Taxation Theory and Law: Capital Gains, FBT and Asset Sales

This report delves into Australian taxation law, focusing on capital gains and fringe benefits tax (FBT). The report begins with an introduction to taxation theory, then analyzes two scenarios. The first scenario involves an antique collector and investor, calculating capital gains from the sale of various assets, including vacant land, an antique bed, a painting, and shares. The second scenario provides advice and calculates FBT liability for a company, Rapid Heat. The report meticulously applies Australian taxation laws, including relevant sections of the Income Tax Assessment Act 1997 and the Capital Gains Tax provisions. Detailed calculations are provided for each asset sale and FBT liability, including the cost base, indexation, and capital gains or losses. The report concludes with a summary of the findings and calculations. This report is a comprehensive analysis of Australian taxation principles and their practical application.

Taxation Theory practice
and law

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
a. Block of vacant land................................................................................................................1
b. Antique bed.............................................................................................................................2
c. Painting....................................................................................................................................4
d. Shares......................................................................................................................................4
e. Violin.......................................................................................................................................6
TASK 2............................................................................................................................................7
Advise on FBT consequences and calculation of FBT liability on Rapid Heat..........................7
Variation in FBT liability............................................................................................................9
CONCLUSIONS..............................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Taxation theory is the set of rules, regulations and policies that are formulated by the
government for companies, individuals, firms and others. It should be followed by the tax
consultant while calculating tax liability and total tax payable by the company or individual. This
is decided by the government or the legal authority of the country (Baldwin, Cave and Lodge,
2012). Australian government has also declared different taxations law that are implemented
within the country. In this project report two different taxation systems are followed one is
capital gain and another is fringe benefit. The main purpose of this project reports is to gather
knowledge of Australian taxation law and its regulations.
This report is based on a calculation of tax which is done by a tax consultant in Mayfield,
New South Wales Australia. In first case the client is an antique collector and investor, and sold
different assets, and in second case advice is provided to the company, tax consultant is required
to calculate tax liability for both the cases.
TASK 1
Australian taxation laws are applied in Mayfield, New South Wales which is an
Australian Community. It is a liability of a tax consultant to calculate the taxable amount and
payable taxes. In this case the clients is an antique collector and an investor too. In year 2017,
many assets are bought and sold by the client and the tax consultant is hired to calculate the tax
liability. For this purpose all the Australian taxation laws are followed, such as income tax and
GST taxation (Boll, 2014). As the amount received or paid while selling or purchasing assets is
considered as capital gain or loss. Hence, in this particular case the taxation will be calculated
under capital gain head. The client is not running a business hence, the tax liability will be
calculated on individual basis. In this particular case, capital gain and insurance claim tax will be
followed.
a. Block of vacant land
In this case the client in a contract to sell a vacant land for $320000, which was
purchased in January 2001 for $100000 and the additional expenses that are feature by the client
are $20000 for water and sewerage. Selling of land is an investment activity which will be
taxable under capital gain head.
1

Related regulations: In this case capital gain taxation laws are going to followed.
According to Capital gain taxation law vacant land will be considered as a investment which a
immovable asset which is considered as an investment after 20 September 1985 (Capital gain
tax, 2018). According to the taxation authority of Australia a vacant land will be taxable under
capital gain head, and the rules are same as for other assets. It will be calculated under sections
110-25 (2), 110-25 (4) and 115-25 (1) because the land was purchased after 20 August 1991.
The calculation of total taxable amount is as follows:
Cost base Calculation on 3/06
Acquisition Cost of Vacant
land
100000
Add Statutory Rates And
taxes
20000
UN-indexed Cost Base 120000
Calculation of Sale Proceeds
Particulars Amount
Sale income from land 320000
Less Index Cost of
acquisition
120000
Gain for next year 200000
Interpretation: From the above tables it has been analysed that total taxable amount for year
ending 30 June 2018 is $200000 which is calculated according to section 115-25 (1). Capital
gain has occurred because the total capital gain was higher than the cost of the land.
b. Antique bed
In this scenarios the client is demanding for insurance claim on his antique bed which
was stolen. It was purchased in 1986 for $5000 in this amount all the expenses are included that
are spent by the client. It was stolen from the house of client, at that time the value of this bed
was $25000. The client has claimed for insurance on 17 November 2017. But the insurance
company has refused the request of insurance claim, as such type of assets are not mentioned in
insurance claim law. The client has received $11000 by compromising with insurance company.
2

Related regulation: In this scenario two different laws are implemented by the tax
consultant, first is capital gain under income tax act 1997 and another is insurance act 1984. It
will be treated under section 104-20 (1), which is for stolen items. The antique items are
recorded under section 108-10 (12) (Braithwaite, 2017). As the cost of asset is greater than $500
and used for personal use by the client than section 118-110 (1) is going to be applied here.
Capital gain for the client is calculated as follows according to the section 115-25 (1):
Calculation of index cost of bed
Particulars Amount Indexation Factor Net Amount
Cost of acquisition of Antique bed 3500 1.59 5565
Add Index cost of improvement
Additions
1500 1.55 2319
Indexed Cost Base 5000 7884
Index factor for cost of acquisition and cost of improvement as per Index reference base –
2011–12
Index value Year
Cost of bed 77.6 Quarter ending September 1986
Additional cost 79.8 Quarter ending December 1986
Index when bed was
stolen
123.4 On September ending 1999
Computation of taxable insurance claim
Particulars Amount ($)
Claim from Insurance
Company
11000
Less: Indexed Cost bed -7884
Net Capital Gain/loss 3116
Interpretation: From the above calculation it has been observed that total taxable
amount for the client is $6000 ($11000-$5000) under section 115-25 (1) which is received from
the insurance department in full settlement by compromising for the same as the asset was stolen
3

from the house. Tax liability for client is $3116. $25000 which was the market value will not be
considered as it is irrelevant under this case and the received amount from insurance company
which was $11000 will be considered as the capital gain from the bed.
c. Painting
In this scenario the client has sold a painting for $125000 which was purchased on 2 May
1985 for $2000 from a very famous Australian artist (Dowling, 2014). This painting was sold by
the client on 3 April 2018 in an auction. This will be taxable under capital gain taxation.
Related regulation: It will be considered as a capital gain under section 104-A as it is a
CGT asset. The painting was purchased before 20 September 1985 and it will be considered as
Pre CGT asset, because the asset was purchased on 2 May 1985. The painting will not be
considered as the collectable because it was purchased for investment purpose not for personal
use. The calculation of tax and taxable amount is as follows:
Calculation of taxable capital gain or loss of painting
Particulars Amount
Sale proceeds from painting 125000
Less: Cost base -2000
Net capital gain/loss for next year 123000
Interpretation: Total capital gain for this scenario was $123000 which is calculated by
subtracting the amount of purchase from the sales. ($125000 - $2000). The assets was purchased
before 20 September 1985 hence it will be treated as Pre capital gain taxation under section 104-
10 (5).
d. Shares
In this scenario the client has a portfolio of shares in which the clients owns different
types of shares. The shares are sold and purchased by the client in specific time period. It has
done to acquire a capital gain. It includes stamp duty and brokerage.
Related regulation: It will be treated under section 104-10 (1). It will be calculated
according to the Australian capital gain taxation laws (Gracia and Oats, 2012). The indexation
cost will not be applicable on this scenario as the shares are purchased after 21 September 1999.
The calculation for taxation amount for shares is as follows:
(i)Trade of Common Bank Ltd Shares
4

Purchase Cost of shares
Particulars Amount
Cost of Purchase per
shares(a)
15
No. of shares purchased(b) 1000
Add Stamp cost on
purchases(c)
750
Net purchase cost d=(a*b)
+c
15750
Proceeds from sale of Shares
Particulars Amount
Sale Price per share (a) 47
No. of shares sold(b) 1000
Less Brokerage Paid(c) 550
Net sales value e=(a*b)-c 46450
Net Capital gain/Loss
Particulars Amount
Gain/Loss (e-d) 30700
(ii)Trade of PHB Iron Ore Ltd
Purchase Cost of Shares
Particulars Amount
Cost of Purchase per
shares(a)
12
No. of shares purchased(b) 2500
Add Stamp cost on
purchases(c)
1500
Net purchase cost d=(a*b) 31500
5

+c
Proceeds from Sale of Shares
Particulars Amount
Sale Price per share (a) 25
No. of shares sold(b) 2500
Less Brokerage Paid(c) 1000
Net sales value e=(a*b)-c 61500
Net Capital Gain/Loss
Particulars Amount
Gain/Loss (e-d) 30000
(iii)Trading of Young Kids Learning Ltd
Calculation for net capital gain/loss
Particulars Amount ($)
Sale proceeds as per current tax year 0.5*1200 600
Less: Cost of base ($5*1200) -6000
Less: Brokerage cost -100
Less: Stamp Duty -500
Net Capital Gain/loss -6000
There is a capital loss occurred of $6000 for the client.
(iv)Trading of Build Ltd.
Calculation for net capital gain/loss
Particulars Amount ($)
Sale proceeds as per current tax year 2.5*10000 25000
Less: Cost of base ($1*10000) -10000
Less: Brokerage cost -900
Less: Stamp Duty -1100
6

Net Capital Gain/loss 13000
Interpretation: From the above tables the calculation of taxable amount for the clients
for shares are calculated. The client has received capital gain of $30700, $30000, -$6000 and
$13000. Indexed costs are not considered because the shares are purchased after 21 September
1999.
e. Violin
In this scenario, the client owns a violin, and the has been sold on 1 May 2018 by the
client to the neighbour (Maddison and Denniss, 2013). It was sold for $12000 and it was
acquired by the client on 1 June 1999 for $5500.
Related regulation: It will be treated as capital gain tax because the violin was
purchased for personal use by the client. The client used the violin a lot and than sold it to the
neighbour. It will be treated under section 108-20 (2).
Calculation for net capital gain/loss
Particulars Amount ($)
Sale proceeds form sale of Violin 12000
Less: Cost of base -5500
Net capital gain/loss 6500
Interpretation: Net capital gain under this scenario is $6500 which is identified from
above table. It calculated under two sections one is 108-20 (2) and another is 104-10 (1) as the
ownership was transferred by the owner to the neighbour.
Adjustment of capital loss
Section 995-1 will be considered while calculating total taxable income from client.
Current year loss which is not eligible for 50% discount under section 115-25 (1). Therefore the
capital loss of $6000 will be adjusted with the capital gain earned from share build shares of
$13000 used to set off. Net capital gain will be $7000 (McGee, 2014).
Particulars Amount ($)
Capital gain form shares 13000
Less: Capital loss -6000
7

Capital gain for tax 7000
Total taxable liability
Particulars Amount ($)
Capital gain form sale of land (200000*50%) 100000
Antique bed (4500*50%) 2250
Capital gain from sale of common bank shares (30700*50%) 15350
PHB iron shares (30000*50%) 15000
Net capital gain tax 132600
TASK 2
Advise on FBT consequences and calculation of FBT liability on Rapid Heat
Case scenario:
According to the provided case scenario, Rapid Heat Limited is a manufacturing
company which operates in electric heaters. Jasmine, an employee of this company has received
a car from the company which is used for work and other purposes. Along with car, Jasmine has
also received a loan of 500000 at an interest rate of 4.25% which is used for purchase of holiday
home and some of that amount is lend to her husband (Mumford, 2017).
Related regulations:
In order to ascertain the tax liability on Rapid Heat Limited, tax which is applied on this
company is Fringe benefit tax. This tax regulation is concerned with the benefits which are
provided to the employees by their company against which company has to pay some value as
tax. FBT is a tax applied within the Australian tax system but the Australian taxation office. This
tax is applicable on most non cash benefits which are provided to employees against their
contribution fro the company. This tax implies the liability on the employer and not on the
employee.
Calculation of taxable amount:
According to fringe benefit tax, motor vehicle that is car in this case has to fulfils various
conductions such as car must be any sedan or station wagon. Vehicle must be a four wheel drive
vehicle. From the information which is provided in the case scenario, it has been observed that
car is received by Jasmine on 1 May 2017 and tax is needed to be calculated for the year of 335
8

days that is from 1 May 2017 to 31 March 2018. In this period it is analysed that employee has
travelled for 10000 km from car and has also incurred few expenses on her own end amounting
to 550 dollars for which employee has received reimbursements (Pickhardt and Prinz, 2014).
As an additional information, it has been informed that car was parked at the airport for
10 days which is not counted as days of employee's personal use.
Number of days for which tax liability is ascertained are 335 but 5 days of repairs are
deducted which gives 330 days of tax liability to the company. Formula for calculating this tax
liability is (0.2 * base value of car * number of days during that year of tax on which the car
fringe benefits were provided by the provider / number of days in that year of tax) – Amount if
any paid by recipient.
= [(0.2 * 33000 * (330/365)]
Particulars Amount
Base value $33,000
Number of days for FBT 330
Number of days in that year 365
FBT liability for the taxable year 6057.53
Along with car, loan was also provided to the same employee named as Jasmine. Loan
was valued at 500000 dollars at the rate of 4.5%. The amount of loan was utilised as, 450000
dollars was used to purchase holiday home and 50000 was lend to Jasmine's husband for
purchase of shares in Telstra. According to the rule of fringe benefit tax, if the amount of loan is
used for purchase of securities than the taxable amount would be nil.
Along with loan, an electric heater of 1300 dollars is purchased of which manufacturing
cost was 700 dollars and its selling price in market was 2600 dollars. Calculation of fringe
benefit tax along with consideration of car, loan amount and electric heater is as follows:
Particulars Amount
Purchase price of electric heater for Jasmine $1300
Manufacturing cost for Rapid-Heat $700
Actual selling price of electric heater $2600
Fringe benefit tax rate 47.00%
Amount on which Fringe benefit tax will be levied (2600-1300-700) $600
Fringe benefit tax liability ($600*47%) $282
9

From the above calculation., it can be said that Rapid Heat is liable to pay input tax credit
in relation to GST inclusive acquisitions (Rose and Karran, 2018). GST credit is also claimed on
the credit on the price of electric heater. Total of 282 dollars is liable to company to pay.
Variation in FBT liability
According to the case, tax liability is ascertained below if amount which is received as
loan is 50000 dollars is utilised as investment in shares instead of lend money to her husband.
FBT liability to company is ascertained below:
Particulars Amount
Actual interest rate levied by employer 4.25%
Statutory interest rate as prescribed by Reserve Bank of Australia 5.50%
Amount of which shares are purchased $50000
Time duration of loan for which interest need to be charged ( 1 September 2017 to 31
March 2018) 212 days
Total FBT liability for loan ($50000 * 5.50%) - ($50000 * 4.25%) * 212/365 $363
CONCLUSIONS
From the above project report it has been analysed that two types of taxation laws are
followed by a tax consultant that are capital gain tax and fringe benefit taxes. Capital gain taxes
are for the investments and other capital nature assets. Fringe benefit taxes are those taxes that
are implemented on the benefits that are provided by the employer to it employees.
10