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Taxation Law : Tax Assessment Act

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Question:

Describe about the Taxation Law for Tax Assessment Act.

 

Answer:

Tax on Capital Gains

According to the Income Tax Assessment Act 1997, acquisition of asset before 20 September 1985 is entitled to exemption from the tax liability under capital gains. However, if the substantial changes have been implemented on such assets then it will be taxable under the head capital gains and loss. In the present case study, the capital asset purchased by Fred was holiday home on March 1987 hence, the provisions of section 104 ITAA 97 shall be applicable on disposal of the capital asset. If the amount of sale proceeds is more than its acquisition cost then the difference is termed as capital gain whereas if the sale proceed is less than the acquisition cost then the difference is known as capital loss (Shah, 2015). In the present assignment, determination of net capital gain for the current tax year has been ascertained in the books of Fred.

As per the regulation of capital gain taxation, an individual assessee is eligible to pay tax on the assessable value of the capital gain for the current taxation year. The assessable value is determined by considering the costs on legal fees, brokerage charges and cost of improvement or other substantial charges incurred to acquire or dispose off the asset. Additionally, the acquisition cost of asset is required to the adjusted by the indexation factor if the asset had been bought before September 21, 1999 (O'Connor et al., 2016). In case of Fred’s holiday home which was purchased during the year 1987 and the garage was constructed during the year 1990 hence, the assessable value of asset can be determined by applying the indexation method. On the contrary, assessable value of the capital asset is also determined by using the discounting method since the period of holding the asset is more than 12 months.

As per the regulations of ITAA97 for the purpose of deduction in determining the taxable value of capital asset, the taxpayer is entitled to claim deduction by applying the several discounting methods. One of the methods is indexation method and the other method is discounting method by deducting the 50% of the taxable value as an exempted value (Weber, 2015). Hence, the net capital gain from the sale of Fred’s holiday home during the current tax year is computed as follows:

Computation of capital gain during the current tax year 2016 using indexation method:

Particulars

Amount $

Amount $

Fair value consideration

 

800,000.00

Less: Expenses related to sale:

   

Legal fees

1,100.00

 

Commission

9,900.00

(11,000.00)

Net value of consideration

 

789,000.00

Less: Cost of acquisition:

   

Purchase cost subject to indexation

149,668.87

 

(100000*67.8/45.3)

   

Stamp duty

2,000.00

 

Legal fees

1,000.00

 

Cost of building a garage

20,000.00

(172,668.87 )

Capital gain

 

616,331.13

Table 1: Capital Gain using indexation method

(Source: Created by author)

Computation of capital gain during the current tax year 2016 using discounted method:

Particulars

Amount $

Amount $

Fair value consideration

 

800,000.00

Less: Expenses related to sale

   

Legal fees

1,100.00

 

Commission

9,900.00

11,000.00

Net sale of consideration

 

789,000.00

Less: Cost of acquisition

   

Purchase cost

100,000.00

 

Stamp duty

2,000.00

 

Legal fees

1,000.00

 

Cost of building a garage

20,000.00

123,000.00

Capital gain

 

666,000.00

Discount @50%

 

333,000.00

Net capital gain

 

333,000.00

Table 2: Capital Gain using discounting method

(Source: Created by author)

Considering the above valuation of the capital asset, holiday home sold by Fred during the current tax year it can be observed that the net capital gain in the indexation method is more than the discounted method. Therefore, it is recommended that Fred should adopt the discounted method to determine the taxable value of the capital asst holiday home. Further, if there is capital loss exist in the block of capital asset then the same can either be set off or carry forward to the subsequent assessment years as per the taxation ruling ITAA97. In the given case there exist net loss from the sale of shares by Fred valued to $10,000 during the last financial year and such loss shall be entitled to set off from the amount of capital gain arise in the current tax year. However, the asset should be long-term asset because as per ITAA 97, capital loss from short-term asset cannot be set off from the long-term capital gain (McCormick, 2015). Since, the nature of the loss from the shares incurred by Fred is not mentioned it is assumed that the investment on shares was made for long- term period. Hence, the set off criteria can be availed by Fred from the current year’s net capital gain valued to ($333,000- $10,000) = $323,000.

Additionally, the regulations of capital gain ITAA97, several capital assets are exempted from the taxability of capital gain and loss head. The assets are residential house if the assessee has no other property, assets or collectibles for personal use while collectibles include drawings, photographs, paintings, antiques, jewellery and coins. If the value of the collectibles is less than $500 then the profit from sale of such collectibles would be exempted while loss shall not be considered to set off. Moreover, if the individual taxpayer develops the interest to collect such asset after December 1995 then the profit from the sale of such asset will not be considered for exemption (Faccio & Xu, 2015). In case of Fred’s capital asset transactions, loss from the sale of antique vase during the last taxation year valued to $10,000 that clarifies the value was more than $500 hence it will not be considered for exemption from capital gain taxation. Accordingly, loss from the sale of such asset shall be considered to set off from capital gains in the current taxation year. On the contrary, in case the vase had been acquired before 16 December 1995 then the value of capital gain shall be exempted while the loss will not be considered to set off from other capital gains.  

 

Tax on Fringe Benefits

(a) Consequences of FBT for the year ending 31 March 2016

Fringe benefit as per the Fringe Benefit Tax Assessment Act (FBTAA) 1986 is defined as the advantages provided by the employers to the employees in monetary or non- monetary terms. The employees are required to be in the service tenure in order to receive the allowances from the employers while such the values of such benefits are taxable in the hands of the employers (Ryen, Temba & Matotay, 2015). Further, section 58X of FBTAA 1986 states the fringe benefits that are exempted from tax liability in the hands of employers and such allowances should be provided for the use of employer’s work only. As per TR97/17 of ITAA 97 and 58X of FBTAA 1986, exempted fringe benefit includes benefits of electronic gadgets, briefcase, computer software, office tools and protective clothes required for the work. The taxable value of the fringe benefit is determined by using the higher gross- up rates and lower gross- up rates in consideration with section 136 of FBTAA 1986 (Badoer & James, 2016).

Higher gross- up rate method is used to measure the taxable value of fringe benefit as per TR97/17 ITAA97 if the employers pay Goods and Service Tax (GST) on the value of allowances provided. The employers are required to be registered and entitled to receive the GST credit for the tax amount paid on the value of benefits (Fowler, 2013). On the other hand, lower gross- up rate is applied if the employers do not pay the Goods and Service charges on the value of the benefits provided to the employees during the taxation year (Nijland & Dijst, 2015).

In the present situation, Periwinkle Limited a manufacturing company who directly sells the bathtub to the general public provided certain allowances to its employee Emma in the taxation year 2016. Periwinkle Ltd offered a car allowance to Emma valuing $33,000 including the charges for Goods and Service Tax. Emma utilized the car for travelling 10,000 kilometers as well as incurring the minor repair charges $550 including the GST charges. Apart from that, Emma did not use the car for around 10 days while it was parked at the airport and scheduled for annual repairs for the next 5 days.

As per the provisions of FBTAA 1986, in case the car is used by the employees for personal purpose apart from the use for the purpose of work then its value will be taxable in the hands of the company. However, if the car is utilized for work purpose only then the value of such allowance i.e. sedan car, station wagon or car with maximum capacity nine passengers shall be exempted in the hands of the employer (Hodgson & Pearce, 2015). Moreover, allowance for car parking is taxable if the car is parked at the employee’s premises or any other place including airport. However, charges for repairs and maintenance of car at garage will not be considered as car used for personal purpose hence would not be taxable.

Accordingly, tax liability on car allowance offered to Emma during the year March 31, 2016 is determined as follows:

Cost of the car

$33,000.00

car used for

10,000 Kms

Number of days car was not in use

10 days

Proportionate cost of car as per the use

33,000*350/360

 

                                       = $32,083.33

Higher gross- up rate

2.1463

Taxable value

$68,860.45

Amount of FBT on the taxable value @49.0%

$33,741.62

Table 3: Fringe Benefit Tax

(Source: Created by author)

The amount of the car provided by the company is inclusive of GST therefore higher gross- up rate is to be used to determine the taxable value. Additionally, charges of repairs and maintenance $550 will not be considered in the taxable value since it is not categorized as use for personal purpose according to FBTAA 1986 (Negro, Visentin & Swaminathan, 2014). On the contrary, the value of parking at airport for 10 days will be considered as taxable value as the car was under Emma’s acquisition.

Cost of car for 10 days $

33,000.00 - 32,083.33

 

                                          = 916.67

Higher gross- up rate

2.1463

Taxable value

                                        = 1,967.44

Amount of FBT on the taxable value @49.0%

964.04

Table 4: Fringe Benefit Tax

(Source: Created by author)

The company also offered the allowances on loan to its employee on September 1, 2015 amounted to $500,000 at an interest rate of 4.45%. As the interest rate is lower than the average benchmark interest rate prevailing 5.45% per annum during the current tax year FBTAA 1986 therefore it will be considered as fringe benefit. Hence, Periwinkle Ltd is eligible to pay tax on the loan allowance on the differential amount i.e. $500,000 * (5.45% – 4.45%) = $5,000 taxable @49.0% i.e. $2,450. However, the utilization of amount of loan will not affect taxation in the books of Periwinkle whereas it will affect the taxability of Emma. In such case, Emma will not be entitled to claim the deduction for interest cost while determining her taxable income since she did not use the loan but used by her husband during the current tax year.

Periwinkle also offered the allowance by offering bathtub to Emma amounted to $1,300 while the cost of production for the company was $700. The company sells the product to the public at $2,600 hence, its sale to Emma at lower value will be considered as fringe benefit and will be taxable according to FBTAA 1986. Therefore, the taxable amount of the benefit in the hands of the company is $637 i.e. 49% on $1,300 $(2600- 1300).  

(b) Consequences of FBT if Emma uses $50,000 to purchase shares herself

In case the amount of loan offered by the company is used by Emma to purchase the shares for herself instead of lending it to her husband then also the provision of fringe benefit will be applicable. Taxability of the allowance provided by the employer is based on the type of benefit provided to the employee depending on the personal use and use for work. However, in case of personal use the value of the allowance is taxable whether used by the employee or if the benefit is lent to the relatives (Dimitropoulos et al., 2016). Therefore, the taxable amount of loan offered by Periwinkle will be similar to that of determined in the first requirement (a) amounted to $637. Moreover, Emma is entitled to claim deduction on the interest charges since the loan is utilized by herself for acquiring the shares.

 

Reference List

Badoer, D.C. & James, C.M., (2016). The Determinants of Long?Term Corporate Debt Issuances. The Journal of Finance, 71(1), pp.457-492.

Dimitropoulos, A., van Ommeren, J.N., Koster, P. & Rietveld, P., (2016). Not fully charged: Welfare effects of tax incentives for employer-provided electric cars. Journal of Environmental Economics and Management, 78, pp.1-19.

Faccio, M. & Xu, J., (2015). Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(03), pp.277-300.

Fowler, G.M., (2013). Fringe Benefits, Proposed Section 84, and Tax Policy.Pepperdine Law Review, 7(3), p.5.

Hodgson, H. & 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.

McCormick, M., (2015). Tracking mass death during the fall of Rome’s empire (I). Journal of Roman Archaeology, 28, pp.325-357.

Negro, G., Visentin, F. & Swaminathan, A., (2014). Resource Partitioning and the Organizational Dynamics of “Fringe Banking”. American Sociological Review, 79(4), pp.680-704.

Nijland, L. & Dijst, M., (2015). Commuting-related fringe benefits in the Netherlands: Interrelationships and company, employee and location characteristics. Transportation Research Part A: Policy and Practice, 77, pp.358-371.

O'Connor, B., Hynes, T., Haugh, D. & Lenain, P., (2016). Searching for the Inclusive Growth Tax Grail: The Distributional Impact of Growth Enhancing Tax Reform in Ireland. The Economic and Social Review, 47(1, Spring), pp.155-184.

Ryen, A., Temba, E. & Matotay, E., (2015). Company welfare and social work ethics: a space for social work?: A discussion based on cases from Norway and Tanzania. Journal of Comparative Social Work, 5(1).

Shah, A., (2015). TAXING CHOICES FOR ECNOMIC GROWTH WITH SOCIAL JUSTICE AND ENVIRONMENTAL PROTECTION IN THE PEOPLE'S REPUBLIC OF CHINA. Public Finance and Management, 15(4), p.326.

Weber, D., (2015). An Analysis of the Past, Current and Future of the Coherence of the Tax System as Justification. EC Tax Review, 24(1), pp.43-54.

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