HA3042 Taxation Law Assignment: Fringe Benefits & Capital Gains

This Taxation Law assignment delves into the complexities of Fringe Benefit Tax (FBT) and Capital Gains Tax (CGT) within the Australian context. The assignment begins by examining FBT, specifically focusing on company cars provided to employees, the methods for calculating FBT (Operating Cost Method and Statutory Formula Method), and the tax implications for both employers and employees. It provides detailed calculations and comparisons of the two methods. The second part of the assignment addresses capital gains tax, analyzing various transactions undertaken by an individual planning for retirement. This includes the sale of a main residence, artistic painting, luxury yacht, and shares. The assignment evaluates the tax implications of each transaction, considering relevant factors like the timing of capital gains events, the application of the discount and indexation methods, and the offset of capital losses. The document provides comprehensive calculations, and explanations of relevant tax laws and regulations.

TAXATION LAW
Name of the Student
5/28/2019

Table of Contents
Answer to Question No.1...........................................................................................................3
Answer to Question No. 2..........................................................................................................6
Bibliography................................................................................................................................9

Answer to Question No.1
Australian landscape business mostly practices the provision of providing company cars to
employees for both private and business use. The car is provided to employees to serve two
main purposes:
 Employees mostly travel for work from one place to another and hence it may be the
requirement of the business to provide car to employees
 In order to be amongst the “best employer by choice” many employer provide
employees car benefits to attract the best talents, and also help them in saving tax by
converting non-deductible cars to deductible cars for the employees (CHANGE
ACCOUNTANTS & ADVISORS, n.d.)
As per the Australian Tax Office (ATO), providing the benefit of cars to the employees falls
under the non-cash benefit and is covered under tax as “Fringe Benefit Tax” (FBT). These
benefits provided to employees are subject to flat tax @ 47% of the benefits taxable under
the act. (business.gov.au, 2018)
Now, most of us would have question in mind as to why would an employer pay 47% tax on
benefits, if they fall even under highest marginal rate of tax being 34.5% to 39% and they
could have easily provided an employee with a pay rise of 12-15% which would be additional
payout above the marginal rate of tax. The answer to the above confusion lies in the way the
fringe benefit taxable amount is calculated. (CHANGE ACCOUNTANTS & ADVISORS, n.d.)
Employee only always calculates Fringe Benefit tax on the private use of car and any
business use does not fall under the fringe benefit taxation. Additionally, the ATO also allows
as deduction from the taxable value of FBT, the contributions which has been made by
employees. So if the taxable value of car is reduced to close to Nil, the employer lands up
providing car benefit to employee without having incurred the FBT tax payable. (CHANGE
ACCOUNTANTS & ADVISORS, n.d.)
So next the question arises as to how the ATO computes the FBT payable on car provided to
employees. There are two methods prescribed for computing the FBT:
1. Operating Cost Method – This method is based on the costs of operating the car
and is popularly known as logbook method, wherein a logbook is compulsory required
to be maintained to track the car utilized for private purpose and for business
purpose. (Australian Taxation Office, 2019)
The logbook must be maintained for a period of at least 12 consecutive weeks and
details of each trip taken with kilometer reading along with bifurcation into private and
business trip. Once the logbook is maintained and kept for 12 weeks, it will be valid

for 5 years. The private use of vehicle is arrived as proportion of kilometer travel for
private to total kilometer traveled in 12 weeks. (Autralian Taxation Officer, 2019)
The proportion of private use is then multiplied by the car’s actual running cost like
fuel, insurance, registration etc. and notional cost like depreciation and interest for the
year to arrive a taxable value of fringe benefit. Travel between home and office will
not be constituted as used for business purpose and would be construed as used for
private purpose (CHANGE ACCOUNTANTS & ADVISORS, n.d.)
The operating cost method provides a lower taxable value if the car is mostly used for
business purpose as kilometers for private use is less and hence the fringe benefit
too.
Calculation of Fringe Benefit Tax payable on Car of Lucinda
Particulars Amount ($)
Cost of the Car 18,000
Distance Travelled (KM’s) 20,000
Private Use (%) 30%
Actual Running Costs
Repairs 3,300
Insurance 2,200
Fuel 990
Subtotal – Actual Running Cost (A) 6,490
Deemed Running Costs
Depreciation @ 25% as per deemed depreciation rates (Australian
taxation Office, 2019) (25% of 18,000)
4,500
Interest @ 5.20% of $18,000 (reference TD 2018/2) (Australian
Taxation Officer, 2019)
936
Subtotal – Deemed Running Cost (B) 5,436
Total Fringe Benefit (A+B) 11,926
Total Fringe Benefit Taxable (Only Private Use) 3,578
Reportable Fringe Benefit @ Grossing up @ 1.8868 (Australian
Taxation Officer, 2019)
6,750
Less: Employee Contribution 1,000
Net Fringe Benefit taxable 5,750
Fringe Benefit Tax Payable @ 47% (Australian Taxation Officer,
2019)
2,702
2. Statutory Formula Method – This method is suitable for employees with no or very
negligible business use of car since the calculation would lead to a lower fringe benefit
tax payable. In 2010 federal budget, it was implemented that the private use of car in

this method shall be assumed 20% of the base value of car, which is the car’s
purchase price inclusive of GST but exclusive of the stamp duty and registration fees.
(CHANGE ACCOUNTANTS & ADVISORS, n.d.)
As with the operating cost method, any contribution made by employee is reduced
from the total taxable liability.
Calculation of Fringe Benefit Tax payable on Car of Lucinda
Particulars Amount ($)
Cost of the Car 18,000
Car fringe benefits statutory formula rates (Australian Taxation
Officer, 2019) @ 20% on Cost of Car
3,600
Total Fringe Benefit Taxable (Only Private Use) 3,600
Reportable Fringe Benefit @ Grossing up @ 1.8868 (Australian
Taxation Officer, 2019)
6,792
Less: Employee Contribution 1,000
Net Fringe Benefit taxable 5,792
Fringe Benefit Tax Payable @ 47% (Australian Taxation Officer,
2019)
2,723
So from above we can see that in case of Operating cost method, the Fringe benefit tax
payable is more by $ 21 under the statutory Formula method.

Answer to Question No. 2
In the current case Daniel ray is in his late 50’s and is planning for retirement, by end of 30
June 2019, he intends to contribute to his superannuation fund by selling different assets to
the tune of $ 1 M. As part of this contribution planning, he has entered into various
transactions with parties which has tax impact on his income by way of normal income as
well as capital gain tax since he is parting away with certain assets. A summary of all such
adjustment along with the impact on taxable income is as below:
1. Special capital receipts and Timing of Capital Gain – In this case, Daniel was living
in the property for past 30 years, which he bought for $ 70,000 and had sold in an
auction for $865,000 on 29 June 2019. The buyer had deposited $85,000 and Daniel
paid $15,000 to real estate agent as his commission. Subsequently, the buyer
expressed inability to pay the amount and asked to forfeit the amount.
In the above case, as per Australian Taxation Office, timing of Capital gain tax (CGT)
event is critical, it says that if any asset is dispose off, the CGT event is usually on the
day when you enter into a contract for disposal and not the date when you settle the
amount with buyer. Hence, Daniel for income tax assessment in June 2019, will be liable
for the CGT as he has entered into a contract for disposal of asset with the buyer.
(Australian taxation Office, 2019)
Now, the asset, which he was disposing off, happens to be his main residence and as
per the Australian Tax office, the main residence is exempt from CGT. Daniel has lived
in this house for 30 years and hence it qualifies to be its “main residence” and hence
exempted from CGT. (Australian Taxation Office, 2019)
Another transaction which has happened is the forfeiture of deposit to the tune of
$85,000, in this case the forfeiture has happened post 30 June 2019 and hence it would
appear as special capital receipts in next year income tax returns and would be reduced
by the amount paid to the broker to arrive at the net taxable receipts. (Australian
Taxation Office, 2019)
2. Sale of Artistic Painting – In this case, Daniel has purchased an artistic painting on 20
September 1985 for $15,000 and sold at the auction at $125,000 on 31 May 2019. Since
the painting was purchased on 20 September 1985, Capital Gain Tax would apply to it
since Capital Gain Tax is applicable to assets which is acquired on or after 20 th
September 1985. (PwC, 2019)
For most of the asset disposal cases,the difference between the two capital proceeds
and cost base of an assets is the capital gain.Two different methods for computation of
the capital gain which are as follows:

 Discount method – Difference between the capital proceeds and cost base of an
assets is the Capital Gain and a discount of 50% would be applied (Australian
Taxation, 2019)
 Indexation Method – Difference between the capital proceeds and the increased
cost base of an assets by applying an indexation factor based on consumer price
index upto September 1999 only, it also applies to assets acquire before 11.45am
(by legal time in the ACT) on 21 September 1999. In our case indexation factor is
Indexation as on September 1999/ Indexation as on September 1985, i.e.
68.7/39.7 = 1.73 (Australian taxation, 2019)
Calculation of Capital Gain Tax on Sale of Artistic painting
Particulars Discount method Indexation Method
Capital Proceeds 125,000 125,000
Less: Cost of Acquisition 15,000 -
Less: Indexed Cost of Acquisition
(15,000X1.73)
- 25,950
Capital Gain 110,000 99,050
Discount @ 50% 55,000 -
Net Capital Gain 55,000 99,050
From above, we can see that the discount method yields lower Capital Gain and should be
followed in case of sale of artistic paintings.
3. Sale of Luxury Yacht – In this case, Daniel had purchased the yacht in November 2004
for $110,000 and sold the same on 01 June 2019 for $60,000. It is a clear case of Capital
Loss and hence in this case capital loss would be capital proceed less by the reduced
cost base. (Australian Taxation Office, 2019)
Calculation of Capital Loss on Sale of Yacht
Particulars Discount method
Capital Proceeds 110,000
Less: Reduced cost base 60,000
Capital Loss 50,000
4. Sale of Shares – In this case, Daniel had purchased the shares on 10 January 2019 for
$75,000 and also paid $250 as stamp duty, so its total cost becomes $75,250. The same
shares were sold on 5 June 2019 for $ 80,000 and brokerage of $750 was paid, so net
sales proceed is %79,250. Since the holding period was less than 12 months, “other
method” would be used to compute the capital gain and hence Capital gain would be
Capital Gain = Net Sales proceeds – Total Cost = $79,250 - $ 75,250 = $4,000

Daniel had borrowed money for the purpose of investment in shares and would be able to
eligible to claim deduction for interest on the loan, provided it's practicable to expect that
assessable dividends will be attained from your investment in the shares only, hence
interest on loan will not be tax deductible for purpose of CGT.
In the previous financial year’s tax return (i.e.2017-2018), Daniel has incurred a net capital
loss of $10,000 from the sale of AZJ shares. As per the Australian Tax Office, if Daniel
has realized a loss from disposal of share then it can be set off against the capital gain
and be carried forward to set off against future capital gain
Daniel’s net capital gain is calculated using the following formula:
A − B
Where:
A is Daniel total capital gains for the year
B is Daniel total capital losses (including any net capital losses from previous years)
So A = Capital Gain Tax on Sale of Artistic painting + Capital Gain on Sale of Shares
B= Capital Loss on Sale of Yacht + Net Capital Losses from previous year
A = $ 55,000 + $4,000
B = $ 50,000 + $10,000
Net Capital Loss = A-B = $59,000 - $ 60,000 = $1,000
The above $1,000 needs to be carried forward next year for set off against the capital gain

Bibliography
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