Question 1

(a) Block of vacant land:

The land sale is CGT event and it could be termed as CGT asset, as per “Section 108-5 of ITAA 1997”. As a result, A1 event is triggered that occurs when the contract was signed on 3^rd June of the present tax year by complying with “Section 104-10 of ITAA 1997”. This sale would fetch capital proceeds of $320,000 and the payable amount of $20,000 on 3^rd January of the following year is irrelevant in this case. Therefore, the total cost base would be $20,000 and this is obtained by addition of the following amounts:

• The initial asset base element is $100,000, in accordance with “Section 110-25(2) of ITAA 1997”.
• The third asset base element includes land taxes and rates of $20,000, as the land was acquired after 20^thAugust 1991 (Huizinga, Voget and Wagner 2018).

This denotes that capital gain exists because the capital proceeds are higher than the total cost base. Hence, $200,000 would be recognised as capital gain ($320,000 – $120,000). This is an eligible discount capital gain, as per “Section 115-25(1) of ITAA 1997”.

(b) Antique bed:

As per the case, the antique bed was stolen and this item is CGT asset. The event C1 has been triggered by this incident by adhering to “Section 104-20(1) of ITAA 1997” (Australia 2016). The incident took place when compensation proceeds were obtained from the insurance organisation. The question here is to assess the collectability of the antique bed. This would depend on the characteristics of the item and client purpose when it was purchased (Dixon and Nassios 2016). According to “Section 108-10(2) of ITAA 1997”, it is possible to classify the antique bed as an antique item. In addition, it is to be noted that the antique bed was purchased for personal use and this meets both the limbs of definition that it is collectable. Therefore, the capital gains and losses need not be disregarded because the asset cost base is more than $500, according to “Section 118-10(1) of ITAA 1997”.

Along with this, according to Section 116-25 of ITAA 1997”, the market value substitution rule is not considered for the event C1 and hence, $11,000 is identified as capital proceeds. This denotes the irrelevancy of market value in this scenario, which is $25,000. Conversely, $5,000 is identified as the total cost base, which is computed by considering the following amounts:

• “Section 110-25(2) of ITAA 1997” cites that S3,500 is the acquisition cost, which is the first asset base element.
• “Section 110-25(5) of ITAA 1997” states that the fourth asset base element is expense spent for raising the value of the asset, which is provided as $1,500.

Therefore, $6,000 would be the capital gain ($11,000 – $6,000) and “Section 115-25(1) of ITAA 1997” states that this is an eligible discount capital gain. In addition, it is necessary to apply indexation to cost because the antique bed was bought before 21^st September 1999, as per “Section 114-1 of ITAA 1997”. In the September quarter of 1986, the index number was 77.6 and in the December quarter of 1986, the index number was 79.8 after changes were made (Evans, Minas and Lim 2015). However, when the bed was stolen, the index number fell to 123.4 in the September quarter of 1999, as per “Section 960-275 of ITAA 1997”. Therefore, the index factors would be 1,590 (4/77.6) and 1.546 (4/79.8) in compliance with “Section 960-275(5) of ITAA 1997”. The calculation of indexed cost is carried out by taking into account the below-stated amounts:

• Initial cost base element: 1.590 x $3,500 = $5,565
• Fourth cost base element: 1.546 x $1,500 = $2,319

Question 2

By considering the above amounts, the index cost base would be $7,884 ($2,319 + $5,565). This denotes that there is capital gain, as the capital proceeds are more than the indexed cost base. Therefore, the amount of capital gain would be $3,116 ($11,000 – $7,784).

(c) Painting:

In this situation, the question is to determine the collectability of painting. In fact, an artwork depends on the nature or purpose of the owner when it is purchased (Jacob 2018). From the case study, it has identified that the item was purchased from a renowned Australian artist and after some time, the sale of painting was conducted because of increase in value after the artist died. Hence, it is evident that the purchase was made for investment purpose rather than personal use. Due to this, painting is not considered as collectable. However, this is CGT asset, as it falls within disposals, in accordance with “Section 104-A of ITAA 1997” (Butler and Calcott 2018).

At the time of disposing the painting, A1 event is triggered falling under “Section 104-10(1) of ITAA 1997”. As the capital proceeds are $125,000 and the cost base is $2,000, then the capital gain would be $125,000 ($123,000 – $2,000). However, as the purchase of painting was conducted on 2^nd May 1985, it was before 20^th September 1985 and thus, it could be considered as Pre-CGT asset and there would be disregard of capital gain. This is in compliance with “Section 104-10(5) of ITAA 1997” (Chardon, Freudenberg and Brimble 2016).

(i) Common Bank Limited:

As the company shares could be classified as CGT asset under “Section 108-5 of ITAA 1997”, when they are sold, it would automatically result in change of ownership. The change is inherent after the shares were sold on 4^th July. Since the purchase of shares was made after 21^st September 1999, it is not possibly to apply indexation to the cost base (Richardson, Taylor and Lanis 2015). Under this scenario, the capital proceeds imply the amount to be received by the taxpayer with respect to the occurrence of the event, which are computed as $47,000 ($47 x 1,000). Conversely, the cost base is calculated as $16,300 by considering the following amounts:

• “Section 110-25(2) of ITAA 1997” cites that initial cost base element, which is acquisition cost amounts to $15,000 (1,000 x $15).
• Brokerage fees are considered as the second asset base element, which is obtained as $550.
• Stamp duty expense is another cost base element, which is identified as $750.

Therefore, the client would make a capital gain of $30,700, which is an eligible discount capital gain, as mentioned under “Section 115-25(1) of ITAA 1997” (Dai et al. 2015).

(ii) PHB Iron Ore Limited:

The scenario is identical to Common Bank Limited where the ownership has changed hands when the shares were sold on 14^th February. $62,500 would be the capital proceeds (2,500 x $25) and the total cost base is identified as $32,500. The cost base is calculated by adding the acquisition cost of $30,000 (2,500 x $12), brokerage fees of $1,000 and stamp duty expense of $1,500. Therefore, the overall capital gain would be $30,000 ($62,500 – $32,500) and this is eligible discount capital gain.

(iii) Young Kids Learning Limited:

Calculation of Net Capital Gain or Loss

The scenario is similar to the above case before the change of ownership; however, the client has encountered capital loss. $600 is identified as the capital proceeds (1,200 x $0.5) having total cost base of $6,150, which is obtained by adding certain amounts. These amounts include acquisition cost of $6,000 (1,200 x $5), brokerage fees of $1,000 and stamp duty cost of $1,500 (Faccio and Xu 2015). Therefore, the capital loss incurred is $6,000 ($6,600 – $600) and it is considered as eligible discount capital gain.

(iv) Share Build Limited:

The situation is identical to that of Common Bank Limited where there is change of ownership after the shares have been sold on 22^nd January. $25,000 is recognised as capital proceeds (10,000 x $2.5), while the total cost base is $11,900 by adding up certain amounts. These amounts are acquisition cost of $10,000 (10,000 x $1), brokerage fees of $900 and stamp duty cost of $1,100. Therefore, the capital loss encountered is $13,000 ($25,000 – $12,000). However, this is not an eligible discount capital gain, since the shares were purchased in January of the current year and they were sold by not even holding for at least 12 months, in compliance with “Section 115-40 of ITAA 1997” (Pomerleau and Cole 2015).

Based on the provided facts, the client has interest of gathering musical instruments only for personal enjoyment. Thus, “Section 108-20(2) of ITAA 1997” states that violin is categorised in the form of personal use asset. Moreover, A1 event would be triggered because of change in ownership. Since the violin acquisition cost of $5,500 is below $10,000, one specific law is applied, based on which there would be no consideration of $6,500 ($12,000 – $5,500) recognised in the form of capital gain. In order to compute the total capital gain, the following computations are made:

Requirement (a):

Issue:

In this case, the issue is ascertaining the fringe benefit tax consequence for the person, in accordance with FBTAA 1986. Specifically, the question is to ascertain whether the provided car by the firm to the individual could be considered in the form of fringe benefit, in accordance with “Section 7 of FBTAA 1986”. Another issue is to find out whether the car parking expense would be incurred by the individual enjoying fringe benefit.

Rule:

As per FBTAA 1986, the fringe benefit is made because of the consequence of employment. More precisely, fringe benefits are provided to the individuals working as staffs in the business organisations. In this case, as per “Section 7 of FBTAA 1986”, fringe benefit takes place due to the relationship between the employee and the employer, as the staff has been provided with a car by the employer. Therefore, the car provided on the part of the employer could be adjudged as fringe benefit. The fringe benefit tax would be applied to the staff, if the individual does not make assessable income from personal usage of the car (Johnson 2016). For instance, in the case of “Federal Commissioner of Taxation v Lunney (1958)”, it has been found that the car usage decided to travel from staying place to employment place is of private nature.

FBT Consequences

The fringe benefit expense is mentioned in accordance with “Subsection B22A of FBTAA 1986”. The expense incurred consists of costs from private as well as official reasons. Basically, if the employee bears any cost on behalf of the employer, the amount is to be reimbursed for that expenditure as fringe benefit related to expense payment. Thus, the amount to be reimbursed to the staff is taxable (Barros 2015).

As per “Section 4 of FBTAA 1986”, when an employer provides loan to the employee, which would be considered as a benefit for the staff, there would be occurrence of loan fringe benefit. In addition, this type of fringe benefit takes place at the time the employer provides loan as benefit to the staff with lower interest for the FBT year.

Application:

As per the provided case, Jasmine is identified as a staff of Rapid Heat Private Limited. She was provided with a car by her organisation, as she has to travel distances for official work. Therefore, this situation would lead to fringe benefit, in accordance with “Subsection 136(1) of FBTAA 1986” (Hodgson 2015). For instance, in the case of “FCT v Lunney (1958)”, the use of car for personal use leads to fringe benefit in accordance with FBTAA 1986.

Jasmine incurred an expense of $50 for repairing some parts of the car. The organisation had reimbursed this expense, which is in accordance with “Subsection B22A of FBTAA 1986” in relation to the expense of Jasmine. However, later on in this situation, the car was parked outside the airport terminal, in which she had to bear some parking expense for ten days. Under this situation, there is no obligation of the organisation in reimbursing the cost of parking due to its prohibition owing to two factors (Tang and Wan 2015). Firstly, the car was not parked within the company premises and secondly, the parking was not done within radius of a kilometre of the commercial parking area. Hence, no fringe benefit tax occurs in this situation (Rein 2017).

Moreover, Jasmine took a loan of $500,000 from the organisation with interest rate of 4.25%, which is provided in the rule and the amount of loan would be identified in the form of benefit for Jasmine. More importantly, the interest rate that the organisation has charged would be lower compared to the statutory rate.

Conclusion:

It could be stated that Jasmine would seek fringe benefit, according to “Section 7 of FBTAA 1986”. The car usage would be subject to fringe benefit tax in compliance with “Subsection 136(1) of FBTAA 186”. The distinctive benefits like repair cost reimbursement and credit provided to Jasmine constitute of benefit, as per FBTAA 1986.

As mentioned under FBTAA 1986, the tax incurring individual needs to maintain the cost details and deduction of claims, which is allowed forming portion of assessable salary along with identifying the consequences (Cooper 2017). A taxpayer has the obligation of ensuring cost findings, which occurred over the group of establishing assessable pay. In the other situation, if the loan amount left of $50,000 was used by Jasmine in order to buy shares rather than providing the same to her husband, she could have asked for deduction in accordance with “Section 8-1 of ITAA 1997”. Therefore, as the remaining amount was provided to her husband purchasing shares and as a result, the deduction would be claimed for the loan. This could have been deductible in a scenario, as per “Section 8-1 of ITAA 1997” (Kaplan and Price 2014).

References:

Australia, C.C.H., 2016. Australian Master Tax Guide: 2016. CCH Australia.

Barros, C., 2015. A matter of trusts: Streaming problems where capital gain proceeds are dissipated. Taxation in Australia, 50(5), p.269.

Butler, C. and Calcott, P., 2018. Optimal fringe benefit taxes: the implications of business use. International Tax and Public Finance, 25(3), pp.654-672.

Chardon, T., Freudenberg, B. and Brimble, M., 2016. Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, p.321.

Cooper, R., 2017. A brief guide to tax filing. TAXtalk, 2017(65), pp.42-45.

Dai, M., Liu, H., Yang, C. and Zhong, Y., 2015. Optimal tax timing with asymmetric long-term/short-term capital gains tax. The Review of Financial Studies, 28(9), pp.2687-2721.

Dixon, J.M. and Nassios, J., 2016. Modelling the impacts of a cut to company tax in Australia. Centre for Policy Studies, Victoria University.

Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: an alternative way forward. Austl. Tax F., 30, p.735.

Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(3), pp.277-300.

Hodgson, H., 2015. Fringe benefit Tax and Travel to and From Work. Australian Tax Law Bulletin, 2(2), pp.1-20.

Huizinga, H., Voget, J. and Wagner, W., 2018. Capital gains taxation and the cost of capital: Evidence from unanticipated cross-border transfers of tax base. Journal of Financial Economics, 16(9), pp.29-34.

Jacob, M., 2018. Tax regimes and capital gains realizations. European Accounting Review, 27(1), pp.1-21.

Johnson, C.H., 2016. A Conceptual Framework for Capital Gain. Fla. Tax Rev., 20, p.664.

Kaplan, R.L. and Price, D.J., 2014. Change and Continuity in Fringe Benefit Taxation: Seeking Sense and Sensibility. NYL Sch. L. Rev., 59, p.281.

Pomerleau, K. and Cole, A., 2015. International tax competitiveness index 2015. Tax Foundation, 21(8), pp.134-146.

Rein, M., 2017. From policy to practice. Routledge.

Richardson, G., Taylor, G. and Lanis, R., 2015. The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling, 44, pp.44-53.

Tang, R. and Wan, J., 2015. Fringe benefits tax and fly-in fly-out arrangements: John Holland Group Pty Ltd v Commissioner of Taxation. Australian Resources and Energy Law Journal, 34(1), p.17.