The provided facts indicate that the taxpayer has disposed multiple assets during the year 2017/18 (Assessment year). The purpose is to consult the taxpayer and extend her a legal advice with respect to the applicable taxation treatment on the derived proceeds.
It is essential to find the nature of proceeds which have been received on the account of disposal. The intention of taxpayer and his/her purpose for disposing the asset is an imperative aspect to differentiate between the nature of receipts being capital or revenue. Selling assets as trading stock would result in revenue receipts because it has been assumed that the concerned taxpayer has sold the assets in the process of his/her business operation only (Gilders, et. al., 2015). However, the capital proceeds will be generated from disposal of the assets of the taxpayer when the objective of the taxpayer is to acquire the capital asset for investment only or so forth. The classification of the proceeds would be thus an essential element with respect to the taxation as the revenue receipts would be taxed under assessable income concepts and the capital proceeds are free from taxation burden. However, the capital transaction would be brought under CGT for any derived capital gains (Deutsch, et.al., 2015).
Relief would be provided to taxpayer on the account of sale of a pre-CGT asset. The question arises here is to find which of the assets are categorised as pre-CGT asset because CGT burden is not applied on pre-CGT asset. When the procurement time of the asset is before September 20, 1985, then it would be known as pre-CGT asset as highlighted in s. 149(10) (Hodgson, Mortimer & Butler, 2016). It is because the CGT implication on the capital gains resulted from the capital proceeds has been incorporated on September 20, 1985 by Australian government. Therefore, assets belongingto the period before this date would not attract any CGT consequences on the taxpayer (Gilders, et. al., 2015).
Along with the above underlying fact, it is also noteworthy that when an asset is classified to collectable or personal use asset, then the special type of condition needs to be completed which are with regards to the net amount spent by taxpayer during purchasing the asset. The spent amount while acquiring the asset should be necessarily beyond the cut off limits which is $500 in case collectable and $10,000 in case of personal use assets. When the above mentioned conditions are met then no CGT exemption is available. Moreover, any asset which is an antique item is represented as collectable and any asset which the taxpayer has used for personal enjoyment on a regular basis would be represented as personal use asset (Reuters, 2017).
There are several steps which need to be taken into account while determining the CGT implications. The transaction of capital assets sale is normally categorised as CGT event which provides the various sub types of events that provides a dedicated procedure to determine the capital gains or losses for each event (Reuters, 2017). For the current case, the transaction is specified as A1 event and thus, cost base and proceeds from disposal would be the two crucial elements of computation of capital gains as highlighted in s. 104-5. The cost base is a function of five different costs or expenses which are paid from initial period of buying till the disposal of the asset. These costs are borne by taxpayer only and have to be cumulatively taken into account which represent the cost base of the asset as highlighted in s. 110-25(1) (Deutsch, et.al., 2015).
Further, the capital gains resulted from the above method would be first brought to adjust the capital losses which have remained unsettled in last year. The capital losses derived from any asset would be compensated against the capital gains derive from capital asset. However, it is essential in case of collectables that capital losses derived from collectable would be settled with the capital gains raised from the sale of collectables only. Further, if the capital losses do remain unsettle, then these losses would be rolled down to future tax year for adjustment (Nethercott, Richardson & Devos, 2016).
The capital gains after considering the impact of the capital losses would be used for CGT based on either of the two methods. Indexation method or discount method. These methods reduce the net capital gains for CGT consequences by providing the concessions. The indexation method has limited application as it can only be taken into account for the assets which are acquired earlier than 1999 (Hodgson, Mortimer & Butler, 2016). In this method, the cost base would be adjusted based on the inflation factor. Further, discount method provides 50% concession on the capital gains which are in the form of the long term capital gains. Such gains would be derived when the ownership period of the asset is more than a year. The net capital gains will be taken for CGT implication which will cause a net CGT burden of 30% of the net capital gains (Coleman, 2016).
The relevant provisions with regards to consideration of the timing of proceeds are defined in TR 94/29 (ATO, 1994). It implies that when the sale proceeds are received in a different tax year in comparison to the sale contract, then the year of sale contract is the year in which CGT would be applied on the potential capital gains from the asset sale (Nethercott, Richardson & Devos, 2016).
It can be said based on the facts that taxpayer does not possess any business carrying motive of selling the trading stock. Further, the taxpayer is an investor and acquired various assets such as land and shares for investment purposes. Moreover, she is also a collector and thus, purchased painting and bed for her collection. She also has interest in violin playing and hence, plays it daily and hence violin is an asset of personal use.
Conclusion
Violin and painting does not result in CGT liability whereas CGT will be applicable on capital gains derived from shares, antique bed and land.
The net amount of capital gains on which CGT would be applied resulting from the capital assets disposal is $136,100.
The major issue of the case study is to ascertain the Fringe Benefits Tax liability for the provided benefits by Rapid heat to Jasmine. Also, a critical analysis with respect to the tax deduction will also be performed for the given situation.
There are some benefits that the employer tends to employee and are known as fringe benefits. These benefits are not in cash form and aimed towards personal favours to the employees. The tax consequences on these benefits are applied on employer only with employee being exempt from any fringe benefit related tax liability (Sadiq, et.al., 2015). It is a special type of tax which is applicable on employer who has issued the benefit but not on the employee who has used the benefit. The various provisions are discussed in “Fringe Benefits Tax Assessment Act 1986.” The FBT computation comprises three main steps which are listed below (Barkoczy, 2017).
Step 1- Amount of fringe benefit
Sep 2: Taxable value of fringe benefit
Step 3: Fringe benefit tax liability
Every step of computation requires special type of rate and procedure which depend on the type of fringe benefit.
The provisions defined in s. 7, FBTAA 1986 refers to the fact that employer extends car fringe benefit to their employee or employee’s associates through providing a car which will be available to employee for personal work. The applicable approach to determine the taxable value of the car fringe benefit is outlined in s. 9FBTAA 1986 (ATO, 2018 b). The taxable value of fringe benefit is the value resulted by multiplying the gross up factor with the amount of fringe benefit (Austlii, 2018). Finally, the taxable value will be used to find the fringe benefit liability by imposing the respective fringe benefit tax rate (Gilders, et. al., 2015).
The necessary condition for loan fringe benefit being given to the employee is that the cost of loan should be charged such that the employee is able to reap savings when compared to the base rate. This base rate is announced by RBA and is called “Benchmark Interest Rate” (Coleman, 2016). For avoiding any loan fringe benefits, employers are expected to adhere to the RBA prescribed rate which serves as a reference. However, any deviation on the lower side of this reference rate results in extension of loan fringe benefits. The total savings by the employee forms the basis of this fringe benefit which is then used to first derive the taxable value and finally the FBT liability (Sadiq, et.al., 2015).
Possible FBT deduction for employer may be possible if loan money is deployed by employee (not relatives) for generation of taxable income (ATO, 2018 a) .
These benefits are provided to employees as per s. 20 when the employer provides financial assistance to pay for any personal expense or liability of the employer. This may also be extended by agreeing to bear part of the payment burden for the acquisition of any good for personal use by the employee. The starting point of computation is the expense savings which is then used to first derive the taxable value and finally the FBT liability (Barkoczy, 2017).
Car is provided to Jasmine by employer company Rapid Heat Pty Ltd for personal work. It represents that car fringe benefit has been given to Jasmine. The total expenses in the form of minor repairing cost which has also paid by employer will be deducted from net purchase cost of car so as to find the capital value of car. Car has been purchased on May 1, 2017 and on this day only Rapid Heat issued the car to Jasmine and thus, total days of car availability is 335 days. No deduction in this regards are available for the period of car being parked at the airport as it was available for use but no one was available to use the car. Similarly, days of minor repairs are not considered for providing time related deduction.
Rapid Hear provided financial assistance to Jasmine in the form of loan of $ 500,000. Also, it can be observed that the offered interest rate (4.25% p.a.) is not at the benchmark interest rate (defined by RBA) and was comparatively lower than the rate recommended by the RBA (5.25%) for the year. Hence, the conclusion can be drawn with regards to extension of loan fringe benefit to the employee.
Loan proceeds are used in the following manner.
Jasmine intended to purchase the electric heater which Rapid Heat manufacturers. The company retails the product at $ 2,600 per piece. However, Jasmine potentially cannot afford this expense and hence the company has agreed to pay 50% on her behalf and in the process reduced her personal expense related to the heater by $ 1,300.
Conclusion
It would be appropriate to consider that the Jasmine has obtained fringe benefits under s. 7, s.16 and s. 20. The respective amounts payable by Rapid Heat as FBT have been computed in accordance with the relevant provisions of FBTAA 1986.
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: 30 September 2018)
ATO, (2018 a) Fringe Benefits Tax- A Guide For Employers. https://law.ato.gov.au/atolaw/view.htm?DocID=SAV%2FFBTGEMP%2F00010 (Accessed: 30 September 2018)
ATO, (2018 b) Loan Fringe Benefits https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Types-of-fringe-benefits/Loan-fringe-benefits/ (Accessed: 30 September 2018)
Austlii, (2018) A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999.[Online] https://classic.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/s148.html (Accessed: 30 September 2018)
Barkoczy, S. (2017) Core Tax Legislation and Study Guide 2017. 2nd ed. Sydney: Oxford University Press Australia.
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters (Professional) Australia.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., & Snape, T. (2015) 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.
Hodgson, H., Mortimer, C. & 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., & 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., & Ting, A. (2015) Principles of Taxation Law 2015. 7th ed. Pymont: Thomson Reuters.
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