Hi6028 Taxation Theory: Determine The Assessment Answers

1.

You are working as a tax consultant in Mayfield, NSW. Your client is an investor and antique collector. You have ascertained that she is not carrying on a business. Your client provides the following information of sales of various assets during the current tax year:

(a) Block of vacant land. On 3 June of the current tax year your client signed a contract to sell a block of vacant land for $320,000. She acquired this land in January 2001 for $100,000 and incurred $20,000 in local council, water and sewerage rates and land taxes during her period of ownership of the land. The contract of sale stipulates that a deposit of $20,000 is payable to her when the contract of sale is signed and the balance is payable on 3 January of the next tax year, when the change of ownership will be registered.

(b) Antique bed. On 12 November of the current tax year your client had an antique four-poster Louis XIV bed stolen from her house. She recently had the bed valued for insurance purposes and the market value at 31 October of the current tax year was $25,000. She purchased the bed for $3,500 on 21 July 1986. Although the furniture was in very good condition, the bed needed alterations to allow for the installation of an innerspring mattress. These alterations significantly increased the value of the bed, and cost $1,500. She paid for the alterations on 29 October 1986. On 13 November of the current tax year she lodged a claim with her insurance company seeking to recover her loss. On 16 January of the current tax year her insurance company advised her that the antique bed had not been a specified item on her insurance policy. Therefore, the maximum amount she would be paid under her household contents policy was $11,000. This amount was paid to her on 21 January of the current tax year.

(c) Painting. Your client acquired a painting by a well-known Australian artist on 2 May 1985 for $2,000. The painting had significantly risen in value due to the death of the artist. She sold the painting for $125,000 at an art auction on 3 April of the current tax year.

(d) Shares. Your client has a substantial share portfolio which she has acquired over many years. She sold the following shares in the relevant year of income:

(i) 1,000 Common Bank Ltd shares acquired in 2001 for $15 per share and sold on 4 July of the current tax year for $47 per share. She incurred $550 in brokerage fees on the sale and $750 in stamp duty costs on purchase.

(ii) 2,500 shares in PHB Iron Ore Ltd. These shares were also acquired in 2001 for $12 per share and sold on 14 February of the current tax year for $25 per share. She incurred $1,000 in brokerage fees on the sale and $1,500 in stamp duty costs on purchase

(iii) 1,200 shares in Young Kids Learning Ltd. These shares were acquired in 2005 for $5 per share and sold on 14 February of the current tax year for $0.50 per share. She incurred $100 in brokerage fees on the sale and $500 in stamp duty costs on purchase.

(iv) 10,000 shares in Share Build Ltd. These shares were acquired on 5 July of the current tax year for $1 per share and sold on 22 January of the current tax year for $2.50 per share. She incurred $900 in brokerage fees on the sale and $1,100 in stamp duty costs on purchase.

(e) Violin. Your client also has an interest in collecting musical instruments. She plays the violin very well and has several violins in her collection, all of which she plays on

a regular basis. On 1 May of the current tax year she sold one of these violins for $12,000 to neighbour who is in the Queensland Symphony Orchestra. The violin cost her $5,500 when she acquired it on 1 June 1999. Your client also has a total of $8,500 in capital losses carried forward from the previous tax year, $1,500 of which are attributable to a loss on the sale of a piece of sculpture which she sold in April of the previous year.

Required: Based on this information, determine your client’s net capital gain or net capital loss for the year ended 30 June of the current tax year.

2.

Rapid-Heat Pty Ltd (Rapid-Heat) is an Electric Heaters manufacturer which sells Electric Heaters directly to the public. On 1 May 2017, Rapid-Heat provided one of its employees; Jasmine, with a car as Jasmine does a lot of travelling for work purposes. However, Jasmine's usage of the car is not restricted to work only. Rapid-Heat purchased the car on that date for $33,000 (including GST).

For the period 1 May 2017 to 31 March 2018, Jasmine travelled 10,000 km in the car and incurred expenses of $550 (including GST) on minor repairs that have been reimbursed by Rapid-Heat. The car was not used for 10 days when Jasmine was interstate and the car was parked at the airport and for another five days when the car was scheduled for annual repairs.

 On 1 September 2017, Rapid-Heat provided Jasmine with a loan of $500,000 at an interest rate of 4.25%. Jasmine used $450,000 of the loan to purchase a holiday home and lent the remaining $50,000 to her husband (interest free) to purchase shares in Telstra. Interest on a loan to purchase private assets is not deductible while interest on a loan to purchase income-producing assets is deductible.

During the year, Jasmine purchased an Electric Heaters manufactured by Rapid-Heat for $1,300. The Electric Heaters only cost Rapid-Heat $700 to manufacture and is sold to the general public for $2,600.

Required:

(a) Advise Rapid-Heat of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2018. You may assume that Rapid-Heat would be entitled to input tax credits in relation to any GSTinclusive acquisitions.

(b) How would your answer to (a) differ if Jasmine used the $50,000 to purchase the shares herself, instead of lending it to her husband?

1.

Issue

The taxpayer in the scenario provided is an investor and also collects collectables. She has made various transactions with respect to the disposal of assets in the financial year 2017/2018. The objective is to determine the total capital gains or loss that may arise from the disposal of the assets. Further, the Capital Gains Tax (CGT) implication would also be taken into consideration for the capital gains derived from the sale.

Law & Application

Section 149(10) ITAA 1997 defines the pre-CGT assets as assets that are purchased before September 20, 1985. Additionally, CGT implication will not rise on taxpayer for the capital gains received from disposal of pre-CGT assets (Reuters, 2017).

Land Block

The computation for the capital gains would be done based on the type of transactions as the transaction for the sale of land block is considered as A1 event  as per s. 104-5, ITAA 1997 and therefore, the capital gains/loss will be calculated by subtracting cost base from the  proceeds derived from sale. Furthermore, s. 110-25(1) defines the five elements of cost base of an asset that are highlighted in the tabular format as show below (Gilders, et.al., 2016).

In context of the sale proceeds received by the taxpayer the relevant tax ruling is TR 94/29. It defines that sale proceeds that would be received in the upcoming year will also be considered for capital gains calculation for the year only in which the contract of sale has been signed by taxpayer with the buyer party. The net capital gains will be calculated after balancing the previous capital losses incurred from the same assets.  Also, if the proceeds from the sales are long term capital gains(holding for more than a year) then 50% discount will be for capital gains under s. 115-25(1), ITAA 1997 (Wilomot, 2014).

Taxpayer has a block of land which he bought in the year 2011. Cleary, this asset of taxpayer does not belong to pre-CGT asset. Also, if the asset is liquidated in the current year, then the holding period would be in excess of one year which implies that the resultant gains would be long term. Besides, even though the proceeds from the sale of the land would be realised in the next year, since the contract for sale has been enacted in the current tax year, hence the implications of CGT would also be borne in the current year only. Hence, the CGT implication is raised and the net capital gains/losses in regards to block of land is computed below.

Antique Bed

Tax determination TD 1999/40 defines that antique items and the fact that these come under the category of collectables and thus, termed as capital assets (Gilders, et.al., 2016). The computation of the capital gains in case of antique bed disposal transaction needs to be carried out in accordance with A1 capital event as mentioned in s. 104 -5, ITAA1997.   Further, the CGT implication would be exempted for the capital gains/losses which are bought for the price lower than or equal to $500  as defined in s. 118-10(1), ITAA 1997 (Deutsch, et.al., 2015).

Taxpayer has an antique bed which he bought on July 21, 1986. Cleary, this asset of taxpayer does not belong to pre-CGT asset. Further, the taxpayer has purchased it for $3500 which is higher than $500 and hence, the CGT implication is raised and the net capital gain/loss in regards to antique bed is computed below.

The asset has not been sold by taxpayer rather it has been stolen and hence the sale proceeds would be the amount received from insurance claim of taxpayer. The insurance amount for the antique bed is $11,000. Also, the proceeds is long term capital proceeds (holding for more than a year) then 50% discount will be for capital gains under s. 115-25(1), ITAA 1997. Clearly, the given asset is eligible for discount method of capital gain concession owing to the capital gains being long term.

Painting

Section 149(10) ITAA 1997 defines the pre-CGT assets which indicates that any asset that are purchased before September 20, 1985 are considered as pre-CGT. Additionally, CGT implication will not rise on taxpayer for the capital gains or losses received from disposal of pre-CGT assets. Taxpayer has a painting which the client bought on May 2, 1985 (Deutsch, et.al., 2015).  Cleary, this asset of taxpayer does belong to pre-CGT era as the period of acquisition is before September 20, 1985. Therefore, the capital gains realised through sale of the painting by the taxpayer will not be subject to CGT implication because the capital gains or losses raised from the sale will be discarded.

Shares

Section 149(10) ITAA 1997 mentions the pre-CGT assets which indicates that any asset that are purchased before September 20, 1985 are considered as pre-CGT. Additionally, CGT implication will not rise on taxpayer for the capital proceeds received from disposal of pre-CGT assets (Reuters, 2017). Taxpayer has bought four shares in different companies and all of them are having acquisition date after September 20, 1985 (Barkoczy, 2017).  Cleary, share asset of taxpayer does not belong to pre-CGT asset. Thereby, the CGT liability will be borne by taxpayer. The capital gains for all the shares would be computed in line with the approach highlighted in s. 104-5 under the CGT event A1. Besides, the holding period of three shares is more than one year implying the underlying gains would be long term and hence eligible for 50% concession in capital gains.

Violin

It is essential to differentiate between the personal use assets and collectables as the provisions for determining the capital gains/loss would be different for each of the above case. The personal use asset would be subject to CGT liability on taxpayer when the acquisition payment is higher than $10,000. In other words, if the taxpayer has personal use asset (purchase for personal enjoyment or use) and paid more than $10,000 for purchasing it, then the CGT will be levied.

It is apparent from the given information that taxpayer has keen interest in collecting musical instruments. In this regards only, she has a plethora of violins in her musical instrument collection (Barkoczy, 2017). Additionally, she plays violin on daily basis and also plays it well and therefore, the conclusion can be made that violin is an asset of personal use.  However, no CGT liability would be levied on the capital gains/loss that will be found on the capital proceeds earned from disposal of a violin as she has purchased for $5,500 (lower than $10,000). Therefore, from the definition for personal use asset, the net capital gains/loss would not be subjected for CGT.

Therefore, it can be seen based on above computation that taxpayer has capital gains from three  assets namely block of land, antique bed and shares. The sum of these three capital gains would be the total capital gains of the taxpayer for year ended on June 30, 2018.

Conclusion

Taxpayer has net taxable capital gains of $139,100 for the year end June 30, 2018. The CGT implication would be implied on taxpayer for the computed net capital gains only for the given asset’s disposal.

2. Issue

The key issue is to comment on the FBT consequences for the three benefits which are given by Rapid Heat Ltd to Jasmine during the income tea year.  Further, the issue is also to comment on the tax deductions on the fact when the extended benefit is provided to associate by Jasmine.

Law & Application

Employer may extend benefits for personal use of the employee during the employment term of employee. It is noticeable that employer may also provide the benefits to the family members of employee for their own personal interest. These benefits are extended to employee but are held taxable for employer not on employee and are termed as fringe benefits and the underlying tax is termed as Fringe Benefits Tax (FBT) (Wilomot, 2014). Further, any personal benefits given to employee by employer produces assessable income (either ordinary or statutory) for the employee, then the employer has the right to claim the tax deduction. The various factors related to the fringe benefits and FBT liabilities are referenced from Fringe Benefits Tax Assessment Act 1986.

Car fringe benefit: According s.8, FBTAA1986 employer would provide car fringe benefit to employee when the car is given for personal use of employee. It is also possible that car would be allowed to employee to use for her/his own personal purpose along with the office work and hence, the scope of utilization of the car for personal purpose would be considered for the computation of FBT payable. It is also imperative to note that the days for which car is sent for repairs (only for minor repairs) will also be part of available days for employee (Sadiq, et.al., 2015). Similarly, when the car is present for the use and employee does not use it for some reason such as she/he is outside and car is parked at home or at airport would also be part of available days for employee. Also, the car is a TYPE I good as shown in Goods and Services Act 1999 and the gross up factor would be taken for TYPE 1 goods only as per the relevant income year. Also, the GST inputs can be demanded by taxpayer in order to avail the rebate on tax (Krever, 2016).

Jasmine works for Rapid Heat Pty Ltd and also does loads of travelling for office purposes. Rapid Heat makes the car availability to Jasmine that she can use for her own personal work. It is apparent that providing car to employee for personal work is car fringe benefits. Therefore, the FBT payable will be determined using the calculations that are illustrated below.

Loan fringe benefit: Any monetary help in form of loan provided to employee to complete their personal work such as paying debts, purchasing home, acquiring shares and so forth would be termed as loan fringe benefit only when the interest rate is inferior to the statutory interest rate. Every year, Reserve Bank of Australia declares the minimum interest rate for loan which is termed as statutory interest rate. The deduction would be provided to employee for the interest payment when loan is used such as way that generates assessable income to employee. Further, when employee issues the extended loan to his/her family members to do any work which results in assessable income then no tax deduction will be availed by employer (Hodgson, Mortimer and Butler, 2016).

As per TD 2017/3, Reserve Bank of Australia declared statutory interest rate as 5.25% per annum  for the year 2017/2018 while Rapid Heat offered loan at 4.25% per annum. It is evident that lower interest rate loan has been offered to employee and hence, loan fringe benefit is extended.

Jasmine has utilized the total loan amount for two ways.

• $450,000 to purchase holiday home

The tax deduction will be availed on $450,000 because it may be assumed that Jasmine will rent the holiday home that would generate rent income (assessable income) for her.

• $50,000 provides to husband to purchase shares in Telstra

The tax deduction will not be availed on $50,000 because Jasmine herself does not purchase the shares as when employee issues the extended loan to her family member to do any work which results assessable income then no tax deduction will be availed by employer.

Internal expenses fringe benefit:

The expenses which are borne by employer on behalf of the employee would be termed as expense fringe benefits only when the expense is of personal nature of employee (Reuters, 2017). Further, any internal expense paid by employer on behalf of employee will be classified as internal expense fringe benefit (Coleman, 2016). For example: if the employer is offering any service to public for a price of $1000 and when the employee wanted to avail the service from employer and the employer has offered concessional price , say $800 for employee, then there is an internal expense fringe benefit. This is because the employer would be borne the remaining $200 amount which should be paid by employer only.

Jasmine purchased the heater from Rapid Heat  

Rapid Heat offered the heater to normal customers (regular rates)  

The company has halved the price for the heater when they offer the heater to its employee Jasmine. Hence, the internal expense fringe benefits has been issued to Jasmine because the rest amount $1300 will be borne by employer only which is a personal nature expense of Jasmine.

Expenses borne by employer = Rapid Heat offered the heater to normal customers (regular rates) - Jasmine purchased the heater from Rapid Heat  

Internal expense fringe benefit = 75% of the regular rates - Expenses borne by employer = (0.75*2600) -1300 =$650

Heater: TYPE I GOODS

Grossed up rate  

Taxable amount under this benefit 

Fringe benefits payable

(b) Jasmine has utilized $50,000 to purchase shares in Telstra

The tax deduction will be availed on $50,000 if it is used by Jasmine to buy the shares. This is because when employee does any activity which results in assessable income production, then tax deduction will be availed by employer. In this case, Jasmine herself purchases the shares and hence she would derive the income.

Deduction = (5.25%-4.25%)*50000 =$500

As a result of this purchase, the net tax deduction will be issued to employer which lowers the total FBT liability for the respective income year i.e. FY2017 (Coleman, 2016).

Conclusion

It would be fair to conclude that Rapid Heat has FBT liability for all the three fringe benefits car, loan and internal expense which are $5823.70, $2575.35 and $635.5 respectively.  Further, FBT liability would be lowered on part of employer, if Jasmine instead of her husband would invest in shares.

References

Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9^th ed. Sydney: Oxford University Press.

Coleman, C. (2016) Australian Tax Analysis. 4^th 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. 9^th ed.  Sydney: LexisNexis/Butterworths.

Hodgson, H., Mortimer, C. and Butler, J. (2016) Tax Questions and Answers 2016. 6^th ed. Sydney: Thomson Reuters.

Krever, R. (2016) Australian Taxation Law Cases 2017. 2^nd ed. Brisbane: THOMSON LAWBOOK Company.

Nethercott, L., Richardson, G., & Devos, K. (2016)  Australian Taxation Study Manual 2016. 8^th ed. Sydney: Oxford University Press.

Reuters, T. (2017) Australian Tax Legislation (2017). 4^th 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. 6^th  ed. North Ryde: CCH Australia Limited.

Woellner, R. (2014) Australian taxation law 2014. 8^th ed. North Ryde: CCH Australia.