Question 1
Client is investor and also collects antique items. During the year 2017/2018 she has performed transactions involving sale of various assets which need to be discussed and net capital gains needs to be computed for year end 31 March 2018.
Pre- CGT asset
Capital gains tax (CGT) is not levied on the pre-CGT asset which is highlighted in s. 149 (10), Income Tax Assessment Act 1997. Therefore, it is pre-requisite to determine whether the asset is defined as pre-CGT asset or not. Pre-CGT assets are those that the concerned taxpayer acquired before 20 September 1985 (Barkoczy, 2015).
Transaction event
The nature of transaction made for sale of asset will be defined as A1 event in accordance of s. 104-5 and the capital gains or capital losses will be estimated after determining the cost base of asset and deducting the same from sale price (Woellner, 2014).
Cost base of asset
In order to determine the cost base of the asset, the five essential factors needs to be found and sum of these factors will be the cost base (Gilders et. al., 2016).
Sale proceeds = $320,000
Acquisition price = $100,000
Acquisition date = 2001 (Not pre-CGT asset)
Incurred expenses payable in local council, water/sewerage rates, land taxes = $20,000
Balance of sale proceeds will be received = January 3 of next tax year
It is evident from the acquisition date (after 20 September 1985) that land is not defined as pre-CGT asset in accordance s.149 (10), ITAA 1997. Further, in accordance of TR 94/29, the sale proceeds will be taken for calculation for the current tax year irrespective of the fact that the balance payment of sale agreement will be received in next tax year and contract enactment has been done in current year only (Coleman, 2016).
Long term capital gains correspond to those capital assets having holding period greater than 1 year period. For such cases, 50% rebate on the total amount for capital gains/loss estimation can be availed as per s. 115-25 (Sadiq et. al., 2016).
Acquisition price of bed = $3,500
Acquisition date = 21 July 1986 (Not pre-CGT asset)
Market value of bed as valued for insurance purpose = $25,000
Proceeds received under household contents policy by insurance = $11,000
Alteration for installation of innerspring mattress for value enhancement of bed = $1,500
It is evident from the acquisition date (after 20 September 1985) that bed is not defined as pre-CGT asset and also, A1 event transaction in accordance s.149 (10), ITAA 1997. The antique bed is classified under collectables (Capital asset) as per TD 1999/40. However, it is critical to note that the sale proceeds amount must be higher than $500 (Deutsch et. al., 2016). Acquisition price of bed paid by client is $3,500 and therefore, bed will be classified under collectables (capital asset). Long term capital gains arise on those assets that have holding period greater than 1 year period and are eligible for 50% rebate on the total amount for capital gains/loss estimated as per s. 115-25 (Barkoczy, 2015).
Acquisition price of painting = $2,000
Acquisition date = 2 May 1985 (Pre-CGT asset)
Sale proceeds = $125,000
The acquisition date is 2 May 1985 i.e. earlier than 2 September 1985 and thus, painting will be a pre-CGT asset. Capital gains tax (CGT) is not levied on the pre-CGT asset which is highlighted in s. 149(10), Income Tax Assessment Act 1997. Thereby, no CGT will be levied on client for the sale proceeds received from painting (Coleman, 2016).
Client has sold four different shares and therefore, the treatment for each of share is highlighted below (Woellner, 2014).
Acquisition date = 2001 (Not pre-CGT asset)
Price per share = $15
Sale proceeds per share = $47
Brokerage fees =$550
Stamp duty on cost of buying = $750
Total incidental cost = $550 +$750 =$1300
Capital gains = ($47*1000) – ((15*1000) +1300) =$30,700
Holding period higher than a year: Long term capital gains
Acquisition date = 2001 (Not pre-CGT asset)
Price per share = $12
Sale proceeds per share = $25
Brokerage fees =$1000
Stamp duty on cost of buying = $1500
Total incidental cost = $1000 +$1500 =$2500
Capital gains = ($25*2500) – ((12*2500) +2500) =$30,000
Holding period higher than a year: Long term capital gains
Acquisition date = 2004 (Not pre-CGT asset)
Price per share = $5
Sale proceeds per share = $0.50
Brokerage fees =$100
Stamp duty on cost of buying = $500
Total incidental cost = $100 +$500 =$600
Capital loss = ($0.5*1200) – ((5*1200) +600) =$6,000
Holding period higher than a year: Long term capital gains
Acquisition date = Current tax year (Not pre-CGT asset)
Price per share = $1
Sale proceeds per share = $2.50
Brokerage fees =$900
Stamp duty on cost of buying = $1100
Total incidental cost = $900 +$1100 =$2000
Capital loss = ($2.5*10000) – ((1*10000) +2000) =$13,000
Holding period lesser than a year: Short term asset.
Capital gains for all the four shares:
Acquisition price of violin = $5,500
Acquisition date = 1 June 1999 (Not pre-CGT asset)
Sale proceeds = $12,000
Violin sold by taxpayer is an asset of personal use and she played it every day for entertainment and hence, it will not be termed as collectables. Personal use asset are subject to the CGT levied on taxpayer only when the taxpayer has paid the acquisition price higher than $10,000 and is not pre CGT asset. Here, violin sold on behalf of taxpayer is not pre-CGT asset but the acquisition price is lesser than $10,000 (Sadiq et. al., 2016). Thus, no capital gains or loss would arise from the sale of violin.
Fringe Benefits Assessment Act 1986 provides various underlying information related to the tax treatment of fringe benefits given to the employee by employer. These benefits are not taxable on the part of employee irrespective of fact that the benefits are extended to employees or employee’s family members. Hence, the fringe benefit tax (FBT) liability will be levied on employer and he/she will be accountable to pay the FBT on the extended fringe benefit for the respective FBT year (Gilders et. al., 2016).
Car
Employer may extend car to their employee so that the respective employee can use car for personal work. In such cases, the employer is extending car fringe benefits to employee in accordance of s.8, FBTAA86 (Woellner, 2014).
Statutory formula to calculate the FBT payable on car fringe benefit is shown below.
Loan of $500,000
Employer may extend financial help to their employees. However, this help would amount to loan fringe benefit when the rate of interest is equal to zero or lesser than the benchmark interest rate as announced by the Reserve Bank of Australia for the given tax year (Deutsch et. al., 2016).
Rapid Heat extends loan of $500,000 to Jasmine. This would be classified as loan fringe benefit because the rate of interest charged by Rapid Heat was 4.25% whereby, the Reserve Bank of Australia has announced the benchmark interest rate under TD 2017/3 for year ending March 31 2018 is 5.25% which is clearly lower than this rate (4.25% <5.25%). Hence, the loan fringe benefits tax is payable by Rapid Heat.
The loan has been extended to Jasmine in the middle of financial year which is on 1 September 2017 and therefore, the number of days of loan available to Jasmine will be counted between 1 September 2017 and 31 March 2018.
Period between 1 September and 31 March 2018 = 212 days
Number of days in FBT year = 365 days
Interest saving will be calculated as highlighted below.
Gross up rate is applied as 1.8868 (for 31 March 2018) because loan is classified as TYPE 2 goods under the Goods and Service Act 1999 (Krever, 2016).
Grossed up value = Interest saving × Gross up rate = $2904.12 × 1.8868= $5479.5
The fringe benefits tax rate applied here would be 47% for the financial year ending 31 March 2018.
Fringe benefit payable = 47% of grossed up value = 47% × $5479.5 =$2575.35
Question 2
The amount of loan ($50,000) which she lent to her husband with no interest to make the purchase of shares in Telstra would not be available for any deduction for Rapid Heat. Further, $450,000 that has taken by Jasmine herself to purchase holiday home would be available for tax deduction by Rapid Heat when the home will generate income for her in the form of rent amount (Coleman, 2016).
Electric Heater
Any internal non- cash benefits that are given on the part of employer to employee will be classified under internal expense fringe benefit. These expenses may be in the form of company’s product at cheaper rate or for free of cost (Woellner, 2014).
Rapid Heat Ltd offers their own manufactured electric heater for $2600 to their customer. However, the price for which it has been given to Jasmine was only $1300. It represents that Rapid Heat has halved the price of the electric heater when the customer is Jasmine. It indicates that Rapid Heat has given internal expense fringe benefit to Jasmine.
Concession amount = $2600 – $1300 =$1300
Saving with respect to concession price = (75% of $2600) -$1300 =$650
Gross up rate is applied as 2.0802 (for 31 March 2018) because electric heater is classified as TYPE 1 good under the Goods and Service Act 1999.
Grossed up value = saving with respect to concession price × Gross up rate = 650*2.0802 =$1352.1
The fringe benefits tax rate applied here would be 47% for the financial year ending 31 March 2018.
Fringe benefit payable = 47% of grossed up value = 47% × $1352.1 =$635.5
(b) Let the amount of loan which she has offered to her husband to make the purchase of shares in Telstra be used by herself only to perform the same, then this amount will also be taken for the deduction by Rapid Heat since income in the form of dividends would be produced. The total liability of Rapid Heat will be reduced by the sum amount found from the deduction on the account of $50,000. (Krever, 2016).
The payable amount in fringe benefits tax computed in above part will be reduced by $500 when the $50,000 will be realised against the shares purchased by Jasmine.
References
Barkoczy, S. (2015) Foundation of Taxation Law 2015. 9th ed. Sydney: Oxford University Press.
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., & Snape, T. (2016) Australian tax handbook. 8th ed. Pymont: Thomson Reuters.
Gilders, F., Taylor, J., Walpole, M., Burton, M. & Ciro, T. (2016) Understanding taxation law 2016. 9th ed. Sydney: LexisNexis/Butterworths.
Krever, R. (2016) Australian Taxation Law Cases 2016. 2nd ed. Brisbane: THOMSON LAWBOOK Company.
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, & Ting, A (2016) , Principles of Taxation Law 2016, 8th ed., Pymont: Thomson Reuters
Woellner, R (2014), Australian taxation law 2014 7th ed. North Ryde: CCH Australia
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