Discuss about the Car Fringe Benefits Statutory.
The relevant information from the case study given is highlighted as shown below.
Fred, an Australian tax resident has liquidated Blue Mountains located holiday home at a price of $ 800,000 in FY2016. It is noteworthy that both the contract for sale of holiday home and receipts of proceeds have been enacted in the same financial year at a gap of almost six months, and hence the capital gains if any would be taken into consideration in FY2016 only.
Fred took ownership of this home almost couple of decade ago in March 1987 and the price paid at that time was $ 100,000.
In relation to the holiday home , there are other costs besides the purchase cost that Fred has incurred which essentially would contributed to the determination of holiday home’s cost base.
Besides, it is also known that there are certain capital losses accumulated from FY2015 which have been derived due to shares and antique sale.
By taking the above information into cognizance, the core concern is to calculate the capital gains that would fall under the CGT (Capital Gains Tax) ambit in the year FY2016 for an individual taxpayer Fred.
The primary step for determination of the CGT liability is to ascertain whether the sale of asset (i.e. holiday home) is liable for application of CGT. In accordance with the thumb rule in this regard, all assets purchased before September 20, 1985 are exempted from the aegis of CGT irrespective of the timing and amount of capital gains (Gilders et. al., 2016). The given holiday home as per the information has been purchased only after the above date and hence the derived capital gains would be CGT applicable.
In the quest of capital gains determination, the first endeavour is to ascertain the asset’s cost base as per Section 110-25. As per this section, the underlying asset’s cost base is deemed to constitute the below mentioned costs (Nethercott, Richardson & Devos, 2016).
With regards to the given holiday home, the cost base can be ascertained in the following manner.
Buying price of Holiday Home (1987) = $ 100,000
Cost incurred in the process of taking possession of asset = 1,000 (Legal Fees) + 2,000(Stamp Duty) = $3,000
Cost incurred during asset disposal = 1,100 (Legal Fees) + 9,900 Real Estate Agent Commission = $ 11,000
Cost incurred during construction of garage = $ 20,000
Hence, Holiday Home’s cost base (Section 110-25) = 100,000 + 3,000 + 11,000 + 20,000 = $ 134,000
It is known that the holiday home was purchased before 1999 and also Fred’s’ status is that of an individual taxpayer. Hence, the available methods for computation of taxable capital gains would include discount method and indexation method (Deutsch et. al., 2015). However, out of the above two methods, Fred can minimise his derivable capital gains by the application of discount method as it allows for concession to the tune of 50% in capital gains which is not present in the indexation method as it solely relies on adjustment of cost base in the wake of inflation differential (Section 115-25, 114-1) (Barkoczy, 2015).
Proceeds realised from home liquidation = $800,000
Holiday home’s cost base = $ 134,000
Capital gains on Holiday Home sale = Proceeds realised from home liquidation – Holiday home’s cost base
= 800,000 – 134,000
= $666,000
Additionally, it is also known that a capital loss of $ 10,000 is available from FY2015 which arose due to share investments. Due to the comparable nature of share and property as asset classes, the capital losses can be mutually settled and thus in this case, firstly the net capital gains would be ascertained and based on the same the discount method would be applied for deriving the taxable gains for FY2016 as indicated below (Sadiq et. al., 2014).
Net Capital Gains after adjustment of previous capital losses = 666,000 – 10,000 = $656,000
Concession of 50% as per discount method = 0.5*656000 = $ 328,000
Hence, taxable capital gains for Fred (FY2016) = 656000 – 328000= $ 328,000
Antique vase contributing to capital loss of $ 10,000 in FY2015
As per the provided information, the capital loss in FY2015 of $ 10,000 instead of being caused by shares is now caused due to antique vase sale. The taxable capital gains in this case would undergo a change as losses arising from antique are to be balanced against the future gains caused in the same segment i.e. antiques. Clearly, holiday home is a property asset that lies outside the ambit of antiques and therefore the FY2015 capital loss would not be adjusted in this year but would rather be extended to the next year for balancing against any potential gains from selling of antique item (CCH, 2013).
Net Capital Gains after adjustment of previous capital losses = 666,000 – 0 = $666,000
Concession of 50% as per discount method = 0.5*666000 = $ 333,000
Hence, taxable capital gains for Fred (FY2016) = 656000 – 333000= $ 333,000
If employer of a firm extends non-cash benefits (of personal nature) to their employees specifically in the course of the employment, then these are entitled as fringe benefits. However, the fringe benefits lead to the incidence of the fringe benefits tax (FBT) liability on behalf of the employer. The application of this liability is governed by the Fringe Benefits Tax Assessment Act, 1986 (Wilmot, 2012).
According to the given case facts, employer Periwinkle has potentially issued fringe benefits to her employee Emma in the following regard.
Employer Periwinkle bought a car in May 1, 2015 with the cost of $33,000. The car was passed on the same date to Emma. The company had not mentioned any restriction for the usage of the car. Emma utilized car for personal use and thus, same FBT liability is valid on Periwinkle under the car fringe benefits of the section 8 of FBTAA, 1986 (Barkoczy, 2015).
FBT value (Car fringe benefits) is examined based on the mentioned formula (Section 9, Division 2B) (Deutsch et. al., 2015)
FBT value = Base value of car × car accessibility for employees in days × Statutory % × Gross up factor
|
Cost of car for employer ( in the year 2015) |
$ 33,000 |
|
Cost incurred during annual repairing in FY2016$550 |
|
|
Base value of car = Cost of car for employer– Cost incurred during annual repairing = 33000 – 550 |
$ 32,450 |
Statutory percentage would be taken as 20%, if the vehicle is purchased after April 1, 2014, irrespective of the usage in days and distance covered by the car in the given financial year (ATO, 2016b).
In the present case, car is acquired by Periwinkle in May 1, 2015, which is after April 1, 2014.
|
Statutory % for the car (For FY2016) |
20% |
The total number of accessible days would be calculated for the duration of FY2016. Car was acquired by Emma on May1, 2015 not from April 1, 2015 and hence, the days counted as 335 for the year. Additionally, car was not available for Emma for the 5 days when it was sent for the annual repairing. It is noteworthy that the airport parking period of ten days would not be deductible from the total number of car accessible days for Emma, because she was out of town and hence could not use the car, but she had the accessibility for the car (CCH, 2013).
|
Car accessibility for Emma in days (in FY2016) = 335 – 5 |
330 days |
|
FBT value (Car fringe benefits) = FBT base value of car × car accessibility for employees in days × Statutory % × Gross up factor = 32450 × × × 2.1463 |
$12,593.80 |
|
FBT liability to be paid by Periwinkle = FBT value (Car fringe benefits) × 0.49 = 12593.80 × 0.49 |
$6,171 |
On September 1, 2015, Periwinkle extended the loan amount of $500,000 to her employee Emma. The interest rate decided by Periwinkle is 4.45%. For the financial year FY2016 the benchmark interest rate specified by RBA is 5.65% (ATO, 2015). Hence, the offered interest rate is less than the specified interest rate i.e. 5.65%. Therefore, the loan fringe benefits are extended to Emma on account of savings in interest cost and related FBT liability on employer would be levied (Section16, Division 4A) (Sadiq et. al., 2014).
|
Loan amount issued to Emma |
$500,000 |
|
Interest amount based on benchmark interest rate (set by Reserve Bank of Australia) =0.0565 × 500000 |
$28,250 |
|
Interest amount based on charged interest rate by Periwinkle = 0.0445 × 500000 |
$ 22,250 |
|
Saved interest cost by Emma on the loan taken = Interest amount based on benchmark interest rate – Interest amount based on charged interest rate by Periwinkle =28250 – 22250 |
$ 6,000 |
|
Duration of loan in financial year FY2016 (in days) (Loan issue date was September 1, 2015) |
213 |
|
Taxable value (loan fringe benefits) = Saved interest cost by Emma on the loan taken × Duration of loan (in years) = 6000 × |
$3491.80 |
|
Grossed up value of loan fringe benefits given to Emma = Gross up factor × Taxable value (loan fringe benefits) = 1.9608 × 3491.8 |
$ 6,846.72 |
|
FBT liability to be paid by Periwinkle =0.49 × 6846.72 |
$3,354.9 |
If the issued loan amount of $450,000 was utilized for the purpose of earning incremental income by Emma, then the deduction would be claimed for Periwinkle on the interest component of this amount. However, for the amount $50,000, there would be no deduction claimed by Periwinkle since, it was utilized by Emma’s husband not by Emma (Barkoczy, 2015).
Periwinkle sold the bathtub to Emma at lower rate in comparison to the market sale price, thus, the expense fringe benefits is extended to Emma in the form of bathtub.
|
Manufacturing cost of bathtub by Periwinkle Company |
$700 |
|
Sale price of bathtub in market |
$2,600 |
|
Price at which bathtub sold to Emma |
$1,300 |
|
Expense (bathtub) fringe benefit to Emma = Sale price of bathtub in market – Price at which bathtub sold to Emma = 2600 – 1300 |
$1,300 |
|
Gross up factor (bathtub) for FY2016 as GST applicable (ATO, 2016a) |
2.1463 |
|
Grossed up amount (expense fringe benefit) = Expense (bathtub) fringe benefit to Emma × Gross up factor =1300 × 2.1463 |
$4,078 |
|
FBT liability to be paid by Periwinkle =4078 × 2.1463 |
$1,998 |
The amount of $50,000 is now deployed by Emma for buying the shares then this respective amount would be liable for the tax deduction for Periwinkle, if it generates profits for Emma as shown below (Gilders et. al., 2016).
|
Interest amount based on benchmark interest rate (set by Reserve Bank of Australia) =5.65% × loan amount =0.0565 × 50000 |
$2825 |
|
Interest amount based on charged interest rate by Periwinkle = 4.45% × loan amount = 0.0445 × 50000 |
$ 2,225 |
|
Incremental interest cost savings = Interest amount based on benchmark interest rate – Interest amount based on provided interest rate =2825 – 2225 |
$ 600 |
|
FBT liability reduction for employer Periwinkle =600 × 0.49 |
$294 |
References
ATO (2015), TD 2015/8, Retrieved on September 21, 2016 from https://law.ato.gov.au/atolaw/view.htm?docid=%22TXD%2FTD20158%2FNAT%2FATO%2F00001%22
ATO (2016a), Gross-up rates for FBT, Retrieved on September 21, 2016 from https://www.ato.gov.au/rates/fbt/?page=3
ATO (2016b), Car fringe benefits statutory formula rates, Retrieved on September 21, 2016 from https://www.ato.gov.au/rates/fbt/?page=4
Barkoczy, S. (2015), Foundation of Taxation Law 2015, North Ryde: CCH Publications,
CCH (2013), Australian Master Tax Guide 2013, Sydney: Wolters Kluwer
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P. and Snape, T. (2015), Australian tax handbook ,Pymont: Thomson Reuters
Gilders, F., Taylor, J., Walpole, M., Burton, M.. and Ciro, T. (2016), Understanding taxation law 2016, Sydney: LexisNexis/Butterworths.
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study Manual 2016, Sydney: Oxford University Press
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., and Ting, A. (2014), , Principles of Taxation Law 2014, Pymont: Thomson Reuters,
Wilmot, C. (2012), FBT Compliance guide, North Ryde: CCH Australia Limited.
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