Introduction to Capital Gains Tax and CGT Events
The issue here is concerned with the determination of the capital gains tax under the legislation of “s 104, of ITA Act 1997”.
According to the definition in “s 102-5, of the ITA Act 1997” explains that the taxpayer should in their taxable income include the capital gains reported throughout the year. It is necessary to determine that whether capital gains or capital loss has been made by the taxpayer or whether the asset is eligible as CGT asset (Grange et al., 20144). As per “s, 102-20 of the ITA Act 1997” capital gains or loss is made when the CGT event happens. A CGT event C1 takes place under “section 104-10 (1)” when the CGT asset is disposed by the taxpayer.
A CGT event C2 happens under “s, 104-25 (1), of the ITA Act 1997” when the intangible asset ceases (James, 2014). When the goodwill of the business is ended on permanent basis a CGT event C1 happens. The “taxation ruling of TR 1999/16” is applied on taxpayers when under the ITA Act 1936 the goodwill of the business is sold.
As held in “Murray v FCT (1998)” the court opinion included that goodwill should be viewed as business quality derived from other business assets (Jover-Ledesma, 2014). However, goodwill is dependent on proof that business generates revenue from the goodwill or techniques or locations. The court in “IRC v Muller & Co Margarine Ltd (1901)” held that a taxpayer should in their taxable earnings include the capital gains derived from the disposal of business goodwill.
As per the “taxation ruling of TR 1999/16” restrictive covenants include the agreement between vendor and the purchaser regarding the disposal of business (Kenny, 2013). It also includes an agreement of not doing anything or competing directly in the business. A taxpayer receiving payments for restricting or relinquishing of rights cannot be termed as income. Receiving payments as the agreement of not doing something is not treated income. The court in “Jarrold v Boustead (1964)” passed its verdict by stating that lump sum amount of payment that is made to the rugby players for giving up the position of amateur cannot be treated as earnings.
If it is noticed that an agreement of restrictive covenants is received following the disposal of business, the restrictive covenants signifies that CGT assets which is created remains vested to the vendor in respect of their own rights for the goodwill that is bought by the purchaser. With respect “section 104-35 (1)” a taxpayer that receives receipts from the restrictive covenants will be viewed as CGT event D1 (Krever, 2013). For a taxpayer, the restrictive covenants happen when a contractual right is created to another entity. The federal court in “Higgs v Olivier (1951)” amount paid to an actor for entering in the agreement of not acting, directing or producing other films is not an income but instead it will be treated as CGT event D1. Similarly, the receipts of money from the above stated case was exclusively from the trade agreement which constituted CGT event D1.
CGT Event C1 and C2
A taxpayer is allowed to claim deductions for the main residence only when the dwelling is used by the taxpayer as the main residence. It is noteworthy to denote that whether the dwelling is regarded as the main residence it is conditional on the matter of fact (Morgan et al., 2013). The interpretative view of the ATO explains that the time span involved in the dwelling or the place where the family of the taxpayer resided is necessary in determining the extent of physical occupancy for being eligible to claim exemption.
Accordingly, explanation made in “s, 118-110 (1) of ITA Act 1997” permits a taxpayer to claim exemption from the capital gains or loss derived from the CGT event where the dwelling was the main residence for the taxpayer through the time of ownership (Sadiq, 2014). The taxpayer can obtain the partial main residence exemption from the CGT when the residence was the main residence for the taxpayer.
The case study opens up with the explanation that Amber owned a chocolate shop and conducted business from that shop in Sydney. After the birth of Amber’s child, she decided to sale the shop in 2018. The disposal of chocolate shop fetched Amber a sum of $440,000 while $280,000 was attributed to goodwill. Reference of “TR 1999/16” should be made in the recent circumstances of Amber. Citing the “Murray v FCT (1998)” goodwill should be viewed as business assets from which she derived revenues (Weltman, 2013). Citing “s, 104-25 (1), of the ITA Act 1997” a CGT event C1 happened when the goodwill of Amber business ended permanently as she entered into the contract of ending the business.
The voluntarily cessation of business permanently by Amber gave rise to CGT event C1. Citing the event of “IRC v Muller & Co Margarine Ltd (1901)” the assessable income of Amber would also include the net sum of capital gains obtained from the disposal of business goodwill (Woellner, 2013). Under “section 104-10 (1)” selling of chocolate shop will be held taxable.
A restrictive covenant was entered into Amber where she agreed to not open any similar shop inside 20 km radius for next five years. The restrictive covenants fetched Amber $50,000. Denoting the judgement in “Jarrold v Boustead (1964)” payment for restricting her rights of not doing any similar for five years is not an income rather under “section 104-35 (1)” receipts from such restrictive covenants should be viewed as CGT event D1 (Woellner et al., 2013). Mentioning the decision in “Higgs v Olivier (1951)”, the receipts of money from the above stated case was exclusively from the trade agreement that was entered by Amber which ultimately constituted CGT event D1.
Facts from the case that is obtained suggest that an apartment was inherited by Amber from her uncle in October 2013. Initially the apartment was purchased in 2013 by her uncle and amber resided in that apartment from October 2013. Later Amber entered into the contract of selling the apartment and the sales ultimately occurred in July 2018. In the current situation of Amber, the main residence exemption can be applied. This is because the residence is used by Amber as her main residence when she undertook the decision of moving into the apartment.
Goodwill and Restrictive Covenants under CGT
A reference to the interpretative view of the ATO can be sought to arrive at the conclusion that dwelling in which Amber resided with her family was considerably for the five years’ time. Denting the explanation that is made in “section 118-110 (1)” the dwelling had certain amount physical residence during the time when the property was under the ownership of Amber (Basu, 2016). Quoting “section 118-110 (1) of the ITAA 1997”, Amber will be permitted of claiming the partial main residence exemption upon selling the capital asset because the asset qualifies as the dwelling throughout the period of ownership.
Conclusion:
On arriving at the conclusion, disposal of the capital shop gave rise to CGT event C1 under “section 104-10 (1)”. Whereas, the restrictive covenants that was entered into by the Amber and receipt of $50,000 from such agreement will be considered as CGT event D1 under “section 104-35 (1)”. The amount will not be regarded as ordinary income within the ordinary meaning. The receipt from such covenant represented the establishment of contractual right of trade agreements. Finally, the sale of apartment will be treated as partial main residence exemption since Amber had certain degree of physical existence during the period of ownership.
The case study brings up the issue relating to the consequences that originates from the fringe benefit provided to the taxpayer during the course of the employment.
As defined in the “section 6-1 of the ITA Act 1997”, a taxpayer generating income from the personal exertion constitute income from the personal employment or services. These incomes include the wages, salaries, commissions, superannuation, gratuity or proceeds obtained from any employment (Braithwaite, 2017). An individual taxpayer that receives receipts from the personal services or employment will attract income tax liability. A fringe benefit on the other hand can be defined as the benefit which does not include the salaries or wages. On the other hand, receipts can be classified as the income until holds appropriate nexus with the receipts arising from the personal service of taxpayer.
As per the “section 6-5, of the ITA Act 1997” a large number of income that comes into the taxpayer should be viewed as the income under the ordinary concepts. The commissioner in “Scott v CT (1935)” held that income is not the term of art and it should be treated under the ordinary concepts or usage of mankind (Blakelock & King, 2017). The federal court in “FC of T v Dean (1997)” held its opinion by stating that retention payment provided to employee in to order to remain employed for twelve months following the takeover of the company will be treated as income or employment remuneration.
As per the “subsection 136 (1) of the FBTAA 1986” car fringe benefit arises when the employer provides the employee with car for their private use. A car is treated to be available for the private use by the employee during any day when the car is really used by the employee for their private purpose. As per the general rule stated in “FC of T v Lunney (1958)” travel from and to the place of work is treated as the private use of the vehicle (Roe, 2017). The taxable value of the car can be determined by using either the statutory or operating cash method.
Main Residence Exemptions under ITA Act
Residual fringe benefit has the wider meaning. The residual fringe benefit comprises of any right, services or facility that is provided to the employee in respect of the employment (Miller & Oats, 2016). The taxable value of the fringe benefit comprises of the in house residual fringe benefit and external residual fringe benefit. The taxable value of the residual fringe benefit is inclusive of the GST after deducting any employee contribution.
Under “section 136 (1) of the FBTAA 1986” an expense payment fringe benefit originates when the employer reimburses the employees with the expense they occur or the employer pays the third party in respect of the expenses occurred by the employee (Christie, 2015). Generally, when the expenses that is incurred by the employee and it is subsequently reimbursed by the employer the expense payment fringe benefit originates. The taxable value of the expense payment fringe benefit arises when the employer reimburses or pays the amount.
Allowance on the other hand generally comprises of the definite predetermined payment to cover the estimated expenditure and would be paid irrespective of whether the recipient incurs the anticipated expenditure. The court in “R v Davis (1978)” held that allowance is created to compensate the employee because the employer does not want to meet such expenses either directly or indirectly (Fleurbaey & Maniquet, 2018).
The court in “Moore v Griffiths (1972)” held that mere prize winning is not treated as the income. However, the amount will be treated as income if there are adequate connection is available with the income deriving activities of the taxpayer (Butler & Calcott, 2018). In another example, the federal court in “Kelly v FCT” amount received by taxpayer as the reward for being the fairest player will be treated as income since it was related to his exercise of skill and employment.
A loan fringe benefit happens when the employer provides the employee with the loan and charges a lower amount of interest rate throughout the FBT year. A lower rate of interest rate is lower than the statutory rate of interest. The taxable value of the loan fringe benefit represents the difference between the interest which may have been accrued throughout the FBT year given the statutory rate of interest has been applicable on the outstanding daily balance of the loan amount.
As evident in the case of Jamie it is noticed Jamie works as the real estate agent for Houses R Us which is the real estate company. Jamie as the part of his employment with Houses R Us received salary of $50,000 and also included commission on sales. Referring to “FC of T v Dean (1997)” the salary constituted employment income. Citing the reference of “section 6-1 of the ITA Act 1997” the receipt constitute income from personal exertion (Cooper, 2016). Quoting the decision of “Scott v CT (1935)” the receipt of salary by Jamie will be regarded as taxable ordinary income under the provision of “section 6-5, ITA Act 1997” since it is derived under the ordinary concepts.
Houses R Us provided Jamie with the car for his private as well as work purpose. With respect to “subsection 136 (1) of the FBTAA 1986” car fringe benefit originated when Houses R Us provided Jamie with car for their private use (Miller & Oats, 2016). The car is treated to be available for the private use for Jamie during any day since the car was really used by him for both private purpose and business purpose. With reference to “FC of T v Lunney (1958)” the use of car by Jamie will be treated as private use. Whereas, for Houses R Us making the car available for employee’s private use it gave rise to fringe benefit and the taxable value of the fringe benefit can be determined by Houses R Us by using the either statutory or operating cost method.
Case Study
Houses R Us later provided Jamie with laptop and mobile phone. This gave rise to residual fringe benefit for Houses R Us. While the taxable value of the fringe benefit would comprise of in-house benefit as well as the external benefit. Houses R Us also reimbursed Jamie with the professional subscription and entertainment allowance. Referring to “section 136 (1) of the FBTAA 1986” an expense payment fringe benefit originated for Houses R Us when it reimbursed Jamie with the expense he occurred.
Later Jamie later received an award of $4,800 for achieving the highest sales. Citing the example of “Kelly v FCT” the amount will be treated as income since it was related to his exercise of skill and employment and will attract tax liability (Blakelock & King, 2017).
In the later instances of the case it is noticed that Jamie is considering to taking up the loan for purchasing the house at the rate of 4% yearly. If Jamie takes up the loan a loan fringe benefit would happen to Houses R Us when it would provide Jamie with the loan and would charge a lower amount of interest rate throughout the FBT year. If Jamie takes up the offer Houses R Us will be held taxable for the assessable value of the loan fringe benefit since the difference between the interest would reference the difference that may have been accrued throughout the FBT year given the statutory rate of interest was applied.
Conclusion:
On arriving at the conclusion Jamie will held taxable for salary income and receipt of award during the year while Houses R Us will be held taxable for the fringe benefits relating to car and reimbursement of expenses made to Jamie.
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