.
The CGT implication would be applicable only when the buying cost is higher than $10,000.
Here. taxpayer purchased violin for $5,500 and therefore, the CGT would not be imposed of
capital gains derived from disposal.
4

CAPITAL GAINS ( year ended June 30, 2018) = 96500 + 2250 + 40350 = $139,100
Conclusion
The net capital gains for transactions come out to be $139,100 for the year ended June 30, 2018.
The CGT implications would be raised on the derived net capital gains ($139,100).
Question 2
Issue
The issue is to comment on the Fringe Benefit Tax (FBT) liability of taxpayer Rapid Heat for the
various fringe benefits extended to Jasmine.
Law
In accordance of Fringe Benefits Assessment Act 1986, the employer will have to pay FBT on
the account fringe benefits which are provided to employee during the assessment tax year.
1) Car Fringe Benefit
As per section 8, FBTAA 1986, a car offered to employee by their employer for personal work
will result in extension of the car fringe benefits tax implication on employer. The employee
would not be held liable for FBT implication. In relation to the base value of car, the minor
expenses which have been borne by the concerned employer would be deducted from acquisition
price. Further, the days of availability of car will be counted from the date on which the
employer has given car to employee for personal work (Deutsch, etl.a., 2015). Gross up rate is a
factor which would be multiplied with the car fringe benefit in order to find the taxable value.
Further, the fringe benefit tax rate as per the assessment tax year will be multiply with the
taxable value so that the net FBT liability would be computed for car fringe benefit (Barkoczy,
2017).
2) Loan Fringe Benefit
5

If the employer offers loan to employee at rate lower than the benchmark rate set by Reserve
Bank of Australia, then loan fringe benefits would be offered by employer. The liability would
only be applied on the respective employer. Further, employer would also get the deduction for
the loan only when the loan amount would lead to generation of assessable income by employee
(Coleman, 2016).
3) Internal expense fringe benefit (Electric heater)
Employer provides benefits to their employees in the form of rebate in personal expenses such as
concession in the prices would be termed as internal expense fringe benefits. The FBT liability
would only be raised on employer and not on employee (Wilmot, 2014).
Application
(a) A car, loan and heater (at low cost) offered to employee (Jasmine) by their employer for
personal work will result in extension of the fringe benefits tax implication on employer
(Rapid Heat).
Car fringe benefit
Capital value of car =($ 33,000) – ($ 550)=$ 32,450
Car issued date = May 1, 2017
Availability of car to Jasmine = 334 days
- car was at airport: 10 days would not be deducted because car was available for her
- car was in garage: 5 days would not be deducted because car was sent for minor repairs only
and not any major repairs.
Gross up rate (car is type I good in GST 1999) = 2.0802
Fringe benefit =0.2*32450*334/365=$5938.79
Taxable value = 5938.79 *2.0802 = $12,353.8
FBT liability = 12,353.8 *0.47 = $5806.32
6

Loan fringe benefit
Rate of interest of Reserve Bank of Australia (RBA) is 5.25% as evident from TD 2017/3 and the
rate of interest offered to Jasmine is 4.25% p.a. It indicates that Rapid Heat is providing the loan
at lower rate as compared with RBA. The FBT liability in this case is also applied on Rapid
Heat.
Loan = $50,000
Loan issued date = September 1, 2017
Hence, total days of availability of loan to Jasmine = 212
Loan fringe benefit = $500,000 * {(5.25/100) – (4.25/100)}* (212/365) =$2904.109
Gross up rate (car is type II good in GST 1999) = 1.8868
Taxable value = 2904.109*1.8868 = $5479.47
FBT liability = 5479.47*0.47 = $2575.35
The loan amount ($450,000) used by Jasmine to purchase the home would generate assessable
income for her in terms of rent payment then only the tax deduction will be claimed by Rapid
Heat.
Internal expense fringe benefit
Electric heater is manufactured product of Rapid Heat which they offer for a price of $2600 per
heater. However, when Jasmine wanted to purchase the heater, employer offered her $1300 price
for heater. It is clearly an internal expense fringe benefit because Rapid Heater has offered lower
prices as she is employee of Rapid Heat Ltd.
Saved amount = 75% of selling price – (selling price - offered price)
Saved amount = (75* 2600) - ($2600 - $1300) = $650
Gross up rate (car is type I good in GST 1999) = 2.0802
7

Taxable value = 650*2.0802 =$1352.1
FBT liability = 1352.1*0.47 = $635.5
(b) Additional amount would be generated for tax deduction when Jasmine herself purchased the
shares rather than offering $50,000 to her husband. The additional deduction amount has
been calculated below.
Additional deduction amount = 50000 * (5.25-4.25) % = $500
The net FBT liability of Rapid Heat will be reduced by $500
Conclusion
It can be concluded that taxpayer Rapid Heat has FBT liabilities for car, loan and expenses fringe
benefits. Further, no FBT liability will be imposed on Jasmine. Moreover, tax deduction would
be claimed by Rapid Heat when loan amount has been used for generating the rent income by
Jasmine. This would further increase when the shares are also purchased by Jasmine instead of
her husband.
References
8

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. (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.
Krever, R. (2016) 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.
9