Answer to A: Sale of Vacant Land
As stated in “section 102-20, ITAA 1997” capital gains or loss only happens due to the CGT event. Referring to “section 104-10 (1), ITAA 1997” CGT event A1 happens when the when the asset is disposed (Stiglitz and Rosengard 2015). The commissioner of taxation in “FC of T v Sara Lee Household” expressed its opinion by stating that CGT event is necessary when a contract is entered into by the taxpayer. Capital gains tax cannot be regarded as the separate system of taxation, instead it forms the part of the income tax regimes of the taxpayer.
Vacant land that is purchased by the taxpayer for the private or investment propose is treated as the capital asset and will attract capital gains tax upon the disposal of vacant land (Becker, Reimer and Rust 2015). The evidences suggest from the present situation that an agreement was reached by the taxpayer for disposal of vacant land. The cost base of land was $100,000 with other expenses such as water, council rate etc. was incurred by the taxpayer that amounted to $20,000.
The interpretative view of ATO makes it clear that vacant land is treated is similar to any other capital asset for CGT purpose. According to the ATO the holders of vacant land should maintain the record of date when the land was acquired and expenses incurred while acquiring the land (Faccio and Xu 2015). The expenses include the council rates and insurance on loan. Case facts obtained reveals that outlays on water, local council rates and land taxes were incurred during the period of ownership. The ATO does not allows claiming deductions for such expenses however they can be added up with the cost base of vacant land to determine the CGT while disposing the land.
The explanation of collectables is given under “section 108-10(2) of the ITAA 1997”. As per “section 108-10(2), ITAA 1997” collectables refers to the artwork, jewellery, antiques or coin that are kept by the taxpayer for their own use and satisfaction. There are certain rules that is applicable on collectables (Tan, Braithwaite and Reinhart 2016). Capital gains and losses made from collectables that costs less than $500 will be excluded. The case study provides that the taxpayer held an antique bed but the antique bed was stole from the house of taxpayer. In the insurance list the antique bed did not formed the part of the taxpayer specified items which resulted the insurance company in paying the taxpayer a sum of $11,000.
Answer to B: Antique Bed
CGT event C1 takes place under “section 104-20(1), ITAA 1997” when the asset is lost or destroyed that is owned to the taxpayer (Snape and De Souza 2016). Receipt of compensation from such asset give rise to CGT event C1. Similarly the compensation received by the taxpayer from the insurance company relating to the loss of antique bed gave rise to CGT event C1.
Capital gains tax is usually applied on the assets that is acquired or on after 20 September 1985. It is worth mentioning that Pre-CGT and Post CGT is generally used to refer the assets that is obtained or events that taking place before or after that date (Robin 2017). For an individual taxpayer it is necessary to work out the capital proceeds from the CGT events. The primary step of ascertaining whether the transaction will attract CGT is to ascertain the whether the CGT event has taken place.
The painting was bought by the taxpayer from the well-known Australian Artist on 2nd May 1985 for the sum of $2000. With the rise in the value of the painting it was sold for $125,000 in auction on 3rd April in current tax year. The painting can be classified as the Pre-CGT asset because it was acquired before the introduction of CGT on 20th September 1985 (Maley 2018). Therefore, the capital gains made from the paintings will be exempted from CGT.
Shares that are held by the taxpayer in company are treated as CGT asset. On the happening of CGT event, capital gains tax is applied to determine the net capital gains or shares from the sale of shares (Johnston 2017). As understood the taxpayer reported capital gains from the disposal of PHB Ltd shares, Build Ltd and Common Ltd shares. But also reports net capital loss from the sale of Young Kinds shares. The capital loss can be offset against the capital gains made from the sale of shares.
The definition of personal use asset stated under “section 108-20 (2)” refers to the asset that are non-collectables. These personal use assets are held for the personal enjoyment and usage by the taxpayer. They include the electrical goods, household items, furniture and boats. The personal use assets under “section 108-20 (3)” does not include the land buildings (Chardon, Brimble and Freudenberg 2017). An explanation stated under “section 118-10 (3)” states that capital gains derived from personal use asset that has the cost of $10,000 or less is excluded from CGT.
Answer to C: Painting
The cost base of the violin that was kept for the taxpayer personal use amounted to $5,500. The violin was later sold for $12,000. Mentioning the elucidation of “section 118-10 (3)” capital gains derived from personal use asset that has the cost of $10,000 or less is excluded from CGT (Barnes 2018). Hence, capital gains made from sale of violin should be disregarded by the taxpayer.
Issue:
The case study involves the issues that is associated with the fringe benefit tax liability. The case would be addressing the issue of Rapid Heat Pty Ltd relating to the fringe benefit tax consequences and by determining the fringe benefit tax liability for the income year ended 31st March 2018.
Laws:
According to the ATO the fringe benefit tax is generally paid by the employer. An individual is held as employer for the fringe benefit tax purpose given that a payment is made to the employee, holder of the office or the director of company that are subjected to withholding obligations, or if the employer provides the benefit in lieu of such payments (Hodgson and Pearce 2015). As the employer an individual is required to pay the fringe benefit tax notwithstanding whether the taxpayer is operating the business of sole trader, corporation, trustee, partnership or government authority. The benefit provided is regardless of whether the employer or any other party provides the fringe benefit. An individual is accountable of paying the fringe benefit tax whether they are paying or not paying any other taxes such as the income tax (Braverman, Marsden and Sadiq 2015). An individual taxpayer can claim the deduction for income tax purpose for the expenses incurred in providing the fringe benefit and the amount they pay to employee.
A fringe benefit signifies the payment that is made to the employee but it is different from the salary or wages. As defined under the legislation of the FBT, a fringe benefit is given to the employee based on their employment. This signifies that benefit is given to a person because they are employee (White and Townsend 2018). The employee can be either the future or former employee as well.
As per the “section 7, FBTAA 1986” a benefit that most commonly occurs is the car fringe benefit when the employer gives or makes the car available for the employee’s private use (Pearce and Hodgson 2015). The employer makes the car available for the employee personal use actually when the car is available for the private purpose of the employee. A car is treated available for the personal use during any day when the car is either used by the employee for private purpose or the employer makes the car available to the employee’s private use.
Answer to D: Shares
When the car is kept at the garage at employees home, the car is treated to be available for the private use of the employee irrespective of whether they have the permission to use. The federal court in “FC of T v Lunney (1958)” passed its verdict by explaining that travel to and from the place of work should be viewed as private use of car (Young and Miles 2015). When the car is kept in the workshop for the extensive repairs then it is not available for the employee’s private use. Conversely, the car is regarded to be available for the employee private use when the car is for the routine service or maintenance. The employer can compute the taxable value of the car fringe benefit by using either the statutory method or the operating cost method.
As stated in “Subdivision B 22A, FBTAA 1986” whenever the employer reimburse the employee relating to the expenses that they occur it give rise to the expense payment fringe benefit (Shields and North-Samardzic 2015). The expense payment fringe benefit happens in two ways. Generally when the employer reimburses the expense that is incurred by employee or they pay the third party in satisfaction of the expenditure that is incurred by the employee. In either of the above stated cases the expense can be business or private expense or the combination of both. The taxable value of the expense payment fringe benefit represents the amount that the employer reimburses or pays the employee. The concessional rates rules can be applied to determine the taxable value of the fringe benefit.
Very broadly speaking under “Sub-Division B 39C, FBTAA 1986” a fringe benefit relating to car parking can happen during any day when the employer offers the employee with a car parking space exclusively for the employee use (Seymour 2017). Precisely, fringe benefit relating to the car parking happens during the fringe benefit year given that all the below stated conditions are met. This includes;
- The parking of car is made near the primary place of employee’s employment during that day.
- The car is parked for no less than four hours during that day.
- The car is leased, owned or controlled by the employee or the car the provided to employee.
- The car is parked at the place or leased by or under the control of the employer
- The car is inside the one kilometre area of premises or there is an existence of the commercial parking station that charges fees for all day parking.
As per the “Division 4 of the FBTAA 1986” when the employer provides the employee with the loan and a lower interest rate is charged then in such a situation the loan fringe benefit happens during the FBT year (Barkoczy 2016). A noteworthy fact of loan fringe benefit is that the lower rate of interest is less than the statutory rate of interest. The taxable value of the loan fringe benefit reflects the difference between the interests which may have been accrued during the FBT year given the statutory rate of interest is applied on the outstanding balance of the loan.
Answer to E: Violin
The situation from the case study provides that the Rapid Heat Pty Ltd is the manufacturer of electric heaters and one of its employee, Jasmine is provided with the car as majority of her work requires travelling. Quoting the instance of “FC of T v Lunney (1958)” the case study further adds on that the Jasmine use of car is not limited to work only as she has the permission of using the car for private purpose as well (Fisher 2015). Citing the “section 7, FBTAA 1986” a car fringe benefit arises for Rapid Heat Pty Ltd when the company gave or made the car available for the Jasmine’s private use. The car fringe benefit is given to the Jasmine based on her employment with Rapid Heat Pty Ltd. Therefore, Rapid Heat Pty Ltd will be liable for the taxable value of the car fringe benefit during the FBT year.
Evidences gained suggest that the Jasmine used the car to travel 10,000 km and occurred the expenses for conducting minor repair which was reimbursed by Rapid Heat Pty Ltd. Based on “Subdivision B 22A, FBTAA 1986” the reimbursement by Rapid Heat Pty Ltd relating to the expenses that Jasmine occurred on minor repair gave rise to the expense payment fringe benefit (Foster 2016). In whichever of the above stated case the expense incurred by Jasmine can be business or private expense or the combination of both. The taxable value of the car repair expense payment fringe benefit represents the amount that the Rapid Heat Pty Ltd reimburses or pays Jasmine. The concessional rates rules can be applied by Rapid Heat Pty Ltd to determine the taxable value of the fringe benefit.
In the following part of the case it is noticed that Jasmine parked the car at the airport when she was out of state. The car was further parked at the work station for another five days due to scheduled repairs. Referring to “Sub-Division B 39C, FBTAA 1986” a fringe benefit relating to car parking did not arise for Rapid Heat Pty Ltd (Young and Miles 2015). The reason for this is that the parking of car was not made near the primary place of employee’s employment during those 10 days. Neither the car was parked at the place that was under the control of the employer. Therefore, Rapid Heat Pty Ltd will not be held liable for the car parking fringe benefit in such circumstances.
Issue
In the other instances obtained it is noticed that Rapid Heat Pty Ltd provided Jasmine with the loan of $500,000 for purchasing the holiday home at 4.25% interest rate. Citing the “Division 4 of the FBTAA 1986” making of loan by Rapid Heat Pty Ltd to Jasmine gave rise to the loan fringe benefit during the FBT year (Seymour 2017). The lower rate of interest that is charged by Rapid Heat Pty Ltd is less than the statutory rate of interest. The taxable value of the loan fringe benefit for Rapid Heat Pty Ltd reflects the difference between the interests which may have been accrued during the FBT year given the statutory rate of interest is applied on the outstanding balance of the loan.
Conclusion:
The above stated analysis can be concluded by stating that the benefit provided by Rapid Heat Ltd constitute fringe benefit for Jasmine under “S 7, FBTAA 1986”. Rapid Heat made the car available for employee’s private use and the other benefits that was provided was in respect of the employment. Rapid Heat will be held taxable for the value of fringe benefit under the “FBTAA 1997”.
In the alternate hypothetical situation if it is noticed that Jasmine used the amount of $50,000 to purchase the shares herself rather the lending the amount to her husband. She would have been able to claim a permissible deductions under the general provision of “s 8-1, ITAA 1997” for the interest on loan that is accrued on her. However, the she lend the amount of $50,000 to her husband at interest free rate. Therefore, in such circumstances she will not be entitled to claim an allowable deductions under the general provision of “s 8-1, ITAA 1997”.
References:
Barkoczy, S., 2016. Core tax legislation and study guide. OUP Catalogue.
Barnes, J., 2018. On the ground and on tap—law reform, Australian style. The Theory and Practice of Legislation, pp.1-32.
Becker, J., Reimer, E. and Rust, A., 2015. Klaus Vogel on Double Taxation Conventions. Kluwer Law International.
Braverman, D., Marsden, S. and Sadiq, K., 2015. Assessing Taxpayer Response to Legislative Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl. Tax’n, 17, p.1.
Chardon, T., Brimble, M. and Freudenberg, B., 2017. Tax and superannuation literacy: Australian and New Zealand perspectives [Part 1]. Taxation Today, (102), pp.17-25.
Faccio, M. and Xu, J., 2015. Taxes and capital structure. Journal of Financial and Quantitative Analysis, 50(3), pp.277-300.
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Hodgson, H. and Pearce, P., 2015. TravelSmart or travel tax breaks: is the fringe benefits tax a barrier to active commuting in Australia? 1. eJournal of Tax Research, 13(3), p.819.
Johnston, V., 2017. An Australian Road Transport Carbon Price: A Comparative Analysis.
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Snape, J. and De Souza, J., 2016. Environmental taxation law: policy, contexts and practice. Routledge.
Stiglitz, J.E. and Rosengard, J.K., 2015. Economics of the public sector: Fourth international student edition. WW Norton & Company.
Tan, L.M., Braithwaite, V. and Reinhart, M., 2016. Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), pp.329-344.
White, J. and Townsend, A., 2018. Deductibility of employee travel expenses: The ATO’s guidance. Taxation in Australia, 52(11), p.608.
Young, W. and Miles, C.F., 2015. A spatial study of parking policy and usage in Melbourne, Australia. Case Studies on Transport Policy, 3(1), pp.23-32
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