Tax Implications Of Capital Gains And Losses From Assets Sales

Objective and Background

Question 1

The key objective here is to offer advice to client for the likely tax implication in the wake of the various transactions which are acted on behalf of the taxpayer during assessment year. The factual information indicates that client does not perform transaction for deriving ordinary income from business course as she has not run a business of trading assets. Therefore, the scope of the taxation rests on the capital receipts which are received from the disposal and highlighting the Capital Gains Tax (CGT) consequences because the proceeds are not categorised as revenue receipts and thus, income tax would not be applied on capital proceeds

The initial task is to determine whether the asset is pre-CGT asset or not because if the asset is pre-CGT asset, then the CGT implication will be exempted on the capital gains/losses derived from the liquidation of capital asset. Asset that are purchased before September 20, 1985 are considered as pre-CGT asset (s. 149(10) ITAA 1997) (Austlii, 2018 a). The CGT implication would only be raised on taxpayer when the acquisition date is after the September 20, 1985.  The sale of capital asset would be termed as CGT event of A1 type (s. 104(5) ITAA 1997). The formula for determining the capital gains/loss requires two variables namely cost base and sale proceeds. The cost base is comprises five elements which are furnished below under relevant sub sections (s.110 (25) ITAA 1997) (Austlii, 2018 b).

The capital receipts will be considered for the computation of capital gains/losses in the year in which the contract has been formed. Besides, tax effects would still be enforceable if the actual payment has not received in the same year (contract enactment year) and will be earned in next year (TR 94/29) (ATO, 1994).. The capital losses which remain unbalanced in the previous year would be balanced with the derived capital gains or else again rolled down to next financial year (s. 102-5 ITAA 1997). Holding period of the asset exceeded 12 months implies that the sale proceeds of the asset would be long term capital gains and hence, would be liable for rebate which is 50% on the capital gains. In other words, only 50% of the total capital gains will be considered for the implication of the capital gains tax (s. 115(25) ITAA 1997) (Reuters, 2017).

Land block has been sold by the concerned taxpayer who has signed the contract of sale in 2017-18 but will be able to get the proceeds in 2018-19. However, as per TR 94/29 the proceeds will be part of the capital gains computation for the year 2017-18 which is illustrated below.

Antique bed

Collectables also comprise antique pieces as per respective definition in s. 118-10 ITAA 1998 (Reuters, 2017). The CGT treatment in case of antique bed depends on the fact that taxpayer has procured the respective antique bed for more than $500 (s. 118 (10) ITAA 1997) (Gilders, et.al., 2015).  The taxpayer has procured the antique bed after the CGT regime enactment and therefore, the antique bed is not defined as pre-CGT asset (s. 149 (10) ITAA 1997) (Austlii, 2018 a).  Moreover, antique bed disposal is also CGT event of A1 type and cost base and income from the asset disposal would be two main aspects of capital gains/loss calculation (Nethercott, Richardson and Devos, 2016). The taxpayer has not sold the bed and hence, no income has been received from the disposal. However, the taxpayer has got the payment from insurance company because the bed was stolen and therefore, the only viable option to consider is the insurance proceeds as income received from disposal. Also, the asset is deriving long term capital gains (s. 115(25) ITAA 1997) and thereby, 50% rebate is now be available on the capital gains for capital gains tax liability.

Determining the Capital Gains Tax Implications

Painting

The painting procurement date is before the CGT enactment date. It means that she has done the payment for purchasing the painting on May 2, 1985 which is earlier than September 20, 1985. As a result, the conclusion can be made that the asset (painting) is pre-CGT asset (S. 149 (10) ITAA 1997 and it is evident that CGT will be exempted when there is disposal of pre-CGT asset (Austlii, 2018 a). Clearly, painting belongs to pre-CGT asset and thereby, no CGT is imposed.

Shares

The taxpayer has procured the shares after the CGT implication enactment and therefore, the shares are not defined as pre-CGT asset (s. 149 (10) ITAA 1997) (Nethercott, Richardson and Devos, 2016).  Moreover, shares disposal is CGT event of A1 type and cost base and income from the asset disposal would be two main aspects of capital gains/loss calculation (Gilders, et.al., 2015). Common bank, PHB Iron Ore and also Yung Kids Learning shares are having the holding period > 1 year and the long term proceeds will become halved for CGT implication. But, Shares Built Ltd’s shares is holding for less than a year and the short term proceeds will not get 50% rebate for CGT liability.  

Violin

CGT implication will only be valid when the personal use asset has been procured for more than $10,000 (Nethercott, Richardson and Devos, 2016). The violin procured by the taxpayer is also a personal use asset because she used to play it very frequently almost each day and also, possess keen interest in collecting and playing violin. She plays violin proficiently and utilizes the violin daily. Hence, this asset will be asset of personal use. Further, she has procured the disposed violin for $5,500 which represents that the condition required for CGT implication validity for personal use asset is not true and therefore, capital receipts incurred from the sale of the violin would not create any capital gains tax liability on taxpayer.

Computation of cumulative capital gains/losses

Taxpayer has received the net capital gains of $139,100 for the year 2017-18 from the liquidation of the capital assets.

Question 2

• There are non-cash benefits which are provided to employees called as fringe benefits which are personal or non-professional in nature. In order to highlight the underlying taxation implications of these benefits, a separate statute exists which is called as Fringe Benefits Tax Assessment Act 1986 (FBTAA). The existence of a separate statute is on expected lines as the treatment of these benefits is unique in the sense that the beneficiaries are not taxed but the complete tax liability falls on the employer which happens to the provider of fringe benefits. The relevant benefits pertaining to the given scenario are highlighted as follows.

“Car Fringe Benefits”

The extension of car benefits has been highlighted by s. 7 FBTAA 1986. The necessary condition for this benefit being granted to the employee is that the employer owned car can be used by the employee for personal work and not limited to professional work (Barkoczy, 2017). It is not necessary that such permission may be given directly by employer since it could be tacit as well. This is indicated if the parking of car takes place at garage of employee or near employee’s house, then it is assumed that permission for private use has been granted (Hodgson,Mortimer and Butler, 2016).

Personal use has been permitted in the presented scenario for Jasmine by Rapid Heat. The result would be that FBT implications would arise for Rapid Heat on account of car fringe benefits being given to Jasmine. The given car has been purchased on May 1, 2017 and given to Jasmine for use. The purchase value of car is given as $ 33,000. Section 9 has been used to computed the car fringe benefit provided to Jasmine.

• Base Value (Vehicle)

Capital gains and losses from the sale of Land Block

In order to derive the same, the cost price of the car must be takes and the deduction of repairs that are paid by the employer are subtracted.  Depreciation deduction is also permissible in case of aged vehicles but this is not the case with the given car which has been possessed in 2017/2018 only (Barkoczy, 2017).

• Days of private use

Leaving aside the month of April, Jasmine has had the car in her possession for the complete FY2018. Hence, 30 days would be subtracted from 365 days leading to 335 days.  Also, the car for the purpose of minor repairs spent five days in garage but no deduction can be claimed for the same under s. 9 since deduction available only in case of repair being major one.  Besides, Jasmine was out of town for ten days and the car meanwhile was at the airport parking. The car was available for use even though Jasmine was not here and hence deduction not permitted.

Key information to compute the relevant liability related to FBT computation is as exhibited below (Hodgson,Mortimer and Butler, 2016).

Using the information above, FBT to be levied on employer is calculated.

“Loan Fringe Benefits”

This is one of the types of fringe benefit that can be provided to the employee by the employer. In accordance with s. 16, FBTAA 1986, the act of providing loan to employee at lesser interest rate leads to creation of loan fringe benefit (Deutsch, et.al., 2015). The decision as to whether the interest rate is lower or no, is taken after comparison with benchmark rate given by RBA. This is because if the employer provides loan at rate lower than the RBA prescribed benchmark rate, then it would imply interest savings for the employee and thereby receipt of benefit. Additional, the extension of loan does not relate to professional reason and is indeed personal (Deutsch, et.al., 2015).

In line with information provided, Rapid Heat has provided loan to Jasmine at a concessional rate of 4.25% p.a. The quantum of loan given is $ 500,000. Also, the reference rate or benchmark rate disseminated by RBA for the current year is 5.25% p.a. The presence of concessional interest rate clearly implies extension of loan fringe benefit to Jasmine by employer.

• Days of loan availability

At the start of the financial year, loan extension has not happened. Contrary, the extension of loan has taken place on September 1, 2017 and hence the savings in interest cost would also be computed starting from this date and moving towards the year end (Barkoczy, 2017).

Using the information above, FBT to be levied on employer is calculated.

As per the deduction rule specified in s. 19, deduction on the interest savings on the loan amount is available to the employer to the extent the loan amount is deployed for income producing purpose (Deutsch, et.al., 2015). Also, it is noteworthy that this extends only to the money used by employee directly and does not extend to any money used by any associated.  The information on loan proceeds usage highlighted that $ 450,000 is used by Jasmine for making a purchase of holiday home while the remaining amount is used by her husband for stock investment.  Deduction on the $ 450,000 amount would be availed by Rapid Heat if the holiday home does provide assessable income to Jasmine.

“Expenses Fringe Benefits” 

Personal expenses should be carried out by employees only. However, when employer meets these personal expenses of employees, then it is said that expense fringe benefit has been extended by the employer to concerned employee. In this regards, a particular car arises when the employer provides discount in relation to the a product that is produced by the employer and the resultant discount benefit is called internal expense fringe benefit.

The given circumstances clearly highlight that employer effectively provided $ 1,300 worth of personal expense funding to the employee Jasmine by charging only half of the list price and thereby ensuring that the remaining half are borne by the company or employer.

Using the information above, FBT to be levied on employer is calculated.

There is a change in the utilization of the loan proceeds which is apparent from the fact that now the entire money is being used by Jasmine. Hence, incremental deduction can be claimed by employer if the $ 50,000 tends to produce any income. The assessable production income on $ 50,000 would happen in the form of dividends derived from Telstra stock. The deduction computation is shown as follows.

References

ATO, (1994) Taxation Ruling –TR 94/29 [Online]. Available at: Income tax: capital gains tax consequences of a contract for the sale of land falling through. https://www.ato.gov.au/law/view/document?DocID=TXR/TR9429/NAT/ATO/00001&PiT=99991231235958 (Accessed: 24 September 2018)

Austlii, (2018 a) Income Tax Assessment Act 1997- SECT 149.10 [Online]. Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s149.10.html (Accessed: 24 September 2018)

Austlii, (2018 b) Income Tax Assessment Act 1997- SECT 110.25.General Rules About Cost Base [Online]. Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.5.html (Accessed: 24 September 2018)

Barkoczy, S. (2017) Core Tax Legislation and Study Guide 2017. 2^nd ed.   Sydney: Oxford University Press 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.

Nethercott, L., Richardson, G., & 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.