The key issue in the context of scenario presented is to highlight the resulting capital gains or losses from the various transactions that have been enacted by the client in the given financial year. The cumulative capital gains or losses on which CGT (Capital Gains Tax) would be applicable are also highlighted in the discussion and computation highlighted as follows.
A key check for application of CGT related liability is whether the underlying asset is a pre-CGT asset or not. This is ascertained as per s. 149(10) ITAA 1997 which clearly highlights that assets which are bought on or before September 20, 1985 are categorised as pre-CGT asset. This classification is essential considering that pre-CGT assets are CGT exempt (Nethercott, Richardson and Devos, 2016).
In order to compute the capital gains or loss arising from a given transaction, it is required to determine the appropriate event as per s. 104-5 ITAA 1997 where the underlying capital event would fall. This is critical since the underlying event determines the precise formula for CGT computation. With regards to land being sold, the relevant event as per s. 104-5 would be classified as A1 event. As per this event, the capital gains or losses (as may be applicable) can be calculated by the following formula (Sadique, et. al., 2015).
Applicable capital gains or losses = Proceeds from sales generated – Land bank cost base
Additional aspect to consider is the cost base determination which ought to be performed as highlighted in s. 110-25 ITAA 1997. There are essentially five elements which constitute the cost base of the asset (Reuters, 2017). These are summarised below.
Element 1: The acquisition cost associated with the asset as per ss. 110-25(2)
Element 2: The related costs while selling or buying of underlying asset as per ss. 110-25(3)
Element 3: The ownership costs related to the asset which includes cost incurred when the asset is owned by the taxpayer and includes sewerage tax, land tax in case of vacant land as per ss. 110-25(4).
Element 4: An expenditure which is capital in nature and incurred for value preservation or value appreciation as per s. 110-25(4).
Element 5: An expenditure which is capital in nature and incurred for title preservation as per s. 110-25(5).
The computation of land cost base can be carried out as shown below.
Element 1: Price of acquisition = $ 100,000
Element 3: Expenses during period of ownership = $ 20,000
Land block cost base = Element 1 + Element 3 = $ 120,000
A key issue pertaining to the given transaction is in regards to the timing of CGT especially with regards to those transactions where thee contract to sell the asset and settlement of the same do not proceed in the same tax year. In such cases, tax ruling TR 94/29 requires that CGT implications ought to be captured in the tax year when the sale contract enactment happens rather than the year of settlement as payment on the contract can be made later (Sadique, et. al., 2015). In line with this understanding, the CGT liability on the sale of land would arise in the current tax year even though the corresponding cash would be received only in next year.
Also, it is known that the given client has a pending capital loss of $ 7,000 which ought to be adjusted with the capital gains derived from sale of land. Therefore, net capital gains after adjustment would amount to (200000-7000) or $ 193,000
With regards to long term capital gains for individual taxpayer, s. 115-25(1) offers the application of discount method where half of the capital gains are provided concession on (Sadique, et. al., 2015).
With regards to antique bed being sold, the relevant event as per s. 104-5 would be classified as A1 event (Nethercott, Richardson and Devos, 2016). As per this event, the capital gains or losses (as may be applicable) can be calculated by the following formula.
Applicable capital gains or losses = Proceeds from sales generated – Antique bed cost base
The antique bed on account of the purchase date is a post CGT asset with an acquisition price exceeding $ 500. The net result would be that CGT would be applied on the net capital gains or losses derived from the asset disposal. The computation of cost base for the asset under consideration is highlighted as follows.
Element 1: Acquisition price = $ 3,500
Element 4: Expenditure of capital nature for increase in asset value = $ 1,500
Antique bed cost base = Element 1 + Element 4= $ 5,000
The asset disposal in this case is involuntary which has led to proceeds of $ 11,000 being generated on account of insurance proceeds.
Hence, capital gains = 11000 – 5000 = $ 6,000
A previous capital loss to the tune of $ 1,500 exists from sculpture (a type of collectible) and therefore will be adjusted in the capital gains before application of discount method. Hence, capital gains after adjustment of previous losses = 6000-1500 = $ 4,500
With regards to long term capital gains for individual taxpayer, s. 115-25(1) offers the application of discount method where half of the capital gains are provided concession on (Sadique, et. al., 2015).
With regards to this asset, the data of purchase lies in the era when no CGT was applied on capital gains. This, the painting is a pre CGT asset as per s. 149(10) ITAA 1997 and hence no CGT implications would result from any capital gains or loss derived on the sale of this asset.
Share disposal corresponds to A1 event as per s. 104-5 ITAA 1997 (Nethercott, Richardson and Devos, 2016). With regards to shares being sold, the relevant event as per s. 104-5 would be classified as A1 event. As per this event, the capital gains or losses (as may be applicable) can be calculated by the following formula.
Applicable capital gains or losses = Proceeds from sales generated –Shares cost base
Element 2: Related incidental costs = $ 1,300 (750 on stamp duty and 550 brokerage related fee).
Cost base: Share Asset = 15000 +1300 = $ 16,300
Sales proceeds = 47*1000 = $ 47,000
Realised capital gains on share asset = 47000 – 16300 = $ 30,700
The resultant capital gain is long term owing to share being held by client for more than a year.
Element 2: Related incidental costs = $ 2,500 (1500 on stamp duty and 1000 brokerage related fee).
Cost base: Share Asset = 30000 +2500 = $ 32,500
Sales proceeds = 25*2500 = $ 62,500
Realised capital gains on share asset = 62500 – 32500 = $ 30,000
The resultant capital gain is long term owing to share being held by client for more than a year.
Element 2: Related incidental costs = $ 600 (500 on stamp duty and 100 brokerage related fee).
Cost base: Share Asset = 6000+600 = $ 6,600
Sales proceeds = 0.5*1200 = $ 600
Realised capital losses on share asset = 6600 – 600 = $6,000
Element 2: Related incidental costs = $ 2,000 (1100 on stamp duty and 900 brokerage related fee).
Cost base: Share Asset = 10000+2000 = $ 12,000
Sales proceeds = 2.5*10000 = $ 25,000
Realised capital gains on share asset = 25000-12000= $13,000
Owing to ownership period being lesser than a year, discount method under s.115-25 cannot be applied here.
The case facts presented clearly indicate that violin in the context of the given client is an item of personal use. This is established from the given information whereby it is known that the client has ownership of several violins which all are played regularly (Kreyer, 2016). Considering the use of violin for deriving entertainment, it is correct to categorise it as an item of personal use. For items of personal use, no CGT implications arise if the acquisition price for these is lower than $ 10,000. The given violin costs $5,500 and hence would not have any CGT implications.
Summary (Conclusion)
Capital gains: Block of Land = $96,500
Capital gains: Antique bed = $2,250
Capital gains: Shares = $40.350
Taxpayer (employer) would be held accountable for the FBT liability only when they have provided benefits to employee that the employee can use for private purpose as per Fringe Benefits Tax Assessment Act 1986 (Sadique, et. al., 2015). It is noteworthy that the benefits provided to employee would not be categorised under fringe benefits when the usage of the benefit is restricted to professional work only. FBT liabilities will not be applicable on the employees and would only be imposed on employer for the respective FBT year. Further, the employer may claim tax deduction only when the employee is using the benefits to derive assessable income (Coleman, 2016).
Employer – Rapid Heat and Employee – Jasmine
Rapid Heat has provided three fringe benefits i.e. a car, a loan of sum $500,000 and an electric heater to Jasmine during the FBT year which would be taken into account to find the FBT consequences and FBT liability.
Car fringe benefit
The relevant provisions are discussed in s.8, FBTAA 1986 which defines that car fringe benefit will be provided to employee by the employer when the car is given for the private purpose of employee. Taxable value of car is an imperative factor to determine the car related fringe benefit tax liability on employer. The statutory formula as per s. 9, FBTAA 1986 for car fringe benefits computation and is shown below (Gilders et. al., 2016).
Base value of car is also known as capital value which would be calculated by deducting the expenses resulting from minor repairs. Available days will be the days between 31 March 2018 and the date when the car was available for private purpose to employee. Days will not be deducted from available days when the car is held present for employee for private use. Further, the days will also not deduct when the car was at garage for the minor repairs but days deduction for major repairs is available (Deutsch, et. al., 2017).
Rapid has provided a car to Jasmine for private purpose on September 1, 2017 and hence, car fringe benefit has been provided to Jasmine. Rapid has also paid $550 for minor expenses. The FBT liability will be raised on Rapid Heat.
Base value = (33000-550) = $32,450
Car purchased after 2011 and thus, statutory % = 20%
Available days = 334 (May 1, 2017 to March 31, 2018)
Gross up rate = 2.0802 (Type I goods)
Total days = 365
FBT rate = 47% (March 31, 2018)
Therefore, Rapid Heat has to pay $5823.70 as fringe benefit tax for providing car fringe benefit to Jasmine.
Any financial help (loan) provided to employees by their employer would be considered as loan fringe benefits only if the loan was provided with no interest or with concessional rates. Any rate below the statuary rate defined for the relevant year by Reserve Bank of Australia (RBA) will be termed as concessional rate (Barkoczy, 2017). For FY2017/18, the statutory rate by RBA is 5.25% as per TD 2017/3. Gross up factor of car, loan and non-cash benefit depends on the type of goods and FBT year as highlighted in Goods and Service Act 1999.
Further, the employer may claim tax deduction only if the employee is using the benefits to derive assessable income through the loan.
Rapid Heat has provided financial help (loan) to Jasmine at an interest rate of 4.25% per annum. It is evident that Rapid Heat has used concessional rate for loan as the statutory rate by RBA is 5.25% p.a. for FY2017/18.
Loan = $500,000
Available days = 212 (Sep 1, 2017 to March 31, 2018)
Gross up rate = 1.8868 (Type II goods)
Total days in FBT year = 365
RBA rate of interest = 5.25% per annum (TD 2017/3)
Rapid Heat’s concessional rate = 4.25% per annum
FBT rate = 47% (March 31, 2018)
Therefore, fringe benefit tax payable for Rapid Heat is $2575.35 for providing loan fringe benefit to Jasmine.
Jasmine has used the loan for two purposes. She has realised $450,000 to buy holiday home and has provided $50,000 to her husband to purchase Telstra’ shares with zero interest rate. Rapid Heat would be liable to claim deduction on the received interest only if the holiday home purchased by Jasmine would result assessable income. Further, the received interest on $50,000 will not be taken for tax deduction as it has been acquired by Jasmine’s husband.
Non-cashable benefit provided by employer to employee that deals with private expense would be considered as expense payment fringe benefit. Further, any product of company sold to employee at cheaper price as compared with the original price will be considered as internal expense fringe benefit (Woellner, et.al., 2017) . Gross up factor of car, loan and non-cash benefit depends on the type of goods and FBT year as highlighted in Goods and Service Act 1999.
Rapid Heat is selling heater for $2600 to their customer. However, the selling price given to Jasmine is $1300. The concessional price would lead internal expense fringe benefit by Rapid Heat by Jasmine.
Concession offered = halved of selling price = 2600/2 = $1300
Saving =
Gross up rate = 2.0802 (Type I goods)
FBT rate = 47% (March 31, 2018
Therefore, fringe benefit tax payable for Rapid Heat is $635.5 for providing internal expense fringe benefit to Jasmine.
(b)In this case, Jasmine has realised $50,000 to buy Telstra’ shares rather than offering her husband with no interest rate and hence the incremental deduction would be available for Rapid Heat. This incremental deduction reduces the total fringe benefit tax liability of Rapid Heat as highlighted.
References
Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University Press.
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters (Professional) Australia.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2015) Australian tax handbook. 8th ed. Pymont: Thomson Reuters.
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016) Understanding taxation law 2016. 9th ed. Sydney: LexisNexis/Butterworths.
Krever, R. (2016) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON LAWBOOK Company.
Nethercott, L., Richardson, G., & Devos, K. (2016) Australian Taxation Study Manual 2016. 8th ed. Sydney: Oxford University Press.
Reuters, T. (2017) Australian Tax Legislation (2017). 4th ed. Sydney. THOMSON REUTERS.
Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., and Ting, A. (2015) Principles of Taxation Law 2015. 7th ed. Pymont: Thomson Reuters.
Woellner, R., Barkoczy, S., Murphy, S. and Pinto, D. (2017) Australian Taxation Law 2017 27th ed. Sydney: Oxford University Press Australia.
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