Capital Gain Tax Calculation And Fringe Benefits Tax Implications

CGT Implications for Vacant Land

1. In the present case, client is an investor and also collects antique items and has made numerous transactions involving disposal of various assets. Here, the main task is to find whether the proceeds received from the disposal of assets would amount to Capital Gain Tax (CGT) or not. Further, the net capital loss or capital gains would be calculated for the incurred capital gains or losses for the given financial year.

• Transaction made for the sale of block of vacant land

CGT would be applicable only for those assets which are categorised as post- CGT asset that are purchased after 20 September 1985 under the provisions of s. 149(10) of Income Tax Assessment Act 1997.  Similarly, the assets that are acquired by the concerned taxpayer earlier than 20 September 1985 are known as pre-CGT asset and are free from CGT implications. Therefore, it can be said that acquiring date of asset is an imperative aspect for the validation of CGT (Barkoczy, 2017). In the present case, taxpayer (client) has acquired a block of vacant land in January 2001. The acquirement of block of vacant land is after 20 September 1985 and therefore, the sale of CGT asset would amount to capital gains/loss. Further, as per s. 140-5, the transaction occurred for the sale of CGT asset (block of vacant land) would be classified as A1 event. The capital gain/ loss can easily be calculated with the help of cost base of asset and the income received from disposal under s. 110-25 ITAA 1997 (Reuters, 2017). The cost base of an asset includes five essential elements which are defined in s. 110-25 (1) (Deutsch et. al., 2016).

• Under s. 110-25(2), amount paid by taxpayer to buy the asset.
• Under s. 110-25(3), incident costs paid by taxpayer to acquire or sell the asset.
• Under s. 110-25(4), expense occurred in regards to the ownership of asset which includes interest on loan, land tax, sewerage tax and so forth.
• Under s. 110-25(4), capital expenses occurred for the asset value increment or/and for preservation of asset.
• Under s. 110-25(5), capital expenses undertaken for the protection of title of the asset.

Amount paid by taxpayer to buy the block of vacant land = $100,000

Expense occurred in regards to the ownership of block of vacant land = $20,000

Cost base of block of vacant land = (Expense occurred in regards to the ownership of block of vacant land) + (Amount paid by taxpayer to buy the block of vacant land)

Here, one of key aspects is that she has enacted the contract for the sale of block of vacant land in the existing tax year. However, the payment of contract has not been received by her as the amount would be received in the next financial year. Hence, it is essential to determine whether the proceeds would be taxed under CGT in the existing financial current year or in the next financial year. The relevant provision is defined in TR 94/29 which highlights that proceeds from the sale of asset would be utilized for CGT in the financial year on which contract of sale has been enacted irrespective of the fact that taxpayer would get the payment in the next financial year (Gilders et. al., 2016). Here also, the client would get the payment of $100,000 in net year while she has signed the contract of sale in the current financial year only. Therefore,

Cost Base Calculation for CGT Asset

Further, the net balance of capital gains/losses would be the amount that would be found after settling the previous capital losses incurred (Woellner, 2014).

Client has capital losses of sum $7,000 and therefore, the losses would be settled with the current year’s capital gains.

50% rebate would be claimed by the taxpayer for the disposal of long term (holding period >1 year) CGT asset. It is apparent that client buys the land in 2001 which indicates that holding period of land is more than 1 year and hence, 50% rebate on the net capital gains would be applied (Woellner et. al., 2017).

• Transaction made for the sale of antique bed

Antique pieces are considered as collectables and as per TD 1999/4, the collectables would be classified as capital asset and disposal of capital asset would lead to CGT liability on taxpayer (Gilders et. al., 2016). Further, capital gains or losses subject to the sale of antique pieces would not lead to CGT when the item has been acquired for lesser than or equal to $500.  Further, as per s. 140-5, the transaction occurred for the sale of CGT asset (antique piece) would be classified as A1 event. In present case, client has acquired an antique bed on 21 July 1986 which means the asset would be classified under post-CGT asset category and thus, CGT would be payable by the taxpayer for the derived capital gains or losses (Barkoczy, 2017).

Under s. 118-25(1), amount paid by client to acquire the bed = $3,500

Under s. 118-25(5), amount spent in the alterations of bed in regards to increase the value = $1500

Client has not sold the bed rather the bed has been stolen from her house. As a result, the insurance amount received on the account of stolen of bed would be taken as proceeds from the disposal of asset. Hence,

Capital gains =$6,000

Further, the net capital gains/losses would be found after settling the previous capital losses incurred from the same CGT asset. Client has capital losses of sum $1,500 from disposal of sculpture in previous year and therefore, the losses would be settled with the current year’s capital gains (Coleman, 2016).

50% rebate would be claimed by the taxpayer for the disposal of long term (holding period >1 year) CGT asset. It is apparent that client is holding the antique bed for more than 1 year and hence, 50% rebate on the net capital gains would be applied (Hodgson, Mortimer and Butler, 2017).

• Transaction made for the sale of painting

CGT Implications for Antique Items

CGT would be applicable only for those asset swhich are categorised as post- CGT asset and that are purchased after 20 September 1985 under the provisions of s. 149(10) of Income Tax Assessment Act 1997. The purchase of painting was done on 2 May 1985 and therefore, painting is classified as pre-CGT asset and disposal of painting (pre-CGT asset) would not lead to CGT implication for taxpayer (Reuters, 2017).

• Transaction made for the sale of shares

Further, as per s. 140-5, the transaction undertaken for the sale of CGT asset (shares) would be classified as A1 event. The capital gain/ loss can easily be calculated with the help of cost base of asset and the income received from disposal under s. 110-25 ITAA 1997 (Woellner, 2014).

• Sale of 1,000 Common Bank Ltd shares

Capital gains = Proceeds from sale – Cost base of share (Purchase cost + incidental cost)   

• Sale of 2,500 shares in PHB Iron Ore Ltd 

• Sale of 1,200 shares in Young Kids Learning Ltd 

For all the above three shares, the holding time is higher than 12 months and therefore, 50% discount would be applied for the calculation of capital gains. 

• Sale of 10,000 shares in Share Build Ltd 

In this case, taxpayer holds the share for lesser than 12 months and hence, the short term asset would not be eligible for 50% rebate.

Capital gains from short term shares =$13,000

Hence,

• Transaction made for the sale of violin

Personal use assets would not be considered as collectibles. However, the disposal of personal use asset would give rise to CGT implication on the derived capital gains or losses only when the buying amount of the asset is more than $10,000 (Hodgson, Mortimer and Butler, 2017). It can be seen that taxpayer has sold her violin which she was playing for entertainment and was for personal usage only. Further, she has acquired the violin for $5,500 which is lower than the threshold amount of  $10,000 and hence, the capital gains or loss incurred for violin would not lead for any CGT liability for her.   

Therefore, it can be seen from the above that client would have a net capital gains of $139,100 for the year end June 30, 2018 on the account of various transactions. 

Benefits which are issued to the employees for private usage by the employer are termed as fringe benefits. These benefits are extended to the employees and are taxed for employer under Fringe Benefits Assessment Act 1986 (FBTAA86) (Wilmot,  2014). The main objective is to find that the benefits issued to employee Jasmine by employer Rapid Heat are fringe benefits or not. Further, the fringe benefits tax (FBT) payable for the fringe benefits will be determined for Rapid Heat for the ending year 31 March 2018.

CGT Implications for Shares

(a) FBT implication for benefits for the ending year 31 March 2018

Rapid heat has issued a car, loan of tune $500,000 and a heater at lower rate to Jasmine and thus, the implications of these benefits needs to be discussed under FBTAA86.

Car

Section 8, FBTAA86 comprises the provisions with respect to providing car to employee for personal usage. It implies that extension of car by employer to its employee for private usages would be termed as car fringe benefit. Rapid heat has issued car to Jasmine and the usage of car is not restricted to work purpose only, it means she can use car for her personal work. As a result, the FBT would be applicable on Rapid Heat for issuing car fringe benefit (Barkoczy, 2017).

(1) Capital value

Car had been acquired by Rapid Heat for a value of $33,000. Further, there was a total expense of $550 on the repairing after the car was issued to Jasmine for private usage. Hence, the capital value is calculated as shown below (Gilders et. al., 2016). 

(2) Applicable statutory percentage

The date of acquisition of car is an essential parameter to find the statutory percentage. It is because the car that is acquired by employer after 2011 would amount for a statutory percentage of 20% with no reference to the total distance covered by car. Here, Rapid Heat Ltd has acquired car in 2017 and hence, the statutory percentage for the calculation would be 20% (Reuters, 2017).

(3) Available days of car for employee

Car has issued to Jasmine on 1 May 2017 and therefore, the period of calculation of number of available days would be counted from 1 May 2017. Hence, the day available days will be 335 days.

It is crucial to note that car required some repairing and thus, sent to the garage for five days. These five days would not take away as the days involved in the minor repairs on car will not contribute to the total available days for employee as well as the expenses occurred on repairing will also not include in the tax deduction by taxpayer. Car was not used by Jasmine for 10 days on which she was not present in town and car was parked at airport. However, car available for her to use and thereby, these 10 days also will not be taken away from total available days (Deutsch et. al., 2016). 

FBT Implications for Fringe Benefits

(4) Grossed up factor

Car is a type I goods as mentioned in Goods and Service Act 1999 and thus, for the financial year end 31 March 2018 the grossed up factor would be 2.0802. Rapid Heat may claim for the tax rebate on GST input credit (Nethercott, Richardson and Devos, 2016). 

(5) Taxable value

It can be calculated based on the relevant formula as highlighted in s. 9F of FBTAA86.

Taxable value = capital value * statutory percentage * total available days * grossed up factor

(6) FBT rate

FBT rate is 47% for the financial year end 31 March 2018.

Loan

Loan fringe benefits would be issued when the employer has decided to provide loan at zero interest or lower interest rate as compared with the interest rate set by Reserve Bank of Australia (RBA). The interest rate defined by RBA is termed as statutory interest rate and any interest rate below this rate would raise the extension of fringe benefits by employer. Rapid Heat extends loan to Jasmine at 4.25% against the statutory interest rate of RBA is 5.25. Thus, the loan would be classified as loan fringe benefits. The saving of interest because of discounted interest rate will be taken into note for calculating the FBT payable (Nethercott, Richardson and Devos, 2016).

(1)Number of days

Loan has been issued to Jasmine on 1 September 2017 by Rapid Heat and thus, Jasmine has sum of 213 days after taking the loan.

(2)Difference of interest payment  

(3)Grossed up factor

Loan is type II goods as mentioned in Goods and Service Act 1999 and thus, for the financial year end 31 March 2018 the grossed up factor would be 1.8868.

(4)Taxable value

Taxable value = Difference of interest payment * grossed up factor

(5)FBT rate

FBT rate is 47% for the financial year end 31 March 2018.

Rapid Heat has FBT liability of value $2580.43 for loan fringe benefit. Further, the loan payment has been used by Jasmine to acquire a holiday home. The tax deduction can be claimed by Rapid Heat on the loan payment of $450,000 only for the event when the acquired holiday home becomes source of assessable income for Jasmine (Wilmot, 2014).

Rapid Heat is an electric heater manufacturing company and selling heaters to public for $2,600. However, the car price given to Jasmine is only $1300. It represents that Rapid Heater is issuing internal expense fringe benefits to Jasmine.

1) Internal expense fringe benefits =2600 -1300 =$1,300

2) 75% of selling price of electric heater = 75%* 2,600 =$1,950

(3)Grossed up factor

Electric heater is a type I goods as mentioned in Goods and Service Act 1999 and thus, for the financial year end 31 March 2018 the grossed up factor would be 2.0802.

(4)Taxable value

Taxable value = ($1,950-$1,300)*2.0802=$1352.13

(5)FBT rate

FBT rate is 47% for the financial year end 31 March 2018.

Rapid Heat has FBT liability of value $635.50 for internal expense fringe benefit. 

(b)Jasmine herself used $50,000 to acquire shares of Telstra

Difference of interest payment on remaining $50,000 would also be taken into consideration for tax deduction by Rapid Heat when Jasmine herself used $50,000 to acquire shares of Telstra. The underlying reason is that the shares acquired by Jasmine would generate income for her and thus, loan payment would be deductible on behalf of Rapid Heat (Woellner et. al., 2017). 

The net FBT payable computed in part a) would be reduced by $500 when the shares have been acquired by Jasmine.

References

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

Coleman, C. (2016) Australian Tax Analysis. 4^th ed. Sydney: Thomson Reuters (Professional) Australia.

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016) Australian tax handbook.  8th ed. Pymont: Thomson Reuters.

Gilders, F, Taylor, J, Walpole, M, Burton, M. and Ciro, T (2016) Understanding taxation law 2016. 6th ed.  Sydney: LexisNexis/Butterworths

Hodgson, H., Mortimer, C. and Butler, J. (2017) Tax Questions and Answers 2016. 6^th ed. Sydney: Thomson Reuters.

Nethercott, L., Richardson, G., and Devos, K. (2016)  Australian Taxation Study Manual 2016. 8^th ed. Sydney: Oxford University Press.

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

Woellner, R., Barkoczy, S., Murphy, S. and Pinto, D. (2017) Australian Taxation Law 2017 27^th ed. Sydney: Oxford University Press Australia.