The main agenda of the given case study is to analyse the disposal of the assets of the taxpayer which has been performed in the income year 2017/18. As the taxpayer is not associated with any business related to trading of assets, therefore, the nature of the proceeds from the disposal would be capital proceeds and therefore, the relevant taxation implications would be in the form of Capital Gains Tax (CGT). Further, the key aspects along with their application on the disposed assets (block of land, shares, antique bed, painting and violin) is analysed and represented below.
The provision of s. 149 (10), Income Tax Assessment Act 1997 describes that the assets that are owned by taxpayer before September 20, 1985 are named as pre-CGT asset (Sadiq, et.al., 2015). As the assets are purchased before the enactment of CGT consequences and hence, would not attract any CGT liability.
All the above transactions are CGT events which are classified in the A1 sub class and therefore, the cost base and proceeds from the disposal of the assets are the two main factors for computing the capital gains or losses for CGT (Barkoczy, 2017).
The relevant provisions about the cost base of asset is highlighted in s. 110 (25) ITAA 1997 indicates that five main elements which includes various costs which are cumulatively paid by taxpayer. These five elements of cost base are listed in table given below (Austlii, 2018).
Capital loss Adjustment
The s. 102 (5) defines that the capital losses will be balanced against the capital gains produced from the assets (Krever, 2017). The imperative aspect in this regards is that the capital losses on account of collectables would be balanced against the capital gains produced from the sale of collectables only (Sadiq, et.al., 2015). The unbalanced capital losses will be shifted to the next year for future adjustment.
Reduction of CGT liability
Selection of suitable method would lower the net CGT liability of taxpayer. The indexation method is enforceable only for the capital assets which are owned before 1999. Further, the capital gains that are derived from assets which concerned taxpayer holds for more than a year are categorised as long term capital gains (Barkoczy, 2017). A flat 50% discount is applied on the capital gains which then provide only 50% of the capital gains for CGT implications. Further, when this period is lower than one complete year then the short term capital gains would not get any rebate and complete amount of capital gains will be taken for CGT implications (Reuters, 2017).
Realisation of Capital receipts
TR 94/29 defines that even if the payment for sale of a given asset is not received in a given tax year but the contract of sale has been enacted, then the underlying tax implications would be considered in the current year only (ATO, 1994) .
CGT will not be imposed on the capital gains received when the following factors are incurred (Deutsch, et.al., 2015).
- When taxpayer has sold a pre-CGT capital asset then CGT is exempted
- When the personal use asset has been acquired at lesser than $10,000 then also CGT is exempted.
- When any collectable has been acquired lesser than $500 then CGT is exempted
Disposal of Block of Vacant Land
The CGT liability will be linked to the capital gains or losses computed in case of sale of land block because the transaction is not related to a pre-CGT. Further, the nature of transaction for selling the asset is CGT event of A1 subclass. The proceeds from the sale of the land will actually be received in FY2019 while the sale contract has been made in FY2018 and hence, as per the applicability of TR 94/29,
the proceeds will be used for capital gains/losses computation in FY 2018 only (Deutsch, et.al., 2015). Further, the losses from the previous years will also be counterbalanced against the capital gains generated. Ownership period for land has exceeded one year and therefore, 50% will be chargeable on the capital gains received so as to minimize the net CGT liability for taxpayer.
Disposal of Antique Bed
Antique bed is classified as collectable (s. 118-10) and the CGT liability will be applied on the capital gains/loss received from the disposal income because the owning amount is $3,500 whereas the threshold cut-off limit is more than $500 which is satisfied and hence, CGT will be applicable. It is apparent that taxpayer has not voluntarily sold the antique bed and rather it has stolen and therefore, the sale proceeds would essentially be limited to insurance proceeds received. The taxpayer’s capital losses resulted from disposal of sculpture (Collector) will be balanced with the produced capital gains. Further, the long term capital gains would be subjected to 50% discount. The step-wise computation of the capital gains or losses from antique bed is discussed below in the tabular format.
Disposal of Painting
As highlighted in the summary table with regards to classification of pre-CGT asset. Painting is classified as pre-CGT asset which implies that asset has been owned by taxpayer before the CGT liability has started and hence, CGT liability linked to the capital gains or losses raised from disposal of painting is zero.
Disposal of Shares
As per the provisions outlined in s. 104(5) ITAA 1997, shares sale is a CGT event of A1 category and hence, the cost base (sum of purchase cost and incidental costs) is computed for the shares which then are taken for the final calculation of capital gains. Capital gains which are derived from the assets for which the ownership period exceed one year would amount to 50% concessions (s. 115-25).
Disposal of Violin
Taxpayer has separate collection for musical instruments which also includes violin. Further, the violin would not be considered as collectable because she purchased the violin for personal uses which is apparent from the facts that she holds interest in playing it frequently (almost each day). It represented that the violin is an asset which is personal use of taxpayer. The taxpayer has spent $5,500 to buy the violin. It can be seen that the amount spent for acquisition the personal use asset does not meet the criteria required for CGT application for personal use asset as per which the buying cost necessarily be in the excess of $10,000. The requisite condition for CGT implication in case of personal use asset is not true for violin and hence, the conclusion can be drawn that selling of violin and the received capital proceeds would be free from CGT implications.
Net Capital Gains
The sum of all the derived capital gains would be considered as net capital gains from the disposal of the assets.
- There are specific benefits that employers provide to employees which are named fringe benefits. There are two key characteristics associated with these.
- These would not be presented in cash form and limited to non-cash form only.
- The benefits are not professional but rather personal in nature.
Another unique feature of fringe benefit which segregates it from other kind of employee benefits is the unique pattern of taxation. For normal employee benefits (both cash and non-cash), the employee would be levied personal income tax and employer would be able to gain deduction on the expense. However, in case of fringe benefits, the beneficiary (i.e. employee) is exempt from all concerned tax liabilities and only the benefit provider would be taxed. As a result, the applicable statute for these benefits is “Fringe Benefit Tax Assessment Act 1986”(Wilmot, 2014). The discussion in regards to various applicable fringe benefits for Jasmine is carried in the manner exhibited as follows.
Car Fringe Benefit
A common benefit that is often extended to employee is car fringe benefit. If the employer provides conveyance in the form of car to the employee for conducting job duties, then it does not lead to any fringe benefit since the car is only used for completing office work. However, benefit is extended to employee only when the employee can use the car for personal use which is indeed a benefit enjoyed by the employee (Sadiq, et.al., 2015).
The given case facts highlight that employer purchases a brand new car and hands it to the employee (Jasmine). The usage of this car is not limited to professional reasons as the car also remains with Jasmine on weekends and holidays when the office is closed. Owing to the arrangement indicated above, it becomes evident that Jasmine has been the recipient of car fringe benefits and resultant FBT would be payable by the employer (Rapid Heat).
A key variable which impact the extent of car fringe benefit given to employee is the days in the underlying assessment year for which private usage of car is allowed to the employee. Here, a thirty day deduction would be available on account of the car being made available for use on May 1 while the year commences from April 1.
Additionally, deduction for 1st May is also considered since it is assumed that the vehicle is provided by end of day and hence effective usage begins from 2nd May onwards. Further, for the ten days on which Jasmine was not in town, car was parked at the airport but it was available for use as nobody else was using the same. The car was lying idle and could have been used by employee or any associate. Also, minor repairs related deduction is not allowed.
Loan Fringe Benefit
Section 16, FBTAA states that employer extending loan at discount to the rate provided by the RBA would amount to loan fringe benefits. The prime reason for this conclusion is that the employee would save money on account of the lowering of interest cost. The rate provided by RBA is known as “Benchmark Rate” and is revised annually (ATO, 2018 b). The employer while granting financial assistance in form of financial loans need to comply with this rate to avoid FBT liability (ATO, 2018 c). The providing of saving to employee would result in FBT liability for the employer linked to loan fringe benefit.
The various details of this case are summarised below.
Total financial assistance provided = $ 500,000
Applicable interest rate at which the assistance provided by employer = 4.25% p.a.
Applicable interest rate given by RBA (2017/2018) = 5.25% p.a.
The application of discount on the RBA rate to the extent of 1% is clear evidence of the loan fringe benefit being extended to Jasmine.
The deduction rule outlined in section 18, FBTAA 1986 highlights that FBT reduction may be possible for employer depending upon the utilisation of the loan and obtaining assessable income by employer from the usage of loan proceeds (ATO, 2018 c). In this regards, a key aspect is that possible deduction is available when the money is used by employee and not any associate.
Taking into consideration the usage of the loan proceeds, no deduction on $ 50,000 loan amount would be available for Rapid Heat since this has been extended to Jasmine’s husband. The possibility of FBT deduction for the employer depends on whether the holiday home that jasmine has bought would generate taxable income probably in form of rent or not for Jasmine.
Internal Expenses Fringe Benefit
The private expenses of employees are not the responsibility of employer. However, if the employer provides any contribution in this regards, then the underlying benefit would be called as expense fringe benefit. One particular case which may arise in this regards is when the employer lower the quote of a self-made product when the employer intends to purchase the same. It is equivalent of the employer paying the discount amount while employee bearing the remaining price (ATO, 2018 a).
In the given instance, Rapid Heater is a manufacturer of electric heater and Jasmine is interested in buying one of these. The price to consumers is $ 2,600 but when Jasmine expresses her desire to make purchase, the employer only takes $ 1,300 from her and thereby making the remaining payment on her behalf.
- Now, there has been a change in the loan proceed utilisation with 100% of the amount being used by Jasmine only. This would be useful for the employer since the share related income as dividends would ensure that deduction rule would be applicable. As a result, the employer would be able to extract extra FBT deduction to the following extent.
ATO, (1994) Taxation Ruling –TR 94/29 [Online]. Available at: Income tax: capital gains tax consequences of a contract for the sale of land falling through.
ATO, (2018 a) Fringe Benefits Tax- A Guide For Employers.
ATO, (2018 b) Loan Fringe Benefits
ATO, (2018 c) Fringe Benefits Tax- Exemptions and Concessions
Austlii, (2018 a) Income Tax Assessment Act 1997- SECT 110.25.General Rules About Cost Base
Austlii, (2018) Income Tax Assessment Act 1997- SECT 115.25 [Online].
Barkoczy, S. (2017) Core Tax Legislation and Study Guide 2017. 2nd ed. Sydney: Oxford University Press Australia.
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters (Professional) Australia.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2015) Australian tax handbook. 8th ed. Pymont: Thomson Reuters.
Krever, R. (2017) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON LAWBOOK Company.
Reuters, T. (2017) Australian Tax Legislation (2017). 4th 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.