HI6028 Taxation Theory Practice And Law

Part-A

1.Based on the framework of Income Tax Assessment Act 97, capital gains tax is the tax which can be asserted on capital disposal on a whole. Moreover, by seeking any changes that have been incurred betwixt the base of cost and the proceeds attained from the asset attracting capital gains. This can pave a path for the determination of capital gains or capital losses whatsoever. In this scenario, the taxation of capital gains is not undertaken effectively and moreover, the total capital gain which has been determined has also been incorporated in the usual income (Nethercott, Richardson & Devos, 2012). Under section 4 of the ITAA 97, determination of such capital gains tax is crucial because it assists in analysing the presence of capital gain or loss.

Inadequate utilization of vacant land

If the land and building have not been used by the company for its business, the same attracts capital gains tax. Furthermore, when there is a massive variation in the entity’s ownership, the blockage of vacant land will come under the purview of CGT because the same shall be regarded as asset disposal in general. Nevertheless, based on section 108.5, it is observable that the asset attracting capital gains pursues all property, legal, and other rights that are not signified as a property. In contrast to this, assets forming part of the CGT are properties like goodwill, land, building, interest associated with partnership asset, unit trust, etc (Barcokzy, 2010). Therefore, in relation to such section, the blockage of vacant place can be regarded as a capital asset.

In the given scenario, disposing the vacant land clearly attracts the scope of CGT and the same has been recorded at $320,000. Furthermore, such vacant land was acquired by the company for an amount of $100,000 during the year 2001. Moreover, the incidental expenses related to the land is also included in such amount and taxes amounting to $20000 as well. Hence, total capital gain that can be computed in lieu of the above scenario is equal to cost of asset disposal minus incidental expenses incurred on the same (Pratt & Kulsrud, 2013).

Therefore, total capital gain= 320000 - (acquisition rate + water costs, sewage cost, council rates, etc)

= $200,000.

In lieu of the previously mentioned scenario, it can be noted that the total capital gain from such land amounts to $200000. Therefore, on the transfer date, the entire value is not required to be submitted and instead only $20000 (ANU, 2017).

Antique bedding

The company’s collectibles also come under the purview of CGT and these can be artwork, antiques, jewellery, etc. Besides, based on section 108.5, the same is clearly reflected as an asset attracting capital gains tax. In the given scenario, Louis XIV bed is primarily a collectible and the same has been procured after passing of cut-off date. Thus, the same cannot be considered a pre-CGT asset, thereby prohibiting exemption (ANU, 2017).

The bed was stolen on November 12 that can be referred as the disposal date. Hence, in relation to this, the taxpayer is bound to register a complaint together with the insurance organization so that the entire amount can be attained. In contrast to this, the taxpayers failed to receive the total amount and only attained $11000. According to section 110.25 in relation to attainment of such antique bed for a value of $3500 and under the fourth component, the alteration expenses can be regarded as the incidental cost of such asset. Nevertheless, such procurement expense and incidental cost can be indexed in the following way:

(Quarter index figure when the asset is sold/ quarter index figure of purchase of asset) * incidental expenses

In relation to this, index figure in the procurement of bed (July 21, 1986) = 43.2, index figure in relation to loss on antique (November 12, 2017) is equal to 112.1, and index figure during occurrence of incidental cost (October 21, 1986) is equal to 44.4 respectively.

Moreover, indexation of such incidental expenses = 112.1/44.4 = 2.525

Further, indexation of base expense = 112.1/43.2 = 2.595

Total capital loss or gain from such antique bed

After the process of indexation, the incidental expense shall come at 2.525*1500 = $3787.5 and after the indexation process, the purchase expense shall come at 2.595*3500= $9082.5

Therefore, net base expense = $3787.5+$9082.5 = $12870

Capital proceedings from the insurance organization = $11000

Thus, the total capital loss from the same is equal to $12870 minus $11000 that gives $1870 respectively.

Painting

According to the requirements of section 108.5 of the ITAA 97 act, the painting also comes under the ambit of capital gains tax. In the given scenario, the painting had been procured on May 2, 1985 for a value of $2000. Thus, since the date of procurement is prior to September 20, 1985, it must be noted that the same must not come under the scope of pre-GST asset. Overall, the same is also exempted from the applicability of capital gains tax (Kenny, Blissenden,  & Villios, 2016)

Shares

According to the requirements of section 108.5 of the ITAA act, shares also come under the boundary of capital gains tax since it is both intangible and tangible in nature. Further, if such shares have been used for the purpose of trading, they attract section 6 wherein applicability of ITAA 97 will be removed and instead, these will be incorporated under ordinary income (Sadiq et. al, 2017). In the given case, shares of Young Kids, PHB Iron Ore, and Common Bank are being offered for sale on the date of event and these have been procured on September 21, 1999. Moreover, a discount rate of 50% is applicable in this case because such shares have been on hold for a period of more than twelve months. However, such rate of discount may not be applicable in the case of Share Building Ltd because the same have been bought and sold in the same year.

1. Profit expectation from the sale of shares of Common Bank

Total capital gain = Disposed value less (stamp duty + purchase expenses)

= $(47000-550) less ($15000+750) = $30700

1. Profit expectation from the sale of shares of PHB Iron Ore

Total capital gain = Disposed value less (stamp duty + purchase expenses)

= ($62,500-1000) – ($30000+1500) = $30,000

1. Profit expectation from the sale of shares of Young Kids Learning

Total capital gain = Disposed value less (stamp duty + purchase expenses)

= $(600-100) – (6000+500) = $6000

1. Profit expectation from the sale of shares of Shares Build Ltd

Total capital gain = Disposed value less (stamp duty + purchase expenses)

= ($25000-900) – ($10000+1100)

= $13000

Therefore, total capital gain= (30700+30000+6000+13000) = $67,700

Violin

In relation to this asset, the same is accounted for personal utilization based on section 108.5 that attracts the applicability of CGT. Moreover, violin is purchased for personal pleasure and can be considered as a personal asset under section 108.20(2). Nevertheless, in this scenario, such violin is procured for $5500 on June 1, 1999 and therefore, disposing the same can give rise to the following gains:

Total gain= value of asset disposal + asset’s cost base

= ($12000) – (incidental expenses + procurement rate)

Therefore, in relation to disposal of the same, total gain reports at $6500

Assessment of total capital gain that must form part of usual income

Headings	($)
Capital gain in relation to vacant land disposal	200,000
Capital gain in relation to antique disposal	6,000
Capital gain in relation to share disposal	67,700
Capital gain in relation to painting disposal	0
Capital gain in relation to violin disposal	6,500
Net capital gain	280,200
Loss=	8,500
	271,700
Discount ([email protected]%)	135,850
Usual income addition=	135,850

Part -B

Fringe benefits tax is a mandatory tax that must be contributed by an organization’s employer on the advantages provided to their employees. Rapid Heat Pty Ltd has been primarily engaged in the production of bathtubs and who has given fringe benefits to Jasmine (one of its employees). In other words, it is observable that Jasmine has been provided a car loan in addition to other goods in kind that has been produced by the company (Kenny, Blissenden,  & Villios, 2016). Overall, the company is majorly liable to expend the amount of fringe benefits tax. The amount of fringe benefits tax can be reflected through the following way:

Fringe benefits tax that is incurred in relation to car utilization

When the car has been provided by the employer of the company to Jasmine, it is liable on the employer’s part to pay tax on such fringe benefits. Further, the applicability of residual fringe benefits shall be applicable if the car fails to address proper utilization of the same. It can also happen that the car can be exempt from taxability of fringe benefits. Operating cost and statutory method are the primary methods that can be used to calculate an organization’s fringe benefit tax. The operating cost method plays a primary role in the taxation industry and it necessitates complete information of the travelling that has been undertaken based on personal motives and kilometres (Barcokzy, 2010). This is the reason why the latter method has been used widely by companies in the current scenario.

In this given case, the company has given Jasmine a car and the same has been provided in the year May 1, 2017. Nonetheless, the company had acquired such car for a value amounting to $33000. After the provision of car to Jasmine, she had incurred $550 on such car but the same was returned by the company as a reimbursement. Moreover, when the company had acquired the car, it failed to use the same for more than 15 days. Overall, the car had reported to travel around 10000 kms and afterwards, the same was offered to Jasmine. Hence, FBT can be ascertained in the following manner (statutory method):

Value =

In this phenomenon, it is notable that A= cost of the car, B= statutory or mandatory percentage, C= usage of vehicle for personal motives, D= number of days in a year, and E= employee’s contribution in relation to the vehicle. Therefore, it can be seen that:

A = 33000, B = 0.20, C = 320, D = 335 and E = 0

Thus, fringe benefit tax as per statutory method can be calculated as:

Value = {(33000*0.20*320) / 335} – 0 = $6304

Thus, the net rounded up figure = $6304 * 2.1463 = $13,531

FBT on the loan amount

FBT on a loan amount becomes applicable when the loan amount provided is not charged an adequate rate of interest by the employer. Furthermore, when the rate of interest is not up to the mark and the benchmark or fixed rate is more than the same, then such interest rate is said to be lower or inadequate in nature (Cartwright, 2013). Moreover, if there is an outstanding debt on the part of employee that must be paid to the employer and the employer has taken no initiative to demand such payment, then this provision of loan will come under the purview of fringe benefit that is entirely safeguarded from the applicability of FBT. In association with the given case, the company has given its employee (Jasmine) a loan of $500,000 and the rate of interest charged from her was 4.45%. Jasmine had used such amount for both personal motives and offered the rest amount to her husband. In other words, out of $500,000, she used $450,000 for purchase a home and $50,000 was taken by her husband to buy the shares of Telstra. However, the benchmark rate of interest in that period reported at around 5.95%. Thus, the value of benefit on this loan = (benchmark rate of interest – rate offered to the employee) * amount of loan

= (5.95 – 4.45%) * 500,000 * 7/12

=$4,375

Furthermore, the net rounded off figure = $4375 * 1.9608 = $8,579

Hence, if Jasmine would have used the entire amount of loan for her personal motives, the entire amount would be calculated but if the benchmark rate had been lesser than the rate offered to her, then the purview of FBT would not occur. Since, the amount has been used for purchasing assets that can assist in generation of revenues, deduction on the same can be claimed but in this case, her husband had bought the shares of Telstra from such loan amount and therefore, deduction will not be available.

Fringe benefit tax on the items provided to employee

Fringe benefit tax or FBT becomes applicable when goods are offered to the employees of the company at a lesser price than the prevailing market price. It means that such taxability does not incur if the goods offered are at an equivalent or greater price than the one prevailing in the market. Therefore, the employer is responsible to pay the amount of fringe benefit tax that is present in the difference between the price offered and market price. Thus, according to the given situation, the company has provided some products to the employees and at a rate of $1300. However, the rate of such goods in the market was $2600 that was exactly double the amount. Therefore, the employer is required to pay such fringe benefit tax on the difference in price offered and market price (Fullerton et. al, 2017).

Value of benefit= $2600-$1300 = $1300

Therefore, net rounded off figure = 1300 * 2.1463 = $4078

The aggregate amount of FBT that can be incurred in this segment is:

Grossed up loan amount stands at $8579, grossed up product amount stands at $4078, and grossed up car amount stands at $13,531 respectively. Therefore, the net amount stands at (13531+8579+4078) = $26188.

Fringe benefits tax has been charged at a rate of 49.25% that has reflected at $12897

1. If Jasmine had also used the value of $50,000, the loan obtained by the husband of Jasmine was utilized to buy the Telstra’s shares, then in this case, the employer is responsible for deduction of interest. Hence, the fresh value of FBT has been disclosed in the following method:

Value of benefit on loan = (5.95% - 4.45%) * 450000 * 7/12 = $3,938

Hence, the net rounded figure = $3,938 * 1.9608 = $7,721

The net fringe benefit tax in relation to this is as under:

Grossed up loan amount =7721, Grossed up goods amount = 4078, and grossed up amount of the car provided to Jasmine= 13531 respectively. Furthermore, it is notable that the total figure amounts to (7721+13531+4078) that gives $25,330.

Nevertheless, it can be noted that the fringe benefits tax that has been present in this case is charged at the rate of 49.25%. Hence, the same will amount to 49.25% of $25,330 that gives $12475 respectively.

Hence, the new amount of fringe benefits tax shall arrive at $12475 during the year and the same must be paid by the employer of the company.

References

ANU. (2017) Residual fringe benefits. Available from: https://services.anu.edu.au/financial-management/taxation/residual-fringe-benefits [Accessed 29 September 2018]Barcokzy, S. (2010) Australian Tax Casebook. CCH Australia Ltd

Cartwright, M. (2013) Death to the Australia Tax?, Available from: https://www.ato.gov.au/Individuals/Deceased-estates/Being-an-executor/Tax-responsibilities [Accessed 30 September 2018]

Fullerton, I.G,  Deutsch, R,  Friezer, M.L, Hanley, P &  Snape, T. (2017). The  Australian Tax Handbook Tax Return Edition 2017. Thomson Reuters: Australia

Kenny, B. V. (2016). Australian Tax 2016.  Thomson Reuters (Professional) Australia Limited

Kenny, P, Blissenden, M, & Villios, .S. (2016) Australian Tax 2017. Thomson Reuters: Australia

Nethercott, L,  Richardson, G & Devos,K. (2013) Australian Taxation Study Manual. Sydney.

Pratt, J. W &  Kulsrud, W N. (2013) Federal Taxation. Oxford university press.

Sadiq, K, Coleman, C , Hanegbi, R,  Jogarajan,S,  Krever, R, Obst, R, Teoh, J & Ting, A. (2017) Principles of Taxation Law 2017. Law book Australia