HI6028 Taxation Theory Practice & Law

Question 1

The situation presents involving offering tax advice to the client considering that there are certain assets which have been disposed during the tax year 2017/2018. An important aspect to note is that that given assets which are disposed does not constitute trading stock for the client since these transactions are not part of normal business activity.  As a result, the potential implications of ordinary income can be ruled out and the proceeds derived from the asset sale can safety be considered as capital proceeds. The focus thereby would be on the implications related to capital gains and the resultant CGT that would be payable by the client.

For computation of capital gains and related CGT, certain basic contextual terms ought to be defined for higher clarity.

Pre- CGT Asset

As the name implies, an asset which was purchased in the era when CGT did not exist is referred to as pre-CGT asset. The significance of this term lies in the fact that in accordance with s. 140-10 ITAA 1997, for these assets no CGT would be levied irrespective of the quantum of capital gains or losses and the holding period by the underlying taxpayer (Sadiq. et.al., 2015).

CGT Event

Whenever a CGT event takes place, the computation of capital gains or losses is required. A summary of CGT events is mentioned as per s. 104-5, ITAA 1997. A particular CGT event which would be relevant from the context of the given task is event A1 (Woellner, 2014). This event relates to the disposal of asset. Further, the resultant capital gains computation requires the deduction of cost base of given asset from the sale price that has been fixed for the asset.

Cost Base

Considering the approach highlighted above, the asset cost base ought to be found. The same can be found in accordance with s. 110-25 ITAA 1997. This section indicates that there are namely five key costs related to the computation of cost base as has been explained below (Austlii, 2018 c).

• Cost Element 1: This comprises of the price that the asset is initially bought for.
• Cost Element 2: This comprises of the related costs which are spent by taxpayer during asset selling or buying.
• Cost Element 3: This comprises of the ownership costs which are spent on the asset with regards to meeting the tax obligations, interest amount of loan assumed and such related expenses.
• Cost Element 4: This comprises of the expenses that taxpayer undertakes for increasing the asset value or ensuring that the asset value does not fall.
• Cost Element 5: This comprises of the expenses that taxpayer undertakes in order to retain the title over the asset under consideration.

Discount Method-Capital Gains

ITAA 1997 provides certain concessions with regards to long term capital gains to taxpayers so as to induce them to hold the assets for a longer period. The relevant clause is s.115-25 as per which only half of the long term capital gains would be taxed under CGT regime. However, this method does not provide any discount in case of short term capital gains (Austlii, 2018 b).

Capital Losses Treatment

It is imperative to note that any capital losses which arise on account of asset sale cannot be used to lower the taxable income of the individual but it can only reduce capital gains. Hence, if in a given year when capital losses arise and no capital gains are present, the rolling over of the capital losses would occur (Sadiq. et.al., 2015).

Block of vacant land

The vacant land block was purchased in 2001 and sold in 2017/2018 which clearly highlights that the capital gains on the concerned asset would be long term. Also, the purchase date signifies that the asset is not a pre-CGT asset and hence cannot be exempt from CGT. Another issue which arises in the sale of land block is that there is difference in the tax years of contract enactment and the proceed receipt. This issue can be resolved by referring to TR 94/29 which highlights that tax liability would be borne in the year of agreement execution while the proceeds can be received later (ATO, 1994).  Hence, for the given client, CGT liability would be payable in 2017/2018 only and not 2018/2019.

Capital Gains Calculation

Antique Bed

The acquisition of antique bed took place in 1986 while it has been stolen in 2017/2018 which implies that the ownership period exceeds one year and thereby the capital gains would be long term. Further, it is also confirmed that the given asset is not a pre-CGT asset and hence not exempt from CGT liability. The relevant CGT even triggered is A1 which makes it necessary to compute the relevant capital gains or losses.  Also, considering that it is an antique bed, hence it is a collectable. A noteworthy aspect in this regards is that CGT would be levied on capital gains or losses derived only when the initial purchase price is in excess of $ 500 which is the case here.

Capital Gains Calculation

Painting

This particular asset would not have CGT implications owing to the date of purchase which falls in the pre-CGT era which results in classification of this asset as a pre-CGT asset. In accordance to s. 149(10) ITAA 1997, no CGT implications arise for pre-CGT assets (Austlii, 2018 a).

Shares

All the relevant shares acquired have been done so post CGT application which implies these are not pre-CGT assets. Also, in regards to share disposal, A1 CGT event has been triggered which requires the computation of capital gains using the approach highlighted in s. 104-5 ITAA 1997 (Sadiq. et.al., 2015).

Capital Gains Calculation

Violin

The asset on account of the purchasing date does not qualify as a pre-CGT asset. However, a pivotal aspect of this asset is that it is not a collectable since it is used by the client for her entertainment. This can be established by considering that she has good violin playing skills and maintains a huge collection which she often uses for playing.  This is thereby labelled as an item of personal use and the requisite rule for such items is that the purchase price should not cross $ 10,000 for CGT to be levied. This condition does not fulfil for the violin in consideration and hence no CGT liabilities arise from liquidation of the concerned violin.

Cumulative Capital gains

The taxable capital gains for the client on account of the given transactions are reflected below.

Question 2

• Employers extend certain non-cash personal benefits to employees which are known as fringe benefits. For the tax implications of the above outlined benefits, a separate statute exists in the form of Fringe Benefit Tax Assessment Act (FBTAA) 1986. A noteworthy feature of these benefits is that despite the employee being the recipient of economic benefit, the tax is levied on the employer and the employee is 100% exempt from FBT. In the context of the situation provided, the key fringe benefits as discussed as follows.

Car Fringe Benefit

This fringe benefit tends to arise in a scenario where employer owned car is provided to employee for personal use. This is irrespective of the fact that the same car is professionally used or not. The benefit extension to employee is apparent for the fact that car is being used for employee’s personal use and the underlying costs are borne by employer (ATO, 2018 a).

In this case, employer (Rapid Heat Pty Ltd) has given a car to employee Jasmine and the same is free to be used for her personal use especially on weekends. Clearly, car fringe benefits are being provided to Jasmine by Rapid Heat. The net is that Rapid Heat would have to bear FBT arising from car fringe benefits.

For computation of car fringe benefits, s.9 FBTAA 1986 provides a useful approach comprising of the cost base of car and number of days for which private usage was allowed (Kreyer, 2016).  Based on the date of extension being May 1, 2017, deduction has been made for the period starting from April 1, 2017 to May 1, 2017. However, there are other scenarios whose deduction ought to be discussed. A ten day period when Jasmine had parked the car at the airport parking does not provide any deduction because the car was available to use for Jasmine. A similar conclusion could be drawn in respect of the car being in garage for minor repairs. Deduction on account of repairs is only permissible when these are major.

Relevant gross up factor for car is 2.0808 for FY2018. Also, the FBT rate for the given year is 47%. The FBT computation is carried out below.

Loan Fringe Benefit

These benefits are extended to the employees when they tend to save money in the form of lower interest payments on financial loans obtained from the employers. The reference rate to decide whether the rate offered by employer is lower or not is BENCHMARK INTEREST RATE which is given by RBA for each year.  Providing the loan on an interest rate lesser than the rate provided by RBA leads to loan fringe benefits to employee as he/she would save interest by borrowing at cheaper rate. Further, like other fringe benefits, the tax implications of loan fringe benefit would be borne by the employer with zero liability for employee. (ATO, 2018b)

The employer has provided Jasmine with financial assistance of $ 500,000. The applicable rate of interest is 4.25% p.a. and is lesser than the relevant RBA rate which is 5.25% p.a. for 2017/2018. Relevant gross up factor for loan is 1.8868 for FY2018. Also, the FBT rate for the given year is 47%. The FBT computation is carried out below (Barkoczy, 2017).

 

It is crucial to note that the usage of the loan proceeds may be carried by the employer or any associate. However, from the perspective of the employer, it is imperative to consider the precise breakup of the usage as tax deduction may be claimed by the employer for any interest saving on the loan amount that the employee uses for generation of assessable income (Reuters, 2017). The scope of this deduction is limited only to the employer and does not extend to the spouse or associate. For the concerned employer Rapid Heat, Jasmine uses $ 450,000 for holiday home and the deduction on this would be dependent on the derivation of taxable income for Jasmine. However, the remainder amount has been extended to her husband for investment and hence no deduction on the same is possible for the employer (ATO, 2018b).

Internal Expenses Fringe Benefit

A particular benefit enjoyed by employees is when their personal expense is borne by the employer. A special case of this is when the employer provides internally manufactured product at a steep discount despite the same being used for personal purpose by the employee. This is the situation here where the company has decided to provide Jasmine the heater at a steep discount of 50% to the retail price (ATO, 2018 a). The discount amount is essentially the expense benefit given to Jasmine.

Relevant gross up factor for heater is 2.0808 for FY2018. Also, the FBT rate for the given year is 47%. The FBT computation is carried out below (Barkoczy, 2017).

• Unlike before, the $ 50,000 amount that was given to her husband is now instead used by Jasmine herself for making stock investments. It is highly likely that this would produce dividend income which contributes to assessable income under s. 6-5 ITAA 1997 (Wilmot, 2014). As a result, Rapid Heat would be able to lesser the FBT liability burden on account of $ 50,000 being used by Jasmine, The computation is illustrated as follows.

References

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. https://www.ato.gov.au/law/view/document?DocID=TXR/TR9429/NAT/ATO/00001&PiT=99991231235958 (Accessed: 24 September 2018)

ATO, (2018 a) Fringe Benefits Tax- A Guide For Employers. https://law.ato.gov.au/atolaw/view.htm?DocID=SAV%2FFBTGEMP%2F00010 (Accessed: 24 September 2018)

ATO, (2018 b) Loan Fringe Benefits https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Types-of-fringe-benefits/Loan-fringe-benefits/ (Accessed: 24 September 2018)

Austlii, (2018 b) Income Tax Assessment Act 1997- SECT 115.25 [Online]. Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s115.25.html (Accessed: 24 September 2018)

Austlii, (2018 c) Income Tax Assessment Act 1997- SECT 110.25.General Rules About Cost Base [Online]. Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.5.html (Accessed: 24 September 2018)

Austlii, (2018) Income Tax Assessment Act 1997- SECT 149.10 [Online]. Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s149.10.html (Accessed: 24 September 2018)

Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9^th ed. Sydney: Oxford University Press.

Krever, R. (2016) Australian Taxation Law Cases 2017. 2^nd ed. Brisbane: THOMSON LAWBOOK Company.

Reuters, T. (2017) Australian Tax Legislation (2017). 4^th 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.

Wilmot, C. (2014) FBT Compliance guide. 6^th  ed. North Ryde: CCH Australia Limited.

Woellner, R. (2014) Australian taxation law 2014. 8^th ed. North Ryde: CCH Australia.