Essay: Australian Taxation Law For CGT Applicable And FBT Liability For ABC Ltd.

Part a) - Australian Taxation Law for CGT Applicable

Describe about the Australian Taxation Law for CGT Applicable.

The relevant information with regards to the property owned by Scott who is an individual taxpayer is summarised below.

The vacant land was bought in October 1980 i.e. in the pre CGT era and hence no CGT would be applicable on any capital gains derived from its sale (Barkoczy, 2015).

The house construction got done in September 1986 i.e. in the CGT era and hence CGT would apply on any capital gains derived from its sale (Gilders et. al., 2015).

It is known that the property has been sold in the auction for a value of $ 800,000. Thus, this would include the current valuation of both land and house. However, it is imperative to find out the current value of house so that the capital gains associated with house could be computed.

The house value when construction was finished was equal to the construction value of $ 60,000 whereas the value of the land at that time of $ 90,000.

Hence, contribution of house to the overall value of the property = (60000/(60000+90000)= 0.4

The share of the house in the property would not alter with time and therefore the same proportion of value would still be attributed to the house.

Hence, selling price of house = 0.4*800000 = $ 320,000

The calculation of CGT applicable capital gains can be done using the two choices shown below (Sadiq et. al., 2016).

Indexation Method

In this method, the cost base would be adjusted for the inflation change from the time of purchase of asset to September 1999 (Deutsch et. al., 2015).

Relevant adjustment factor based on inflation = 68.72/43.2

Inflation adjusted cost base of the house = 60000*(68.72/43.2) = $ 95,400

Thus, gains on which CGT would apply = 360000 – 95400 = $224,600

Discount method

Gross capital gains from sale of house = Sales proceeds – Cost base (Construction Cost) = 320000 – 60000 = $ 260,000

A rebate of 50% is available since the nature of capital gains is long term, hence net capital gains on which CGT would apply = 260000 – (50/100)*260000 = $ 130,000

Since the discount method results in lower taxation burden of CGT, hence Scott would compute the taxable gains through this method only (Woellner, 2014).

There would not be any change in the answer obtained above in the given case when Scott instead of going through the auction sells his house for net consideration of $ 200,000 to her daughter.

Part b) - CGT Applicability on Sale of Property to Daughter

This is in line with Section 116-30 which stipulates that calculation of the capital gains would be carried out by taking the higher value of the sale price of the asset and its market value. In the given case, by selling the property to his daughter Scott has managed to lower the sale price but the market value is still pegged at $ 800,000. Thus, using discount method, the capital gains subject to CGT would again amount to $ 130,000 (Deutsch et. al., 2015).

There has been a change in ownership structure of the property from an individual taxpayer to a company. Under the new structure, the taxable component of capital gains would undergo a change as discount method is not available to company structure (Nethercott, Richardson and Devos, 2016). Hence, under the company ownership, the property’s capital gains would be calculated by deploying indexation method and the answer would come out to be $ 224,600.

ABC Ltd is the employer and extends a host of benefits to their employee Alan. The main issue is to ascertain the underlying FBT liability for the employer that arises on account of these benefits.

Rule

As per Section 58X, FBTAA, 1986, no fringe benefit tax liability arises for the employer if any mobile electronic device is given to the employee by the employer provided it is used only for professional purpose and not for personal purpose. With regards to payment of expense also, any expense that is solely of professional nature would not result in extension of fringe benefit. Besides, minor benefit exemption clause provides exemption of FBT on token benefits when the taxable value does not cross the threshold level of $ 300 (Wilmot, 2012).

School fees

Since the fees paid for children are a personal expense, hence payment of the same by the employer would amount to fringe benefit being given to employee (Deutsch et al., 2015).

Taxable Value (School Fees Benefit) = Amount of fees borne by employer * Gross up factor

The gross up factor would be chosen based on whether GST is applicable (Type 1 Good) or GST is not applicable (Type 2 Good). (Gilders et. al., 2015).

FBT liability for employer (School Feed Benefit) = 0.49* Taxable Value (School Fees Benefit)

Dinner

Meal fringe benefit is availed by the employees if the employer arranges for the meal at any venue except the business premises.  In order to calculate the liability on account of meals, the employer has a choice with regards to the underlying method that can be deployed. The choice of method essentially is driven by the following two factors (Hodgson, Mortimer & Butler, 2016).

Part c) - CGT Calculation for Company Ownership

Presence or absence of clients in the invitees list for meals. This is imperative since the company cannot claim tax deduction for the meal expenses on clients but the same is allowed for employees and their associates. Thus, in case clients are also invited, the focus of the employer is to limit the FBT liability.

Total invitees count as it may happen that the individual expenditure could be lower than $ 300 in which case, no FBT liability arises for the employer.

The following approaches may be deployed for computation of FBT liability arising on account of meal fringe benefit.

In this method, all the amount which is spent on meals is considered for calculation of FBT liability and hence this method is preferred when clients are not part of the guest list. This is because the employer is able to claim tax deduction with regards to meal expense on employees and their associates. (Nethercott, Richardson & Devos, 2016).

FBT burden on employer = 0.49* Meal expense *Gross up factor

50-50 Split Method

In this method, as the name indicates, only half or 50% of the actual meal expenses contribute to the FBT liability calculation. With regards to clients since the expenses are not tax deductible, hence it makes sense to atleast reduce the FBT burden. It is noteworthy that deduction on expenses on employees is still available but only 50% of the spending can be deducted  (Sadiq et. al., 2015).

FBT burden on employer = 0.49* 0.5* Meal expense *Gross up factor

Application

As per the given information, it is apparent that Alan uses the mobile provided by the employer only for professional reasons, hence the payment of mobile bill and also the phone handset would be exempt from the aegis of the FBT in accordance with Section 58X.

School fees

Amount of school fees that was paid by the employer  = $ 20,000

Since, school fee is GST exempt, hence the applicable gross up factor for FY2016 is 1.9608.

FBT burden on employer (school fees) = 0.49 * 20000 * 1.9608= $19,215.84

Dinner

The dinner has not been hosted in the business premises but rather at a Thai Restaurant and hence the expense would amount of meal fringe benefit being forwarded.

In this case, 20 employees have been invited to the restaurant along with their associates and the total food bill including the GST amounted to $ 6,600.

Assuming that all employees had company, hence the actual meal expense for employees = (50/100) * 6,600 = $ 3,300

Per person food expenditure = 3300/20 = $ 165

As the value of the meal expense on each employee is within the threshold value, hence the employer Alan is exempt from any FBT liability in the given case.

Now the decrease in the employee count to five without alteration of the food bill implies that the minor benefit exemption would not be applicable under these circumstances. As the invitees excludes clients, hence, the actual method would be used in the given case,

FBT burden on ABC (Meal Fringe Benefit)= 0.49 * 6600 *2.1463 = $ 6,941.13

The company can reduce its tax liability by claiming GST input credits on the food bill (Barkoczy, 2015).

Now the clients are also invited to the dinner and therefore the appropriate method for estimation of FBT liability on meal fringe benefit would be the 50:50 split method. The actual calculation of liability regarding FBT is computed below.

FBT burden on ABC (Meal Fringe Benefit)= 0.49* 0.5*6600 *2.1463 = $ 3,470.6

Conclusion

From the above discussion, it may be fair to conclude that fringe benefit have been extended to Alan based on the meal and also on the payment of school fees, The FBT liability with regards to meal tends to be determined by the guest count and their respective composition particularly with regards to presence or absence of clients.

References

Barkoczy, S (2015). Foundation of Taxation Law 2015, North Ryde: CCH Publications,

Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T (2015). Australian tax handbook, Pymont:Thomson Reuters

Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T (2015). Understanding taxation law 2015, Sydney: LexisNexis/Butterworths.

Hodgson, H, Mortimer, C & Butler, J (2016), Tax Questions and Answers 2016, Sydney: Thomson Reuters,

Nethercott, L, Richardson, G & Devos, K (2016), Australian Taxation Study Manual 2016, Sydney: Oxford University Press

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A (2015), Principles of Taxation Law 2015, Pymont: Thomson Reuters,

Wilmot, C (2012),  FBT Compliance guide, North Ryde: CCH Australia Limited,

Woellner, R (2014), Australian taxation law 2014, North Ryde: CCH Australia,