Capital Gains Tax on Disposal of a Block of Vacant Land

1. Selling of Vacant Land:

According to the Australian taxation office purchasing the vacant land by a taxpayer for the personal use or for investment purpose, the vacant block of land is treated as capital asset which will be considered for taxation upon the sale of land. The contract of sale of vacant land was entered into by the taxpayer (Grange et al., 2014). The land was purchased for $100,000 with additional $20,000 for land and water tax when the land was under the ownership of the taxpayer.

The vacant land in the current case will be treated as capital asset which will attract capital gains tax similar to other assets. The taxpayer under this situation should maintain the records relating to the date of purchase of land and cost that were incurred in purchasing the land (James, 2014). The taxpayer cannot claim an allowable deduction for council water, rates or land tax but these cost will be added up in the property case base. On disposal the cost base of the asset will be subtracted to determine the net value of capital gains made from such disposal.

Antique Bed:

As defined in “S-108 (1), ITAA 1997” collectables usually comprise of any rare folio, manuscript, artwork, jewellery or any antique object or any interest or debts originating from the above stated items (Jover-Ledesma, 2014). A taxpayer is required to disregard any capital gains for asset that has the purchase value of $500 or less and hence it is exempted from the CGT provisions of “S-118-10(1), ITAA 1997”. 

In the current case, the evidences gained suggest that the antique bed that was held by the taxpayer was stolen from the taxpayer’s residence. The taxpayer later learned that antique bed did not formed the part of specified items in the insurance policy.

As per “S-104-20(1), ITAA 1997” a CGT event C1 happens to a taxpayer when an asset is destroyed or damaged. It is noteworthy to denote that the timing of the CGT event is essential in ascertaining the capital loss or capital gains (Kenny et al., 2018). The antique bed in the current case was stolen from the residence of the taxpayer and the same was not in the list of specified items. Therefore, the compensation that is received for the lost antique bed resulted in CGT event C1.

Painting:

“Subdivision 108-C” deals with the personal use assets. A private use asset is generally treated as non-collectable asset, kept by the taxpayer for their private enjoyment. These assets are boats, furniture, electrical goods and the household items (McCouat, 2018). “S-108-20(2), ITAA 1997” explains that the personal use asset includes the option or the right to obtain the asset that are mainly used for the taxpayer own purpose.

Taxation of an Antique Bed

“S-118-10(3)” held that a taxpayer is required to disregard the capital gains when the private use where the private use asset that was purchased stands $10,000 or less than that (Sadiq, 2018). This represents that the taxpayer is under the obligation of keeping the details of purchase of personal use assets if they are purchased for $10,000 or greater than that.

In the current case the taxpayer has provided an information by stating that the painting was purchased for $2,000 and was bought on 2^nd May 1985. CGT is only applied when the CGT is acquired on or after 20/9/1985 (Sadiq et al., 2018). Assets which is purchased before CGT was introduced will be treated as the exempted asset. The gains made by the taxpayer from the sale of painting will be disregarded because the painting is the pre-CGT asset and will be treated as exempted asset.

Shares:

As per the Australian taxation office, a taxpayer that holds shares in company or units in the unit trust will be treated for CGT purpose similar to other assets. An investor that makes capital gains from the sale of shares when there is a CGT event, especially when the shares are sold. Profits made from the disposal of shares are considered as income under ordinary concepts (Taylor et al., 2018). Likewise, the taxpayer presently reported the capital gains from the sale of shares held in Common Ltd, PHB Ltd and Build Ltd shares. The taxpayer also reported loss from sale of young kids learning shares. An offset can be claimed by taxpayer from the gains made on sale of shares.

Violin:     

“Subdivision 108-C” deals with the personal use assets. A personal use asset is generally considered as non-collectable asset, kept by the taxpayer for their private satisfaction (Woellner et al., 2018). These assets are boats, furniture, electrical components and the household objects. “S-118-10(3)” held that a taxpayer is required to disregard the capital gains when the private use where the private use asset that was purchased stands $10,000 or less than that.

In the current case it is noticed that the taxpayer brought a violin that costed $5,000. The taxpayer used the violin for their private use. Since the cost base of asset is less than $10,000 the capital gains derived by the taxpayer is not included for CGT purpose. The net value of capital gains derived from the explanation made is given below;

Capital Gains Tax on the Sale of a Painting

                                         

                                         

2 A: 

Issues:

The issue here revolves around the consequences originating from the FBT event in relation to “FBTAA 1986”. Will the taxpayer be held liable for the car fringe benefit under “S-7, FBTAA 1986” originating from the car that is provided to employee? Whether the taxpayer be held liable for the expense payment fringe benefit under “section 39 A, FBTAA 1986”? Will the taxpayer be accountable under “sub-div A of FBTAA, 1986” for the loan fringe benefit during the FBT year?

Rule:

A fringe benefit can be defined as the payment that is made to the employee however the benefit it that is provided is different from the salaries and wages. This effectively means that the benefit which is provided to someone because the person is an employee. The employee can be either former or the future employee. Fringe benefit tax is generally paid by the employer (Woellner et al., 2018). As the employer, they are liable for pay the FBT notwithstanding of whether the employer is the sole trader, partners or government authority. An employer may claim the allowable deductions for majority of the cost that is incurred in providing the fringe benefit.

As per the “S-7, FBTAA 1986” a car fringe benefit in most of the situation arises where the employer makes the car that they hold available for employees personal or private use (Caldwell, 2014). An employer usually makes the car available for the private use of the employee during any day when the car is actually held for the personal purpose of the employee. As the general rule, the court of law in “Lunney v FCT (1958)” held that travel to and from the work place is treated as the personal use of the vehicle (Douglas et al., 2014).

An expense payment fringe benefit arises under “Subdivision B 22A of the FBTAA 1986” when the employer reimburses the employee with the expenditure that they occur. The expenditure can be either business expenditure or the private expenditure (Kenny, 2014). For an employer the taxable value of the fringe benefit represents the amount that is reimbursed or paid. An in house fringe benefit expense payment arises when the expenditure is reimbursed by the employer or paid relating to the expenses that is incurred by the employee.

Taxation of Shares

As per the “Sub-Division B 39C of the FBTAA 1986” the car parking fringe benefit might happen for each of the day when the employer provides the employee with the car parking space for their use (Morgan et al., 2015). A car parking fringe benefit happens only when;

1. The car is parked at the premises which is owned or leased under the control of the car provider.
2. The car is parked within the radius of one kilometre of the employer premises
3. The car is provided in respect of the employment
4. Car is used by the employee to travel for home and work place

As per the “Division 4 of the FBTAA 1986” loan fringe benefit happens the employer provides the employee with the loan. Providing such loan by the employer to employee is regarded as the benefit for the recipient (Taylor et al., 2018). The lower rate of interest represents the one which is less than the statutory interest rate.

Application:

In the current case Rapid Heat Pty Ltd provided its employee Jasmine with the car as she does majority of the work by travelling. The use of car provided by Rapid Heat Pty Ltd to Jasmine was not limited to work purpose as she uses the car for her private use as well. Citing “S-7, FBTAA 1986” a car fringe benefit has originated for Rapid Heat Pty Ltd since the company made the car that they held available for Jasmine personal or private use. Citing the reference of the court of law in “Lunney v FCT (1958)” use of car by Jasmine constituted the benefit as the car was used by her for private purpose as well (Douglas et al., 2014). For Rapid Heat Pty Ltd it gives rise to car fringe benefit and the taxable value of the fringe benefit can be determined by using the statutory or operating cost method.

A minor repair expenses were incurred by Jasmine relating to the use of car. The expenses were however repaid by Rapid Heat Pty Ltd. With reference to “Subdivision B 22A of the FBTAA 1986” an expense payment fringe benefit arises since Rapid Heat Pty Ltd, reimbursed Jasmine with the expenditure that she occurred for car repair (Caldwell, 2014). The reimbursement of car repair expenses by Rapid Heat Pty Ltd gave rise to in house expense payment. Rapid heat Pty Ltd will be held taxable for assessable value of the expense payment fringe benefit that is reimbursed.

In the later part it is noticed that Jasmine incurred certain expenses relating to the car parking when she was out of state. Citing the explanation made in “Sub-Division B 39C of the FBTAA 1986” no car parking fringe benefit originated for Rapid Heat Pty Ltd as the car was neither park at the premises of the owner nor it was parked within the radius of one kilometre area (Woellner et al., 2018).

Taxation of the Sale of a Musical Instrument

Rapid Heat Pty Ltd made loan to Jasmine for a sum of $500,000 at the annual interest rate of 4.25%. Making of such loans by Rapid Heat Pty Ltd gave rise to the Loan Fringe benefit under “Division 4 of the FBTAA 1986”.  

Conclusion: 

The cost that is incurred by the Rapid Heat Pty Ltd can be claimed as the allowable income tax deductions. This is because the expenses paid were in relation to the employment of Jasmine.   

2 B: 

In the alternate situation if the left over portion of the loan was used for acquiring the shares by Jasmine herself instead of lending the amount to her husband, Jasmine would have been entitled to claim an allowable deduction under the positive limbs of “section 8-1, ITAA 1997” (Woellner et al., 2018). Nevertheless, the leftover part of the loan was used by Jasmine husband for acquiring shares. Therefore, Jasmine will not be entitled to any allowable deductions under the general provision of “S-8-1, ITAA 1997”.

The existing study will take into the account the CGT and fringe benefit tax consequences relating to the events occurred in the case study. The study will be considering the net capital gains or capital loss for the current year ended 30 June. In the later parts the report would cover the fringe benefit tax outcomes that arises out of the information furnished in the report for the current income tax year ended 2018.

The wider concept of capital gains tax comprises of the comparison between the capital proceeds and the cost base of the asset (Barkoczy, 2018). Capital gains or capital loss is ascertained by subtracting the relevant cost base associated with the asset or other events from the capital proceeds or the disposal of assets.

References:

Barkoczy, S. (2018). Australian Tax Casebook (2018). 14e ebook. Melbourne: OUPANZ.

Caldwell, R. (2014) Taxation for Australian businesses.

Douglas, H., Bartlett, F., Luker, T., & Hunter, R. (2014) Australian Taxation Judgments.

Grange, J., Jover-Ledesma, G., & Maydew, G. (2014) principles of business taxation.

James, S. (2014) The economics of taxation.

Jover-Ledesma, G. (2014). Principles of business taxation 2015. [Place of publication not identified]: Cch Incorporated.

Kenny, P. (2014) Australian tax.

Kenny, P., Blissenden, M., & Villios, S. (2018) Australian Tax.

McCouat, P. (2018) Australian master GST guide.

Morgan, A., Mortimer, C., & Pinto, D. (2015) A practical introduction to Australian taxation law.

Pinto, D. (2013). State taxes. In Australian Taxation Law (pp. 1763-1762). CCH Australia Limited.

Sadiq, K. (2018). Australian taxation law cases 2018. Pyrmont, NSW: Thomson Reuters.

Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., & Obst, W. et al. (2018) Principles of taxation law.

Taylor, C., Walpole, M., Burton, M., Ciro, T., & Murray, I. (2018) Understanding taxation law.

Woellner, R., Barkoczy, S., & Murphy, S. (2018). Australian Taxation Law 2018 ebook 28e. Melbourne: OUPANZ.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. Australian taxation law 2018.