Calculation of net capital gains for an individual taxpayer
Describe about the Australian Taxation for Gross-Up Rates.
1. The information extended in the given case has been summarised below in wake of relevant facts.
A holiday home situated in Blue Mountains has been sold by Fred in the current tax year for a total sun of $ 800,000.
This particular holiday home was bought by Fred nearly two decades ago i.e. in 1987 for a price of $ 100,000.
There are various other costs that have been incurred by Fred in relation to the buying and selling of the holiday home and also for construction on the asset which effectively would be considered while calculation of the cost base associated with the holiday home.
Additionally, certain information has been provided with regards to the accumulated capital losses from previous years on account of sale of assets.
In wake of the above, the concern is to compute the net capital gains for Fred for FY2016 that would be subjected to CGT liability.
CGT applicable or not – Holiday Home
The first step is to determine if the capital gains that are derived from holiday home sale would attract CGT or not. In this regard, it is noteworthy that all those assets which are bought before September 20, 1985 would be exempt from the application of CGT (Gilders et. al., 2016). Apparently, the holiday home does not fall in the above category and hence CGT would apply on the capital gains derived from the home sale.
Calculation of capital gains
For computation of capital gains from any asset, the primary step is to determine the cost base of the asset. In accordance with Section 110-25, the cost base of the asset would typically consist of the following elements (Nethercott, Richardson & Devos, 2016).
Buying price of the asset
Incidental costs in relation to taking asset possession and ownership
Incidental costs in relation to sale of asset
Costs of construction which lead to asset value enhancement
Costs undertaken to maintain asset possession
In wake of the above discussion, the cost base of Blue Mountain based holiday home is computed below.
Price at which holiday home bought in 1987 = $ 100,000
Incidental expenses while purchasing holiday home in 1987 = 1,000 (Legal Fees) + 2,000(Stamp Duty) = $3,000
Incidental expenses while sale of holiday home in FY2016 = 1,100 (Legal Fees) + 9,900 Real Estate Agent Commission = $ 11,000
Fringe benefits and FBT liability for the employer
Money spent during garage construction = $20,000
Total cost base of Holiday Home = 100,000 + 3,000 + 11,000 + 20,000 = $ 134,000
Considering that Fred is an individual taxpayer and the fact that property was bought before September 20, 1999, thus two methods namely discount method and indexation method are available for derivation of capital gains that are taxable (Deutsch et. al., 2015). As the discount method allows for a 50% concession on the long term capital gains, hence it would result in lower CGT liability and would be used to calculate taxable capital gains (Section 115-25) (Barkoczy, 2015).
Hence, the proceeds obtained from the sale of the house = $800,000
Total cost base of the holiday home as computed above = $ 134,000
Capital gains (Holiday Home) =Sales proceeds (Holiday Home) – Cost Base (Holiday Home)
= 800,000 – 134,000
= $666,000
The case information states that Fred has an accumulated capital loss to the tune of $ 10,000 from the previous year on account of losses in share investments. The capital loss on shares would be adjusted against the corresponding capital gains made on the holiday home sale and finally the net amount would be applied the discount method to arrive at the capital gains for FY2016 on which CGT would be applicable (Sadiq et. al., 2014).
Thus, capital gains for Fred in FY2016 = 666,000 – 10,000 = $656,000
Concession of the above capital gains as per the discount method = 0.5*656000 = $ 328,000
Thus, capital gains that would atleast CGT in FY2016 = 656000 – 328000= $ 328,000
Antique vase related previous year capital loss of $ 10,000
In the given case, there would be change in the value of the taxable capital gains, as the capital losses on antiques must be adjusted against future capital gains from antiques only. Hence, there would not be any impact of this capital loss as this will have to be carried to the next year (CCH, 2013).
Thus, capital gains for Fred in FY2016 = 666,000
Concession of the above capital gains as per the discount method = 0.5*666000 = $ 333,000
Thus, capital gains that would atleast CGT in FY2016 = 666000 – 333000= $ 333,000
2. The objective in the case study provided is to analyse the host of fringe benefits that Periwinkle has given to Emma and in light of the relevant provisions of the Fringe Benefit Tax Assessment Act, 1986 (FBTAA, 86), comment on the FBT (Fringe Benefit Tax) liability for the employer, Periwinkle.
Section 8, Division 2A advocates that car fringe benefit are provided to employee only when the employer owned car is utilised by employee for personal use. However, if the use of the car is limited to only use for professional work, then car fringe benefit would not arise. In the situation given, it is known that Emma does utilise the car for her personal works also and thereby there is no denying the extension of car fringe benefit (Barkoczy, 2015).
The statutory formula for estimating the taxable value of car fringe benefit has been given by Section 9, Division 2B and stated below (Wilmot, 2012).
The requisite inputs that are required above are computed as shown below.
Base value of car = Purchase price paid by the employer –Repairs = (33,000 – 550) = $ 32,450
The applicable rule states that a statutory percentage of 20% is valid for all cars whose purchase date lies after April 1, 2014 irrespective of the usage and the distance covered during the year. Periwinkle has purchased the car in 2015, thus applicable statutory percentage for the given case would be 20%. (ATO, 2016b).
Car availability (FY2016) = 366 – 30 (Emma got the car only on May 1) – 5 (Out for repairs) = 331 days
It is worth noticing that the period for which car was at the parking is not deductible as the car was very well available for use but the employee Emma could not use the car as she ws not in the city (Gilders et. al., 2016).
Grossed up value for the car fringe benefit = $ 32450 × 20% × 331/365 × 2.1463 = $ 12,631.95
Periwinkle’s FBT liability = 12,631.95 *0.49 = $ 6,190
Loan fringe benefit
As per Section16, Division 4A, loan fringe benefit would arise if interest savings are accrued by the employee on account of no interest charged or lower interest rate charged by the employer in comparison to the applicable RBA (Reserve Bank of Australia) rate (Deutsch et. al., 2015).
The rate of interest charged by Periwinkle = 4.45% pa
The rate of interest advocated by RBA for FY2016 (TD 2015/8) (ATO, 2015) = 5.65% pa
As the rate of interest charged by employer is less than the corresponding rate announced by the RBA, hence some interest cost would be saved by the employee and hence would lead to loan fringe benefits (Sadiq et. al., 2016).
It is critical to note that Emma does not have loan for the complete financial year but rather a part of it as lending was executed on September 1, 2015.
Days for which Emma took the loan = 213
Absolute value of Loan Fringe Benefit given to Emma = 500000*(5.65% – 4.45%)*(213/366) = $ 3,491.8
Grossed up value of corresponding benefit = 3,491.8*1.9608 = $ 6,846.72
Periwinkle’s FBT liability = 6,846.72*0.49 = $ 3,355
Expense fringe benefit
The useful facts from the given case study are detailed below
Bathtub’s unit sale price in market =$ 2,600
However, price at which bathtub offered to Emma = $ 1,300
It is apparent that on an item which is meant for personal use, an expense of $ 1,300 is saved, which amounts to expense fringe benefit for Emma from Periwinkle (CCH, 2013).
It is also known that bathtub sale attracts GST due to which the applicable gross up factor for calculation would be 2.1463 (ATO, 2016a).
Expense Fringe Benefit (EFB)- Bathtub) taxable value = (2600-1300)*2.1463 = $ 4,078
Periwinkle’s FBT liability = 4078*0.49 = $ 1.998
In line with the information provided, the component of loan to the tune of $ 50,000 which the husband was using before now is being used for Emma for generation of income from trading in shares. This would allow the employer to claim higher tax deductions on account of the incremental loan amount being used by Emma for producing taxable income as calculated below (Nethercott, Richardson & Devos, 2016).
Periwinkle’s addition deduction on outstanding FBT liability = 50000*(5.65% -4.45%) = $ 600
Hence, due to the changed circumstance, Periwinkle would be able to reduce its outstanding FBT liability by $ 600.
Reference
ATO 2015, TD 2015/8, Australian Taxation Office, Available online from https://law.ato.gov.au/atolaw/view.htm?docid=%22TXD%2FTD20158%2FNAT%2FATO%2F00001%22 (Accessed on September 20, 3016)
ATO 2016a, Gross-up rates for FBT, Australian Taxation Office, Available online from https://www.ato.gov.au/rates/fbt/?page=3 (Accessed on September 20, 3016)
ATO 2016b, Car fringe benefits statutory formula rates, Australian Taxation Office, Available online from https://www.ato.gov.au/rates/fbt/?page=4 (Accessed on September 20, 3016)
Barkoczy, S 2015, Foundation of Taxation Law 2015, 7th eds., CCH Publications, North Ryde
CCH 2013, Australian Master Tax Guide 2013, 51st eds., Wolters Kluwer, Sydney
Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2015, Australian tax handbook 8th eds., Thomson Reuters, Pymont
Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2016, Understanding taxation law 2016, 9th eds., LexisNexis/Butterworths.
Nethercott, L, Richardson, G & Devos, K 2016, Australian Taxation Study Manual 2016, 4th ed., Oxford University Press, Sydney,
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2014 , Principles of Taxation Law 2014, 7th eds., Thomson Reuters, Pymont
Wilmot, C 2012, FBT Compliance guide, 6th edn, CCH Australia Limited, North Ryde
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