Issue

Issue

Taking into consideration the information provided with regards to the disposal of assets by the client, the key objective is to analyse these transactions in wake of the prevalent statutory rules and provide guidance in regards to the appropriate tax implications of these for the 2017/2018 year.

Law

The first aspect to consider is whether the receipts are revenue or capital. The capital proceeds are non-taxable and hence different from revenue receipts. With regards to liquidation of assets, the proceeds would be capital provided that the underlying assets are not trading stock. This would happen if the underlying taxpayer is not engaged in a business regarding the buying and selling of the asset but is rather an investor in assets (Wilmot, 2014).

If the underlying proceeds are capital, even though there is no tax on the proceeds but any increase or decrease in capital proceeds arising from the cost base may be subject to Capital Gains Tax (CGT).  In relation to determining the requisite implications and application of CGT on potential capital gains and losses, the following aspects are noteworthy.

• A relevant rule that applies in relation of application of CGT is that the sale of a pre-CGT asset would not give rise to CGT consequences as the resultant capital gains or losses would be ignored as per s. 149-10 ITAA 1997 (Barkoczy, 2017). Hence, it is essential to list down assets which would be categorised as pre-CGT assets. The defining characteristic of these pre-CGT assets is that these have been acquired before the cut-off date for application of CGT. This threshold or cut-off date is September 19, 1985 and thereby assets procured before this date would be considered as exempt from CGT (Hodgson,Mortimer and Butler, 2016).

Every time a CGT event happens, it is imperative to compute the capital gains or losses on the asset. There are various kinds of CGT events and a summary of these is presented in s. 104-5 ITAA 1997. The capital event of interest for this given case is event A1 which is caused when an underlying asset is disposed. The capital gains or capital losses determination on the basis of A1 event is derived by relying on difference of the proceeds from sale of asset and the underlying cost base of asset (Nethercott, Richardson and Devos, 2016).

• Proceeds from sale refer to the amount that would be realised by the taxpayer when the underlying asset is disposed. On the other hand, cost base of asset comprises of five components that are highlighted as per s. 110-25 ITAA 1997 (Gilders, et. al., 2015). These are summarised below.
• Another key issue which is of significance here is to decide on the tax treatment when the sale contract enactment and related proceeds do not occur in the same tax year. In such a scenario, it is recommended that the respective tax treatment ought to be considered in the year when the contrast for sale is executed. This has been highlighted by TR 97/29 (Wilmot, 2014).
• With regards to definition of collectables in accordance with s. 118-10, antique is one of the components. In relation to collectables, CGT imposition has a key condition with regards to minimum acquisition price being higher than $ 500. If the above condition is not complied with, than no CGT would be applicable on any capital gains or capital losses arising from the sale of the collectable(Woellner, 2017).
• It is imperative to segregate items of personal use for the taxpayer for the collectable considering the fact that the CGT consequences for the two can differ. A significant condition attached with personal use items is the frequent use by taxpayer for entertainment. Further, as per s. 108-20(1), it is essential that this asset must have been acquired for cost in excess of $ 10,000 or CGT exemption would arise for the asset. Thus, the logical conclusion is that for any personal use asset purchased for $ 10,000 or lower amount, no CGT would be levied.
• In relation to capital gains that are levied CGT, a particular concession that is available for individual taxpayer is mentioned in s. 115-25 ITAA 1997. This is referred to as discount method and was introduced in the amendments done to CGT regime in 1999. As per this clause, for long term capital gains arising on any asset, a 50% debate can be claimed by the individual taxpayer and small businesses.

Application

In FY2018, client has liquidated five capital assets and the resultant implications need to be worked out. The status of the various assets with regards to them being classified as pre-CGT asset is summarised in the table below.

The above table clearly reflects that only one pre-CGT asset occurs in the list of assets which is essentially painting and all the other asset have been acquired only after CGT era has begun (Reuters, 2017).  Hence, for the other asset, there would not be any relief from CGT on the basis of their respective purchase dates. However, in case of painting, relief from CGT to the extent of 100% would be available on this asset without any conditions related to amount of capital gains or capital losses along with the holding period by the taxpayer.

Law

Block of vacant land

Acquisition cost of land (January 2001)

The agreed sale value of the land as per the contract =

Incidental costs during the holding period (s. 110-25(3) ITAA 1997) 

Hence, land asset related cost base in accordance with s. 110-25 =

Capital gains (as per A1 capital event) = Proceeds from land sale ($320000) – Cost base of land ($120,000) = $200,000

Capital loss adjustment as per s. 102-5 1TAA 1997 would be required as previous losses of $ 7,000 ought to be adjusted.

Antique bed

As discussed, any antique item falls within the ambit of collectable. Also, the condition with regards to minimum acquisition price of $ 500 has been fulfilled in this case as the antique bed cost $ 3,500 at the time of acquisition (Wilmot, 2014).

Acquisition Price of Bed (July 21, 1986)

Expenses undertaken by client with a view to improve the value of bed through the use of mattress (s. 110-25(5) ITAA 1997)

Hence, bed asset related cost base in accordance with s. 110-25

Proceeds on account of insurance for stolen bed = $ 11,000

Capital gains (as per A1 capital event) = Proceeds from insurance ($11000) – Cost base of antique bed ($5,000) = $ 6,000

Also, it is noteworthy that there is capital loss owing to sculpture worth $ 1,500 which is carried forward to the current year. 

Painting

No capital gains tax liability would be levied on the client due to sale of painting as has been explained previously.

Shares

The computation of the capital gains in accordance with the A1 capital event formula is stated below for the four shares.

In the computation of the above taxable capital gains on account of shares, adjustment has been made with regards to long term capital gains on three shares and short term capital gains on one share by ensuring that 50% discount is applicable only to the shares which lead to long term capital gains (Krever, 2017).

Violin

With regards to violin, it is apparent that the asset is for personal use as derived from following observations.

• The client likes playing violin and is skilled towards the same.
• She plays the various violins not for any income derivation but for personal pleasure and satisfaction.
• She has a huge violin collection with herself.

A key aspect of the violin which the client has been liquidated is the purchase price which was only $ 5,500 and thereby failed to cross the threshold limit of $ 10,000 set for these assets by s. 108-20(1) ITAA 1997. Thus, the CGT on the underlying capital gains would not be levied and the client would not have to pay any tax on the capital gains realised from this transaction.

Application

Conclusion

The above computations clearly reflect that capital gains subject to CGT owing to all the transactions discussed above amount to $139,100. In the process the previous capital losses that were extended to the given year were also taken into consideration.

Question 2

Issue

The central concern in the given case is to offer advice to employer (Rapid Hear) in relation to FBT liabilities that would be levied on account of the various fringe benefits that are doled out to employee Jasmine.

Law and Application

The description of these benefits along with the particular manner in which the FBT liability on these ought to be computed is exhibited in Fringe Benefits Tax Assessment Act 1986. A key feature which ought to be highlighted since it differs from other taxes in the sense that in case of fringe benefit, the tax burden does not fall on the beneficiary but rather on the entity that provides the benefit. However, the benefit provider can usually claim deduction on these benefits as these are related to assessable income production (Sadiq, et.al., 2015).

Car fringe benefit

A car owned by employer may be provided to employee and this car use may not be limited to only use for professional purpose. As per s. 7, such a situation gives rise to car fringe benefit being provided to employee since profession use car is imperative but there is no obligation on the part of the employer to provide a car for personal use of the employee (Barkoczy, 2017).  The quantum of car fringe benefit may be computed as per s. 9 FBTAA 1986. In this regards, the car capital value involves deduction of repairs from the cost of car.

Also, a crucial factor is the time duration within the given year when the employee had the car for private usage. Deduction for days is only available for any major repairs but not for small repairs. Additionally, if the employee is out of the town but the car is parked at any parking including airport, then deduction in availability would not be entertained (Krever, 2017).

Also, car is a product which attracts GST and hence is categorised as Type 1 good which would imply a gross up factor value of 2.0802. Also, the FBT rate for the 2017/2018 year is 47% which is sued for FBT liability computation (Barkoczy, 2017).

In the concerned case, the employer is Rapid Heat while the employer is Jasmine. The given details reflect extension of car fringe benefits owing to which the following FBT liability would arise on Rapid Heat.

Loan fringe benefit

The loan fringe benefit in accordance with s.16 is extended when the interest rate charged on the loan is such that the employee is benefitted by the same (Woellner, 2017) . It is expected that the employers must provide financial help in the form of loan by charging interest rate equal to the benchmark interest rate. Any negative deviation from the benchmark interest rate would result in loan fringe benefit extension (Deutsch, et.al., 2015). This benchmark interest rate is decided by the RBA and notified in advance. For 2017/2018, the relevant benchmark rate has been pegged at 5.25% p.a.

However, the interest rate at which lending has been done is 4.25% p.a. which creates an interest saving of 100 bps for the employee based on which employer would be levied FBT.  The computation of this liability payable by the employer is exhibited as follows (Reuters, 2017).

Also, s. 18 allows for deduction on loan if the same is utilised by the employer for the purpose of producing income. This may be the case here since $ 450,000 is diverted to the purchase of the holiday home and since it is not a residence home, therefore it is highly probable that rent income generation would be there which would result in suitable deductions for Rapid Heat. However, no deductions are available for the $ 50,000 used by associate i.e. husband of Jasmine even though income is produced.

Expenses fringe benefit

It is expected that the personal expense of the employee ought to be borne by them. But the employer at times may also bear some personal expense which leads to expense fringe benefit outlined in s. 20, FBTAA 1986  (Deutsch, et.al., 2015). Sometimes, the employer may provide some good that is produced by employer only at reduced price which leads to internal expense fringe benefits (Barkoczy, 2017).

Based on situation provided, it is apparent that the electric heater manufactured by the company (Rapid Heat) is normally sold to any customer who approaches the company at $ 2,600. However, in relation to Jasmine, a quote of $ 1,300 is given. It is apparent that electric heater is being purchased by Jasmine for her own use and hence the reduction is basically the private expense which employer is bearing and in the process extending fringe benefit to the employee. It is noticeable that electric heater would have GST applicable and the same would be considered while computing the FBT related liability on the purchase of electric heater as highlighted below (Sadiq, et.al., 2015).

(b) Unlike previous case where the $ 50,000 was used by husband of employee (Jasmine) for income production, now the amount is being used by Jasmine. As a result, she makes the investment in Telstra shares which tends to produce taxable income in the form of dividends.  Now, the deduction rule would be applicable and yield incremental deduction for the employer (Rapid Heat) in line with the following computation.

Conclusion

The discussion above clearly suggests that employer has extended three fringe benefits in the form of car, expense and loan. The FBT liability for these benefits has been computed in the above section and the same would be payable by Rapid Heat. Besides, Jasmine is using the $ 450,000 for holiday home which is expected to provide assessable income for Jasmine and resultant deduction in FBT for Rapid Heat.

References

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

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. 9^th ed.  Sydney: LexisNexis/Butterworths.

Hodgson, H., Mortimer, C. and Butler, J. (2016) Tax Questions and Answers 2016. 6^th ed. Sydney: Thomson Reuters.

Krever, R. (2016) 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., Barkoczy, S., Murphy, S. and Pinto, D. (2017) Australian Taxation Law 2017 27^th ed. Sydney: Oxford University Press Australia.