The information provided about the client highlights a set of transactions that have been entered into by the client which would have certain tax implications. In the capacity of a tax consultant, the objective is to provide advice in relation to these transactions particularly the tax implications.
Whenever there is receipt of cash, the first step is to classify the proceeds considering the bearing that this classification has on the underlying tax implication for the taxpayer. Typically, the proceeds that are revenue tend to have tax consequences for the taxpayer in the form of ordinary income which is one of the key components of assessable income (Hodgson,Mortimer and Butler, 2016). The treatment of capital receipts is significantly differently considering the fact that no tax would be imposed on such receipts as previously capital was invested and these amounts to repayment of the invested capital. However, if any gains are realised, then this would assume income character and hence capital gains tax would apply. A potential example is where a jeweller sells a rare gemstone which is over a century old (Nethercott, Richardson and Devos, 2016. This would amount to revenue receipts owing to the business of jeweller to buy and sell gems. On the contrary, if the same gemstone was sold by a collector, then the nature of proceeds would be capital since it was investment from the perspective of the taxpayer (Gilders, et. al., 2015).
Under certain conditions, the capital events may not lead to any CGT liability. One of the most prominent one in this regards is when the asset could be termed as pre-CGT (Coleman, 2016). These assets would be those which the respective taxpayers have purchased at the time when there was no tax imposed on the capital gains or losses by the relevant tax authorities. This particular time would essentially be limited to the date of purchase lying on or before September 19, 1985.The need to identify these assets stems from the fact that s. 149-10 provides 100% exemption to any capital gains linked from such assets (Deutsch, et.al., 2015).
Certain other exemptions can also be enjoyed by taxpayers which are asset specific. One of these related to asset for personal use, whereby the minimum purchase cost needs to be greater than $ 10,000 or else CGT would not apply on the derived capital gains or losses. Another rebate is provided to collectable asset class, whereby the minimum purchase cost needs to be exceeding $ 500 or else CGT would not apply on the derived capital gains or losses (Coleman, 2016).
The CGT is imposed on the net capital gains that remain after the computation process is finished which comprises of the following mentioned steps (Wilmot, 2014).
The process begins with the occurrence of a CGT event a list of which is outlined. While there are multiple ways in which such an event could be triggered, one of the relevant ones from the point of view of the transactions done by client is A1 event. This happens when any asset is sold or disposed. It is essential that based on the underlying transaction, the identification of event must be correctly undertaken as the process of computation of capital gains tends to vary with CGT events (Barkoczy, 2017).
For an A1 event, a key requirement is the asset cost base which extends beyond the asset purchase price since it includes a host of components which are detailed as shown below (Woellner, 2017).
A noteworthy point while computation cost base is that some assets may have only limited parameters based on which the cost base is computed.
Post the computation of cost base, the difference of proceeds that the seller obtains from asset sale and cost base could furnish capital gains and in certain cases capital losses. However, these are not levied CGT as these are first used to adjust against any potential capital losses that may be pending owing to transactions enacted in the present year or past years (Nethercott, Richardson and Devos, 2016). These losses as per s. 102-5 cannot be adjusted against any other avenue except the capital gains and hence the adjusted balance needs to be found to proceed ahead.
The taxpayer can also lower the taxable capital gains post this by choosing a particular approach between discount and indexation. The aim of the latter method is to ensure taxation of only the real gains and insuring that nominal gains are insulated from tax burden. As a result, it allows for increasing the cost based on the CPI values but a major shortcoming is that the asset is primarily used for assets bought before 1999 (Barkoczy, 2017). A more potent option can be availed in the former approach where the concession is significant since only 50% of the capital gains are considered CGT taxable while the other half is discarded. However, the discount approach can be applied only in case the underlying capital gains are long term (i.e. holding period >1 year) and not when these are short term (i.e. holding period < 1 year) in nature (Deutsch, et.al., 2015).
With regards to capital asset liquidation, considering the huge payment to be made, there may be time gap between the sale of asset (i.e. contract enactment for sale) and the actual cash receipt by the asset seller. Owing to this, it is quite possible that the sale may be executed in a given tax year while the corresponding payment is received in the next (Wilmot, 2014). In such cases, the question emerges as to whether the underlying tax consequences ought to be considered in the year of sale or year of proceeds. Clarification on this issue is offered by TR 94/29 as it advocates that the appropriate treatment would be to consider tax consequences in the year when the sale of asset is realised while the payments can be received later (Nethercott, Richardson and Devos, 2016.
On the basis of client information given, it is apparent that sale of various assets enacted by the client during the year is not part of any business transactions. To an extent, this is also confirmed by the client being an investor and hence it would be common to invest in the various assets that have been liquidated in 2017/2018. This discussion points towards the proceeds not having ordinary income character and instead would be reflected as capital receipts. As already discussed in the previous section, no tax on the proceeds would be levied and hence the focus is to compute any potential capital gains which may be included within the CGT ambit.
Before computing any capital gains on the asset sale, it makes sense to determine if any asset is exempted from CGT and hence no computation would be performed on these. The purchase price has been taken into reference for the liquidated assets and barring painting, no other asset is categorised as a pre-CGT asset. Hence, it implies that barring painting which would be CGT exempt, other assets are not exempt based on this parameter.
The list of disposed assets also highlights an asset as collectible which is the antique bed. The necessary condition in terms of minimum purchase price has been met by this asset as it was bought for $ 3,500 which is significantly greater than reference value of $ 500. However, the same cannot be said about another asset violin. The frequent usage of this violin for deriving personal pleasure implies the labelling of this asset under the aegis of personal use asset. The information provided implies that the violin has been bought for consideration of $ 5,500 and hence does not qualify for levying of CGT in accordance with the relevant law indicated in the previous section.
The disposed assets which have not gained exemption from CGT would produce capital gains or losses in accordance with the previous section and summarised below.
The scenario indicated for land sale presents the situation of time gap between sale and proceed realisation. Also, the above two events tend to fall in different years with sale of asset being closed in the given year. However, the relevant proceeds would not be available in the current year and hence would be available the next year. But this does matter since the crucial factor for capturing the tax consequences is the sale enactment date as indicated in TR 94/29.
Conclusion
Out of the five classes of assets that have been liquidated by the client, CGT liability would arise only on account of three of those assets. The same has been computed with due consideration to the applicable statutory rules and the information provided in context of client and transactions.
Fringe benefits tend to differ from the normal employment benefits that are doled out to employees. The key difference is that unlike normal benefits where the tax liability would arise for the recipient, the tax liability for fringe benefits would arise on the employer which is the source of the benefits. Clearly, the rules in relation to fringe benefits are quite difference and captured as a different legislation named “Fringe Benefit Tax Assessment Act, 1986”.
Considering the applicable provisions of FBTAA 1986, a discussion has been carried out in relation to necessary conditions for extension of difference fringe benefits and the process of computation of related Fringe Benefit Tax (FBT) liability (Hodgson,Mortimer and Butler, 2016).
Pre-requisites – It is crucial to note that car may be given to employee for professional or personal work. Restricting the use of employer owned vehicle to only official use does not extend any fringe benefit to employee as the employer needs to provide work related conveyance support. Hence, car fringe benefit would be provided only when the permission regarding the use of vehicle is extended to personal sphere for a given employee (Wilmot, 2014).
.1) Use the following formula to highlight the quantum of car fringe benefits transferred to employee in the assessment year.
Critical aspect to make note is that any lowering of availability would not be entertained if case of minor repairs but major repairs would be considered. Similarly, the car availability is the crucial element and not usage of car (Sadiq, et.al., 2015).
2) Taxable value determination using vital inputs such as gross up factor and the quantum of relevant fringe benefit provided in the assessment year.
3) FBT liability is based on the assessment year FBT rate along with the above computed taxable value.
Statutory Authority – FBTAA 1986, Section 16
Pre-requisites – Offered interest rate by employer< Benchmark Interest rate (RBA)
The above condition ensures that employee tends to lower the amount paid as interest and hence this is a personal benefit considering that extension of loan is not related to any professional work on the part of the employer (Woellner, 2017).
1) The employee interest savings calculation during year of assessment would serve as the underlying fringe benefit.
2) Taxable value determination using vital inputs such as gross up factor and the quantum of relevant fringe benefit provided in the assessment year.
3) FBT liability is based on the assessment year FBT rate along with the above computed taxable value (Reuters, 2017).
Section 18 highlights deduction rule provides FBT related deductions to employer to the extent of interest saved on the loan amount utilised for income production by employee but not others related to employee (Nethercott, Richardson and Devos, 2016).
Statutory Authority – FBTAA 1986, Section 20
Pre-requisites – Employer must extend monetary contribution for lowering a personal expense on the part of the employee (Krever, 2017).
Crucial steps in computation:
1) Extent of underlying fringe benefit during assessment amount would be the employee savings on account of employer financial intervention.
2) Taxable value determination using vital inputs such as gross up factor and the quantum of relevant fringe benefit provided in the assessment year.
3) FBT liability is based on the assessment year FBT rate along with the above computed taxable value (Hodgson,Mortimer and Butler, 2016).
At the time of providing car to Jasmine, employer has clearly allowed personal use and hence fulfilled the crucial pre-requisite for car fringe benefit. The stay of the car in garage has been prompted by repairs which are categorised as minor thereby leading to no deduction. Also, the parking at airport did not impact the availability of car but usability of car was hampered as Jasmine was elsewhere.
Employer charged interest rate (4.25% p.a.) < Benchmark rate (5.25% p.a.) (FY2018 rate)
In the above arrangement, savings are realised by Jasmine and hence Rapid Heat has given loan fringe benefits which would attract FBT liability on the fringe benefit provider.
Even though 90% of the loan proceeds have been used by Jasmine, but the relevant deduction on FBT that employer may claim under s. 18 would depend on the generation of rent based income by the holiday home. No deduction available for spending by her husband.
Electric heater original price for any customer as apparent from the given information is $ 2,600. However, there is a 50:50 sharing of this amount by the employer despite this electric heater being meant for Jasmine’s personal use. Hence, fringe benefits do exist in the scenario presented.
Conclusion
The above discussion clearly highlights the fringe benefit related liability is to be paid by Rapid Heat while Jasmine would not share any burden. Some respite is available for the employer is the loan proceed utilisation by employee is carried out in a manner which produces income that is assessable.
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.
Hodgson, H., Mortimer, C. and Butler, J. (2016) Tax Questions and Answers 2016. 6th ed. Sydney: Thomson Reuters.
Krever, R. (2017) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON LAWBOOK Company.
Nethercott, L., Richardson, G., and 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.
Wilmot, C. (2014) FBT Compliance guide. 6th 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. 2nd ed. Sydney: Oxford University Press Australia.
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