Liquidation of Vacant land
As per the situation presented, there is a client who has sold certain assets in the tax year 2017/2018. The aim is to offer consultation to this client with regards to the potential tax implications that may arise on account of these transactions particularly with regards to capital gains or capital losses that are realised from asset sale. It is imperative to note that the possibility of the receipts being treated as revenue has been eliminated taking into consideration that the client does not run any business where there is any trading in any of the given assets. This essentially hints that the proceeds from the sale of assets would be capital and the only CGT (Capital Gains Tax) would imply on the potential gains or losses realised in the process of liquidation.
Liquidation of Vacant land
The first critical aspect is to highlight if the given asset falls within the ambit of pre-CGT asset or not. This question becomes vital owing to the presence of s. 149-10 ITAA 1997 which allows complete exemption from CGT liability (Barkoczy, 2017). In order to qualify as a pre-CGT asset, the central condition is the acquisition date to be September 19, 1985 or before and not after this date. The land block fails to satisfy the pre-CGT asset qualification criterion and hence would be eligible for application of CGT.
The second aspect is to indicate the appropriate CGT event which is triggered by the decision to sell the asset based on the summary presented in s. 104-5 ITAA 1997 (Coleman, 2016). The requisite CGT event is A1. In order to determine the potential gains or losses for this event, a crucial input that would be required is asset cost base which is determined in accordance with s. 110-25 ITAA 1997 (Woellner, 2017). Cost base is said to comprise of the key elements listed below.
Considering the facts related to sale of land, a pertinent issue arises which deals with land being sold in the current tax year with receipts expected in the next year. In such a situation, a potential issue arises in relation to timing of taxation. Tax ruling TR 94/29 opines in this matter that the relevant tax treatment in case of sale of asset ought to be carried out when the contract for the asset sale has been executed even though there may be a time delay in receipt of associated cash (Coleman, 2016). Further, s. 102-5 ITAA 1997 requires that any capital gains that arise in current year or accumulated from previous year need to be neutralised against the capital gains. Concessions are provided in terms of capital gains as per s. 115-25 which allows a 50% reduction in long term capital gains. It is imperative to understand that long term capital gains are associated with assets with a holding period higher than one year (Wilmot, 2014).
The CGT implications arising on the land block owing to sale would be considered in the givn3e tax year only as per TR 94/29 (Barkoczy, 2017). Also, the gains realised on this asset are long term which makes the asset eligible for deduction under s. 115-25 as highlighted below.
The CGT event and the Potential Gains or losses for Antique Bed
Antique belongs to the sub-category of collectable as is apparent from s. 118-10 which defines these assets. As per this section, for CGT to be levied on these assets a necessary condition is that the asset procurement price (also called buying price) must exceed $ 500. The antique bed has complied with this necessary condition besides being purchased after levying of CGT and therefore would be considered for CGT consequences based on the relevant information. The disposal of bed leads to A1 CGT event and need to compute the cost base of the bed which would comprise of the cost undertaken for value improvement through mattresses.
Also, the client has not engaged in transaction of sale of bed but the same has been stolen. Hence the realised proceeds comprise of the money that has been obtained from insurance despite the actual market value being higher. Additionally, the holding period of this asset is sufficiently long so as to warrant a 50% discount on the capital gains in line with s. 115-25 ITAA 1997 as highlighted below.
The critical aspect is to highlight if the given asset falls within the ambit of pre-CGT asset or not. This question becomes vital owing to the presence of s. 149-10 ITAA 1997 which allows complete exemption from CGT liability (Reuters, 2017). In order to qualify as a pre-CGT asset, the central condition is the acquisition date to be September 19, 1985 or before and not after this date. The painting asset succeeds to satisfy the pre-CGT asset qualification criterion and hence would be eligible for exemption of CGT (Sadiq, et.al., 2015). Hence, no CGT consequence for client on painting related proceeds.
Liquidation of Shares
The share purchase for the various companies has been done after the levying of CGT and therefore none of the shares fail to comply with the definition of pre-CGT asset. Besides, CGT event A1 is triggered by the share sale and hence in order to derive the underlying capital gains or capital losses, information about the cost base of these shares need computation as per s. 110-25 (Reuters, 2017). The discount method highlighted as per s. 115-25 would be applied for the shares of those companies which have been held by the client for a period in excess of one year. The computation of the capital gains derived on each of the shares in accordance with the methodology prescribed by the A1 capital event is exhibited below (Sadiq, et.al., 2015).
The cumulative capital gains have been derived for all the shares asset with appropriate adjustment for capital loss generated in accordance with s. 102-5.
Liquidation of Violin
Subsection 108-20(1)) states that personal use assets in order to be qualified for CGT liabilities must have purchase price exceeding $ 10,000 (Coleman, 2016). The client in the given case tends to be an avid violin player and has maintained a huge collection of violins which are played on a frequent basis. Thus, these are not financial assets but rather items which the client uses for her personal entertainment and driven by personal interest. Therefore, the violin collection as a whole instead of being labelled as collectable would be better categorised as a personal use asset. For the violin sold, the purchase price was $ 5,500 which implies that the necessary threshold value was not crossed in this case as levied by s. 108-20(1) and hence no CGT liability would arise (Gilders, et. al., 2015).
Capital gains realised from Sale of Shares
Summary of capital gains/losses
It is apparent from the above capital gains arising from individual assets that total taxable gains for the client comes out as $139,100 for FY2018 which would be suitably levied CGT.
- Potential non-cash personal benefits extended to employees are referred to as fringe benefits. It is imperative to note that job related benefits such as car for office work does not constitute as fringe benefit. For working out the tax implications of the benefit extended, there is a dedicated tax law i.e. Fringe Benefits Tax Assessment Act 1986 (FBTAA). There is a need of this separate tax law as the tax treatment of these benefits is different from the conventional benefits under ITAA 1997 and ITAA 1936. Here, instead of taxing the benefit recipient, the benefit provider is instead taxed. In wake of the given scenario, the fringe benefits applicable are indicated below.
“Car Fringe Benefits”
A mandatory condition that ought to be fulfilled for the extension of car fringe benefits is that the car that employer has provided the employee can be used for personal purpose by the employee. Limiting the use of car only to professional purpose would not lead to car benefit extension in accordance with s. 7 FBTAA 1986 (Gilders, et. al., 2015). Hence, the critical aspect of car fringe benefit is personal use with/without the presence of professional use. The personal use might be allowed by providing verbal or written permission (Krever, 2017). Alternately, the conduct of the parties involved may also hint the presence of personal use. A key action in this regards is parking of car at the garage located at the employee’s house or near the same where personal use is automatically derived despite the presence of an explicit permission by employer (Nethercott, Richardson and Devos, 2016).
As per the case facts, Jasmine is allowed to use the car by Rapid Heat and this use is not limited to only office use. Thereby existence of car fringe benefit to Jasmine is confirmed. The given car which has been provided to Jasmine has been purchased on the first day of May in the current financial year for a consideration of $ 33,000. For computation of car fringe benefit value, the statutory formula approach highlighted in s. 9 has been adopted which requires the following inputs.
- Base Value (Car)
The car base value typically is arrived at by making suitable deductions from the purchase price of the car. These would include multiple aspects such as car depreciation, minor repairs borne by employer etc. In the given cade only minor repairs deduction has been made and no depreciation would be charged as the car has been purchased in the given year only.
- Private Use Period
The car has been provided to Jasmine for the whole of the given financial year barring April month. Therefore, deduction of 30 days for month of April needs to be done leading to 335 days. Section 9 does not permit any deduction for time period if car is in garage for the purpose of minor repairs which is valid here. Further, the imperative aspect for inclusion in the given period is the fact that car usage must be allowed and actual use of the car is not essential. When the car was parked at the airport, there was no use of the car for the period Jasmine was not in town but the car was still available at the time.
FBT computation related vital information for 2017./2018 are summarised as follows.
Section 16, FBTAA specified that loan fringe benefit is extended to employee only when loan facility is provided at an interest rate which is concessional when compared to the benchmark rate which the employer must adhere to so as to avoid any benefit being extended to employee (Hodgson,Mortimer and Butler, 2016). The benchmark rate is provided by the RBA and updated for each year. It is imperative that the loan cost must be compared with the benchmark rate applicable for the given year only. For instance, in this case, the relevant year is 2017/2018 for which the benchmark rate is 5.25% pa.
Taxation of Sale of Painting
However, the loan has been extended by the employer at an interest rate which would be deemed concessional by 100 bps. This is because the applicable cost of loan on the employee is 4.25% p.a. As a result, the FBT liability would arise for Rapid Heat based on the underlying interest savings that Jasmine has derived owing to lower interest rate by 100 bps as computed.
- Availability of loan
A vital input is the duration for which the loan has been extended during the year under consideration. The loan has been provided on September 1, 2017 and hence the time period from this date to the end of the financial year would be considered for computation as exhibited below.
A crucial aspect is highlighted by s. 19, FBTAA is that potential deduction by employer may be claimed if the use of the loan proceeds by employee is such that it leads to generation of assessable income for the employee. However, this deduction rule does not provide any deduction in tax for the use of loan proceeds by an associate of employee. The given details highlight that $ 450,000 loan amount is utilised by Jasmine in the holiday home acquisition which on not being used as a main residence is likely to be used for income generation. On the other hand, the remainder money to the tune of $ 50,000 has been given to her husband for share market investment. No deduction for Rapid Heat is possible on amount extended to Jasmine’s husband despite income production.
“Expenses Fringe Benefits”
It is expected that employees would meet their own personal expenses. However, at times, the employer tends help in this regards by paying for personal expenses (Krever, 2017). A special case in this case arises if discount is provided by employer on an internally produced good leading to the internal expense fringe benefit (Deutsch, et.al., 2015).
The scenario narrated reflects that the electric heater was available for $ 2,600 for any person who wanted to purchase directly from the company i.e. Rapid Heat. However, the company provides the same heater for $ 1,300 to Jasmine which implies that the remaining expense has been borne by the employer resulting in expense fringe benefit.
- The amount used by Jasmine’s husband is now being used by Jasmine without change in any utilisation. Thus, Jasmine would derive taxable income in the form of dividend income which as per the deduction rule would provide extra deduction for Rapid Heat thereby allowing it to lessen the outstanding FBT liability as demonstrated below.
References
Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University Press.
Coleman, C. (2016) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters (Professional) Australia.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2015) Australian tax handbook. 8th ed. Pymont: Thomson Reuters.
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016) Understanding taxation law 2016. 9th ed. Sydney: LexisNexis/Butterworths.
Hodgson, H., Mortimer, C. and Butler, J. (2016) Tax Questions and Answers 2016. 6th ed. Sydney: Thomson Reuters.
Krever, R. (2016) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON LAWBOOK Company.
Nethercott, L., Richardson, G., and Devos, K. (2016) Australian Taxation Study Manual 2016. 8th ed. Sydney: Oxford University Press.
Reuters, T. (2017) Australian Tax Legislation (2017). 4th ed. Sydney. THOMSON REUTERS.
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. 6th ed. North Ryde: CCH Australia Limited.
Woellner, R. (2014) Australian taxation law 2014. 8th ed. North Ryde: CCH Australia.
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