You are working as a tax consultant in Mayfield, NSW. Your client is an investor and antique collector. You have ascertained that she is not carrying on a business. Your client provides the following information of sales of various assets during the current tax year:
- Block of vacant land. On 3 June of the current tax year your client signed a contract to sell a block of vacant land for $320,000. She acquired this land in January 2001 for $100,000 and incurred $20,000 in local council, water and sewerage rates and land taxes during her period of ownership of the land. The contract of sale stipulates that a deposit of $20,000 is payable to her when the contract of sale is signed and the balance is payable on 3 January of the next tax year, when the change of ownership will be
- Antique bed. On 12 November of the current tax year your client had an antique four-poster Louis XIV bed stolen from her house. She recently had the bed valued for insurance purposes and the market value at 31 October of the current tax year was $25,000. She purchased the bed for $3,500 on 21 July 1986. Although the furniture was in very good condition, the bed needed alterations to allow for the installation of an innerspring mattress. These alterations significantly increased the value of the bed, and cost $1,500. She paid for the alterations on 29 October 1986. On 13 November of the current tax year she lodged a claim with her insurance company seeking to recover her loss. On 16 January of the current tax year her insurance company advised her that the antique bed had not been a specified item on her insurance policy. Therefore, the maximum amount she would be paid under her household contents policy was $11,000. This amount was paid to her on 21 January of the current tax
- Your client acquired a painting by a well-known Australian artist on 2 May 1985 for $2,000. The painting had significantly risen in value due to the death of the artist. She sold the painting for $125,000 at an art auction on 3 April of the current taxyear.
- Your client has a substantial share portfolio which she has acquired over many years. She sold the following shares in the relevant year ofincome:
- 1,000 Common Bank Ltd shares acquired in 2001 for $15 per share and sold on 4 July of the current tax year for $47 per share. She incurred $550 in brokerage fees on the sale and $750 in stamp duty costs on
- 2,500shares in PHB Iron Ore These shares were also acquired in 2001 for $12 per share and sold on 14 February of the current tax year for $25 per share. She incurred $1,000 in brokerage fees on the sale and $1,500 in stamp duty costs on purchase
- 1,200 shares in Young Kids Learning Ltd. These shares were acquired in 2005 for $5 per share and sold on 14 February of the current tax year for $0.50 per share. She incurred $100 in brokerage fees on the sale and $500 in stamp duty costs on
- 10,000 shares in Share Build Ltd. These shares were acquired on 5 July of the current tax year for $1 per share and sold on 22 January of the current tax year for $2.50 per share. She incurred $900 in brokerage fees on the saleand $1,100 in stamp duty costs on purchase.
- Your client also has an interest in collecting musical instruments. She plays the violin very well and has several violins in her collection, all of which she playson a regular basis. On 1 May of the current tax year she sold one of these violins for $12,000 to neighbor who is in the Queensland Symphony Orchestra. The violin cost her $5,500 when she acquired it on 1 June 1999.
Your client also has a total of $8,500 in capital losses carried forward from the previous tax year, $1,500 of which are attributable to a loss on the sale of a piece of sculpture which she sold in April of the previous year.
Based on this information, determine your client’s net capital gain or net capital loss for the year ended 30 June of the current tax year.
Rapid-Heat Pty Ltd (Rapid-Heat) is an Electric Heaters manufacturer which sells Electric Heaters directly to the public. On 1 May 2017, Rapid-Heat provided one of its employees; Jasmine, with a car as Jasmine does a lot of travelling for work purposes. However, Jasmine's usage of the car is not restricted to work only. Rapid-Heat purchased the car on that date for $33,000 (including GST).
For the period 1 May 2017 to 31 March 2018, Jasmine travelled 10,000 km in the car and incurred expenses of $550 (including GST) on minor repairs that have been reimbursed by Rapid-Heat. The car was not used for 10 days when Jasmine was interstate and the car was parked at the airport and for another five days when the car was scheduled for annual repairs.
On 1 September 2017, Rapid-Heat provided Jasmine with a loan of $500,000 at an interest rate of 4.25%. Jasmine used $450,000 of the loan to purchase a holiday home and lent the remaining $50,000 to her husband (interest free) to purchase shares in Telstra. Interest on a loan to purchase private assets is not deductible while interest on a loan to purchase income-producing assets is deductible.
During the year, Jasmine purchased an Electric Heaters manufactured by Rapid-Heat for $1,300. The Electric Heaters only cost Rapid-Heat $700 to manufacture and is sold to the general public for $2,600.
- Advise Rapid-Heat of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2018. You may assume that Rapid-Heat would be entitled to input tax credits in relation to any GST- inclusive
- How would your answer to (a) differ if Jasmine used the $50,000 to purchase the shares herself, instead of lending it to her husband?
The issue is to consult the taxpayer about her taxation implications for year 2017/18 on the account of received capital proceeds from the disposal of the capital assets belonging to taxpayer.
When the taxpayer does not carry a business course of action of trading the assets for deriving the assessable income, then the disposal of assets would be considered as capital receipts not revenue receipts (Barkoczy, 2017). Therefore, the applicable taxation treatment would be Capital Gains Tax (CGT).
- Pre-CGT assets
The CGT will not be imposed on the received capital gains when the disposed asset is a pre-CGT asset (Deutsch, et.al., 2015). The assets that are purchased before September 20, 1985 are named as pre-CGT asset (s. 149 (10), ITAA 1997 (Coleman, 2016). Thus, the first step would be to decide whether the asset is pre-CGT asset or not.
The exact procedure for calculating the capital gains/losses from the asset disposal would be decided based on the type of transaction (Nethercott, Richardson & Devos, 2016). For the given scenarios, the transaction is considered as CGT event (TYPE A1) and hence, the income resulted from disposal of the respective capital asset would be used to deduct the cost base of the capital asset (S. 104 (5), ITAA 1997) (Woellner, 2017).
- Cost Base
All the respective payments which the concerned taxpayer have paid at the various stages of the transactions for the asset would cumulatively be termed as cost base (s. 110 (25), ITAA1997. The five board classification of elements of the cost base with respect to the relevant sub section is highlighted below (Hodgson, Mortimer & Butler, 2016).
- Applicable rebate %
The rebate (50%) will only be applicable on long term capital gains (Reuters, 2017). Hence, it is essential to differentiate between long term and short term capital gains. The best way to ascertain this is to find the holding period of the asset by the taxpayer (Nethercott, Richardson & Devos, 2016).
Holding period of asset > 1 year: Long term capital gains
Holding period of asset < 1 year: Short term capital gains
Further, no rebate will be applicable on short term capital gains (Deutsch, et.al., 2015).
- Balancing the capital losses
The taxpayer will either receive capital gains or capital losses from the disposal of assets. When the taxpayer has earned capital losses, then it is essential to balance the capital losses with capital gains which are derived from similar capital asset disposal (Krever, 2017). Further, when only capital losses are received by taxpayer, then these capital losses will be taken to the next year. It means the unbalanced capital losses will be transferred to the next year and will be adjusted with capital gains of next year (Wilmot, 2014).
- Consideration of proceeds
As per TR 94/29, the income which would be derived from sale of asset will be realised for CGT consequences in the same year in which the contract of sale has been entered into by the parties (Coleman, 2016). This aspect will remain unchanged when the income will be received in next year and enactment of contract has been done in present income year (Sadiq, et.al., 2015).
- Block of vacant land
Acquisition date: 2001
The date itself defines that block of land is not a pre-CGT asset. Hence, CGT treatment would be levied on the received capital gains or losses. Further, the taxpayer has sold the land block which indicates that it is a CGT event (TYPE A1) and the capital receipts from sale and cost base of the asset will be calculated. The income of sale of land will be received in next year while the contract of sale has been made in 2017/18. However, the income will be realised in the assessment year only. The capital losses ($7000) of last year will also be balanced with the obtained capital gains. At last, 50% rebate will be directed on the long term capital gains to find the net capital gains from block land sale (Holding period of asset > 1 year: Long term capital gains).
- Antique bed
Acquisition date: 1986
The date itself defines that antique bed is not a pre-CGT asset. Hence, CGT treatment would be taken place on the received capital gains or losses. Further, the taxpayer has not sold the bed and it was stolen which is also a CGT event (TYPE A1) and thus, capital receipts which are in the form of amount received from insurance claim and cost base of the asset will be calculated for capital gains/losses.
Antique items are categorised as collectables and it is important to check the validity of the pivotal condition of the collectable for the applicability of capital gain tax liability. The CGT is imposed on the capital gains/loss on the asset which is acquired for at least $500 or more. The taxpayer procured the antique bed for her collection for $3500 which is clearly fulfilled the pivotal condition of CGT application for collectables.
The capital losses ($1500) of the last year will also be balanced with the obtained capital gains. At last, 50% rebate will be directed on the long term capital gains to find the net capital gains from antique bed (Holding period of asset > 1 year: Long term capital gains).
Acquisition date: May 2, 1985
The date itself defines that painting is a pre-CGT asset. Hence, CGT treatment would not be taken place on the received capital gains or losses.
Acquisition date: After September 1985
The date itself defines that shares are not pre-CGT assets. Hence, CGT treatment would be imposed on the received capital gains or losses. Further, the taxpayer has sold the shares which indicate that it is a CGT event (TYPE A1) and the capital receipts from sale and cost base of the asset will be calculated. At last, 50% rebate will be directed on the long term capital gains (initial three shares) to find the net capital gains from shares sale (Holding period of asset > 1 year: Long term capital gains). Further, shares acquired of Share Build Ltd would short term capital gains and 0% rebate will be directed. (Holding period of asset < 1 year: short term capital gains).
Acquisition date: June 1999
The date itself defines that violin is not pre-CGT asset. Hence, CGT treatment would be imposed on the received capital gains or losses. Further, the taxpayer has sold the violin which indicate that it is a CGT event (TYPE A1) and the capital receipts from sale and cost base of the asset will be calculated. Further, it can be seen that violin which she has sold for $5,500 is not a collectable as it is a personal use asset. The supportive factors are underlying below.
- She herself plays violin
- The frequency of playing violin is quite often or rather regular
- She used to play violin for personal enjoyment/entertainment
The condition to check the CGT implication applicability for personal use asset is that the asset must be bought for a price higher than $10,000. Thus, the condition is not true for the present scenario as the buying cost is lower than $10,000 and hence, CGT is not applicable.
Taxpayer has cumulative capital gains of $139,100 from the disposal of block of vacant land, shares and antique bed and the CGT will be applicable on the calculated capital gains only. Further, disposal of painting and violin does not result any CGT implication on taxpayer as painting is a pre-CGT asset and violin is a personal use asset which does not satisfy the requisite condition for CGT implication.
The issue is to analyse the given benefits by Rapid Heat to Jasmine during the assessment year and also their respective FBT consequences. Further, the tax deduction claim would also be analysed for the loan amount which is utilized by Jasmine in different ways.
The set of potential personal benefits (not in form of cash) which are provided to the employees are called as fringe benefits. Any benefits which are provided to employee for office/professional work are not categorised as fringe benefit (Woellner, 2017). There is a separate taxation law to treat the tax implication on employee and employer for fringe benefit which is known as “Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986).” This tax is applicable on employer not on the employee (Reuters, 2017).
“Car Fringe Benefit”
The critical condition that must be satisfied for providing car fringe benefit is that the employer must issue car to employee so that the employee can use the car as per his/her choice for personal work. According to s.7, FBTAA 1986, the car fringe benefits will not be given to employee by their employer when the usage of offered car is restricted to office purpose only (Nethercott, Richardson & Devos, 2016). The extension of car and authority to use the car for personal interest work may be provided either in oral form or in written form. Furthermore, the way of action of the employer may also provide sufficient clue that employer has issued car to employee for personal work. In this regards, the practice of car parking at employee’s own garage or at house implies that the employee directly get the permission to use the car due to presence of implicit permission of the employee (Hodgson,Mortimer & Butler, 2016). Capital value of car is a function of purchasing price which has been paid on behalf of the employer and the respective amount called deductions which are also paid by the employer in order to pay the minor repair expenses. According to s.9, FBTAA 1986 the deduction on days would not be imposed from total period of personal utilization when the car is not present for her and sent for minor repairing (Gilders, et. al., 2015). Further, the inclusion of the utilization would be followed means the actual use of car is not essential for computing the total period of car utilization for personal work (Krever, 2017).
“Loan Fringe Benefit”
According to s. 16, FBTAA loan fringe benefit is issued when the employer has taken concessional rate of interest as compared with the statutory interest rate while extending loan to employee to complete the personal level work. The statutory interest rate for year 2017/18 is 5.25% pa which has been declared by Reserve Bank of Australia as per TD 2017/3 (Barkoczy, 2017). Further, the usage of loan by employee for personal work is imperative to analyse since if the loan amount has been used for assessable income generation then deduction will be available for employer as highlighted in s. 19, FBTAA 1986 (Wilmot, 2014) . Further, when the employee provides the loan amount to other family member then deduction will not be present for claim on the part of the employer irrespective of the utilization of that loan amount by family member or associates of the employee (Nethercott, Richardson & Devos, 2016).
“Expenses Fringe Benefits”
Employer pays expenses of employee which are clearly personal in nature hence would be considered as expense fringe benefit (Sadiq, et.al., 2015). The expense payment by providing the concession in the product of the company then it is sub category of internal expense fringe benefit. This benefit reduces the personal nature liability of the employee via issuing this benefit (Deutsch, et.al., 2015).
- FBT consequences
“Car Fringe Benefit”
Rapid Heat (employer) has allowed Jasmine (employee) to use company’s car for her personal work. The car cost is $33,000 and has issued to her on May 1, 2017. Jasmine has commenced utilizing the car for her own private work on May 1, 2017. The Fringe Benefit Tax (FBT) liability has been imposed on Rapid Heat as it has issued car fringe benefit to Jasmine. The net FBT payable is computed as highlighted below based on the requisite variables.
- Period of personal utilization
The taxpayer employer provide car to her for the complete financial years except April month and therefore, the total period of personal utilization of car would be 365 days – 30 days (April) = 335 days.
As the period when the car is left at the airport parking area and employee does not use it and was out of the city then also the duration when car was parked will be part of available period of utilization. Car sent out for minor repairing for five days which will also not deducted from net period as the repairing type is only minor not major.
“Loan Fringe Benefit”
The interest rate of Rapid Heat for the offered loan is 4.25% pa. The rate is clearly inferior by 100 bps as compared with the statutory interest rate (RBA) which is 5.25%. The low interest rate is referred that employer has extended loan fringe benefit to Jasmine. It has been presumed that loan has been received on September 1, 2017. Therefore, the total period of utilization of loan will be 212 days
Jasmine has used $450,000 to procure holiday home which would not become her home and therefore, it may be assumed that she would rent the house to make it as her source of assessable income and thus, deduction will be available. Also, $50,000 has been utilized to procure shares of Telstra which has been done by her husband because she provided this amount to her husband. This amount would not create any deduction despite the fact that shares may derive dividend income.
“Expenses Fringe Benefits”
Rapid Heat which provides heater to customer for a net price of $2600 has provided 50% discount and provided it to Jasmine for $1300. The reason behind 50% discount is to reduce the personal nature expenses liability of her and hence, it will be termed as expense fringe benefit. Further, this internal expense fringe benefit would minimize the personal expenses of employee and raise FBT implication on employer.
- The nature of utilization of the loan amount has been changed which means the share which are previously used by Jasmine’s husband is now being used by Jasmine. In this case, the deduction is applicable because the dividend income that would be generated from the shares will become part of the assessable income of employee Jasmine. Thereby, the respective deduction will be imposed which also lower down the net FBT liability which has been raised from loan fringe benefit.
The FBT implications are imposed for all the three fringe benefits which are car, loan and expense. The FBT payable for each of the given cases is listed below.
FBT liability for car fringe benefit =$5823.70
FBT liability for loan fringe benefit = $2575.35
FBT liability for expenses fringe benefit =$635.5
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