HI6028 Taxation: Capital Gains and Fringe Benefits

This assignment solution analyzes various taxation aspects, including capital gains tax on collectibles, personal use assets, and share sales. It also delves into fringe benefits tax, specifically loan fringe benefits, and calculates the taxable value in different scenarios. Furthermore, the solution examines partnership arrangements, determining loss allocation based on the existence of a partnership. Finally, it discusses the principle of tax avoidance, as highlighted in the IRC v Duke of Westminster case, and its relevance in Australia, along with the treatment of proceeds from pine tree removal as royalty income under ITAA 1936.

Taxation Theory, Practice and the Law
HI6028
STUDENT ID
[Pick the date]

Taxation
Question 1
Issue
Eric has made a host of transactions in the given financial year and the objective is to highlight
the capital gains impact of the same.
Rule
Considering the differing rules to compute capital gains, the relevant discussion in this matter is
indicated as follows.
Collectibles
 Defined by s. 108-10(2) and consists of antique items besides painting, rare books etc.
 Capital losses if any on these articles cannot offset gains made in other asset classes but
have to be adjusted only against capital gains on collectibles sale only (s. 108-1)
(Barkoczy, 2017).
 Capital gain recognition would be enabled only the underlying article has been bought for
a price which surpasses $ 500 (Deutsch et. al., 2016).
 Can be rolled over perpetually till the time the capital gains from collectibles are realised
for adjustment (Sadiq et. al., 2017).
Items of Personal Use
 Capital losses are never realised and instead ignored and non-existent for CGT
computation (s. 108-10(3)) (Gilders et. al., 2016).
 Realisation of capital gains is accomplished only if the underlying asset has been bought
for a price that surpasses $10,000 (CCH, 2013).
Disposal of Shares
 Capital gains or losses on share sale as per s. 104-5 would lead to taxable capital gains.
 Respite available to individual taxpayers whereby as per s. 115-25, long term capital
gains can be discounted and thus only the remaining half would attract CGT (Woellner,
2014).
Application
The various transactions enacted by Eric need to be analysed in the light of the rules outlined
above.
Collectible
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Taxation
 Antiques (Chair & Vase) and painting to be recognised as collectible items for CGT
purposes.
 The price at which each of these items have been procured is greater than $ 500 and
hence these items are not exempt from CGT implications.
Antique chair sale (Capital gains realised) = 1000-3000 = -$ 2,000
Antique vase sale (Capital gains realised) = 3000-2000 = $ 1,000
Painting sale (Capital gains realised) =1000-9000 = -$8,000
Net capital gains from collectible sale = -2000+ 1000 -8000 = -$ 9,000
The above losses would be carried forwarded by Eric in the future years so that it can be sued to
neutralise any future collectible capital gains.
Personal Use Assets
 The buying cost of the sound system which is for personal use is over $ 10,000 and
therefore the CGT implications would arise in case of any gains made.
Sound System sale (Capital gains realised) = 11,000- 12,000 = -$ 1,000
The capital losses do not contribute to the capital gains computation and hence this is ignored.
Shares
 Buying price of shares is given as $ 5,000 while the corresponding sale price is $ 20,000.
 Also, it is noticeable that holding period is less than 12 months.
Share sale (Capital gains realised) = 20,000 – 5,000 = $ 15,000
Conclusion
Eric would need to pay capital gains tax on capital gains of $ 15,000 for the given year.
Question 2
Issue
Certain fringe benefits in the form of cheap loan have been extended to Brian by his employer in
wake of which the taxable value needs to be computed.
Rule
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Taxation
It is noteworthy that as per division 4, FBTAA, loan fringe benefits is given to a particular
employee when there is interest savings reaped by the employees. The rate of reference below
which the employer must not lend is the statutory rate which the RBA defines and is used for the
interest savings computations which eventually defines the taxable value of the loan fringe
benefit (Gilders et. al., 2016). The formula to be used for taxable value computation is
highlighted below (CCH, 2013).
Taxable Value = Savings in interest during concerned financial year * Gross Up Rate (Type 2)
Before, there is adjustment in taxable value to the extent that the employer deploys the financial
assistance taken for raising income (Woellner, 2014).
Application
 Company allows Brian to pay interest yearly instead of monthly
The loan fringe benefits in this case would increase as Brian would be able to save a higher
amount in terms of interest leading to higher taxable value (Nethercott, Richardson and
Devos, 2016).
 Company allows Brian exemption to paying interest effectively making r=0%
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Taxation
The loan fringe benefits in this case would increase as Brian would be able to save a higher
amount in terms of interest leading to higher taxable value. Infact the loan fringe benefit
would assume the maximum possible value in this case as no interest cost levied (Sadiq et.
al., 2016).
Conclusion
On the basis of the current situation, the loan fringe benefit will have a net taxable value of
$51,718.06.
Question 3
Issue
The central issue is to highlight the arrangement for loss allocation and Jack and his wife Jill.
Relevant law
The key concern is to determine if the given transaction gives rise to a partnership relation or not.
This requires the fulfilment of three pivotal conditions (Woellner, 2014).
1) “Carrying on of the business activity”
2) Carrying on “in common”
3) Profit motive should be present for the activities.
Few critical points which are relevant are outlined below (Nethercott, Richardson and Devos,
2016).
 It would be unfair to compare carrying on with repetition and isolated transactions driven
by circumstances can be partnership (Playfair Development Corporation Pty Ltd v Ryan
(1969) 90 WN (NSW))
 In common not only implies collective rights and obligations but same extends to profit
and loss sharing. Hence, no partner can limit exposure to loss unless the underlying
partner is limited (Re Ruddock (1879) 5 VLR (IP & M) 51).
Application
The first objective is to ascertain whether there is existence of partnership relationship in the
given case. The key facets in this regards are indicated below.
 Business owing to buying and selling of property
 In common as the property purchase has been done jointly.
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Taxation
 Further, purchase of property has been done so as to make gains by selling the same.
From the above, existence of partnership is concerned. Hence, if loss arises on account of
business, then irrespective of the agreement, the partners (Jack & Jill) will have to divide losses
in the ratio 10(Jack) : 90(Jill). Also, in case of capital losses, the relevant losses would be
available to the individual partners who can then offset the same against any capital gains or can
roll these over.
Conclusion
The loss division would be in the same ratio as profit as partnership exists and the executed
agreement does not matter.
Question 4
Issue
The principle which the IRC v Duke of Westminster case highlighted needs to be listed down and
the relevance of the same in Australia needs to be outlined.
Relevant law and Application
The key principle that this landmark case brought into light was in relation to tax avoidance. This
case entitled every taxpayer with the legally approved right of minimising the liability associated
with tax outflow (Barkoczy, 2017). The net result was that there was no provision related to anti-
avoidance that was inserted in the ITAA 1936 and relevant changes were prompted only after
four decades when the income levels grew and also the misuse also increased. The various steps
in Australian context are outlined as follows (CCH, 2013).
 The judicial system through the court endorsed the choice principle as per which the
taxpayer are not supposed to get creative in their tax arrangements and rather utilise the
concessions provided in the statute in the manner prescribed to lower tax liability.
 Anti –avoidance provisions were incorporated in ITAA 1936 (Part IVA) in 1981
 Before 2006, the clauses only targeted taxpayers but not the promoters offering such
schemes to them. However, this was rectified with promoter penalty provisions with
wider powers available to Tax Commissioner (Gilders et. al., 2016).
Conclusion
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Taxation
As a result of the measures undertaken above, the right to manage tax affairs for lowering tax
still exists but steps have been taken to prevent the abuse of the same (Barkoczy, 2017).
Question 5
Issue
In wake of the relevant provisions of ITAA 1936 along with case law, the relevant treatment of
the proceeds received from pine tree removal needs to be outlined.
Rule
Any income that arises from passing the “right to fell timber” would be treated as royalty as
highlighted by s. 26(f), ITAA 1936. This recognition is independent of the taxpayer conduction
forest operations or not. A leading case which provides evidence about the same is McCauley
v The Federal Commissioner of Taxation (1944) 69 CLR 235 case (Deutsch et. al., 2016).
The royalty mechanism can be enacted in the following two formats (Sadiq et. al., 2016).
 A sum lump payment being forwarded by contractor to land owner with no regards to
actual timber extracted. For such a case, a leading case is Stanton v The Federal
Commissioner of Taxation (1955) 92 CLR 630 in accordance with which payments
received are non-assessable.
 Royalty linked with the amount of timber extracted in which cases the receipts are
assessable in the hands of the land owner.
Application
It is apparent that Bill did not grow the pine trees and now wanted to get rid of these for
establishing a business. The compensation provided by the contractor (i.e. logging company) is
given as $1,000 for every meter of pine timber extracted. Since, there is a link between proceeds
obtained and the timber taken, hence the proceeds would be taxable at Bill’s end. However, if the
right was given to the contractor for $50,000, then the proceeds would not be taxable considering
the discussion and case law cited above.
Conclusion
Hence, the proceeds received from pine timber would be assessable for Bill only when the
royalty is linked to wood extracted while lump sum payment is not taxed.
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Taxation
References
Barkoczy, S. (2017), Foundation of Taxation Law 2017, 9thed., North Ryde: CCH Publications
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), 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.
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study Manual 2016,
4th ed., Sydney: Oxford University Press
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A
(2016) , Principles of Taxation Law 2016, 8th ed., Pymont:Thomson Reuters
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia
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