Sale of Assets and Applicable Taxation Rules

The given information highlights that there has been sale of multiple assets during 2017/2018 tax year. The objective is to offer tax advice to client in wake of these transactions with reference to the applicable taxation rules and the details of the transactions.

In wake of the transactions involving sale of certain assets, it needs to be highlighted as to the proceeds would be having capital nature or revenue nature. Both the possibilities arise when an item is sold. Selling of property as a trading stock would bring in revenue receipts since the underlying taxpayer would be assumed to have a business dealing with real estate. On the contrary, the proceeds from the sale of a property in which the taxpayer had bought for investment purposes would yield capital proceeds (Barkoczy, 2017). It is essential to differentiate between these two proceeds since revenue proceeds would contribute to assessable income in sharp contradiction to capital proceeds which would not be levied any taxation burden. However, tax can be applied for capital transactions by way of taxing the capital gains in the process (Wilmot, 2014).

CGT relief can be availed by a particular asset class known as pre-CGT asset. In order to belong to this class of assets, it is necessary that the asset purchase should have been concluded when there was no taxation of the capital gains resulting from liquidation of capital assets. This would imply that the time would lie before September 20,1985 as on this date CGT was introduced by the Australia government (Austlii, 2018 a). Thus, assets purchased prior to this date would not attract any CGT related liability.

While the above category provides a blanket exemption to a host of asset classes, there are certain other limits which provide relief to specific asset classes.  One of these would be collectables where it is necessary that a threshold of $ 500 has to be crossed in the buying price so as to ensure that applicability of CGT is there (Barkoczy, 2017). Any collectable bought for lesser price would not attract any CGT. A threshold tends to exist for assets kept for personal use also where the minimum purchase price ought to exceed $ 10,000 for application of CGT. Failure to reach that level in terms of buying price would provide exemption from CGT (Woellner, 2017).

The calculation regarding CGT liability involves a host of steps that ought to be followed.  The initial step is the taking place of a CGT event which triggers the need to compute potential capital gains on the underlying transaction. A list of possible CGT event is drawn in s. 104-5 but these are not relevant to the current discussion and hence the focus is only limited to a particular event called as A1 which deals with the situation involving asset disposal (Reuters, 2017). Further, this event also highlights the precise mechanism in which the underlying capital gains may be found.

Distinction between Capital and Revenue Proceeds

In this process, a crucial input is required in the form of cost base. The starting point of the cost base is the asset purchase price but it is not limited to this only as has been indicated in s. 110-25(1) which clearly cites that there are in total five elements whose sum actually comprise the asset base as indicated below (Austlii, 2018 b). 

For every asset, all the above elements may not occur and hence the cost base determination would proceed with the elements known.

With the computation of cost base, it might be possible to derive the underlying capital gains but these cannot be taxed as s. 102-5 requires that potential capital losses either extracted from the asset sale in current year or brought forward from past need to be first balanced so as to derive the net capital gains (Krever, 2017). It is imperative to note that while for other assets, the capital losses may be adjusted against capital gains of any other asset class also but in collectables, the capital losses ,may be adjusted only against the same asset class only or rolled over to future  (Nethercott, Richardson and Devos, 2016).

The net capital gains after accounting for the capital losses are provided concession in the form of indexation method and discount method. These can enable lowering of capital gains provided the respective conditions required by each are fulfilled (Reuters, 2017). Indexation method has limited utility post the allowance of discount method in 1999 and primarily applies to asset bought before 1999 whose cost base can be inflation adjusted to lower taxable capital gains. Discount method (s. 115-25) is able to provide a flat 50% discount to the capital gains provided these are long term in nature. The gains would be long term when the underlying asset from which these arise would have a holding period which was greater than a year. The capital gains hence derived would be applied CGT at the rate of 30% to highlight the tax liability for the taxpayer (Coleman, 2016).

In liquidation of capital assets, often situation arises whereby a timing mismatch exists between the two events namely the contract of sale and the proceeds of sale receipt (Sadiq, et.al., 2015). This is typical of transactions involving land, property as the receipt amount may be significant and hence some period may be provided to the buyer to make the complete payment thereby leading to ownership transfer of the asset (Wilmot, 2014). This may lead to situation where the above two events fall in different tax year and hence decision regarding timing of CGT ought to be taken. TR 94/29 highlights that in such situation, the tax consequences must be levied in the year when the sale contract is executed and the timing of the proceeds does not matter (ATO, 1994).

CGT Relief and Computation of CGT Liability

The information about client clearly highlights that the sale of the various assets does not comprise business transactions. Also, it is known that the client is an investor and collector. Hence, this information leads to the conclusion that the underlying receipts would be essentially capital as the client is not dealing with these assets as business transactions.  Considering the receipts nature as capital, the taxation burden on the receipts would not be present.  Thus, the only possible tax that could be levied on the client is the CGT based on the underling capital gains realised.

Considering the various assets that have been sold on behalf of the client, it needs to be determined if any of these falls within pre-CGT asset class based on the date on which these were bought. This has been performed and it has been realised that only one asset namely painting can be termed as a pre-CGT asset. All the other assets which have been liquidated were acquired after September 19, 1985 and CGT was in place at these times. The result is that there would not be any CGT burden on the painting.

One of the collectables sold is the antique bed which has a purchase price of $ 3,500 thereby staying above the minimum threshold of $500 for application of CGT. Also, an example of an asset for personal use is violin. This can be said considering the fact that the client uses violin for her own entertainment and plays the violin quite well and often. For CGT liability to arise on this asset, the threshold value of $ 10,000 as purchase price need to be crossed which violin has failed to do and thereby it is exempt from the application of CGT related liabilities.

Considering the discussion of the applicable law and the information provided about the various assets, the respective taxable capital gains computation is proceeded with in the outlined manner exhibited below.

In relation to land related sale, it is known that the sale contract has been executed in the current year but the proceeds would be provided by the buyer only in the next tax year. Thus, the client should realise on TR 94/29 to decide on whether the resultant CGT consequences should be represented in the current year or the next year.  It would be appropriate that based on the contractual terms, the CGT consequences are reported in the given year only.

Fringe Benefits Tax Assessment and Employer’s Liability

Conclusion

In line with the computations performed, it would be fair to conclude that the next taxable capital gains amount to $139,100. Further, violin and painting are two assets which would not attract any CGT while land related CGT consequences would be reported in current tax year only. 

The key aim is to outline the FBT liability that would arise for the employer based on the key fringe benefits that have been passed on to Jasmine, who is employed by Rapid Hear. The reference to suitable provisions of Fringe Benefits Tax Assessment Act 1986 or FBTAA 1986 would be made in this regards.

In wake of the FBTAA 1986, the various fringe benefits that have been provided to the employee ought to be discussed as exhibited below (ATO, 2018 b).

• Car Fringe Benefit

Section 8 highlights that if the employer is providing an employee car along with requisite permission for personal use in this regards, then it can be assumed that there has been extension of car related fringe benefits. Hence, the key aspect is that car use must not be limited to only professional use.  For determining the associated FBT liability on the employer, the following steps may be done (Reuters, 2017).

 1) Compute the car related value of fringe benefit provided (s. 9) 

Key inputs:

• Base value = Car buying price – Employer paid repair cost
• Number of days for which the employer has the car for private use available. Deductions only possible when car undergoing major repair or non-availability of car but employee willing to use.

2) The taxable value associated with these fringe benefits ought to be revealed by taking the gross up factor and multiplying the same with the output of the first step.

3) The liability in relation to FBT on employer ought to be revealed by taking the applicable FBT rate for the concerned assessment year and multiplying the same with the output of the second step (ATO, 2018 b).

• Loan Fringe Benefit

Providing loan to employees at subsidized interest rate amounts to presence of loan fringe benefits as employee would enjoy savings in relation to interest payment. Ideally, the minimum interest rate charged ought to be RBA benchmark rate which is provided every year. Extension of loan amount at rate lesser than the RBA benchmark rate would result to providing employee with loan fringe benefit. For determining the associated FBT liability on the employer, the following steps may be done (ATO, 2018 a).

1) Compute the total interest payment savings reaped by employee based on the given assessment year considering the RBA rate, employer interest rate and date of loan extension.

2) The taxable value associated with these fringe benefits ought to be revealed by taking the gross up factor and multiplying the same with the output of the first step.

Conclusion

3) The liability in relation to FBT on employer ought to be revealed by taking the applicable FBT rate for the concerned assessment year and multiplying the same with the output of the second step.

Possible deduction is available for employer in FBT liability on account of this fringe benefit is assessable income is produced by employee (and not any associates) through the use of proceeds extended through loan (Woellner, 2017).

• Internal expense fringe benefit

These benefits are extended when employer tends to pay for the personal employee expenses. Internal expense fringe benefit is a specific case of expense fringe benefit which would arise when the payment occurs on behalf of employer to enable the employee to purchase a product manufactured by the employer only. For determining the associated FBT liability on the employer, the following steps may be done (Barkoczy, 2017). 

2) The taxable value associated with these fringe benefits ought to be revealed by taking the gross up factor and multiplying the same with the output of the first step.

3) The liability in relation to FBT on employer ought to be revealed by taking the applicable FBT rate for the concerned assessment year and multiplying the same with the output of the second step (Coleman, 2016).

Application

• The computation of liability in relation with FBT to be levied on Rapid Heat in the wake of laws highlighted above is indicated as follows.

There is existence of fringe benefits in this scenario as Jasmine has the right to personal use of employer owned car.  Further, deduction for days is disallowed in view of minor repairs and also spending time at airport parking as it is assumed that these do not hamper availability of car. 

The RBA benchmark rate for the assessment year is 5.25% p.a. while the employer charges 100 basis points lesser, thereby providing loan fringe benefit leading to savings of interest payment staring from September 1 to be continued till year end. 

The loan provided is divided into two components. One component is expected to produce some rebate in FBT for Rapid Heat as the holiday home purchased by Jasmine may act as a source of taxable income for Jasmine. However, the other component would not provide any FBT relief as  the same is used by associate (husband).

The employer producer electric heater and provides to buyer @ 2,600 per heater. In case of Jasmine, half of the amount is paid by employer and hence Jasmine only has to pay $ 1,300 to buy the heater. 

• The component of loan earlier utilised by husband is not brought back to Jasmine who utilises it for the same purpose as her husband. Assessable income generation is possible in terms of dividends received on shares held and incremental FBT reduction to the tune of $ 500 may arise as demonstrated below. 

Conclusion

It would be correct to conclude that the employer would have to pay FBT on account of the fringe benefits doled to Jasmine while no liability would fall on Jasmine. Some deduction in FBT for employer could be viable based on the utilisation of the loan proceeds by Jasmine.  

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) Loan Fringe Benefits https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Types-of-fringe-benefits/Loan-fringe-benefits/ (Accessed: 30 September 2018)

ATO, (2018 b) Fringe Benefits Tax- A Guide For Employers. https://law.ato.gov.au/atolaw/view.htm?DocID=SAV%2FFBTGEMP%2F00010 (Accessed: 30 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: 30 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: 30 September 2018)

Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9^th ed. Sydney: Oxford University Press.

Coleman, C. (2016) Australian Tax Analysis. 4^th ed. Sydney: Thomson Reuters (Professional) Australia.

Krever, R. (2017) Australian Taxation Law Cases 2017. 2^nd ed. Brisbane: THOMSON LAWBOOK Company.

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.

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. 6^th  ed. North Ryde: CCH Australia Limited.

Woellner, R. (2014) Australian taxation law 2014. 8^th ed. North Ryde: CCH Australia.