CGT & FBT Tax Case Study: Deductible Business Employee

Case study 1: Capital Gain Tax Liability Of Fred

Describe about the CGT & FBT Tax Case for Deductible Business Employee.

Capital gain tax concept is no different in Australia. Each and every person who hold capital assets and later on earns money from the sale of the assets, it to be assumed as the capital gain tax. Here in the following, the fact is written regarding computation of capital gain tax. According to Australian Income Tax Assessment Act, 1997, CGT is the differences between sales prices of the property and reduced by less purchase price and any other cost thereof and also any money spend towards renovation or further development of the property. A capital asset can be held for the period of 12 months and if it is sold in the later date, it would be considered as the capital assets and the proceeds from the sale reduced by the expenditure and purchase price would be considered as the capital gain. The capital asset which was the sole property of the owner used as residence and dwelling place, where at the address of the property, the name off the owner is listed in the electoral roll, then the property will not be considered as the capital asset for calculation of CGT and the tax will be exempt (Ato, 2016).

Fred is an Australian Citizen and holds a property Blue Mountains.

The property is a holiday home.

After buying the property, he spent some money for the development of the property and in later on Fred sold his property at $ 800,000.

During the sale of the property he incurred following costs–

Legal fees of $ 1,100 (with GST).

Real estate agent’s commission $ 9,900 (with GST).

When Fred purchased the holiday home in March, 1987 for $ 100,000 he also incurred some of the expenses as following;

$ 2,000 for stamp duty.

$ 1,000 for legal fees.

Later Fred added garage for $ 20,000 in the property.

He incurred $ 10,000 for shares sold last year carried forward capital loss

The property is being used for more than 12 months and indexation can only be used for the property which is acquired on or before on 21 September 1999.  In most of the cases it is been seen that indexation is lesser helpful in terms of CGT savings benefit than discount method of calculation of capital gain tax.  The use of the discount method would be more appropriate rather than using the indexsation; the benefit would be higher in terms of savings money.  CGT is not applicable for residence property (Ato, 2016).

CGT calculation

Basic cost of sales to be deducted from the dale price.

Then other cost incurred in relation to the sale of the property will be deducted from the sale price like costs of advertising or marketing, fees of the lawyer, search fees, convincing kit. All the costs incurred in relation to the sale of the property will be allowed to be deducted apart from brokerage and commission.

Indexation has to be done on the purchase price and on the cost of improvement based on the CPI inflation index.

Once the owner decides not to take the indexation benefit, he will receive 50% discount on CGT.

The capital loss can only be deducted from the CG. Therefore the capital loss incurred by Fred will only be allowed to be deducted from the CG.  The calculation of the net capital gain or loss is the major relevance. If the assessee incurred capital loss, he can carry forward the loss for deduction in the future assessment year from the capital gain but in case of gain, the assessee will have to pay tax against the gain (Koulizos, 2016).

There is list of the assets which are exempt from the capital gain;

There are certain capital assets exempt from the CGT;

The main residence of the assessee where he is dwelling.

Items of personal purpose valued less than $ 10,000.

Electrical items.

Household goods.

Personal assets are also part of the exception list—

Building alongside residential home.

Company shares.

Leasehold properties.

Foreign currencies.

Any capital asset addition to the dwelling house.

Collectables (with certain restrictions) included goods of very personal hobby type items like—

All antique goods.

All coins or medal collections.

All stamp of any first day cover collections.

Any type of jewellery collection.

Any sculptures, paintings, photographs, engraving type items, etc.

Personal cars, motorbikes, etc.

Assets for which deprecation claimed.

Gain from lottery, gambling, etc.

Compensation out of any injury, illness, etc.

Fred bought that holiday home and then renovated the property. The capital gain taxation mechanism will be used to ascertain the capital gain tax liability.

Using Indexation
Sale Proceeds	$800,000
Less: Legal Fees	$1,100
Actual sale Proceeds	$798,900
Less:
Purchase Price	$100,000
Stamp Duty	$2,000
Legal Fees	$1,000
	$103,000
Improvement Cost	$20,000
Index
March, 1987	$45
August, 2015	$108
January, 1990	$56
Sale Proceeds	$798,900
Less: Index cost of acquisition	$245,563
Less: Index cost of Improvement	$38,434
Taxable Capital Gain	$514,903
Less: Loss on capital gain	$10,000
Total taxable capital gain	$504,903
Tax on Capital gain
Tax on 180000	$54,547
After 180001 to 504903	$146,206
Tax Payable	$200,753
Discount Method
Tax on 180000	$54,547
Tax on Rest	$224,505
Total Tax	$279,052
50% Exemption	$139,526

Once the owner decides to take the benefit of indexation in terms of capital asset selling; CGT after 20^th September, 1985 all documents and transactions details for all assets. The compulsory part of the CGT for at least five years documentation has to be clear (Yahoo, 2016).

The Fringe Benefit is known as the benefits that are being provided to the employee apart from salary and other incentives. Here in this case Periwinkle offered some benefits to its employee Emma. The benefit is a lower interest rate loan and a bathtub half of the market price. The benefits is offered by Periwinkle attracts FBT liability to the company. In ascertaining the fringe benefits certain things need to be ascertained.  

Case Study 2: Fringe Benefit Tax

This is concerned with the benefits that will be given to its employees, Emma being its employee, the company offered some benefits. The benefits given to Emma are as following—

1. Car fringe benefits.
2. Car parking fringe benefits.
3. Expense towards car maintenance benefits.
4. Loan fringe benefits.

The following facts have been found in relation to the fringe benefits offered to Emma.

Periwinkle Pty Ltd manufactures and sells bathtubs.

On 1^st May, 2015 Periwinkle purchased a car for $ 33,000 (with GST) and gave it to Emma, an employee for official and personal use.

Emma spent $ 550 (with GST) for car repair & was reimbursed.

On 1^st September, 2015 Periwinkle provided Emma a loan of $ 500,000 at interest rate of 4.45%.

Emma purchased a bathtub at $ 1,300 which is sold in market at $ 2,600 and it costs $ 700 to manufacture it (Ato, 2016).

Calculate the taxable value of FBT
FBT Tax	$28,250
Deduction $500000 @4.45%	$22,250
	$6,000
FBT Benchmark Interest Rate 5.65%
The taxable value of the total interest	$28,250
according to market rate of 5.65%
Less: Interest Paid on $450,000 @ 4.45%	$20,025
Total Taxable fringe benefit from loan	$8,225
Add: Bathtub Purchase ($2600-$1300)	$1,300
Total Taxable fringe benefit	$9,525

The car FBT calculation is dependent on some factors and there are factors that need to be understood in relation to ascertainment of the FBT. They are—

The car’s price based statutory formula only if the car is used for personal purpose or official purpose. If the car is used by the employee for the official reasons, there will be no fringe benefit tax levied on the company.

The important factor that need to understood that any electronic goods or goods used for official reasons would not be considered as fringe benefits.

The cars operating cost paid for the employee is also to be used as the calculation FBT. The long book method important for the calculation of FBT.

The target of the assessment includes lowest taxable value of the benefit provided to the employee (Ato, 2016).

The exemption to the current benefit calculation as following;

Employee’s if used taxi, utility car or the parcel van less than 9 person.

Travel between home and workplace.

Travel related to employment related work (Ato, 2016).

Car parking fringe benefit—the car parking charges paid by the company is also to be assumed as FBT. Examples are—

The car is parked during the working hours from 7 A.M. and 7 P.M. for four hours or more

The parking employee’s employment related is not considered as Fringe benefit.

The car owned by company or employee but expense like fuel, chauffeur, maintenance cost provided by employer, etc.

The car parking place provided the employer.

The car is parked near the employee’s place of work.

The car parked one kilometre radius from the commercial parking station (Ato, 2016).

FBT Calculation

Expense payment fringe benefit—

The employee made and expenditure and later on reimbursement directly to a third party from who employees have taken the service. If expense was related to official work, but it was paid by employer will not be considered as the fringe benefit.

Loan fringe benefit—

The employee was provided loan at no interest or at lower interest while the benchmark interest rate for loan is 5.95% for accounting year ending on 31^st March, 2015. If the interest rate is benchmark is to be assumed as fringe benefit.

Residual fringe benefits—

The employees are provided certain fringe benefits which has not been categorised as the fringe benefits will be considered for the purpose of calculation of FBT. There are certain categories mentioned as per FBT Law, such FBT calculation is to be done on the basis of residual fringe benefits. Some examples are like use of private car for business purpose, television or any camera used for any business usage, etc (Ato, 2016).

The FBT are used for work like GPS navigation systems, portable printers, laptops, tablets, mobile phones, computer software, tools used by the trade, briefcases, protective gears, etc are not considered as fringe benefit.

Here in this case Periwinkle provided certain benefits to Emma as listed below;

Periwinkle purchased car for $33,000 (including GST)

Periwinkle incurred expenses of $550 (including GST) for minor repairing.

According to the problem, expenditures will only be considered as expenses one they are used for personal purpose of employee. Periwinkle can claim the GST credit as it is considered as the business expenditure.

Total expenditures are worth of $33,550 (including GST). As the GST amount is not mentioned separately, then the GST will be calculated as =33550/11=$3050. The company will be recipient of GST credit worth of $3050 (Ato, 2016).

(b) Emma if had not given $50,000 of the loan amount to her husband for the investment in shares, instead she used that loan amount for investment in shares she would have received FBT exemption (Ato, 2016).

$50,0000 used by Emma for Investment in Shares
The taxable value of the total interest	$28,250
according to market rate of 5.65%
Less: Investment in Shares $50.000 @ 5.65%	$2,825
Less: Interest Paid on $450,000 @ 4.45%	$20,025
Total Taxable fringe benefit from loan	$5,400
Add: Bathtub Purchase ($2600-$1300)	$1,300
Total Taxable fringe benefit	$6,700

 

References:

Ato, 2016. 8.8 Reduction in taxable value where interest would have been deductible to employee. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/In-detail/Employers-guide/Loan-and-debt-waiver-fringe-benefits/?page=8 [Accessed 22 September 2016].

Ato, 2016. Capital gains tax. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Capital-gains-tax/ [Accessed 30 Augustus 2016].

Ato, 2016. Capital gains tax. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Capital-gains-tax/ [Accessed 13 September 2016].

Ato, 2016. Do you need to pay FBT? [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT/ [Accessed 05 September 2016].

Ato, 2016. FBT exemptions and concessions. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/fbt-exemptions-and-concessions/ [Accessed 19 September 2016].

Ato, 2016. How to calculate your FBT. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT/ [Accessed 15 September 2016].

Ato, 2016. Reduction in taxable value where interest would have been deductible to employee. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(fbt)/In-detail/Employers-guide/Loan-and-debt-waiver-fringe-benefits/?page=8#8_8_Reduction_in_taxable_value_where_interest_would_have_been_deductible_to_employee [Accessed 19 September 2016].

Ato, 2016. The indexation method of calculating your capital gain. [Online] www.ato.gov.au/General/Capital-gains-tax Available at: https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/The-indexation-method-of-calculating-your-capital-gain/ [Accessed 13 September 2016].

Ato, 2016. When you can claim a GST credit. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/business/gst/claiming-gst-credits/when-you-can-claim-a-gst-credit/ [Accessed 21 September 2016].

Ato, 2016. Work-related items exempt from FBT. [Online] www.ato.gov.au Available at: https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/do-you-need-to-pay-fbt-/work-related-items-exempt-from-fbt/ [Accessed 19 September 2016].

Koulizos, P., 2016. What is Capital Gains Tax? [Online] www.realestate.com.au Available at: https://www.realestate.com.au/advice/what-is-capital-gains-tax/ [Accessed 19 September 2016].

Workingin-australia, 2016. Understanding Australian capital gains tax. [Online] www.workingin-australia.com Available at: https://www.workingin-australia.com/money-and-costs/tax/capital-gains#.V-KJ5fl97MU [Accessed 18 September 2016].

Yahoo, 2016. What % rate is capital gains tax in australia? [Online] au.answers.yahoo.com Available at: https://au.answers.yahoo.com/question/index?qid=20080209205535AAkTXFh [Accessed 18 September 2016].