Taxation Theory, Practice, And Law T2 2018 – Capital Gain Tax And FBT Consequences

Question 1

Capital gain tax in relation with the Australian tax system is applicable to the capital gain earned on the asset disposal, with the number of specified exceptions. In accordance with Australian Tax Office, a capital gain on an asset is the difference regarding the amount what the assets actually cost to the individual and what individual actually receives when the asset is disposed of (Sinfield, 2018). An individual pays tax on the capital gain, being the part of the individual’s incomes tax, and is not termed as a separate tax.  

CGT is referred to as the tax levied on any of the capital gains that take place in from of either sale or disposal of any of the purchased asset or  asset obtained after the September 1985. It is not considered as a separate tax. The most general means of making a capital gain or capital loss is by putting the asset into a sale, like a car or property which is specifically considered as CGT event (Plummer, 2016). For calculating the capital gain tax, that a taxpayer is liable to determine the benefit or loss while selling the asset, for this the individual must consider the selling price by adjusting its actual costs and related expenditure. Thus the computed amount is capital gain (or loss).

If an individual puts a capital asset into a sale, like shares or real estate, then the individual generally gets a capital gain or loss (Australian Government, 2018). This is the difference of what the assets actually cost to and what actually is received when the asset is disposed of.

If a capital loss is generated by the individual, then the individual does not claim the same in opposition to their other income but can make use of it to make a reduction in the capital gain (Dixon and Nassios, 2016).

• All assets that are acquired by the individual, from the time the tax started on the capital gains and are imposed to CGT expect if it is excluded specifically.
• Majority of the personal assets are exempted from CGT, inclusive of the individual’s house, car and individual assets like furniture.
• CGT is not applicable to the assets which are depreciated and are employed only for the purpose of the tax, like tools and equipment of business in rented premises (Jacob, 2018).

The state at which an individual makes a capital gain, or capital loss is generally when an individual takes entry in the disposal, not while settling. For the majority of the CGT events, the individual’s capital gain is considered as the variation amid the capital revenues and the base of the cost of the CGT asset.  The CGT asset’s cost base based largely on what the individual pays, along with certain other related costs withholding, obtaining and disposing of it (Evans, Minas and Lim, 2015).

There is the presence of three key ways for working out of the individual’s capital gain, in this individual can choose the means that provides the best suitable outcomes, which is a minimum capital gain (Burkhauser, Hahn and Wilkins, 2015).

Question 2

CGT discount method

It is eligible for the assets with 12 months or more holding prior to the reliable CGT event. It is not accessible to the corporations.

For individuals who are not an Australian resident, the discount of 50% is abandoned or reduced on the capital gains which are made later than the 8 May 2012.

It enables the individual to make a reduction in their capital gain by 50 per cent for the individuals who are residents inclusive of the partnership partners and trusts. 33.33% is applicable for fulfilling super funds and entitled companies providing life insurance (Chardon, Freudenberg and Brimble, 2016).

This is done by subtracting the cost base from the proceeds held from the capital, minus any capital loss, the decreasing by the reliable percentage of discount.

Indexation method

It is eligible for the assets which are acquired prior to the 11.45am; it is the legal time present in the Act on 21 September in the year 1999 and is eligible for the assets with 12 months or more holding prior to the valid CGT event.

It enables the individual to make increment in the cost base with the help of indexation factor on the basis of the customer price index until September 1999.

This is done by applying the reliable indexation factor, and following to this making subtraction of indexed cost base and capital proceeds (Evans, Minas and Lim, 2015).

Other method

It is eligible for the assets with not more than 12 months holding prior to the valid CGT event.

The most fundamental method lies in doing subtraction amid the cost base and capital proceeds.

This is done by subtracting the cost base or the specific amount by the reliable CGT event from the proceeds of capital.

CGT methods and 12-month ownership period

By considering all the three above methods, while identifying if or if not the individual has acquired the assets for at least 12 months prior to the CGT event, exempts the acquisition date as well the CGT event day (Chen and et al., 2016).

Taxation provision related to the case wherein the assets is misplaced or damaged has been particularly mentioned in section 24 of ITAA 97. Further, this provision states that in a scenario where the assets are misplaced or damaged then the similar will be considered to be asset disposal.

By considering the above-described provisions, the Net capital gain for the given case is as follows:

Particular	Working note	Calculations	Amount
Long Term Capital Gain
Block of Land	1		$200000
Antique Bed	2		$6000
Antique Painting	3		$123000
Long-term capital gain / loss from the sale of shares	4
Common Bank Shares – $29500
PHB Iron Ore                   – $30000
Young Kids Learning      – ($6000)			$53500
Violin	5		$6500
The total long-term capital gain for the current year			$389000
Taxable long-term capital gain		($389000*50%)	$194500
Total taxable capital gain		($13000+$194500)	$207500
Less: Capital loss of the previous year			($1500)
Net capital gain			$206000

Capital Gain Tax in Relation to Australian Tax System

Working notes

1: Block of Land		Amount
Selling price of asset		$320000
Less: Cost of asset**		($120000)
Capital gain		$200000
Cost of asset
Purchase Cost		$100000
Add: Local council expense		$20000
Total		$120000
Note: 2 Antique Bed
The selling price of the asset  (Compensation Received)		$11000
Less: Cost of antique bed**		($5000)
Capital Gain		$6000
Cost of asset **
Purchase cost		$3500
Add: Alteration Cost		$1500
Total Cost		$5000
Note: 3 Painting
Selling price of painting		$125000
Less: Cost of painting		($2000)
Capital Gain		$123000
Note: 4 Shares
Common Bank Share
Selling proceeds(1000*$47)		$47000
Cost of acquisition(1000*15)	($15000)
Brokerage Fees	($1000)
Stamp duty cost	($1500)
Less: Total cost of acquisition		($17500)
Capital Gain		$29500
PHB Iron Ore
Selling proceeds(2500*$25)		$62500
Cost of acquisition(2500*12)	($30000)
Brokerage Fees	($1000)
Stamp duty cost	($1500)
Less: Total cost of acquisition		($32500)
Capital Gain		$30000
Young Kids Learning Ltd.
Selling proceeds(1200*$0.5)		$600
Cost of acquisition(1200*$5)	$6000
Brokerage Fees	($1000)
Stamp duty cost	($1500)
Less: Total cost of acquisition		($6600)
Capital Loss		($6000)
Share Build Ltd
Selling proceeds(10000*$2.5)		$25000
Cost of acquisition(10000*$1)	($10000)
Brokerage Fees	($900)
Stamp duty cost	($1100)
Less: Total cost of acquisition		($12000)
Short-Term Capital gain (as holding period is less 12 months		$13000
Note: 5 Violin
Selling Price of Violin		$12000
Less: Cost of Violin		($5500)
Capital Gain		$6500

Part A

Fringe benefits tax is a tax which is payable by the employer on some benefits to their employees, this benefit might be added or comes under employees’ pay system and salary. The company’s director or a trust beneficiary having operations in business, wherein benefits received by the, in relation to their employment might be attributed to FBT. FBT is not covered under income tax; it is a separate term and is computed on the basis of the taxable value of the provided fringe benefits (Australian Government, 2018).

It is a tax applicable with the Australian Taxation System held by the Australian Taxation Office; the tax is imposed on the majority of the benefits which are non-cash, specifically provided by the employer in regards with the employment. Following to this, the tax is charged on the employer, and the employee is free from tax obligation and will be charged regardless of if or if not the benefit is offered to the employee directly or to the employee’s associates (Shields and North-Samardzic, 2015).

By considering the background, the fringe benefits tax is levied on the employers who offer some benefits (excluding wages and salaries) to the employees as well as to their associated in regards with their employment (Jia, 2017). Further, such benefits comprise, however, are not restricted under:

• the motor vehicle provision  in direct terms or novated lease
• payment of individual expenditure inclusive of some salary packages or reimbursement
• provisions related to accommodation
• Entertainment
• Car parking
• loans
• the residing way from house allowances

A fringe benefit on the car can be imposed on the owned car or held by employer leasing that is used by the employee on a private basis. For the rationale of fringe benefits tax, a motor car is:

• Van, sedan, station wagon or inclusive of the four-wheeler.
• Other vehicles which carriers good having the carrying capacity of 1 tonne or less
• Other vehicles designed only to carry no more than nine passengers.

For the car to be termed as accessible for using privately can be:

• Employed by the employee for using the same privately
• Making accessible for the employee to use privately, in spite of the fact if or if not it is used supposedly.

Any of the liability of FBT based on the average travelled kilometres in the year when FBT is charged, irrespective of if or if not they were meant for the business (Australian Government, 2018). In a situation where the vehicles are not available for the private use, for some days yearly, then the liability of FBT calculation is based on the pro-rata with the FBT amount payable proportionally by the employee to the accessible car days, instead of the entire year (Hodgson and Pearce, 2015).

ATO has laid strict guidelines and must be complied in regards with the exempt days, for example, parking car at the garage at the premises of the employer under lock and the opening for the entire time period of 24- hour.

By making use of the statutory fraction method, calculation of FBT is done by the multiplication of the car’s capital cost by the statutory fraction, with the multiplication of the number of days in the year when the car was made available. Thus, the last outcome will be divided with the number of days present in the FBT year (Pearce and Pinto, 2015).

CGT Discount Method

Fringe Benefits Tax Kilometre Statutory Fractions (Source: Australian Government, 2018)

Less than 15000 km travelled a year	20% FBT liability	= 0.2 statutory fraction
15000 – 24999km	20% FBT liability	= 0.2 statutory fraction
25000 – 40000	20% FBT liability	= 0.2 statutory fraction
Over 40000kmtravelled in a year	20% FBT liability	= 0.2 statutory fraction.

The contribution method enables the employee to make a reduction in their FBT liability with the help of contributions to the car maintenance and operating cost.  Further, such contributions should be alleviated from the after-tax salary (Martin, 2015). The contribution of each dollar decreases the liability of FBT by adding a dollar to the net payable FBT amount.

The highest amount of the contribution made each year will be equivalent of the multiplication of the vehicle’s capital costs that is multiplied to the statutory fraction, adding to the 10% of GST.

A fringe benefit on loan is prepared by an employer to an employee that is free of interest or is made available at lower interest as compared to the published benchmark rate. The revision interest rate of the benchmark is done annually, and the Tax Office publishes the same (Money Buddy, 2018).

The loan fringe benefit’s taxable value is the variation amongst the interest computed on the regular balance at the rate of the benchmark, and the interest accrued; within this computation, GST is not present (McCormack, 2017).  The rules of Minor benefit on the amount less than $300 or the deductible (decrease in the taxable value wherein the interest will have to be deductible) regimes that can be used when the cited justified requirements are met.

Key rate: FBT benchmark interest rate (Source: Australian Tax rate and Information, 2018)

FBT year ending 31 March	Rate of interest
2019	5.20%
2018	5.25%
2017	5.65%

By considering the provisions of the loan, FBT on the provided loan will be as follows

The loan is given to Jasmine		$ 500000
The interest rate charged by Rapid Heat		4.25%
Benchmark interest rate		5.25%
Concession on interest rate	5.25%-4.25%	1%
Thus the FBT on loan	$ 500000*1%	$5000

The investment made by her husband will not be considered for the reduction in tax obligation for fringe benefits tax.

By considering the provisions of the loan, FBT on the provided car will be as follows:

Cost of Car		$33000
No. of days car was used	=356-10-5-30	310 days*
The taxable value of the car fringe benefit by making use of the statutory formula	(33,000*20%*310/365) –	$5605
Less: Amount paid by Jasmine		(550)
Fringe benefit on the tax		$5055

Days in a year	365
Less: Days when jasmine was interstate	(10)
Less: Days when the car was scheduled for annual repairs	(5)
Less: Days of April month as the car was provided on 1st May	(30)
No. of days car was used	310

By considering the provisions of the loan, FBT on the provided car will be as follows

Cost at which heater is provided to the general public –	$2600
Less: Cost at which heater is                  provided to Jasmine.	($1300)
Benefit	$1300
Taxable rate on FBT	47%
Taxable value on FBT $1300*47%	$611

Table 1: Statement showing taxable value of fringe benefits tax to jasmine

Particular	Amount
FBT on Loan	$5000
FBT on Car	$5055
FBT on Heater	$611
Total Taxable FBT	$10666

If the Jasmine had purchased the shares on her own, instead of lending the amount to the husband for the purpose of investment. Then shares are considered to be income generating assets. Therefore, interest paid for such loan will be deductible from the amount of FBT.

FBT on Loan

The loan is given to Jasmine		$ 500000
The interest rate charged by Rapid Heat		4.25%
Benchmark interest rate		5.25%
Concession on interest rate	5.25%-4.25%	1%
Thus the FBT	$ 500000*1%	$5000
Interest for investing in shares	(50000*5.3%)	$2650
Amount of interest paid to the company at the rate of 4.25% for providing the amount to the husband as this amount is deductible	$50000*4.25%	$ 2125
The taxable value of FBT	($5000-$2125)	$2875

FBT on car and heater provided will be the same

Table 2: Statement showing taxable value of fringe benefits tax to jasmine

Particular	Amount
FBT on Loan	$2875
FBT on Car	$5055
FBT on Heater	$611
Total Taxable FBT	$8541

References

Australian Government, 2018. Fringe benefits tax – rates and thresholds (Online). Available from <https://www.ato.gov.au/Rates/FBT/>. [Accessed on 27 September 2018].

Australian Government, 2018. Fringe Benefits Tax (FBT) (Online). Available from <https://www.business.gov.au/finance/taxation/fringe-benefits-tax>. [Accessed on 27 September 2018].

Australian Government, 2018. Working out your capital gain(Online). Available from <https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-capital-gain/>. [Accessed on 27 September 2018].

Australian Tax rate and Information, 2018. Loan Fringe Benefits (Online). Available from <https://atotaxrates.info/businesses/fringe-benefits-tax/loan-fringe-benefits/>. [Accessed on 27 September 2018].

Burkhauser, R.V., Hahn, M.H. and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.

Chardon, T., Freudenberg, B. and Brimble, M., 2016. Tax literacy in Australia: not knowing your deduction from your offset. Austl. Tax F., 31, p.321.

Chen, Z., Gallagher, D., Harman, G., Warren, G. and Xi, L., 2016. How Much Does Tax Erode Fund Excess Return?.

Dixon, J.M. and Nassios, J., 2016. Modelling the impacts of a cut to company tax in Australia. Centre for Policy Studies, Victoria University.

Evans, C., Minas, J. and Lim, Y., 2015. Taxing personal capital gains in Australia: an alternative way forward. Austl. Tax F., 30, p.735.

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.

Jacob, M., 2018. Tax regimes and capital gains realizations. European Accounting Review, 27(1), pp.1-21.

Jia, Q., 2017. It is time to cut the corporate tax rate. Bulletin (Law Society of South Australia), 39(10), p.36.

Martin, F., 2015. Overseas travel by employees: When does FBT apply?. Taxation in Australia, 49(7), p.382.

McCormack, C., 2017. Our clinging to the fringe is stultifying development. News Weekly, (3010), p.7.

MoneyBuddy, 2018. FBT – Fringe Benefits Tax And Company Cars Explained (Online). Available from <https://www.moneybuddy.com.au/car-loans/guide-fringe-benefits-tax.html>. [Accessed on 27 September 2018].

Pearce, P. and Pinto, D., 2015. An evaluation of the case for a congestion tax in Australia. The Tax Specialist, 18(4), pp.146-153.

Plummer, W., 2016. Tax consolidation update: Still grappling with these rules?. Tax Specialist, 19(5), p.209.

Shields, J. and North-Samardzic, A., 2015. 10 Employee benefits. Managing Employee Performance and Reward: Concepts, Practices, Strategies, p.218.

Sinfield, A., 2018. Fiscal welfare. In Routledge Handbook of the Welfare State (pp. 45-55). Routledge.