Client Profile and Asset Disposal
In wake of the information provided, the key concern is to highlight the tax implication of the proceeds that the client has derived from asset liquidation. It is noteworthy that these proceeds would be capital and not revenue which is confirmed by the fact that the taxpayer has not sold these assets as part of any business transaction. This is reflective of the fact that the current client does not deal with any of the liquidated assets as trading stock but instead has ownership of the assets as a collector or investor. The capital proceeds are not taxable but could lead to creation of taxation burden by resulting in capital gains which would be taxed using CGT (Capital Gains Tax).
Pre-CGT Asset
The definition of these assets is offered by s. 149-10 ITAA 1997 and this definition has special relevance considering the fact that these assets would be immune from CGT impact (Austlii, 2018 e) . This implies that irrespective of the underlying capital gains realised from the sale of these assets, no CGT liability would arise (Wilmot, 2014). The ley criterion for these assets is the date of ownership which must lie in the period when the underlying capital gains were not taxed which was the case before September 20, 1985. For the given client, an analysis of the assets liquidated during the year has been carried so as to determine if any asset is pre-CGT asset or not. The summary of this is presented in the tabular manner below (Hodgson, Mortimer and Butler, 2016).
CGT Event
The need to compute the underlying gains and loss pertaining to an asset arises owing to the CGT event taking place (Nethercott, Richardson and Devos, 2016). In this regards, the identification of the relevant event is crucial since there is attached methodology for computation of gains which acts as the first step in the taxable gains computation process. The relevant event for the client is A1 which is triggered when an asset is disposed (Krever, 2017).
Cost Base
In order to determine the gains or losses, a vital input in the form of cost base is required which needs to be compared with the sales proceeds (Sadiq, et.al., 2015) . This term has been defined as per s. 110-25 and it is highlighted that there are primarily five elements including the initial cost to buy the underlying asset. The various elements pertaining to cost base are summarised in the table illustrated as follows (Austlii, 2018 a).
Pre-CGT Assets
Adjustment of Capital loss
From the capital gains that are derived from comparison of cost base and sales proceeds, there need to be an adjustment of prevailing capital losses as advised by s. 102-5 ITAA 1997. These losses may be from transactions enacted during the assessment year or may belong to past transactions. This happens since capital gains can be rolled to the future till there is availability of capital gains for balancing (Woellner, 2017).
CGT Concessions
After the above step is done, the taxpayer can lower the remaining capital gains by adopting one of the two approaches i.e. discount and indexation. The former approach is more useful in the given case considering the high amount of capital gains. This approach is outlined in s. 115-25 and provides an exemption of 50% on the capital gains thereby reducing the CGT burden only on the remaining capital gains (Austlii, 2018 b). However, the rebate is available only for a particular type of capital gains called as long term capital gains. This type of capital gains are realised on sale of assets where the owner had a holding period of greater than one year.
Timing of Capital receipts
In capital asset liquidation, potential timing difference between sale contract and resultant proceeds may arise. At times, this lands the taxpayer is a confusing position when the above two incidents do not converge in the same tax year. In such cases, it is advisable that the taxpayer must consider the potential tax implications of the asset sale in the year when the sale contract gets enacted as has been validated by tax ruling TR 94/29 (ATO, 1994).
CGT Exemption
One case of CGT exemption has been introduced with regards to pre-CGT asset. Certain other cases in this regards are summarised below (Hodgson, Mortimer and Butler, 2016).
- Purchase price of collectable asset is not higher than $ 500 (s. 118-10) (Austlii, 2018 d)
- Purchase price of asset of personal use is not higher than $ 10,000 (ss. 108-20(1))
Vacant Land
It has already been cited that the land is not a pre-CGT asset and hence cannot claim any CGT exemption on this ground. The sale contract for land has been enacted in 2017/2018 while the buyer would provide the agreed proceeds only in next tax year. With reference to TR 94/29, the CGT implications would be taken into consideration in the current year only. The relevant CGT event in this case is A1. From the capital gains that result on the asset, the previous year capital losses would also be adjusted. Further, the concession under s. 115-25 would be available in the case of this asset considering the long term holding period which would imply CGT application only on half of the capital gains.
CGT Events
Antique Bed
Considering that antique bed is an example of collectable item, hence it needs to adhere to the minimum price threshold for CGT to apply. The given asset succeeds in complying with the requirement as the money spent on purchasing the asset is $ 3,500. The relevant CGT event in this case is A1. From the capital gains that result on the asset, the previous year capital losses would also be adjusted. The losses adjusted are of sculpture since capital losses associated with collectable items can only be balanced against the gains made on same category asset. Further, the concession under s. 115-25 would be available in the case of this asset considering the long term holding period which would imply CGT application only on half of the capital gains.
Painting
The given asset is a pre-CGT asset as has been already pointed in the summary above. The implication of this is that irrespective of the capital gains that painting sale generates, these would not be taxed as the asset was purchased at a time when these gains were not levied any CGT and this treatment would continue.
Shares
All the shares that the client are sold are not pre-CGT assets and hence CGT exemption would not be extended. As a result, the capital gains would be determined on each of the share using the methodology indicated by CGT event A1. Further, the concession under s. 115-25 would be available in the case of those shares where the long term holding period would be there which would imply CGT application only on half of the capital gains.
The key issue in relation to taxation of this asset sale is whether this needs to be classified as collectable or personal use asset. In order to determine the appropriate choice, the underlying facts provided ought to be taken into cognisance. Key among them is the fact that client uses each of the violins from her collection to derive personal entertainment and this does not happen sporadically but rather is a regular occurrence. Under such circumstance, it is opportune to consider the violin sold as an asset that is of personal use. This requires the underlying violin to have a cost price greater than $ 10,000 so as to be eligible for levying of CGT on the derived capital gains. The cost price of the selected violin is only $ 5,500 and hence CGT exemption would be applicable for this violin. Net Capital Gains
Cost Base and Capital Loss Adjustment
The summary of the final tally of taxable capital gains for the client considering the given transactions is provided below.
- Rapid Heat Pty Ltd provides a car, loan ($500,000) and heater (at low cost) to Jasmine at different point of time in the tax year 2017/18. The objective is to examine the nature of the underlying benefit and make a decision regarding the aspect that whether the given benefits would be categorised as an extension of fringe benefit or not. Further, if the benefit is classified as fringe benefit then the relevant fringe benefit tax liability will be determined.
There are certain benefits which an employer extends to employee during their relationship with the company. These benefits are considered as fringe benefits only when the below highlighted characteristics is present in the benefit (Coleman, 2016).
- Benefit must not be issued for fulfilling the professional liabilities but rather for the personal interest of the employee.
- The extension of the benefits should not be in terms of direct cash benefits
A separate statute has been put in place which provides detailed information about the fringe benefits and their associated taxation implications which is termed as “Fringe Benefit Tax Assessment Act 1986.” The key factor extracted from the provisions of FBTAA 1986 is application of tax liability (Wilmot, 2014). The tax liability would be charged on employer based on the fringe benefit amount and the nature of the benefit. However, employee is not held liable for any fringe benefit tax liability.
Car Fringe Benefit
Many employers allow the employee to take the car in order to complete professional work/obligations, in such cases the benefit of using the car for professional duties will not be considered as car fringe benefit. However, when the employer has provided the car or issued the permission to utilize the car for his/her personal usage, then it would be said that car fringe benefit has been issued to employee.
Rapid Heat Pty Ltd has bought a new Toyota car for a net amount of $33,000 on May 1, 2017 and hands over to Jasmine for personal work. The car was available to her on weekends as well as the period when she was not in the city. Based on these circumstances, it can be concluded that Jasmine is utilizing a car fringe benefit which has led the FBT liability on Rapid heat Ltd.
The total days of the assessment year on which the car is in the hands of Jasmine for personal utilization is an imperative factor. Based on the information provided, it is apparent that jasmine had access to car from May onwards and hence deduction for the April month would be made which would bring down the days to 335 days. Further, the scenario when the car is actually sent for minor repairs and the total period spent in minor repairing in five days. These five days from total 335 days will not be deducted as the car is held for minor repair only. Further, there are 10 days for which the Jasmine herself parked the car at airport and went to another place. In this case also, the 10 days will not lower the total available days because the car remained available for Jasmine only no other person is using the car for professional work and thus, the car would be said available to Jasmine.
CGT Concessions
The payment for the minor repairing which has been borne by employer would also be deducted from net procurement amount of car. Additionally, the relevant gross up factor and FBT value applicable for the assessment year would be applied to yield the following FBT.
Section 16, FBTAA 1986 defines that loan offered at discounted interest rate would amount to loan fringe benefit when the discounted rate is lower than statutory rate which is prescribed by RBA with respect to the relevant tax year. This is because discounted interest costs would imply lower interest outflow and hence realisation of savings by the employee (Austlii, 2018 c).
The first step of loan fringe benefit tax liability computation is to find the exact amount which has been saved by employee while taking the discounted loan. Further, the taxable value computation based on the applicable gross up rate (ATO, 2018 b). The final taxable value would be taxed by 47% which is the FBT rate for FY 2018. The deduction would also be issued to employer for the case where the loan income would result in assessable income for employee (ATO, 2018 a).
The rate of interest which has been prescribed by RBA = 5.25% per annum
Rapid Heat has taken the rate of interest for loan = 4.25%
The discount of 1% in the interest rate has resulted the summary that loan fringe benefit is issued. Additionally, the relevant gross up factor and FBT value applicable for the assessment year would be applied to yield the following FBT.
$450,000 from loan has used by Jasmine to own a holiday home. If the assumption is made that holiday home will be used for assessable income making process by Jasmine, then the interest on $450,000 will bring FBT deduction for the employer i.e. Rapid Heat.
The s. 20, FBTAA 1986 defines that personal expenses which actually must be paid by employee if paid by employer, then expense payment fringe benefit issuance is the result (Deutsch, et.al., 2015).
Jasmine wanted to purchase a heater from Rapid Heater which has a normal sale price of $2600. It implies that Jasmine has to pay $2600 for heater. However, Rapid Heat has provided the heater to her only for $1300 which indicates that rest $1300 has been paid by Rapid Heat. As the expense has been borne for their own product and therefore, it will be considered as internal expenses payment fringe benefit.
- According to the new arrangement, Jasmine has decided to use $50,000 to own the share which would produce dividend income and thus, becomes part of assessable income of Jasmine. Hence, the FBT liability will be reduced by $500 (computed below) for the employer under this scenario.
References
ATO, (1994) Taxation Ruling –TR 94/29 [Online]. Available at: Income tax: capital gains tax consequences of a contract for the sale of land falling through. https://www.ato.gov.au/law/view/document?DocID=TXR/TR9429/NAT/ATO/00001&PiT=99991231235958 (Accessed: 1 October 2018)
ATO, (2018 a) Fringe Benefits Tax- Exemptions and Concessions. https://www.ato.gov.au/general/fringe-benefits-tax-(fbt)/in-detail/getting-started/fbt-for-small-business/?page=21 (Accessed: 1 October 2018)
ATO, (2018 b) Loan Fringe Benefits https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Types-of-fringe-benefits/Loan-fringe-benefits/ (Accessed: 1 October 2018)
Austlii, (2018 a) Income Tax Assessment Act 1997- SECT 110.25.General Rules About Cost Base [Online]. Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.5.html (Accessed: 1 October 2018)
Austlii, (2018 b) Income Tax Assessment Act 1997- SECT 115.25 [Online]. Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s115.25.html (Accessed: 1 October 2018)
Austlii, (2018 c) FRINGE BENEFITS TAX ASSESSMENT ACT 1986- SECT 148.[Online] https://classic.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/s148.html (Accessed: 1 October 2018)
Austlii, (2018 d) Income Tax Assessment Act 1997- SECT 118.25 [Online]. Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.25.html (Accessed: 1 October 2018)
Austlii, (2018 e) Income Tax Assessment Act 1997- SECT 149.10 [Online]. Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s149.10.html (Accessed: 1 October 2018)
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. (2017) 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., Barkoczy, S., Murphy, S. and Pinto, D. (2017). Australian Taxation Law Select Legislation and Commentary Curtin 2017. 2nd ed. Sydney: Oxford University Press Australia.
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