Taxation Theory, Practice & Law HI6028: CGT and FBT Liability Analysis

This assignment solution analyzes the capital gains tax (CGT) and fringe benefits tax (FBT) implications for a client's financial transactions. Question 1 examines CGT liabilities arising from the sale of assets, including vacant land, an antique bed, shares, and a violin, considering cost base determination, pre-CGT assets, and the application of the discount method. The analysis includes detailed calculations of capital gains or losses, adjustments for previous losses, and the timing of CGT. Question 2 provides legal advice to Rapid Heat regarding its fringe benefits tax (FBT) consequences, specifically addressing the provision of a car, a loan, and an electric heater to an employee. It covers the calculation of FBT liabilities, including car fringe benefits based on the statutory formula, and loan fringe benefits considering concessional rates. The solution outlines the relevant provisions of the FBTAA 1986 and provides computations for each benefit, culminating in the determination of the FBT payable by Rapid Heat.

Taxation Theory, Practice & Law
HI6028
Student Name
[Pick the date]

Question 1
The key issue in the context of scenario presented is to highlight the resulting capital gains or
losses from the various transactions that have been enacted by the client in the given financial
year. The cumulative capital gains or losses on which CGT (Capital Gains Tax) would be
applicable are also highlighted in the discussion and computation highlighted as follows.
Asset 1- Vacant Land
A key check for application of CGT related liability is whether the underlying asset is a pre-CGT
asset or not. This is ascertained as per s. 149(10) ITAA 1997 which clearly highlights that assets
which are bought on or before September 20, 1985 are categorised as pre-CGT asset. This
classification is essential considering that pre-CGT assets are CGT exempt (Nethercott,
Richardson and Devos, 2016).
In order to compute the capital gains or loss arising from a given transaction, it is required to
determine the appropriate event as per s. 104-5 ITAA 1997 where the underlying capital event
would fall. This is critical since the underlying event determines the precise formula for CGT
computation. With regards to land being sold, the relevant event as per s. 104-5 would be
classified as A1 event. As per this event, the capital gains or losses (as may be applicable) can be
calculated by the following formula (Sadique, et. al., 2015).
Applicable capital gains or losses = Proceeds from sales generated – Land bank cost base
Additional aspect to consider is the cost base determination which ought to be performed as
highlighted in s. 110-25 ITAA 1997. There are essentially five elements which constitute the cost
base of the asset (Reuters, 2017). These are summarised below.
Element 1: The acquisition cost associated with the asset as per ss. 110-25(2)
Element 2: The related costs while selling or buying of underlying asset as per ss. 110-25(3)
Element 3: The ownership costs related to the asset which includes cost incurred when the asset
is owned by the taxpayer and includes sewerage tax, land tax in case of vacant land as per ss.
110-25(4).

Element 4: An expenditure which is capital in nature and incurred for value preservation or value
appreciation as per s. 110-25(4).
Element 5: An expenditure which is capital in nature and incurred for title preservation as per s.
110-25(5).
The computation of land cost base can be carried out as shown below.
Element 1: Price of acquisition = $ 100,000
Element 3: Expenses during period of ownership = $ 20,000
Land block cost base = Element 1 + Element 3 = $ 120,000
A key issue pertaining to the given transaction is in regards to the timing of CGT especially with
regards to those transactions where thee contract to sell the asset and settlement of the same do
not proceed in the same tax year. In such cases, tax ruling TR 94/29 requires that CGT
implications ought to be captured in the tax year when the sale contract enactment happens rather
than the year of settlement as payment on the contract can be made later (Sadique, et. al., 2015).
In line with this understanding, the CGT liability on the sale of land would arise in the current
tax year even though the corresponding cash would be received only in next year.
Also, it is known that the given client has a pending capital loss of $ 7,000 which ought to be
adjusted with the capital gains derived from sale of land. Therefore, net capital gains after
adjustment would amount to (200000-7000) or $ 193,000
With regards to long term capital gains for individual taxpayer, s. 115-25(1) offers the
application of discount method where half of the capital gains are provided concession on
(Sadique, et. al., 2015).
Asset 2: Antique Bed

With regards to antique bed being sold, the relevant event as per s. 104-5 would be classified as
A1 event (Nethercott, Richardson and Devos, 2016). As per this event, the capital gains or losses
(as may be applicable) can be calculated by the following formula.
Applicable capital gains or losses = Proceeds from sales generated – Antique bed cost base
The antique bed on account of the purchase date is a post CGT asset with an acquisition price
exceeding $ 500. The net result would be that CGT would be applied on the net capital gains or
losses derived from the asset disposal. The computation of cost base for the asset under
consideration is highlighted as follows.
Element 1: Acquisition price = $ 3,500
Element 4: Expenditure of capital nature for increase in asset value = $ 1,500
Antique bed cost base = Element 1 + Element 4= $ 5,000
The asset disposal in this case is involuntary which has led to proceeds of $ 11,000 being
generated on account of insurance proceeds.
Hence, capital gains = 11000 – 5000 = $ 6,000
A previous capital loss to the tune of $ 1,500 exists from sculpture (a type of collectible) and
therefore will be adjusted in the capital gains before application of discount method. Hence,
capital gains after adjustment of previous losses = 6000-1500 = $ 4,500
With regards to long term capital gains for individual taxpayer, s. 115-25(1) offers the
application of discount method where half of the capital gains are provided concession on
(Sadique, et. al., 2015).
Asset 3: Painting
With regards to this asset, the data of purchase lies in the era when no CGT was applied on
capital gains. This, the painting is a pre CGT asset as per s. 149(10) ITAA 1997 and hence no
CGT implications would result from any capital gains or loss derived on the sale of this asset.

Asset 4: Shares
Share disposal corresponds to A1 event as per s. 104-5 ITAA 1997 (Nethercott, Richardson and
Devos, 2016). With regards to shares being sold, the relevant event as per s. 104-5 would be
classified as A1 event. As per this event, the capital gains or losses (as may be applicable) can be
calculated by the following formula.
Applicable capital gains or losses = Proceeds from sales generated –Shares cost base
(i) Element 1: Cost of acquisition = $15*1000 = $ 15,000
Element 2: Related incidental costs = $ 1,300 (750 on stamp duty and 550 brokerage related fee).
Cost base: Share Asset = 15000 +1300 = $ 16,300
Sales proceeds = 47*1000 = $ 47,000
Realised capital gains on share asset = 47000 – 16300 = $ 30,700
The resultant capital gain is long term owing to share being held by client for more than a year.
(ii) Element 1: Cost of acquisition = $12*2500 = $ 30,000
Element 2: Related incidental costs = $ 2,500 (1500 on stamp duty and 1000 brokerage related
fee).
Cost base: Share Asset = 30000 +2500 = $ 32,500
Sales proceeds = 25*2500 = $ 62,500
Realised capital gains on share asset = 62500 - 32500 = $ 30,000
The resultant capital gain is long term owing to share being held by client for more than a year.

(iii) Element 1: Cost of acquisition = $5*1200 = $ 6,000
Element 2: Related incidental costs = $ 600 (500 on stamp duty and 100 brokerage related fee).
Cost base: Share Asset = 6000+600 = $ 6,600
Sales proceeds = 0.5*1200 = $ 600
Realised capital losses on share asset = 6600 – 600 = $6,000
(iv) Element 1: Cost of acquisition = $1*10000 = $ 10,000
Element 2: Related incidental costs = $ 2,000 (1100 on stamp duty and 900 brokerage related
fee).
Cost base: Share Asset = 10000+2000 = $ 12,000
Sales proceeds = 2.5*10000 = $ 25,000
Realised capital gains on share asset = 25000-12000= $13,000
Owing to ownership period being lesser than a year, discount method under s.115-25 cannot be
applied here.
Asset 5: Violin
The case facts presented clearly indicate that violin in the context of the given client is an item of
personal use. This is established from the given information whereby it is known that the client
has ownership of several violins which all are played regularly (Kreyer, 2016). Considering the
use of violin for deriving entertainment, it is correct to categorise it as an item of personal use.
For items of personal use, no CGT implications arise if the acquisition price for these is lower
than $ 10,000. The given violin costs $5,500 and hence would not have any CGT implications.

Summary (Conclusion)
Capital gains: Block of Land = $96,500
Capital gains: Antique bed = $2,250
Capital gains: Shares = $40.350
Question 2
(a) The issue is to offer a legal advice to Rapid Heat about its Fringe Benefits Tax (FBT)
consequences based on given information and also, the computation of FBT liabilities for
year ending 31 March 2018
Taxpayer (employer) would be held accountable for the FBT liability only when they have
provided benefits to employee that the employee can use for private purpose as per Fringe
Benefits Tax Assessment Act 1986 (Sadique, et. al., 2015). It is noteworthy that the benefits
provided to employee would not be categorised under fringe benefits when the usage of the
benefit is restricted to professional work only. FBT liabilities will not be applicable on the
employees and would only be imposed on employer for the respective FBT year. Further, the
employer may claim tax deduction only when the employee is using the benefits to derive
assessable income (Coleman, 2016).
Employer - Rapid Heat and Employee – Jasmine
Rapid Heat has provided three fringe benefits i.e. a car, a loan of sum $500,000 and an electric
heater to Jasmine during the FBT year which would be taken into account to find the FBT
consequences and FBT liability.
Car fringe benefit

The relevant provisions are discussed in s.8, FBTAA 1986 which defines that car fringe benefit
will be provided to employee by the employer when the car is given for the private purpose of
employee. Taxable value of car is an imperative factor to determine the car related fringe benefit
tax liability on employer. The statutory formula as per s. 9, FBTAA 1986 for car fringe benefits
computation and is shown below (Gilders et. al., 2016).
Base value of car is also known as capital value which would be calculated by deducting the
expenses resulting from minor repairs. Available days will be the days between 31 March 2018
and the date when the car was available for private purpose to employee. Days will not be
deducted from available days when the car is held present for employee for private use. Further,
the days will also not deduct when the car was at garage for the minor repairs but days deduction
for major repairs is available (Deutsch, et. al., 2017).
Rapid has provided a car to Jasmine for private purpose on September 1, 2017 and hence, car
fringe benefit has been provided to Jasmine. Rapid has also paid $550 for minor expenses. The
FBT liability will be raised on Rapid Heat.
Base value = (33000-550) = $32,450
Car purchased after 2011 and thus, statutory % = 20%
Available days = 334 (May 1, 2017 to March 31, 2018)
Gross up rate = 2.0802 (Type I goods)

Total days = 365
FBT rate = 47% (March 31, 2018)
Therefore, Rapid Heat has to pay $5823.70 as fringe benefit tax for providing car fringe benefit
to Jasmine.
Loan fringe benefit
Any financial help (loan) provided to employees by their employer would be considered as loan
fringe benefits only if the loan was provided with no interest or with concessional rates. Any rate
below the statuary rate defined for the relevant year by Reserve Bank of Australia (RBA) will be
termed as concessional rate (Barkoczy, 2017). For FY2017/18, the statutory rate by RBA is
5.25% as per TD 2017/3. Gross up factor of car, loan and non-cash benefit depends on the type
of goods and FBT year as highlighted in Goods and Service Act 1999.
Further, the employer may claim tax deduction only if the employee is using the benefits to
derive assessable income through the loan.
Rapid Heat has provided financial help (loan) to Jasmine at an interest rate of 4.25% per annum.
It is evident that Rapid Heat has used concessional rate for loan as the statutory rate by RBA is
5.25% p.a. for FY2017/18.
Loan = $500,000
Available days = 212 (Sep 1, 2017 to March 31, 2018)

Gross up rate = 1.8868 (Type II goods)
Total days in FBT year = 365
RBA rate of interest = 5.25% per annum (TD 2017/3)
Rapid Heat’s concessional rate = 4.25% per annum
FBT rate = 47% (March 31, 2018)
Therefore, fringe benefit tax payable for Rapid Heat is $2575.35 for providing loan fringe benefit
to Jasmine.
Jasmine has used the loan for two purposes. She has realised $450,000 to buy holiday home and
has provided $50,000 to her husband to purchase Telstra’ shares with zero interest rate. Rapid
Heat would be liable to claim deduction on the received interest only if the holiday home
purchased by Jasmine would result assessable income. Further, the received interest on $50,000
will not be taken for tax deduction as it has been acquired by Jasmine’s husband.
Expense payment fringe benefit
Non-cashable benefit provided by employer to employee that deals with private expense would
be considered as expense payment fringe benefit. Further, any product of company sold to
employee at cheaper price as compared with the original price will be considered as internal
expense fringe benefit (Woellner, et.al., 2017) . Gross up factor of car, loan and non-cash benefit
depends on the type of goods and FBT year as highlighted in Goods and Service Act 1999.
Rapid Heat is selling heater for $2600 to their customer. However, the selling price given to
Jasmine is $1300. The concessional price would lead internal expense fringe benefit by Rapid
Heat by Jasmine.
Concession offered = halved of selling price = 2600/2 = $1300

Saving = ( 75 %∗2600 ) − ( 1300 ) =$ 650
Gross up rate = 2.0802 (Type I goods)
FBT rate = 47% (March 31, 2018
FBT payable=650∗2.0802∗0.47=$ 635.5
Therefore, fringe benefit tax payable for Rapid Heat is $635.5 for providing internal expense
fringe benefit to Jasmine.
(b)In this case, Jasmine has realised $50,000 to buy Telstra’ shares rather than offering her
husband with no interest rate and hence the incremental deduction would be available for Rapid
Heat. This incremental deduction reduces the total fringe benefit tax liability of Rapid Heat as
highlighted below.

References
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Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters (Professional)
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