Question 1
The aim is to calculate the capital gains/ losses for the given transactions incurred by the client during the tax year. Further, the net capital gains/losses would also be calculated based on the given information.
Transaction 1: Block of Vacant Land
Assets which are purchased before 20 September 1985 are termed as pre-CGT assets and would not be considered for Capital Gains Tax (CGT) implication as per s. 149(10), ITAA 1997. It can be said that client has acquired the block of vacant land on January 2001 and therefore, the land block would not be termed as pre-CGT asset and thus, CGT implication would be taken into account. Further, the transaction occurred for sale of land block is considered as A1 event under s. 104 -5. In order to find the capital gains/losses from the transaction, cost base of land block would be computed under s. 110-25, ITAA 1997 (Hodgson, Mortimer and Butler, 2017).
There are five factors that need to be computed in regards to find the cost base of the asset under s. 110-25(1) (Gilders, et.al., 2016).
In accordance of s. 110-25(2): The total amount spent by the taxpayer in order to purchase the asset.
In accordance of s. 110-25(3): Sum of incidental costs which are incurred in selling and buying of the asset.
In accordance of s. 110-25(4): Various costs that are incurred in relation to the ownership which includes land tax, interest on loan amount, sewerage tax and so forth.
In accordance of s. 110-25(4): Capital expense for the betterment of asset or/and preservation of the asset would be taken into account.
In accordance of s. 110-25(5): Capital expense for the reservation of the ownership of land would also be the part of cost base.
Amount spent by the taxpayer in order to purchase land block = $100,000
Capital expense in relation to ownership of land =$20,000
Cost base of land block = Amount spent by the taxpayer in order to purchase land block+ Capital expense in relation to ownership of land = $100,000 + $20,000 = $ 120,000
It is noteworthy to determine whether the capital gains would be taken into account in the current tax year in which the contract of sale of land has been signed or in the next tax year in which the contractual amount would be received (Gilders, et.al., 2016). In accordance of Tax Ruling TR 94/29, the capital gains would be considered in the same tax year in which the contract has been enacted irrespective of the fact that whether the payment of contract has been received in the same tax year or not (Wilmot, 2014).
Income received from the sale of land block = $320,000
Capital gains/losses = Income received from the sale of land block- Cost base of land block = $320,000 – $120,000 = $ 200,000
Capital gains from the sale of land block = $ 200,000
The client has last year’s capital loss that would be balanced from the current year’s capital gains. Thereby,
Capital gains after balancing the capital loss = $200,000-$7000 = $ 193,000
The holding period of land is more than one year and hence, 50% discount method would be used to find the capital gains under s. 115-25(1).
Capital gains = 50% *$193,000 = $96,500
Transaction 2: Antique Bed
Antique items are classified as collectibles and therefore, termed as capital asset under TD 1999/40. In accordance of s. 118-10(1), proceeds derived from the sale of collectables which were purchased for $500 or lower than $500 would not be considered for CGT. Further, the transaction occurred for the sale of antique bed is considered as A1 event under s. 104 -5 and therefore, cost base of antique base would be computed to find capital gains/losses for the transaction (Coleman, 2016).
It can be said that client has purchased the antique bed on 21 July 1986 means after 20 September, 1985 and hence, it would not be termed as pre-CGT asset (Hodgson, Mortimer and Butler, 2017). Further, the antique bed is a collectable and CGT liability would be applied as the bed is purchased for $3500 which is higher than $500 (Woellner, 2016).
Total amount spent by taxpayer in order to purchase antique bed under s. 118 -25(1) = $3,500
Capital expense for the increasing the value of antique bed under s. 118 -25(5) = $1,500
Cost base of antique bed = Total amount spent by taxpayer in order to purchase antique bed+ Capital expense for the increasing the value of antique bed = $3500 + $1500 = $5,000
It is apparent that antique bed was stolen from her house which means the disposal of antique bed and therefore, the insurance amount of $11,000 would be taken as proceeds from disposal of bed. Hence,
Capital gains/losses = Income received from the disposal of antique bed- Cost base of antique bed = $11,000 – $5,000 = $6,000
Client has received capital gains of $6,000 from disposal of antique bed.
The client has last year’s capital loss from sale of sculpture (Antique item) that would be balanced from the current year’s capital gains. Thereby,
Capital gains after balancing the capital loss = $6,000-$1,500 = $ 4,500
The holding period of antique bed is more than one year and hence, 50% discount method would be used to find the capital gains under s. 115-25(1).
Capital gains = 50% *$4,500 = $2,250.
Transaction 3: Painting
Assets which are purchased before 20 September 1985 are termed as pre-CGT assets and would not be considered for Capital Gains Tax (CGT) implication under s. 149(10), ITAA 1997 (Barkcozy, 2017). It can be said that client has acquired painting on 2 May 1985 and therefore, the painting would be termed as pre-CGT asset. Thus, proceeds derived from disposal of paining would not amount to Capital Gains Tax (CGT) implication and hence, no capital gains/losses would be present for the sale of paining (Wilmot, 2014).
Transaction 4: Shares
The transaction occurred for the disposal of shares would be considered as A1 event under s. 104 -5 and therefore, cost base of shares would be computed to find the capital gains/losses for the transaction (Coleman, 2016).
Total share cost = 1000 shares * $15 = $15,000
Incidental cost incurred in selling and buying = Stamp duty + Brokerage fee = $750+$550 =$1,300
Cost base of share = $15,000 + $1,300 =$16,300
Proceeds from disposal of shares = 1000 shares *$47 =$47,000
Capital gains = Proceeds from disposal of shares – Cost base of share = $47,000 – $16,300 = $ 30,700
Capital gains would be long term because the holding period is higher than one year (Gilders, et.al., 2016).
Total share cost = 2500 shares * $12 = $30,000
Incidental cost incurred in selling and buying = Stamp duty + Brokerage fee = $1500+$1000 =$2,500
Cost base of share = $30,000 + $2,500 =$32,500
Proceeds from disposal of shares = 2500 shares *$25=$62,500
Capital gains = $62,500 – $32,500 = $ 30,000
Capital gains would be long term because the holding period is higher than one year.
Total share cost = 1200 shares * $5 = $6,000
Incidental cost incurred in selling and buying = Stamp duty + Brokerage fee = $500+$100 =$600
Cost base of share = $6000 + $600 =$6,600
Proceeds from disposal of shares = 1200 shares *$0.5=$600
Capital loss = $6,600 – $600 = $6,000
Capital loss would be long term because the holding period is higher than one year.
Total share cost = 10000 shares * $1 = $10,000
Incidental cost incurred in selling and buying = Stamp duty + Brokerage fee = $1100+$900 =$2,000
Cost base of share = $10,000 + $2,000 =$12,000
Proceeds from disposal of shares = 10000 shares *$2.5=$25,000
Capital gains = $25,000 – $12,000 = $13,000
Capital gains would be short term because the holding period is not higher than one year and therefore, discount under s. 115-25(1) would not be applicable here (Hodgson, Mortimer and Butler, 2017).
Sum of capital gains from the disposal of shares =50% of (30700 + 30000-6000) + 13000 = $40,350
Transaction 5: Violin
It is apparent that client has many violins which she has used for entertainment and more importantly for personal use and violin is not an antique item or collectable. Hence, the disposal of personal use item would amount to capital gains or loss only when the purchasing cost is higher than $10,000. Here, she has purchased violin for $1,500 and hence, it would be exempted from CGT (Nethercott, Richardson and Devos, 2016).
Calculation for ‘Net Capital Gains/Losses’ for the year end 30 June 2018
Net Capital Gains = Capital gains from land block + Capital gains from antique bed + Capital gains from share = 96500 + 2250 + 40350 = $139,100
Question 2
Fringe benefits are the benefits which are provided on the part of employer to the employees and would be taxed on employer’s end. The taxation consequences would be analysed under Fringe Benefits Assessment Act 1986. Jasmine is the employee of Rapid Heat who has received three benefits for her personal interest from the company. Therefore, the fringe benefits tax (FBT) liability for Rapid Heat needs to be determined based on FBTAA86 (Reuters, 2017).
Part a
FBT implications for Rapid Heat on the account of the benefits for year ending 31 March 2018
For car fringe benefits
The relevant section for car fringe benefits is section 8 of Fringe Benefits Assessment Act 1986. It shows that when the employer extends company owned car to their employee for his/her personal usage, then the benefits given in the form of car would be categorised as car fringe benefits (Woellmer, et.al., 2017). As a result of car fringe benefit, the employer is held liable for car fringe benefits tax.
Step 1: Capital value of car
Rapid Heat has bought car for $33,000 and on the same day, they have extended car to Jasmine. Further, the car has been sent for some minor repairs that results an expenses of $500 which is paid by Rapid Heat on behalf of Jasmine (Hodgson, Mortimer and Butler, 2017).
Hence, the capital value of car = Car price – expenses on minor repairs =
Step 2: Statutory percentage
Car purchasing date is the key decision variable for deciding the statutory percentage. Cars that are purchased after 2011 would amount to statutory percentage of 20% irrespective of travelled distance by the car. It is apparent from the case facts that car is bought on 1 May 2017 (after 2011) and therefore, statutory percentage would be taken as 20% (Nethercott, Richardson and Devos, 2016).
Statutory percentage for car = 20%
Step 3: Availability of car to Jasmine in the tax year
As stated above, Rapid Heat has extended car to Jasmine on 1 May 2017 and therefore, the total number of days for which the car was available for Jasmine is 335 not 365. Further, five days would not be subtracted from 335 days as the repairs were not minor and routine in nature. However, it is essential to note that when Jasmine was overseas and the car was parked at airport premises would not be subtracted from number of available days of car because she had accessibility for the car but she could not utilize car (Woellmer, et.al., 2017).
Availability of car to Jasmine in the tax year = 335 days
Step 4: Gross up rate of car
According to Goods and Service Act 1999, car is defined under type 1 goods and thus, the gross up rate of car for year ending 31 March 2018 would be 2.0802. Tax allowance can be claimed by employer under GST input credits (Wilmot, 2014).
Gross up rate of car = 2.0802
Step 5: Taxable value of car
Taxable value = Capital value of car* statutory percentage* number of available days of car * gross up rate of car
Step 6: Fringe benefits tax rate
The applicable fringe benefits rate is 47% for the year ending 31 March 2018.
Step 7: Fringe benefits tax liability
FBT liability
The FBT liability in case of car fringe benefits is $5823.70.
For loan fringe benefit
Loan fringe benefits tax liability would be present on employer when the employer has extended financial help to the employee in terms of low interest rate or without any interest rate. Loan fringe benefit is extended when the offered interest rate is lower than the benchmark interest rate stated by Reserve Bank of Australia (RBA).
The benchmark interest rate for loan stated by Reserve Bank of Australia as per TD 2017/3 = 5.25%
Rapid heat has charged the interest rate for loan to Jasmine = 4.25%
It is apparent that Rapid Heat has provided loan at lower interest rate and hence, the benefit would be termed as loan fringe benefit (Coleman, 2016) .
Step 1: Total loan amount
Jasmine has received a loan of tune $500,000.
Step 2: Number of days
The loan has been issued on 1 September 2017 and therefore,
Number of days of loan to Jasmine = 213 days
Step 3: Interest saving
Interest saved =
Step 4: Gross up rate
According to Goods and Service Act 1999, loan is categorised under type II goods and thus, the gross up rate of car for year ending 31 March 2018 would be 1.8868 (Woellner, 2016).
Step 5: Taxable value of loan
Taxable value = Interest saved * gross up rate of car
Taxable value
Step 6: Fringe benefits tax rate
The applicable fringe benefits rate is 47% for the year ending 31 March 2018.
Step 7: Fringe benefits tax liability
FBT liability
The FBT liability in case of loan fringe benefits is $2580.43.
It is noteworthy that a part of loan $450,000 has been used by Jasmine to buy a home would lead deduction on the part of Rapid Heat only when the purchased home is used to derive income for Jasmine.
Internal expense fringe benefit
Any non-cash benefit extended to the employee for personal benefit by employer would be considered as internal expense fringe benefit (Barkcozy, 2017). Rapid Heat has provided an electric heater to Jasmine at discounted rate (lower than the regular rates) and hence, they have extended internal expense fringe benefits. As a result, the company would be liable for FBT implications (Wilmot, 2014).
Regular price of heater = $2,600
Discounted price of heater given to Jasmine = $1,300
Step 1: Total amount of internal expense fringe benefit
Non- cash benefit (internal expense fringe benefit amount) = Regular price of heater- Discounted price of heater given to Jasmine
Step 2: 75% of selling price
Step 4: Amount saved due to discounted price
Amount saved
Step 4: Gross up rate
According to Goods and Service Act 1999, car is defined under type 1 goods and thus, the gross up rate of car for year ending 31 March 2018 would be 2.0802.
Gross up rate of car = 2.0802
Step 5: Taxable value
Taxable value = Amount saved * gross up rate of car
Taxable value
Step 6: Fringe benefits tax rate
The applicable fringe benefits rate is 47% for the year ending 31 March 2018.
Step 7: Fringe benefits tax liability
FBT liability
The FBT liability in case of internal expense fringe benefit is $635.5.
Part b
Jasmine utilizes $50,000 to buy Telstra’s shares instead of providing her husband to do the same. In this case, the interest amount saved in the form of interest would also be taken into calculation for deduction on the part of Rapid Heat. It is because $50,000 has been used by employee to derive income and hence, the incremental deduction would be available.
Incremental deduction
The incremental deduction of $500 would drop the FBT payable for Rapid Heat and would be deducted from the net amount of FBT payable computed in part a.
References
Barkcozy, 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. (Deutsch, et.al., 2015)
Gilders, F, Taylor, J, Walpole, M, Burton, M. and Ciro, T (2016) Understanding taxation law 2013. 6th ed. Sydney: LexisNexis/Butterworths
Hodgson, H., Mortimer, C. and Butler, J. (2017) Tax Questions and Answers 2016. 6th ed. Sydney: Thomson Reuters.
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
Wilmot, C. (2014) FBT Compliance guide. 6th ed. North Ryde: CCH Australia Limited.
Woellner, R. (2016) Australian taxation law 2014. 8th ed. North Ryde: CCH Australia.
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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