Tax Implications Of Loss From Flipping Property And FBT Liability

1. Anthony Mcloed is a project manager for a home renovation company located in Western Sydney, Unique Homes. Early last year Anthony celebrated his twenty years of service for Unique Homes. After reaching this milestone in his career Anthony decided to reduce his hours of work to twenty hours a week to enable him to pursue a venture he had been contemplating for a long time, property flipping. This required Anthony to apply his twenty years of knowledge, expertise and skills in purchasing property, renovating the property and quickly reselling for a profit.

Between July 2017 and May 2018, Anthony had successfully flipped three units and two stand-alone homes. Anthony spent considerable periods of time on his days off, researching the up and coming suburbs and what types of homes buyers wanted in these areas. Anthony’s renovated homes were quite popular and were selling quickly.

Unfortunately, in June of 2018 two properties Anthony had purchased for resale were found to be infested by termites and needed to be knocked down. This news was devastating for Anthony who ceased flipping houses after June 2018 because of the mental stress he had suffered.

Anthony kept records of all purchases and sales using online accounting software.

Anthony now wishes to know whether the loss of $120,000 he realised from the above activities should be recorded on revenue or capital account for tax purposes and has come to you for advice.

Required: Advise Anthony by reference to relevant legislation, caselaw and rulings (if any) whether the above loss should be recorded as a revenue or capital loss. Your answer must include discussion of relevant principles.

2. Estelle is the advertising manager for Australian Landscaping Supplies Pty Ltd (“ALS”), a retailer of landscaping supplies such as soils, plants, pavers and pots. On 1 October 2017, ALS supplied Estelle with a car valued at $55,000 for work which was garaged at Estelle’s home on the weekends.

Also on 1 December 2017, ALS loaned Estelle $10,000 at 1.5% interest pa. Estelle used the money to pay for repairs to her investment property. ALS also provided her with a pallet load of pavers she needed for her back yard valued at $2,000 and an ornamental pot valued at $250 to decorate her back yard.

By 30 March 2018, Estelle had travelled a total of 21,000 kms in the car, with 4,960 kms being for private use. ALS pays $20,000 a year in lease payments in respect of the car and has to date paid $4,000 for maintenance and repairs and $3,500 for registration and insurance in relation to the car it provided Estelle. Estelle has paid $1,500 in fuel expenses. Estelle keeps all invoices, receipts and odometer readings.

ALS is unsure how the above will be treated for taxation purposes and has come to you for advice.

Required: By reference to legislation and relevant case law (if any), calculate the total FBT liability arising from the above transactions.

Background Information on Anthony's Property Flipping Business

The issue here is to determine the tax implications of loss of $120,000 suffered by Anthony from flipping houses in the income year 2017-18.

Division 4-15 of Income Tax Assessment Act 1997 (ITAA) provides that a tax payer is liable to pay tax on the amount of taxable income of such person. The taxable income is calculated by subtracting the amount of total deductions from assessable income of the person for a particular year. Deductions allowed from assessable income of a person have been outlined in division 8 of the act, i.e. ITAA (McGee, Devos and Benk, 2016).

Division 8 of the act classifies deductions under three broad categories, these are general deductions (division 8-1), deductions which are specific in nature (division 8-5) and disallowance of double deductions (division 8-10).

As per division 8-1 of the act, a tax payer can deduct any outgoing and loss from the assessable income to the extent such outgoing or loss is to earn the assessable income or has been incurred for earning income from business which is assessable income under the act (Long, Campbell and Kelshaw, 2016).

The division also specifies that the tax payers are not allowed to deduct any loss or outgoing if such loss or outgoing is capital in nature thus, sub division 2 of the division 8-1 of the act has made it clear that only the outgoings and losses that are revenue in nature are allowed as tax deduction for computing taxable income of the tax payers (Chardon, Freudenberg and Brimble, 2016).

According to Australian Taxation Office, here in after to be mentioned as ATO only in the document, a person carrying on operations with the objective of earning profit from such operation will be considered carrying on a business. Income or loss from such business will be considered for calculation of taxable income of such person along with other ordinary income as defined in division 6-5 of the act and statutory income as per division 6-10 of the act. Thus, business income will be added along with other ordinary and statutory income of the tax payer and in case of loss from business then such loss shall be deducted from assessable income as general deduction under division 8-1 of the act to calculate the income which is liable to be taxed for the income tax purpose of the tax payer (Edmonds, Holle and Hartanti, 2015).

Anthony has pursued a business of flipping property and selling them at profits to the customers from July 2017 to June 2018. Anthony has successfully flipped few properties and sold them from July, 2017 to May, 2018 before suffering massive loss due infestation of properties by termites purchased in June 2018. Subsequent to the massive loss on resale of these properties, Anthony decided to stop pursuing his business ambitions. The overall loss from business during the period from July, 2017 to June, 2018 is $120,000. As discussed earlier that division 8-1 allows general deductions and business loss falls under such general deductions. Entire loss of $120,000 from business shall be allowed as deduction from assessable income of Anthony for the year 2017-18. The amount of loss, i.e. $120000 is revenue in nature and will be allowed as general deductions under division 8-1 of ITAA to compute the taxable income of Anthony for the year ending on June 30, 2018 (Warren, 2016).

Relevant Legislation and Principles for Deductions from Assessable Income

Conclusion:

The loss of $120,000 from flipping and sale of properties between July, 2017 and June, 2018 is to be recorded on revenue account for tax purposes. The amount of taxable income shall be calculated by deducting the entire loss of $120,000 from assessable income of Anthony for the tax year to determine his income tax liability for the period.

The taxable value of fringe benefits resulted from the non-monetary benefits provided to Estella, the advertising manager of Australian Landscaping Supplies Pty Ltd, here in after to be referred to as ALS in this document, is to be determined here.

Fringe Benefits Tax Assessment Act 1986 (FBTAA) is the premier legislation governing the provisions related to fringe benefits provided by the employer to employees in Australia. Thus, the provisions of FBTAA has to be followed and complied with by the employer and employees in the country in respect of liability for fringe benefits tax in the country (Smith et. al. 2016).

Division 2 of FBTAA contains all the provisions related to car fringe benefits provided by an employer to the employees. Sub-division A of division 2 of the act specifies that an employer providing his or its owned or leased car to an employee which is available to the employee for his personal use shall be considered as fringe benefits in the hands of the employee. Accordingly, the employer will be liable to pay fringe benefit tax (FBT) on the taxable value of fringe benefits calculated as per the provision of FBTAA. Subdivision A outlines the car benefit as type 1 benefit for grossing up purpose of taxable value of fringe benefits for calculation FBT (Woellner et. al. 2016).

Section 7 of FBTAA provides that if a car is provided by an employer to his employee which is available for personal use of the employee or any member of his family at any time of the day then such benefits will be assessable as fringe benefits taxable in the hands of the employer providing such benefits to the employee. However, section 7 further provides that if the car was only available for the purpose business of the employer and not for the private use of the employee then it will not be considered as fringe benefits (Hodgson and Pearce, 2015). Thus, the contention is whether a car is available for personal use of the employee during any point of time when it was provided to the employee. In case the car is available for the personal use then, even if it was not used for personal purposes of the employee, the fringe benefits will still be considered and accordingly, taxable value of fringe benefits shall be calculated to determine the FBT liability of the employer in this regards (Braverman, Marsden and Sadiq, 2015).   

In case of loan provided by an employer to his employees, then the employer will be liable to pay FBT if the loan was provided at zero percent interest or at an interest rate that is lower than the bench mark interest rate.  The bench mark interest rate is 5.65% for the FBT year 2017-18.

Application of Division 8-1 and Conclusion for Anthony's Loss

Division 2 of FBTAA allows employers to use any of the prescribed methods to calculate taxable value of car fringe benefits. Two prescribed methods are statutory method and operating cost method. The method that results in lower amount of taxable value of car fringe benefits shall be chosen by the employer (Tang and Wan, 2015).

In this case since, Estella was provided with a car for work purposes however, since it was garaged at the home of Estella hence, it will be considered that the car was available for personal use of Estella and his family. Hence, the FBT will have to be paid by the employer for the car provide to Estella.

Type 1 benefit of car provided to the employee:

Type 1 benefit for the loan provided at concessional rate of interest:

Type 1 benefit for backyard decoration of Estella:

Conclusion:

Taking into consideration the above it is clear that the non-monetary benefits given by ALS to Estella are in the nature of fringe benefits on which the company requires to FBT. The taxable value of fringe benefits for Type 1 and Type 2 benefits shall be grossed up by using appropriate gross up rate to calculate the taxable value of fringe benefits for the purpose of determining the FBT liability of the company for benefits provided to Estella. FBT is paid at the rate of 47% on the grossed up value of fringe benefits.      

References:

Braverman, D., Marsden, S. and Sadiq, K., 2015. Assessing Taxpayer Response to Legislative Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl. Tax'n, 17, p.1. Braverman, D., Marsden, S. and Sadiq, K., 2015. Assessing Taxpayer Response to Legislative Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl. Tax'n, 17, p.1.

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. Avaiable at: https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/austraxrum31&section=16 [Accessed on 22 October 2018]

Edmonds, M., Holle, C. and Hartanti, W., 2015. Alternative assets insights: Super funds-tax impediments to going global. Taxation in Australia, 49(7), p.413.

Hodgson, H. and Pearce, P., 2015. TravelSmart or travel tax breaks: is the fringe benefits tax a barrier to active commuting in Australia? 1. eJournal of Tax Research, 13(3), p.819.

Long, B., Campbell, J. and Kelshaw, C., 2016. The justice lens on taxation policy in Australia. St Mark's Review, (235), p.94.

McGee, R.W., Devos, K. and Benk, S., 2016. Attitudes towards tax evasion in Turkey and Australia: A comparative study. Social Sciences, 5(1), p.10.

Smith, F., Smillie, K., Fitzsimons, J., Lindsay, B., Wells, G., Marles, V., Hutchinson, J., Hara, B.O., Perrigo, T. and Atkinson, I., 2016. Reforms required to the Australian tax system to improve biodiversity conservation on private land. Environmental and Planning Law Journal, 33, pp.443-450.

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.

Warren, N., 2016. E-filing and compliance risk: Evidence from Australian personal income tax deductions. Austl. Tax F., 31, p.577. Available at: https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/austraxrum31&section=28 [Accessed on 22 October 2018]

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.