HA3042 Taxation Law Assignment: FBT, CGT Calculation, Analysis

This document presents a comprehensive solution to a tax assignment, addressing two key issues: the calculation of Fringe Benefit Tax (FBT) liability for a car provided by Spiceco Pty Ltd to Lucinda, and the computation of Capital Gains Tax (CGT) gain or loss arising from transactions by Daniel Ray. T...Read More

Running head: TAX
Tax
Name of the Student
Name of the University
Author Note

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QUESTION 1
Issue
FBT liability calculation of the car that Spiceco Pty Ltd has provided to Lucinda based on
the assumption of minimisation of the FBT objective during the year 2018/19. The various
methods of FBT computation I also required to be used for the computation to arrive at the
lowest value possible. The suggestion of the best method that can be arrived at.
Rule
Fringe benefit is a benefit that is extended by the employer to his employee or any person
who is associated with the employee or even a third party who is supposed to be extended
with that benefit compliance with the arrangement that has been existing among the employer
and employee to that respect in a particular tax as defined u/s 136 of the FBTAA86. This may
be extended as right or interest that has been extended with respect to a personal or real
property as well as any service facility. The benefits extended can be towards a past, present
or even a future employee (Barkoczy 2016).
Car fringe benefit is considered to be accrued when extended by an employer to an
employee with a car to made the employee use it in personal capacity as husband define u/s 7
of the FBTAA86.
Approaches has been provided in the act for the purpose of calculation of car fringe
benefit.
The Statutory Method of Car Fringe Benefit has been provided under the provision
contained u/s 9(1) of the FBTAA86.
Formula:
[0.2 * BV * (n/ tn)] - A

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BV = cost of the car
n = no. of days in the FBT year during which the car fringe benefit has been used by the
employee as extended by the employer
tn = no. of days in that income tax year
A = employee’s contribution
The Operating Cost Method of Car Fringe Benefit has been provided under the provision
contained u/s 10(2) of the FBTAA86:
Formula:
[C * ( 100% - BP)] – R
C = operating cost during the period of holding, which includes maintenance, insurance,
registration and fuel.
BP = business percentage
R = employee’s contribution
The FBT will be calculated by applying the benefit availed with the prevailing rate.
Application
Lucinda, an employee of the Spiceco Pty Ltd has been provided with a car for the purpose
of being used in a personal capacity. The cost pertaining to the car $1800, the repairs $3000,
insurance $2200, cost for fuel $900. The travelled distance is 20000km and percentage used
for business is 70%. Lucinda’s contribution towards the cost is $1000. Hence, it needs to be
treated as a fringe benefit. This is because Fringe benefit is a benefit that is extended by the
employer to his employee or any person who is associated with the employee or even a third
party who is supposed to be extended with that benefit compliance with the arrangement that

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has been existing among the employer and employee to that respect in a particular tax as
defined u/s 136 of the FBTAA86. Moreover, it needs to be treated as a
FBT Liability under Statutory Formula section 9(1):
[0.2 * BV * (n/ tn)] - A
= [0.2 * 18000 * (365/365)] – 1000
= $ 2600
[BV = $ 18000
n = 365 days
tn = 365 days
A = $1000]
FBT = $ (2600 * 2.0802 * 47%) = $ 2542
FBT Liability under Operating Cost Method Formula section 10(2):
[C * (100% - BP)] – R
= [12007 * (100% - 70%)] – 1000
= $2602
[C = $ [3300 + 2200 + 990 + 4500 + 1017] = $ 12007
# Depreciation = 18000 * 25% = 4500
# Interest = {(18000*5.65%*365)/365} = $1017
BP = 70%
R = $ 1000]

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FBT = $ (2602 * 2.0802 * 47%) = $ 2543.95
The FBT chargeable computed by the Operating Cost Method is more than the Statutory
method. Hence, if an assumption of cost minimisation is considered the Statutory Method
should be is required to be implemented by the Spiceco Pty Ltd for the purpose of FBT
determination.
Conclusion
FBT needs to be calculated by applying the Statutory Method by the Spiceco Pty Ltd.
QUESTION 2
Issue
The computation of the CGT gain or loss that has been arising from the transactions
effected by Daniel Ray for the year of income ending on 30th of June of the year 2019.
Rule
For the purpose of determining the CGT liability, the asset that is involved in the
transaction is required to be assessed under the categories of pre-CGT asset and post-CGT
asset. Any asset, which has been acquired prior to the date of 20.09.1985, is required to be
treated as a pre-CGT asset. All the assets purchased afterwards will be treated as a post-CGT
asset. A CGT gain is said to have accrued when a transaction involving a post-CGT asset, not
expressly excluded under the Act is needed to be affected causing a CGT event. The presence
of two elements are required for the purpose of rendering a gain to be assessed under the
CGT gain. A CGT gain requires the presence of a post-CGT asset and a occurrence of CGT
event as has been mandated under section 104-5 of the ITAA97. Section 104-10 of the
ITAA97, any disposal pertaining to a CGT asset by way of sale is required to be categorised
as A1 category transaction. A CGT gain is required to be computed by making a deduction of

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the cost of acquisition or cost base from the proceeds of the transaction for the purpose of
obtaining the CGT gain, which needs to be assessed to be taxed under the liability of CGT.
Again, the occurrence of CGT event is required to be made evident for the purpose of
claiming a CGT gain (Woellner et al. 2016). However, CGT event has happened when the
individual paying the tax has been severed with the ownership of the asset or the contract for
the same has been affected properly. The main residence of a taxpayer when sold is required
to be treated as an exemption for the purpose of CGT computation under the section 118-10
of the ITAA97.
Collectible is defined in section 108-10 of the ITAA97 to be a commodity that a taxpayer
owns and enjoys in a personal capacity. This section includes artwork, coin, jewellery,
antique and other similar objects. The proceeds that the sale of a collectible earns is required
to be considered as CGT gain and such a collectible is required to be considered as CGT
asset. Again, to be considered as a CGT asset the collectible needs to be worth anything more
than $500. Only the collectibles that are worth more than $500 are required to be permitted as
a CGT asset for the purpose of yielding a CGT gain, any other collectible below that
threshold is required to be treated as an exemption as per section 110-10 of ITAA97.
As per section 108-5 of ITAA97, a CGT asset covers any equitable right as well as legal
right in relation to a property. It also covers shares, buildings, debts to be recovered,
contractual rights, options or even foreign currency. The sale of such CGT assets is required
to be treated as an A1 category of CGT event.
For the computation of CGT gain or loss two factors are required to be involved, firstly,
the cost base is required to be calculated and secondly, the cost proceeds is required to be
assessed. The higher of the two needs to be deducted with the lower of the two for the
purpose of arriving at the CGT gain or loss. As per s 110.25 of ITAA97, cost base includes

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five elements namely acquisition cost, incidental cost, owning cost, capital expense as well as
preservation cost.
Sale of shares is to be considered as CGT event and the same yields a proceed, which is to
be construed as CGT receipt. The receipt whether points towards loss or gain is required to be
construed as a CGT loss or gain. Where the cost base is reduced for certain factors it should
not be included with the third element that is the owning cost as per section 110-55 of
ITAA97. This would include any interest as the inclusion of the interest within the cost base
will lower the profit or will lead to a loss even if the transaction has been proved to be a
beneficial aspect in the income of the taxpayer.
Application
The first transaction that has been arising from the given situation is the is the sale of the
house of Daniel. The house has been acquired for an amount of $70000 and has been used for
residential purposes by Daniel for the last 30 years. The acquisition of the same has been
made after the 20.09.1985 rendering the same as an exemption. However, all these
consideration will not be required as the proposed sale has never been effected and the
ownership has never been severed. Moreover, the buyer after 14 days of the advance made
has withdrawn the advance and cancelled the purchase. Hence, this event is not giving rise to
a CGT event.
The second transaction that furtherance is the sale of a painting which has been purchased
on the date of 20.09.1985. As the same has not been purchased prior to the prescribed prior to
the mentioned date, the same is required to be treated as a CGT event. The purchase of the
same for $15000 and the sale being sale of the same being made for $125000 has rendered
the sale to be a CGT loss arising from a collectible and being worth more than $500 the same
needs to be admitted to the assessment of CGT.

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Capital Gain Tax Liability = Cost Proceed – Cost Base (element 1 + element 2 + element
3 + element 4 + element 5) [Cost Proceed >Cost Base]
Cost Proceed = $125000
Cost Base = $15000
Capital Gain Tax Liability = $ (125000 – 15000) = $110000
The sale of the Yacht has earned a loss to Daniel as the same has been purchased for
$110,000 and sold for $60,000. The transaction needs to be considered for the computation of
CGT as the same has been purchased in 2004 that renders it with the status of post-CGT
event. Hence, it needs to be computed as a CGT loss.
Capital Loss Tax Liability = Cost Base (element 1 + element 2 + element 3 + element 4 +
element 5) – Cost Proceed [Cost Base > Cost Proceed]
CB = $110000 (element 1)
CP = $60000
Capital Loss Tax Liability = $ [110000 – 60000] = $50000
The sale of shares is also to be considered under the CGT computation. The purchase of
such shares has been effected for a price of $75000 on January 2019 and the sale of such
shares has been effected for a price of $80000 has incurred a gain towards Daniel. 50%
discount will not be permitted as the same has not been held by Daniel for more than 12
months. The purchase has been effected by way of a loan of $70000 on which an interest of
$5000 is to be paid. This interest will not be considered for CGT computation as the same has
reduced the cost base. However, the brokerage fee of $750 as well as the stamp duty of $250
is to be considered.

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Capital Gain Tax Liability = Cost Proceed – Reduced Cost Base (element 1 + element 2 +
element 3 + element 4 + element 5) [Cost Proceed > Reduced Cost Base]
Reduced Cost Base = $ [75000 + 750 + 250] = $76000
Cost Proceed = $80000
Capital Gain Tax Liability = $[80000 – 76000] = $ 4000
Net CGT gain = [(CGT gain from sale of painting + CGT gain from sale of shares) - CGT
loss from sale of a yacht]
= $ [(110000 + 4000) – 50000]
= $ 64000
Conclusion
The net CGT gain of Daniel in the year ending on 30 June 2019 will be $64000.

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Reference
Barkoczy, S., 2016. Foundations of taxation law 2016. OUP Catalogue.
The Fringe Benefits Tax Assessment Act 1986 (Cth)
The Income Tax Assessment Act 1997 (Cth)
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation
Law 2016. OUP Catalogue.