The issue is to extend advice to client (taxpayer) about her taxation consequences based on the type and nature of the transactions which have been done in regards to disposal of selected few assets.
Law
Classification of Receipts
The derived receipts from disposal of an asset can be either capital receipt or revenue receipt. The determination of type of receipt is an imperative factor because if the receipt is categorised as revenue receipts, then the relevant taxation consequences applied on the receipts would be under s. 6(5), ITAA 1997. However, when the receipts are capital receipts, then the relevant tax legislation is Capital Gains Tax (CGT) (Sadiq, et.al., 2015). The main aspect to draw the exact type of receipt is the source and intention of the taxpayer while disposing the assets. If the taxpayer is running a business which includes trading assets, then the receipts will be revenue receipts and business transaction will be deriving ordinary income (Barkoczy, 2017). Further, when the taxpayer does not engage in business based on trading assets and disposes the capital assets then the derived sale proceeds will result in either capital gains or capital losses which will be taxed as per CGT (Nethercott, Richardson and Devos, 2016).
CGT Applicability
The CGT would be applied on those assets which are not pre-CGT asset (purchased before September 20, 1985) as these belong to the period which is after the CGT legislation was implemented. This would be the first step to check the whether the disposed asset is pre-CGT or not (Hodgson, Mortimer and Butler, 2016).
There are some cases where CGT will not be applicable even though they are not pre-CGT asset. Likewise, if an asset is collectable of the taxpayer then CGT will be enforceable only if the total amount spent by taxpayer for procuring the asset is higher than $ 500 as described in s. 118(10) ITAA 1997 (Sadiq, et.al., 2015). Also, if an asset is personal use asset of the taxpayer then CGT will be enforceable only if the total amount spent by taxpayer for procuring the asset is higher than $ 10,000 as described in s. 108-20(1) ITAA 1997.
Computation Essentials
The capital assets disposal (for the given case) is termed as a CGT event and falls under A1 event and therefore, the formula has been taken for A1 event only under s. 104(5) ITAA 1997 (Nethercott, Richardson and Devos, 2016). This implies that cost base of asset and income from disposed assets constitutes the two main factors for capital gains or losses computation. The cost base comprises five elements which are listed below under s.110 (25) ITAA 1997 (Wilmot, 2014) (Gilders, et. al., 2015).
Elements of Cost Base
Application
For the given scenario, the applicable tax legislation is CGT as the taxpayer has capital assets which she has disposed. Also, she has not carried any business activity by engaging in asset sale. Whether the asset is pre-CGT or not is represented in the table given below.
Land Block: Block of land has been sold in year 2017/18 but taxpayer will be able to receive the sale proceeds in 2018/19 and thus, as per TR 94/29, the expected CGT consequences will be realised in 2017/18 only. The capital losses which are carried forward from last year would be cancelled from the produced capital gains. Further, as indicated from the above, the holding period of asset is higher than a year and 50% discount will be provided as exhibited below.
Antique Bed: CGT will be enforceable only if the total amount spent by taxpayer for procuring the asset (collectable) is higher than $ 500. It is apparent that the procuring amount is $3500 for antique bed. It indicates that the requisite condition is met and thus, CGT will be applicable.
Shares: None of the shares fall in the category of pre-CGT asset and cannot escape CGT liability. However, discount under s.115-25 would be applicable to shares leading to long term capital gains while not being provided to those which would yield short term capital gains.
Painting: It is categorised as a pre-CGT asset and thereby immune from application of CGT.
Violin: Violin can be identified both as a collectable or a personal use item. The latter seems more suitable considering that the client is using the violin on continuous basis for personal entertainment. Further, the cost price of the violin does not exceed $ 10,000 and hence immune from CGT application.
Conclusion
Cumulative capital gains
Question 2
Issue
Fringe Benefit Tax payable (FBT payable) would be computed based on the given information in which the employer ‘Rapid Heat has extended three benefits to employee “Jasmine.”
Law
The “Fringe Benefit Tax Assessment Act 1986 (FBTAA 1986)” is used to analyse the given benefit based on the relevant sections (Reuters, 2017).
Car fringe benefit:
As per s. 7 FBTAA1986, if employer has issued the permission to employee to take the car for his/her own work, then it is assumed that car fringe benefits are extended (Deutsch, et.al., 2015). The FBT will be payable by employer and the beneficiary who takes the car in use for personal purposes will not be held responsible for FBT burden. The total amount of car fringe benefit for personal use of the employee will be calculated through statutory procedure s. 9, FBTAA 1986 (Woellner, 2017).
When the employee does not contribute in car purchase then the last variable will become zero. The base value is the amount which would be determined after eliminating the minor repair expenses from the total buying cost of car. The available days will also comprise of the period when car is not used but was available for use (such as in airport parking) and when it has been shifted to garage on the account of minor repair (Nethercott, Richardson and Devos, 2016).
Loan fringe benefit
For assessment year 2017/18, the standard benchmark rate of interest for providing the loan is 5.25% per annum which has been specified by Reserve Bank of Australia. The loan which has been given in year 2017/18 at a lower interest rate than the benchmark rate will lead to extension of loan fringe benefit. The FBT burden is imposed on employer only (Wilmot, 2014). Moreover, the loan which has been realised by employee for production of ordinary income purpose, then the loan amount will lead to production of FBT deduction for employer. However, this deduction would not be available when the loan has been realised by associate of employee for the same purpose (Reuters, 2017).
Expense fringe benefit
Making the payment of personal nature expenses of employee or providing lower price of company’s product would amount to expense fringe benefit (Gilders, et. al., 2015).
For all the above three benefits gross up factor (based on type of goods) will be included while calculating the taxable value of fringe benefit. Further, the FBT rate for the assessment year will also be applied on the taxable value for computing the net FBT payable (Woellner, 2017).
Application
Car fringe benefit: Rapid Heat issued a car to Jasmine clearly for personal work and thus, fringe benefit tax would be payable by Rapid Heat. Moreover, the procurement amount and the minor repair expenses have been paid by Rapid Heat only which will be used to find the exact base value of car. No deductions are available for the parking of car at airport and the time taken for minor repairs at garage.
Loan fringe benefit: Rapid Heat issued loan to Jasmine, clearly for personal work and at concessional interest rate which is 4.25% whereby the standard benchmark rate for 2017/18 is 5.25% p.a. Thus, loan fringe benefit tax would be payable by Rapid Heat.
Tax deduction claim:
90% of loan ($450,000) has spent by Jasmine to purchase a holiday home. This purchase may offer her rent income (ordinary income) if she decided to rent it. In this case, the tax deduction claim can be requested by Rapid Heat.
10% of loan ($50,000) has spent by her husband because she has given this amount to him to buy shares. This share purchase may offer dividend but no tax deduction claim is available because the purchase has been done by her husband.
Expense fringe benefit: The normal price charged from customer for one heater is $2600 whereby, the price charged from Jasmine is $1300. This clearly shows that Rapid Heat has provided concession to Jasmine because the objective of the employer was to provide benefits in terms of paying the personal expense of Jasmine.
Conclusion
All the three benefits given to Jasmine are considered as fringe benefits and the associated fringe benefit tax payable for employer in each of the given case is summarised as follows.
References
Barkoczy, S. (2017) Core Tax Legislation and Study Guide 2017. 2nd 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. 9th ed. Sydney: LexisNexis/Butterworths.
Hodgson, H., Mortimer, C. and Butler, J. (2016) 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.
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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