Taxation Theory, Practice & Law: Capital Gains & Fringe Benefits Tax

This assignment solution addresses key aspects of Australian taxation law, specifically focusing on capital gains tax (CGT) and fringe benefits tax (FBT). Question 1 delves into CGT implications for various assets, including land, an antique bed, a painting, shares, and a violin, considering pre-CGT asset rules, cost base calculations, and the 50% capital gains rebate. It examines how the timing of asset acquisition impacts tax liabilities. Question 2 explores fringe benefits tax (FBT), analyzing car fringe benefits, loan fringe benefits, and internal expense fringe benefits. It provides detailed calculations and explanations for determining FBT liabilities, including gross-up rates and the impact of different interest rates on loan benefits. The assignment also discusses strategies for minimizing FBT payable, such as utilizing loan funds for investments. The solution references relevant sections of the Income Tax Assessment Act (ITAA) 1997, the Fringe Benefits Assessment Act 1986, and other authoritative sources to support its analysis.

Taxation Theory, Practice & Law
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Question 1
The major aim is to perform computation for capital gains/loss for the taxpayer (client) with
respect to the proceeds derived from the sale of the assets during the tax year.
Pre- CGT Asset
The Capital Gains Tax (CGT) would not be applied on the capital gains which are derived from
the sale of the Pre- CGT Asset. Any assets which are acquired on behalf of the taxpayer before
September 20, 1985 would be known as pre-CGT asset (Woellner, 2014).
Transaction
The CGT will be applicable on the capital gains received on the account of transaction which
shows A1 event nature in accordance with s. 104-5, ITAA 1997 which typically involves
disposal of asset (Reuters, 2017).
Cost Base
Cost base of the respective asset which would be computed after determining the presence of
five main essential parameters based on the relevant sections (Nethercott, Richardson and Devos,
2016).
 “Total buying cost as per s. 110-25(2)”
 “Incidental costs that may result during the selling or buying as per s. 110-25(3)”
 “Payment paid due to sustain the ownership of the respective asset as per s. 110-25(4)”
 “Incurred capital expenses that may result due to value increment work on asset as per s.110-
25(4)”
 “Incurred capital expenses that may result in the process of retaining the title of the asset as
per s. 110-25(5)”
50% Rebate on Capital Gains
Only 50% capital gains would be considered for the determination of the CGT only when there is
a long term capital gains that means holding period greater than 12 months (Deutsch, et.al.,
2015).
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Balancing capital gains
Previous year’s capital losses would be adjusted with the current year’s capital gains raised from
same type of asset before finding the net capital gains from the asset.
Capital gains or loss: Block of vacant land
Taxpayer acquires the block of land in 2001 and hence, the land asset would not be stated as pre-
CGT asset and hence, the CGT implication would be imposed on client. Moreover, the
transaction for the sale of land is A1 event as per s. 149 (10). Further, as per the provisions of TR
94/29, the sale income derived from the transaction would be considered for CGT implication in
the current year irrespective of the scenario that taxpayer did not get the contractual amount and
would get the respective amount in next year but has signed the contract for the sale.
Computation
Capital gains or loss: Antique Bed
Taxpayer acquires the antique bed in 1986 and hence, the asset would not be stated as pre-CGT
asset and hence, the CGT implication would be imposed on her. Moreover, the transaction for
the sale of antique bed is A1 event as per s. 104-5 ITAA 1997. Antique bed is collectable or says
capital assets in accordance with TD 1999/40. The CGT applicability for the antique items is
possible only when the acquisition cost for the asset must be higher than $500. If the taxpayer
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has purchased the antique item for lesser than this amount, then CGT will not be applied. The
taxpayer has paid $3500 to purchase the antique bed and hence, the CGT treatment of the bed
would be done based on the underlying treatment which is used for collectables.
Computation
Capital gains or loss: Painting
It can be seen that taxpayer purchased the painting before September 20, 1985 which is May 2,
1985 and hence, the asset will be known as pre-CGT asset and no CGT implication would be
raised on the capital gains received from the sale of painting.
Capital gains or loss: Shares
All the shares have been purchase on behalf of taxpayer after September 20, 1985 and hence,
none of the share will be classified under pre-CGT asset. Moreover, the transaction for the sale
of shares is A1 event as per s. 104-5 ITAA 1997.
Computation
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Capital gains or loss: Violin
It can be seen that taxpayer purchased the violin on or after September 20, 1985 which is June,
1999 and hence, the asset will not be known as pre-CGT asset and CGT implication would be
raised on the capital gains received from the sale of violin (Barkoczy, 2017). Further, the CGT
treatment would be as per the personal use asset because violin is not collectable because she has
loads of violin in her violin collections which she plays daily for fun. Hence, the capital proceeds
from personal usage violin would be considered only when the taxpayer paid more than $10,000
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to purchase that item. Here. Taxpayer paid only $5,500 and hence, the personal use asset (violin)
would be exempted from CGT implications.
Capital gains
Question 2
(a) During the income tax year, if an employer provides personal benefits to employee or/and
employee’s family member then the employer has to pay tax (Fringe Benefits Tax ‘FBT’) on
the given benefits. However, the employee who has received these benefits will not be liable
to pay any FBT as per Fringe Benefits Assessment Act 1986.
Car Fringe Benefit
Car fringe benefit is one of the most common fringe benefits on which employer makes the car
available for employee so that the employee can use car for his/her personal work as per s.8
(Woellner, 2014).
Jasmine an employee of Rapid Heat Ltd gets a car from Rapid Heat for her personal work and
hence, fringe benefit has been given to Jasmine by Rapid Heat and as a result FBT liability will
be imposed on Rapid Heat.
The payment ($550) paid by Rapid Heat for minor repairs would be taken away from buying cost
($33,000) of car in order to determine the cost base of car.
Car has been available to Jasmine on May 1, 2017 and hence, the total period in terms of days till
March 31, 2018 would be 334 days. The car would be available for Jasmine for ten days period
when she went overseas for some work and car was at airport parking. Similarly, the 5 days in
which car was at the garage for some minor repairing will also be part of available days and
hence, both 10 days and 5 days will not be taken away from 334 days.
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Car is type I good as mentioned in Goods and Service Act 1999 and hence, the gross up rate is
2.0808 also, the FBT rate is 47% for the given date (March 31, 2018) (Wilmot, 2014).
Loan Fringe Benefit
Many employers provide financial help such as loan to employees for purchasing home or any
asset. The provided loan would be classified as loan fringe benefits when they offer it at low
interest rates so that employee would have to pay less interest as compared with the interest
amount which would be incurred if the take loan at benchmark rate (Krever, 2016). The rate
which is inferior to benchmark rate of interest of RBA (Reserve Bank of Australia) would
amount to extension of loan fringe benefit to employee. Further, the employer would have to pay
FBT on loan fringe benefits based on the saving in the interest amount (Coleman, 2016).
Jasmine receives loan of $500,000 @4.25% while the rate of interest of RBA is 5.25% on
September 1, 2017. Clearly, it can be seen that Rapid Heat extends loan to Jasmine at low
interest Loan is type II good as mentioned in Goods and Service Act 1999 and hence, the gross
up rate is 1.8868 also, the FBT rate is 47% for the given date (March 31, 2018) Hodgson,
Mortimer and Butler, 2016).
Employee may use the loan for own purpose or may extend the amount to his/her associate. It is
essential to determine that what portion of amount has been used by employee and for what
purpose. This is because tax deduction would be availed by employer if the loan amount given to
employee would be utilized to produce assessable income (Gilders, et.al., 2016). Amount will
not be taken for tax deduction when the amount is used by associate of employee. Here, Jasmine
uses $450,000 for owing a home and hence, the deduction will be claimed if the home produces
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assessable income (rent amount) for Jasmine. Further, $50,000 will not be part of tax deduction
because it has been used by Jasmine’s husband.
Internal Expenses Fringe Benefit
Employer may provide personal expense benefit to employee which is classified as internal
expense fringe benefit (Reuters, 2017). Jasmine buys heater from employer company Rapid
Heater for $1300 while the market price of heater is $2600. It implies that employer gives low
rate to Jasmine as she works for them and hence, internal expense fringe benefit has extended to
Jasmine. Car is type I good as mentioned in Goods and Service Act 1999 and hence, the gross up
rate is 2.0808 also, the FBT rate is 47% for the given date (March 31, 2018).
(b) The FBT payable would be minimized when the loan payment of $50,000 is used to buy
shares by Jasmine only. It is because the overall deduction would be increased. The
deduction on $50,000 is computed below (Coleman, 2016).
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References
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.
Woellner, R. (2014) Australian taxation law 2014. 8th ed. North Ryde: CCH Australia.
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