Tax Implications Of Asset Sale For Rapid-Heat Pty Ltd

Issue

Issue

The client has enacted sale of certain items and in wake of the same intends to obtain tax related advice so as to ascertain the likely tax liability that would arise on account of the transactions undertaken.

Law

Receipts Classification

In the event of any cash that may be derived by the taxpayer, the first concern that must arise is in relation to the proceeds classification where essentially there are two choices i.e. revenue and capital. This determination holds significance in the backdrop of revenue receipts making contribution to taxpayer’s ordinary income in contrast with capital receipts that are completely exempt from any taxation related liability (Barkoczy, 2017). However, even capital receipts are taxed to an extent but the same is on account of capital gains being booked.

With regards to segregating the two, the key factor is the underlying intention with which the transaction is enacted and the frequency of these transactions. A case in point is the transaction involving sale of a flat by a builder which would bring in receipts of revenue nature since it is part of business. However, for an individual, selling of flat that his parents lived in would amount to capital proceeds owing to these transactions not being part of business.  Hence, the critical aspect is to decipher the nature of the transaction underlying the sale of asset or the trading stock depending on the circumstance  (Nethercott, Richardson and Devos, 2016).

CGT Exemption

In case of capital transactions, it is possible for CGT implications to result. In order to avoid the same, certain statutory rebates are available. One of these is indicated in s. 149-10 which defines a type of asset which is pre-CGT asset. In layman terms, this would refer to an asset which the taxpayer acquires in the period when the underlying gains on asset sale were not taxable. Taking iuto cognisance that CGT regime began as on September 20, 1985, therefore the assets for which the buying was done before the above cut-off date would be categorised as pre-CGT asset. This classification has significance considering the fact that no CGT can be imposed on any pre-CGT asset (Wilmot, 2014).

Additionally, there are certain other rebates, which are available for specific assets. In this context, for an asset termed as collectable as per s. 118-10 would be levied CGT only if the price paid at the time of purchase was higher than $ 500. However, in the context of personal use assets as per s. 108-20(1), levying of CGT is permissible only if the price paid at the time of purchase was higher than $ 10,000.  In the event of the above conditions net met in regards to two type of assets indicated above, no CGT liability would arise for the asset (Woellner, 2017).

Law

Capital Gains Derivation

CGT would be applied only on the capital gains that are derived on the asset sale which is done through the following process.

There is a CGT event which begins the whole process which first involves identification of the appropriate event from the list of such events as detailed under s. 104-5 ITAA 1997. In this scenario, the relevant CGT event is chosen as A1 which deals with asset disposal of various kinds. The proper event identification has high relevance as any mistake in this regards would result in use of wrong methodology for capital gains derivation eventually leading to wrong estimation of tax burden (Gilders, et. al., 2015).

A critical input parameter which aids in this process is termed as cost base. The various components of this are taken as per s. 110-25 and consist of costs besides those incurred for asset purchase (Deutsch, et.al., 2015). This is apparent from consideration of the various components indicated as follows.

For every asset, it is not essential that all the components outlined above would exist and hence the relevant elements are considered for cost base computation.

Taking the asset cost base in conjunction with proceeds obtained from asset sale, the underlying gains or losses can be derived as applicable for a given asset. Before moving ahead, any capital losses that may exist need adjustment against the existing gains. These losses are not restricted to the current year and may also be obtained on account of the previous year transactions as the capital losses are allowed to be rolled over till settlement with an equivalent amount of capital gain (Coleman, 2016).

The adjusted gains can further be trimmed through the application of two approaches that are provided namely indexation and discount.  The former approach was inserted in the statute so as not to impose tax on the nominal gains and thereby provides reduction through the adjustment of cost base on account of inflation. Usually this adjustment is not very significant and also this method is deployed only for assets bought prior to September 1999. As a result, the discount approach is widely used (Wilmot, 2014). It is explained in s. 115-25 ITAA 1997 and prescribed a discount of 50% assuming the underlying gains are long term and not short term. The necessary condition for deriving the long term capital gains is that the asset under question must have been held by the investor for atleast an year (Woellner, 2017).

Receipts Classification

Timing in CGT

In asset liquidation since the quantum of sales proceeds can be potentially large, hence often there are two events which are separated in time. One event is the execution of contract between the buyer and seller in relation to the underlying asset sale. The other event is the receipt of sales proceeds from the asset  (Nethercott, Richardson and Devos, 2016). Owing to this difference in time frame between the above mentioned time frames, it may so happen that these two events lie in different tax period. This leads to issue at the end of the taxpayer to decide so to in which period must the capital gains ought to be taxed. The answer to this is provided by TR 94/29 which clarifies that the tax results from the transactions ought to be taxed in the year when the sale contract execution takes place (Barkoczy, 2017).

Application

Receipts Classification

The sale of asset by the client does not form part of any business as has been stated in the information provided. This also gains further support from the fact that the client is an investor besides being a collector. Hence, it is unlikely that the client is an asset trader or in such business. The logical conclusion thereby derived is that the proceeds from asset sale would be capital in nature. These proceeds would not be taxed since taxation is limited only to revenue receipts. However, for capital receipts, there are potential capital gains also possible which may not be exempt from the application of CGT.

CGT Exemption

The first step is to outline any pre-CGT assets as even though capital gains may be derived on such assets, but these would not be considered taxable and thereby the computation of capital gains on such assets may be avoided. The buying date for the given assets has been provided in the question and by analysing those, conclusion may be drawn with regards to painting being the sole asset to be placed under this category and hence exempted from CGT application under 1. 149(10).

A collectable asset present in the list of assets disposed by the taxpayer is antique bed which would have CGT implications as the price at which it has been bought tends to be higher than the minimum value required for application of capital gains tax. A personal use asset of significance here is violin. The classification of this asset as personal use asset is derived from the behaviour of client whereby the violin instead of being looked at as capital asset is used for entertainment with high degree of regularity. Also, the purchase cost of this violin amounts to $ 5,500 which falls short of the minimum requirement of $ 10000 and hence it can be thereby concluded that violin sale would not produce any CGT consequence for the client.

CGT Exemption

Capital Gains Derivation

The assets remaining include land, antique bed and shares and as per the process described in the law section, the taxable capital gains would be computed for these assets.

Block of vacant land

Antique Bed  Shares

Timing in CGT

In relation to the given asset (vacant land block), the information provided reflects that even though sale contract has been entered into by client in the tax year finished but the money from this sale would be obtained only in the upcoming tax year. However, this still does not deter the taxpayer from including the consequences of land sale in the current year returns which would consider the details of the sale agreement.

Conclusion

The taxable capital gains have been reported considering the three assets on which CGT would be levied. For the remaining two assets, exemption from CGT is available resulting in no contribution to taxable capital gains for the current tax year. 

Question 2  

Issue

The given instance involves two main parties i.e. beneficiary which is the employee (Jasmine) and provider which is employer (Rapid Heat). The central aim in the following discussion is to consider the key facts related to fringe benefits that have been provided to Jasmine and work out the potential liability of these benefits particularly the FBT tax burden.

Law

The various benefits that are potentially provided and the resultant tax implications need to be outlined considered the main statute in the form of “Fringe Benefit Tax Assessment Act, 1986”.

• Car Fringe Benefit

The relevant statutory section dealing with the stated benefit is Section 7 (Coleman, 2016).

Required Condition – The pivotal requirement is the employee being able to use the car that is employer owned for his/her personal needs and uses. This only would result in any economic benefit to the employee as professional work related use of car is the entitlement of the employee.

Computations:

.1) Considering the section 9 formula, the car fringe benefits enjoyed by taxpayer during the given year need derivation.

In regards to car private usage time, the noteworhty aspects are marked below.

• Repairs would lead to days deduction only under the circumstance of these being major such as those incurred from an accident.
• Further, failure on the part of the employee to use car does not lead to the conclusion that the car was not available.

2) The gross up factor acts as a key input leading to computation of the taxable value of the concerned fringe benefit (Krever, 2017).

3) On the taxable value concerned with the given fringe benefit, there is application of the FBT in accordance with the corresponding rate for the assessment year.

• Loan Fringe Benefit

The relevant statutory section dealing with the stated benefit is Section 16.

Capital Gains Derivation

Required Condition – Discount offered by the employer in the interest rate charged for the loan provided to the employee. The discount needs to be present relative to the benchmark rate that RBA has announced for the relevant assessment year (Wilmot, 2014).

Computations:

1) The computation begins with determining the extent of savings considering the time for which loan is assumed, amount of loan and the discount relative to the RBA interest rate (Sadiq, et.al., 2015).

2) The gross up factor acts as a key input leading to computation of the taxable value of the concerned fringe benefit.

3) On the taxable value concerned with the given fringe benefit, there is application of the FBT in accordance with the corresponding rate for the assessment year.

There is provision for CGT related deduction which employer may be entitled to provided the proceeds of loan lead to providing income that is assessable for the employee but not any associates (Hodgson, Mortimer and Butler, 2016).

• Internal expense fringe benefit

The relevant statutory section dealing with the stated benefit is Section 20.

Required Condition – Some part of an otherwise personal expense on part of employee must be paid by the employer.

Computations:

1) The fringe benefit amount is linked to the savings that employee derives owing to  employer paying.

2) The gross up factor acts as a key input leading to computation of the taxable value of the concerned fringe benefit.

3) On the taxable value concerned with the given fringe benefit, there is application of the FBT in accordance with the corresponding rate for the assessment year (Nethercott, Richardson and Devos, 2016).

Application

• The consequences in regards to tax burden in relation to FBT are derived in accordance with the law in the previous section.

Car fringe benefit

Personal use is explicitly been allowed for jasmine at the time of car being extended to her. Hence, the key requirement of this benefit has been complied with. The garage stay has arisen owing to repairs of minor nature which do not warrant any deduction. Further, while the car was parking at the airport for a 10 day period but the same could have been used and there was no hurdle in using the car for personal use.

Loan fringe benefit

The applicable RBA prescribed rate for the assessment year is 5.25% pa. but Rapid Heat has offered a hefty discount to the extent of 100 basis points leading to presence of loan related fringe benefits.

A portion of loan proceed is diverted for use of husband which does not provide any benefit to employer. However, the key issue for the employer to be entitled to FBT deductions is whether the holiday home which has absorbed 90% of loan amount would produce taxable income or not for the employee (Jasmine).

Internal expense fringe benefit

Jasmine here desires to buy the electric heater which is manufactured by employer Rapid Heat. There is a sharing of the money by employer and employee since both end of paying $ 1,300 despite no compulsion on the employer to share this expense since it is personal for employee.

• The new arrangement benefits the employer since there is assured deduction in FBT of $ 500 since on investment amount of $ 50,000 in shares, dividends are certain to be produced which would contribute to assessable income generation. The precise derivation of the $ 500 is demonstrated as follows.

Conclusion

No tax related liability has fallen on the employee despite being the beneficiary. All the liability pertaining to FBT has to be borne by employer i.e. Rapid Heat. Only some deduction may be claimed by employer to bring down cost burden which is contingent to the usage of loan amount by employee for generation of income.

References

Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9^th ed. Sydney: Oxford University Press.

Coleman, C. (2016) Australian Tax Analysis. 4^th 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. 9^th ed.  Sydney: LexisNexis/Butterworths.

Hodgson, H., Mortimer, C. and Butler, J. (2016) Tax Questions and Answers 2016. 6^th ed. Sydney: Thomson Reuters.

Krever, R. (2017) Australian Taxation Law Cases 2017. 2^nd ed. Brisbane: THOMSON LAWBOOK Company.

Nethercott, L., Richardson, G., and  Devos, K. (2016)  Australian Taxation Study Manual 2016. 8^th ed. Sydney: Oxford University Press.

Reuters, T. (2017) Australian Tax Legislation (2017). 4^th 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.

Wilmot, C. (2014) FBT Compliance guide. 6^th  ed. North Ryde: CCH Australia Limited.

Woellner, R., Barkoczy, S., Murphy, S. and Pinto, D. (2017). Australian Taxation Law Select Legislation and Commentary Curtin 2017. 2^nd ed. Sydney: Oxford University Press Australia.