Taxation Treatment Of Sale Of Various Assets And CGT Implications

Sale of Assets and CGT Implications

1. In the current situation, the taxpayer has sold some of his assets during the income tax year 2017/18 which needs to be discussed for taxation treatment. Further, the taxpayer is not running a business of the given assets and hence, the objective is not to treat the sale proceed as assessable income of the taxpayer because the client would have capital gains/loss which would then be analysed to comment on the Capital Gains Tax (CGT) implications. The main factors which need to be analysed for the validity of the CGT on the received capital gains are represented below.

As the name suggests, the assets which are acquired before the enactment of CGT are considered as pre-CGT assets. The enactment of CGT has been done on September 20, 1985 which means any asset of the taxpayer which he/she has acquired prior to this date would be recognised as pre-CGT asset. When any pre-CGT asset is liquidated by the taxpayer, then the respective taxpayer who has received capital gains/losses would not liable for CGT implication as evident from s.140-10, ITAA 1997 (Austlii, 2018 c).

When there is a disposal of capital assets then there would be capital gains or losses which need to be computed. The summary of various CGT events is highlighted in s. 104-5, ITAA 1997 (Sadiq, et.al., 2015). Based on the current scenario, the transactions of disposal of assets belong to A1 event which includes that capital gains or losses would be determined when the cost base of the respective capital asset would be deducted from the received sale proceeds. Capital proceed is normal amount which the taxpayer has earned from the buyer party after selling his/her capital assets. However, the cost base of the asset involves five elements which are essential to determine (Wilmot, 2014).

The relevant provision is discussed in s. 110-25, ITAA 1997 which shows the key costs/expenses which may be borne by the concerned taxpayer for the asset. All the respective costs under cost base of the asset would be deductible from the capital proceeds in order to find the net capital gains/loss  (Nethercott, Richardson and Devos, 2016).

Cost base element 1: The payment which the taxpayer had paid to the seller party while purchasing the asset.

Cost base element 2: The numerous incidental costs which the taxpayer has paid while buying or selling the asset.

Cost base element 3: Expenses which are essential to sustain the ownership of the asset. It includes the payment made to complete the tax liabilities or any assumed interest payment for the loan and so forth.

Factors to Consider for Validity of CGT

Cost base element 4: This depends on the choice of the taxpayer because if taxpayer pays any amount in order to increase or conserve the market worth of the asset then the amount would be taken as a part of cost base.

Cost base element 5: The amount spent by taxpayer so that he/she can preserve the title of the asset would be last but imperative element of cost base of the asset.

If any of the above costs have been paid by the concerned taxpayer then the sum amount of the costs would be termed as cost base of the asset.  

Factor 4: 50% Discount On Capital Gains

Long term capital gains are held taken for 50% discount because the taxpayer who has sold capital assets which has holding period greater than a year. It means that taxpayer would be entitled to get a rebate of 50% on capital gains for holding period higher than a year as per the outlines of s. 115-25, ITAA 1997  (Nethercott, Richardson and Devos, 2016). Further, the taxpayer would not liable to get 50% discount when there is short term capital gains from the disposal of the asset.

Previous capital losses would not reduce the taxable income of the taxpayer as they are adjusted with the capital gains. Moreover, if in any financial year the taxpayer has received capital losses but not the capital gains then the capital losses would be shifted to next financial and would compensated against the next year’s capital gains  (Nethercott, Richardson and Devos, 2016).

The date of acquisition defines that taxpayer has purchased land block in 2011 after the enactment of CGT implication (September 20, 1985). As a result, the block of land is not pre-CGT asset and the taxpayer will be liable for CGT on the derived capital gains/losses as per the provisions outlined in s. 149(10), ITAA 1997 (Austlii, 2018 a). Further, the liquidation of land asset is considered as capital event of A1 category as evident from s. 104-5, ITAA 1997 and therefore, all the respective costs for the cost base of the asset would be deductible from the capital proceeds derived from the sale in order to find the net capital gains/loss as per the provisions of s. 110-25, ITAA 1997 (Coleman, 2016).  

The TR 94/29 defines that in a situation when the contract of the sale has been executed in a given tax year but no payment has been received by the taxpayer on the same year and would be received in next financial years, then the capital gains/losses would be computed for the year in which the sale contract has been irrespective of the situation that actually the sale proceeds have not been received (ATO, 1994).

Computing Capital Gains and Losses

Income received from sale  

Capital gains/losses

Capital losses (Last years)

Capital gains after adjusting capital loss

Long term capital gains and hence, 50% discount would be applicable on capital gains for CGT implication.

Capital gains

Taxpayer Sold Antique Bed

The date of acquisition defines that taxpayer has purchased antique bed on July 21, 1986 after the enactment of CGT implication (September 20, 1985). As a result, the bed is not pre-CGT asset and the taxpayer will be liable for CGT on the derived capital gains/losses as per the provisions outlined in s. 149(10), ITAA 1997 (Nethercott, Richardson and Devos, 2016). Further, the liquidation of antique bed which is categorised as collectable is considered as capital event of A1 category as evident from s. 104-5, ITAA 1997 and therefore, the respective costs associated with the asset would be deductible from the capital proceeds derived from the sale so as to find the net capital gains/loss as per the provisions of s. 110-25, ITAA 1997 (Coleman, 2016). Further, the requisite condition for the implication of the CGT is that the antique item must be bought for higher than $500. Here, bed is purchased for $3,500 and hence, the requisite condition is met and thus, CGT would be imposed.

Buying cost of the bed on July 21, 1986

Taxpayer pays capital expenses in order to increase the market worth of the asset

Cost base  

The taxpayer did not liquidate the bed rather the bed had been stolen and hence, the proceeds from disposed asset would be the amount received from the insurance claim = $11,000

Capital gains

Capital losses (Last years)

Capital gains after adjusting capital loss

Long term capital gains and hence, 50% discount would be applicable on capital gains for CGT implication.

Capital gains

Taxpayer Sold Painting

The date of acquisition defines that taxpayer has purchased it prior to the enactment of CGT implication (September 20, 1985). As a result, the painting is pre-CGT asset of taxpayer and the taxpayer will not be liable any CGT implication on the derived capital gains/losses (Coleman, 2016).

Taxpayer Sold Shares

Shares for all the four companies have been purchased after CGT enactment (September 20, 1985) which means that none of the shares are belongs to pre-CGT assets and thus, would be taken for CGT implication. Furthermore, the transaction of selling the share capital asset is an event A1 as highlighted in s. 104-5, ITAA 1997 (Sadiq, et.al., 2015). Thus, the respective costs under cost base of the asset would be deductible from the capital proceeds in order to find the net capital gains/loss from the disposal.

50% Discount On Capital Gains

It is noteworthy that shares of common bank, PHB Iron and Yung Kids have derived long term capital gains/loss and thereby, the 50% capital gains would be considered for the CGT for the taxpayer while the rest would be ignored as per s. 115-25 (Wilmot, 2014). Further, shares of Share Built produce short term gains and thus, no discount would be available in this case. Therefore, the total capital gains after discount are computed below (Sadiq, et.al., 2015).

The deduction of 6000 from the long term capital gains is done because the taxpayer has received the capital losses from Yung Kids which are adjusted from the derived capital gains.

Taxpayer Sold Her Violin

Client possesses many violins in her instrument collection and she plays violin for fun/entertainment. Further, she plays violin on daily base and therefore, the violin would not be categorised as collectable and is an asset of personal usage. The capital gains will be levied for CGT implication only when the purchasing cost is more than a set amount which is $10, 000. Here, client has sold the violin from his collection which she has bought for an amount of $5,500. Here, the condition that cost of purchase for personal use asset higher than $10,000 has not been satisfied and therefore, the taxpayer would not liable for CGT consequences for the disposal of violin (Coleman, 2016).

2. Fringe benefits are provided to employee by the employer in order to provide them personal benefits. Here, Rapid Heat is employer which provides car fringe benefits, loan fringe benefit and expenses fringe benefit to its full time employee Jasmine.

Employer makes an extension of an owned car to employee that he/she can access for personal purposes, then car fringe benefit is given by employer (s. 7 FBTAA 1986). Providing car for personal use will raise the Fringe Benefit Tax liability (FBT liability) on employer not on employee (Hodgson,Mortimer and Butler, 2016). Based on the current circumstances, it can be viewed that Jasmine receives a car from Rapid Heat as car fringe benefits because the usage of car is not restricted for professional work. It implies that Jasmine can use car for her own work and take with her. Cost base of the car after balancing the minor repairs cost paid on behalf of the employer for the employee. The period of usage will be the part of total days of availability of days for the car. No deduction can be made when the car is out for minor repairing and when the car is parked at the premises and client has out of town.

Treatment of Previous Capital Losses

Car would amount to a gross up rate of 2.0802 for taking the consideration of FY 2017-2018 and also, GST will be imposed on the car.  The car offered date is May 1, 2017 which leads that Jasmine has total 335 days for car usages until March 31, 2018. The FBT rate applicable for computation is 47%.

It is a common practice by the employer company to offer loans to employee so as the employees will purchase personal home or to complete the personal level obligations. The loan fringe benefits will be given only for the case whereby, the concessional interest rate is taken by employee to provide the interest saving of the employee (Woellner, 2017). The concessional rate would be any rate which is not equal to or higher than the benchmark interest rate of RBA. In loan fringe benefit, the tax deduction will reduce the FBT liability of the concerned employer when the offered loan has been used such a way that becomes the source of assessable income of the employee (ATO, 2018).

Jasmine took a loan of $500,000 from her employment company (Rapid Heat). The rate of interest when she takes loan from RBA would be 5.25% per year as evident from TD 2017/3 whereby, the rate of interest offers by Rapid Heat is mere 4.25% per year (ATO, 2017). This clearly refers that employer has aimed to provide the interest saving benefit of the employee and therefore, provided the loan at concessional rate. This validates that loan fringe benefit is present and hence, it will attract the FBT liability on employer (Woellner, 2017).

Loan would amount to a gross up rate of 1.8868 for taking the consideration of FY 2017-2018 and also, GST will not be imposed on the loan amount (Austlii, 2018 b).  The loan offered date is September 1, 2017 which leads that Jasmine has total 212 days for loan usages until March 31, 2018. The FBT rate applicable for computation is 47%.

Benefit in terms of paying the expenses for employees which reduces the personal cash outflow of the employee is termed as expense fringe benefit (Wilmot, 2014). Jasmine purchases a heater of Rapid Heat Pty Ltd and she has received a price quote of $1300. However, the price for normal customer is $2600. It indicates that Rapid Heat has quoted low price for heater to Jasmine which reduces the personal cash outflow of Jasmine. Hence, there is an expenses fringe benefit. Further, as the benefit has given in the form of company’s own product and thereby, the fringe benefits will be internal expenses fringe benefit.

The total saving for the cash outflow of Jasmine = Halved the price = $1300

Electronic item would amount to a gross up rate of 2.0808 for taking the consideration of FY 2017-2018 and also the GST will be imposed on the electric heater. Further, the FBT rate applicable for computation is 47%.

(b) As per the given factual information, it may be concluded that part of loan $50,000 which was prior used to give to her husband by Jasmine was not used by Jasmine to purchase Telstra’s shares. Considering this aspect, it can be said that now Jasmine may derive dividend from the shares and hence, would become the part of the assessable income of her and hence, the tax deduction will be available for Rapid Heat for $50,000 also as exhibited below.

Tax deduction = 50000*(5.25%-4.25%) = $500

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: 26 September 2018)

ATO, (2017) Taxation Determination –TD 2017/3 [Online]. https://law.ato.gov.au/atolaw/view.htm?docid=%22TXD%2FTD20173%2FNAT%2FATO%2F00001%22 (Accessed: 26 September 2018)

ATO, (2018) Loan Fringe Benefits https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Types-of-fringe-benefits/Loan-fringe-benefits/ (Accessed: 26 September 2018)

Austlii, (2018 a) 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: 26 September 2018)

Austlii, (2018 b) A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999.[Online] https://classic.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/s148.html (Accessed: 26 September 2018)

Austlii, (2018 c) Income Tax Assessment Act 1997- SECT 140.5 [Online]. Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.5.html (Accessed: 26 September 2018)

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

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

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

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.