Taxation Theory, Practice & Law HI6028: Capital Gains & FBT Analysis

This report provides a detailed analysis of capital gains tax (CGT) implications on the sale of vacant land, loss of an antique bed, sale of paintings, and sale of shares, including the application of relevant sections of the ITAA 1997. It also assesses the fringe benefit tax (FBT) position related to car benefits, loan benefits, car parking benefits, and expense payment benefits, referencing the FBTAA 1986. The report calculates capital gains or losses for each asset disposal, considering previous capital losses and applicable discounts. Furthermore, it examines the conditions and rules governing fringe benefits provided by employers to employees, determining the taxable amounts and employer obligations.

TAXATION THEORY, PRACTICE & LAW
Hi6028
T2 2018
1

Question 1
Vacant land
It is to be understood that a buyer who is intended to buy a vacant land should consider the
asset character which is type of capital. A taxpayer should have knowledge to understand that
the capital gains which are mainly applied on a property are applicable in a vacant land too.
The outgoing record is to be maintained while procuring land and it is an important guideline
given by the ATO (Buxton & Taylor, 2011). As per ATO taxpayer should not get any
exemption from the income tax as it is regarded as the capital expense. However, taxpayers
are given a second chance of obtaining extra capital expense that is got from the procured
land in case the land is disposed.
The client here has carried out many transactions that incorporates various types of asset
disposal as well. From the information that had been furnished, it can easily be derived that
disposal of assets does not form part of the business activity of the client. Hence, it can be
understood such transaction can lead to capital gains and not revenue. Categorizing sale of
assets as capital gain and not as revenues leads to separate treatment for taxation, as capital
gains does not attract taxes similar to revenues however, revenue proceeds generated does
attract substantial amounts of taxes. In case of capital generation, there is Capital gains Tax
(CGT), where the individual will need to pay taxes on the increased value of capital that is
generated (Wagenaar, Salois & Komro, 2009).
Sale Proceeds $320,000
Acquisition Price $100,000
Incurred Expenses payable in local
council, water/sewerage rates, land taxes
$20,000
Cost base =$100,000+ $20,000=$120,000
Capital gains on land block =$320,000-$120,000 = $200,000
2

Previous capital losses $7,000
Capital gains =$200,000 - $7000 = $193,000
Net Capital gains on land block =0.5*193000=$96,500
The cost that is meant for the land procurement is $100,000 and it is accompanied with the
outgoings on land tax, rate payment and water. Taxpayers have to provide $20,000 as a
deposit. All these cost can be taken as the capital cost or land procurement. Deductions are
not allowed as per the rules set by the income tax department. As the land is taken as a capital
asset so, revenue earned form the capital gain is under CGT event A1. For selling vacant land
capital gain tax can be levied under the section 104-10 (1).
Antique Bed
Whenever the taxpayers is tried to report any loss regarding their asset then they have to give
reference of CGT event C1. As per the ITA Act 1997, the section 104-20 has made it
mandatory on the part of the taxpayer to immediately report to CGT event C1 in case of loss
of asset (Hofmann, Hoelzl & Kirchler, 2008). The provision which is set under the 104-20
section has clearly specified more clarifications to this event. One of the specifications is that
the taxpayer is required to increase his awareness while receiving compensation for their
assets. The section 104-20 also demonstrates that a land owner would likely to gain capital on
reporting incidence related to los of assets.
The market price of the antique bed that was lost is $25,000 and the owner will receive
compensation of about 11,000 from the insurance company. Here the provision of CGT event
3

C1 seems to be applicable. As per this section it can be said that capital loss has been
detected as compensation was much lower to the market price.
Capital Expenditure spent by taxpayer in regards to increase the net worth of the
antique bed by installing innerspring mattress as per s. 118-25(2) = $1500
Total cost base of antique bed =$3,500 + $1,500= $5,000
Insurance payment due to involuntary
disposal of bed
$11,000
Capital gains =$11,000-$5,000 = $6,000
Previous capital loss from disposal of
sculpture
$1,500
Capital gains =$6,000 - $1,500 = $4,500
Net Capital gains on antique bed =0.5*$4,500=$2,250
Painting:
In case of sale of painting there would be no CGT for the client in spite of furnishing of all
details. Discussion is conducted for helping the taxpayer so that they get a sound knowledge
regarding post and pre cgt assets. The section 149-10 is known to give guidance to all the
taxpayers regarding those assets which are identified as Pre-CGT (McCluskey & Franzsen,
2017). Pre-ct asset will take into consideration assets that were bought before 20th September,
1985. Entity has not been followed form stat date and it is explained in subsection of 160 ZZ
(1) of the ITAA 1936.
It is to be noted by the taxpayers that the asset that they have purchase following the date 20 th
September 1985 are termed as CGT asset.
4

The scenario is indicating towards the fact that the paintings were purchased on 2nd May by
the taxpayer from a renowned artist of Australia. The total price of the painting was $2000
and but it was sold on $125,000. Acquisition rate clearly indicates towards the fact that the
asset is a pre-CGT. So, it will mean that liabilities will not be provided for the capital gains.
Shares
The gains that are earned by a taxpayer have been demonstrated by the ATO. It has
thoroughly given a demonstration regarding the concept of share for benefiting the taxpayers
(Henry, Harmer, Piggott, Ridout & Smith, 2009). ATO informs the taxpayers that the shares
will also be treated same as that of other kinds of asset by the CGT. One can say that it is
very crucial information given on the part of the ATO. It also further discs that CGT events
are also to be applied in terms of shares which is held by an investor. While selling shares it
is basically entitled as tax as it results in CGT event A1.
It can be discerned from the scenario that the taxpayer holds shares in a large number of
corporate firms. Taxpayer is trying to sell the shares which are held by him. However, most
of the shares were sold had yielded capital gains except the one which is meant for the young
kids learning. In this case the loss incurred will be taken as offset as all other part of shares
have yielded profit.
Violin
The section118-10 of ITAA 1997 has formulated certain provisions for those assets that a
taxpayer usually owns for his personal use. This category of asset has been termed as
collectibles (Murphy, 2008). Further discussions have been conducted regarding the capital
5

gains associated with the collectibles in section 118-10(2). According to this section, the
capital loss or gain that will be obtained by the taxpayer from their personal asset then it will
be disregarded from the cost base and so the depreciating asset will be $10,000 or less. It has
also been confirmed in the subsection 108-20(1) that when a taxpayer encounters loss or gain
from their personal assets then it will not be treated as capital gains for tax purpose.
If you consider the present scenario then you will find that violin was kept as a collectible by
the taxpayer. Violin’s cost was comparatively lower in terms of threshold of $10,000 that is
as per the section 118-10(2). Earlier the cost of the violin was $5,500 but he sold it at $12,000
and it is much greater in comparison to the cost base. However, the capital gain will not be
applicable here as according to the section 118-10(2).
6

Question 2:
Answer A:
Issues:
This question is concerned with the taxation regarding fringe benefit tax position that is
evaluated in the legislation formulated by “FBTAA 1986”. Here the issue is to identify the
benefits that an employer has offered to his/her employees (Saad, 2014). There will be
emphasis on the issues that include loan benefit, car benefit, car parking benefit and expense
payment benefit and these are all set under the “FBTAA 1986”.
7

Rule
The “FBTAA 1986” has given a crucial suggestion regarding the fringe that is provided by
the employers. It generally takes into consideration the extra benefits other than salary that is
given by the employers to their employees (Torgler, Demir, Macintyre & Schaffner, 2008).
The subsection 995-1(1) of FBTAA 1986 states that car has a meaning. As per the subsection
7(1), the car benefit refers to the time when an employee held a car which falls part of
employment. This subsection defines that car fringe benefit is applicable when an employee
is making use of the car for work purpose then or even given to employee on behalf of the
employer for their personal use.
The section 9 of FBTAA 1986 has set certain guidelines for calculating the total amount
which is paid for the car fringe benefit with the help of statutory formula. The aggregate of
assessable value is regarded as the taxable price of fringe benefit provided by an employee to
their employers as a tax.
The car expense benefit has been explained in the division 28 of FBTAA 1986. According to
this division, car expense benefit refers to the fringe benefit which is comprised of the
expense of the car. As per the section 20 of FBTAA 1986 expense payment fringe benefit can
be defined as the payment reimburses by an employer in the form of discharge of obligation
to a person. The recipient will enjoy benefit at the time of reimbursement which is given by
the provider in smaller parts and this provision has been set by the section 20 (b) of FBTAA
1986.
The specification regarding car parking benefit is clarified in the section 39 A of FBTAA
1986 (Woellner, Barkoczy, Murphy, Evans & Pinto, 2010). The benefit that is associated
with the parking of car during certain period of time whereby the employer provides car
parking space for their employees and it is termed as car parking fringe benefit. There are
8

certain condition which needs to be fulfilled for obtaining car parking benefit and these
conditions have been given below:
 The car is to be kept by the recipient under his/her control.
 The employer has allowed the employee to make use of the car for their personal use.
 The car should be parked in the area owned or taken on lease by the provider or
employer.
 Car is parked at the area of primary employment on that particular day.
 The car is to be parked within 1 Kilometre radius and there should be facilities for
commercial parking.
There has been a thorough discussion regarding the benefit pertaining to loan fringe in the
subsection 16(1) of the FBTAA 1986. The loan fringe that is described in this section states
that it is actually the loan which is given by the employer to their employees. These types of
loans are taken as a benefit offered on the part of the employers to the employees and it
proves quite profitable for the workers. The recipients have to pay a part of money for the
loan.
As per the section 18(1) of FBTAA 1986, the loan that is provided to the employee in
taxation period is meant to establish the sum with the help of which interest rate will be
applicable for the loan. It is found to have surpassed total interest which is accumulated for
the loan.
Application
This rule is to be applied in the report that is obtained from by Jasmine from her employer
Rapid Heat. The meaning which is held by car given to Jasmine can well be considered under
9

the subsection 995-1 (Poddar, 2009). Rapid Heat, as per, the subsection 7(1) has given car
benefit to Jasmine as this car is given to jasmine for work purpose. The guidelines which are
demonstrated in section 9 of FBTAA 1986 can be regard by Rapid Heat as it will allow it to
calculate the total taxable amount which is to be paid.
Later the expenses of car repair will be incurred by Rapid Heat on reimbursing the employee.
Rapid Heat is liable to have fringe expense payment which is stated under the section 20(b)
of FBTAA as reimbursement is conducted by Rapid Heat in whole.
In this scenario, it has been found that Jasmine is in the need for parking the car as she has to
go out of state for work. According to section 39A of FBTAA 1986 in order to retain the
benefit of car parking fringe the criteria which is set in section 39 A is to be fulfilled
(Braithwaite, 2009). The current situation is clearly indicates to the fact that Jasmine did not
parked her car at Rapid Heat’s premises. Car was actually parked at the airport and it is not
regarded as commercial parking station. So, fringe benefit is not applicable in this situation.
Rapid Heat had given loan to Jasmine for buying a house. The subsection 16(1) of FBTAA
1986 will acts as guidance for loan fringe benefit for Rapid Heat. As Jasmine is the receiver
so, she will be given the status of a recipient who is at a total gain. The section 18(1) of
FBTAA 1986 for Rapid Heat can be taken as the sum of interest that is applicable on the
loan. It will definitely surpass the interest which is accumulated for a loan.
Answer B:
If Jasmine does not utilize this loan amount to offer to her husband and instead use it for the
procurement of shares then rate of interest is likely to get deducted for taxation. It can well be
said that the tax liability which is meant for Jasmine is to be reduced. The reason being ATO
10

is likely to deduct borrowing amounts of the taxpayer at the time of using them for producing
revenues.
11

Reference Lists
Braithwaite, V.A., 2009. Defiance in taxation and governance: Resisting and dismissing
authority in a democracy. Edward Elgar Publishing. Retrieved on 22nd September 2018, from
https://books.google.co.in/books?
hl=en&lr=&id=JG00ChM1AUQC&oi=fnd&pg=PR7&dq=Australian+taxation&ots=K1tOX
V9m20&sig=3HGhP3mudlI3_8PeFXzEhNSWEJw#v=onepage&q=Australian
%20taxation&f=false
Buxton, M. and Taylor, E., 2011. Urban land supply, governance and the pricing of
land. Urban Policy and Research, 29(1), pp.5-22. Retrieved on 27th September 2018, from
https://rsa.tandfonline.com/doi/abs/10.1080/08111146.2011.537605
Henry, K., Harmer, J., Piggott, J., Ridout, H. and Smith, G., 2009. Australia’s future tax
system. Canberra, Commonwealth Treasury. Retrieved on 20th September 2018, from
http://taxreview.treasury.gov.au/content/submissions/post_14_november_2008/
Australian_Council_for_International_Development_20090508.pdf
Hofmann, E., Hoelzl, E. and Kirchler, E., 2008. Preconditions of voluntary tax compliance:
Knowledge and evaluation of taxation, norms, fairness, and motivation to
cooperate. Zeitschrift für Psychologie/Journal of Psychology, 216(4), pp.209-217. Retrieved
on 23rd September 2018, from https://econtent.hogrefe.com/doi/abs/10.1027/0044-
3409.216.4.209
McCluskey, W.J. and Franzsen, R.C., 2017. Land value taxation: An applied analysis.
Routledge. Retrieved on 23rd September 2018, from
https://www.taylorfrancis.com/books/9781351923576
Murphy, K., 2008. Enforcing tax compliance: to punish or persuade?. Economic analysis and
policy, 38(1), pp.113-135. Retrieved on 25th September 2018, from
https://www.sciencedirect.com/science/article/pii/S0313592608500099
Poddar, S., 2009. Taxation of housing under a VAT. Tax L. Rev., 63, p.443. Retrieved on 26th
September 2018, from
https://heinonline.org/HOL/LandingPage?handle=hein.journals/taxlr63&div=24&id=&page=
12