Tax Advice For Asset Sales And FBT Calculation For Employer Owned Car

Issue

Issue

The key objective is to outline tax related advice for the client on the backdrop of various asset sale that have been concluded in the given tax year. In this regards, the given information would be utilised so as to hint at the potential tax burden on the client.

Law

Receipts Nature

Whenever a taxpayer receives some cash, the pivotal concern from the tax perspective is to label these proceeds either within the category or revenue or capital. These two are possible and the precise determination of the correct nature of the proceeds would require consideration to the underlying circumstances and taxpayer motive. An example of this could be provided through the property sale which if done by builder would result in revenue receipts while the same transaction if done by investor would result in capital receipts (Woellner, 2017).  Thus, a key understanding derived from the above example is that revenue receipts are essentially obtained when the underlying taxpayer is involved in normal business activity. The tax treatment to the two types of proceeds shows significant difference with revenue receipts contributing to assessable income while capital receipts being tax exempted. However, any capital gains or capital losses linked with capital proceeds would attract Capital Gains Tax (CGT) (Nethercott, Richardson and Devos, 2016).

A blanket exemption of CGT can be availed if the underlying asset is part of pre-CGT asset. A unifying character of these assets is these have been acquired at a time when the Australian government had not decided to tax the capital gains or losses (Coleman, 2016).  Since, no CGT was applicable at the time of acquisition of these assets, hence even today these assets would be considered CGT exempt. The date on which CGT was enforced is September 20, 1985 and hence it automatically becomes the cut-off date to decide the pre-CGT assets (Hodgson, Mortimer and Butler, 2016).

While the above exemption is quite broad in scope considering that it applies to all possible assets, there are specific exemptions available for certain particular asset type. The first noteworthy exemption is for the class of assets known as collectables (s. 118-10) where for CGT to apply, the minimum purchase price must be higher than $ 500 (Krever, 2017). Another noteworthy exemption is for the class of assets known as items of personal use (s. 108-20(1)) where for CGT to apply, the minimum purchase price must be higher than $ 10,000. Failure on the part of respective assets to comply with these thresholds would result in CGT exemption without any regards to the underlying gains and holding period (Gilders, et. al., 2015).

Law

For the computation of the CGT liability, the critical aspect is to compute the net capital gains that are taxable.

In order to arrive at the net capital gains, a series of steps ought to be adhered to. The beginning of the process is done with the occurrence of a CGT event. There are several possible CGT events as per s. 104-5 but A1 CGT event is relevant for the discussion in this case. The identification of the appropriate capital event is also essential since there is an attached computation methodology of capital gains with each event (Sadiq, et.al., 2015).

For A1 CGT event, a pivotal input that is required is known as cost base and contains other costs besides the purchase price that the client has spent on the underlying asset. The list of components contributing to the asset cost base is enumerated below (Hodgson, Mortimer and Butler, 2016).

The above list is an exhaustive list and hence it may be possible that for certain assets there are only selected few elements which would then be added to reach the cost base.

Using the cost base computed for the asset along with the selling price, capital gains or associated losses may be computed (Barkoczy, 2017). However, these needs to be capital losses related adjustment as the capital losses cannot be balanced against taxable income and instead can be adjusted only against capital gains (s. 102-5). These capital losses would comprise of both current year losses as well as past year capital losses. Capital losses do not expire and can be carried forward year on year till they are adjusted against the available capital gains (Deutsch, et.al., 2015).

Post the process, concessions in capital gains need to be provided using either the indexation approach or discount approach. The latter is more popular especially when the capital gains are high since the underlying discount is higher. The indexation approach has limitations in terms of being useful for assets bought prior to 1999 with limited utility for those assets born post 1999. The discount method does not suffer from this demerit.  It allows for a 50 % decline in the capital gains value before the same is subject to CGT (Coleman, 2016).

The only condition to be met for application of this discount is that the asset should have been held by the taxpayer for a time period in excess of one year. Only then would the capital gains be long term or else these would be short term. The net capital gains arrived after application of concession using appropriate approach would then be levied CGT and determine the net tax payable for the taxpayer (Gilders, et. al., 2015).

Receipts Nature

In certain cases, a unique problem may arise due to the innate timing gap between the date on which the contract for asset sale is executed and the date on which the related proceeds are gained by the seller of the asset (Barkoczy, 2017). Hence, in such cases, problem arises with regards to the correct tax year when the tax implications of the capital asset must be included. In this context, TR 94/29 provides resolution of the situation by highlighting that irrespective of the timing of the proceeds, the tax implications must be captured in the tax returns of the same year when the sale contract regarding the asset is enacted (Reuters, 2017).

Application

Receipts Nature

The information provided clearly highlights the fact that the transactions involving the asset sale are non-business transactions. This is indication of the client not having any business related to trading of assets. Further, evidence is available considering the fact that the client is an investor. The net result would be that the underlying proceeds that arise from the sale would be termed as proceeds having capital nature. Owing to this classification, there would not be any application of tax on the proceeds, however the capital gains would not be exempt and CGT liability would suitably be computed.

CGT Exempt Assets

Considering possible exemption for pre-CGT assets, hence it is worthwhile to take into consideration the respective dates of asset acquisition in order to analyse if any asset is pre-CGT or not. Considering these dates, it is apparent that a particular asset painting is recognised as a pre-CGT asset as the asset purchase predates the application of CGT by the government. The result is that CGT liability in connection with painting sale is zero.

The antique bed falls within the sub-category of collectables but will not have exemption from CGT owing to $ 3,500 being the purchase price which satisfies the threshold limit. Another asset worth consideration is the violin. If this asset was not regularly used by client for deriving satisfaction coupled with entertainment on personal level, then this could have well being classified as a collectable. The violin has cost of $ 5,500 and hence this is lower than $ 10,000 which implies in zero CGT implication on account of violin sale.

Taxable capital gains

For the assets that are not CGT exempt, the requisite computations are carried out below.

For the land asset sale, the given information clearly hints at the contract of sale already been enacted in 2017/2018 while the sales proceeds to be obtained by buyer only in next year. However, the respective CGT consequences related with land asset would be represented in the current year tax return only as indicated in TR 94/29.

CGT Exempt Assets

Conclusion

There are two assets which emerge as being exempt from CGT namely violin and painting. Taxable capital gains have been computed for the remaining assets and precious capital losses have also been adjusted resulting in taxable capital gains to the rune of $ 139,100.

Issue

The scenario presented has two parties, Jasmine (employee) and Rapid Heat (employer). During the course of employment, certain benefits have been extended to employee on behalf of the employer which would give rise to FBT implications and these need to be computed considering applicable legislation (i.e. Fringe Benefits Tax Assessment Act 1986).

Law

In wake of the fringe benefits details provided, a discussion of the relevant fringe benefits is carried out below.

• Car Fringe Benefit

Applicable section – Section 7, FBTAA 1986

Necessary Condition – Employer owned car should be allowed for private usage by employee. Permission for professional use would not amount to any fringe benefit since employee would not get any benefit as for professional work, employee has an entitlement to conveyance (Wilmot, 2014).

Calculations:

1) Calculate the extent of car fringe benefit using approach endorsed in s. 9.

A critical aspect to note is that days would not be dedcuted when employee is not able to use car because of his/her own reasons. Additional, garage visit for minor repairs does not impact car availability (Nethercott, Richardson and Devos, 2016).

2) For the given fringe benefit, taxable value ought to be computed using gross up factor.

3) For the given fringe benefit, FBT liability ought to be computed using taxable value of benefit.

• Loan Fringe Benefit

Applicable section – Section 16, FBTAA 1986

Necessary Condition – Loan given to employee at rates which are at a discount to the RBA benchmark rate. Higher the discount, higher the savings in interest, higher the fringe benefits provided to the employee (Sadiq, et.al., 2015).

Calculations:

1) Considering the discount in interest rate, amount of loan, and time period, the interest saving ought to be computed which forms the value of fringe benefit (Krever, 2017).

2) For the given fringe benefit, taxable value ought to be computed using gross up factor.

3) For the given fringe benefit, FBT liability ought to be computed using taxable value of benefit.

Section 18 provides for a deduction rule whereby CGT deductions can be taken by employer to the extent the loan amount is utilised by employer only for taxable income production (Hodgson, Mortimer and Butler, 2016).

Taxable capital gains

Applicable section – Section 20, FBTAA 1986

Necessary Condition – Employer to contribute in paying for personal expenses of employee so as to lower the spending by employee (Gilders, et. al., 2015).

Calculations:

1) The amount of personal expense that employer pays for is the extent of fringe benefit which is modified owing to internal benefit.

2) For the given fringe benefit, taxable value ought to be computed using gross up factor.

3) For the given fringe benefit, FBT liability ought to be computed using taxable value of benefit (Deutsch, et.al., 2015).

Application

• In wake of the relevant law, the fringe benefits provided by Rapid Heat ought to be discussed to work out the FBT consequences for the employer.

Car fringe benefit

There is fulfilment of necessary condition in the sense that car provided by Rapid Heat is available for personal use of Jasmine. Time deduction can only be availed for April month when car was not provided. The stay of the car at the airport parking did not restrict usage of car by employee. Similarly, FBTAA does not allow minor repairs related deductions.

Loan fringe benefit

The necessary condition is fulfilled as Jasmine is saving interest on discount to RBA benchmark rate that has been provided by Rapid Heat. The discount is 100 basis points i.e. (5.25% -4.25%)

A part of the loan is being utilised by husband of Jasmine which would not yield any deduction. Hence, the deduction hope for the employer rests on the generation of rental income by holiday home that Jasmine has acquired using 90% of loan proceeds.

The necessary condition is fulfilled as half of the price related to the electric heater is being borne by the employer despite the spending on electric heater being a personal expense for Jasmine. The resultant savings that Jasmine realised amount to $ 1,300.

• The alternate utilisation is beneficial for employer as the $ 50,000 share investment is being carried out by Jasmine as against her husband previously. On account of dividend income, entitlement is available to Rapid Heat to lower the FBT payable by $ 500 as has been captured below.

Conclusion

The FBT related liability falls on Rapid Heat in context of the fringe benefits that Jasmine has availed. Deductions in FBT would be contingent on the holiday home producing income as rent and share purchase being carried out by Jasmine in place of her husband.

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. (2015) Australian tax handbook.  8th ed. Pymont: Thomson Reuters.

Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016) Understanding taxation law 2016. 9^th ed.  Sydney: LexisNexis/Butterworths.

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

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

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.

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., Barkoczy, S., Murphy, S. and Pinto, D. (2017). Australian Taxation Law Select Legislation and Commentary Curtin 2017. 2^nd ed. Sydney: Oxford University Press Australia.