HI6028 Taxation Theory - Practice and Law - Free Samples to Students

Question 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.

Question 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 GST-inclusive 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?

Question 1

Net capital gain/loss have been estimated for the various transactions enacted by the taxpayer (client) during the income tax year from the disposal of her assets.

‘Vacant Land Block’

Capital gain tax would be payable on behalf of the taxpayer for the capital gains/losses incurred on the post-CGT assets as defined in s. 149 (10), ITAA 1997. All the assets which are purchased after 20 September 1985 are counted as post-CGT assets and are liable for CGT. Land block was purchased in 2001 and thus, CGT liability will be levied on taxpayer. The transaction done for sale of land is A1 event under s. 104 -5 and the capital gains/losses would be estimated after determining the various elements of cost base of asset (Barkoczy, 2017).

As per TR 94/29, the CGT would be payable in current year CGT irrespective of the fact that taxpayer has signed the contract in current year but will get the payment in next year. Further, the capital gains would be found after taking away the last year capital losses (Coleman, 2016).

Only 50% amount would be considered for capital gains as the holding period of land exceeds one year as per s. 115-25(1).

‘Antique Bed’

Collectibles are capital assets and antique item fall in the category of collectibles as per TD 1999/40. Further, it is imperative to note that under s. 118-10(1), the income from disposal will not raise CGT when the buying value of asset is $500 or lower than $500. Antique bed is a post CGT asset as it has been acquired after 20 September 1985 and thus, CGT will be estimated for the bed as buying value is higher than $500 (Reuters, 2017).

Only 50% amount would be considered for capital gains as the land is long term post-CGT asset as per s. 115-25(1).

Painting

Capital gain tax would be payable on behalf of the taxpayer for the capital gains/losses incurred on the post-CGT assets as defined in s. 149 (10), ITAA 1997. Painting was purchased on 2 May 1985 i.e. before 20 September 1985 and thus, CGT liability will not arise for taxpayer on account of painting which is a pre-CGT asset (Nethercott, Richardson and Devos, 2016).

‘Shares’

The transaction to sell shares is A1 event under s. 104 -5 and the capital gains/losses would be estimated after determining the various elements of cost base.

Violin

Taxpayer is taking violin in private usage and entertainment. Further, violin is not a collectable (nor antique item) and thus, CGT is valid only when the personal usage asset has been bought for more than $10,000. Here, violin has been bought for $1,500 lower than $10,000 and hence, the personal usage asset disposal will not contribute to the CGT (Woellner, 2016).

Net capital gains or losses (year end 30 June 2018)

Question 2

In accordance of Fringe Benefits Assessment Act 1986, employer gives benefits to employees for their personal interest which are utilized by employees and employer would be held responsible for the tax on the account of fringe benefits.

• Fringe Benefits Tax (FBT) payable for employer (year end 31 March 2018)

Employee: Jasmine and Employer: Rapid Heat

Car fringe benefits

Rapid Heat gives car to employee for her personal use which represents that they extend car fringe benefit to Jasmine as per s. 8, FBTAA86 (Wilmot, 2014).

5 days for which the car was taken for minor repairs will not be deducted from 335 days as the repairs are quite minor. 10 days on which car was situated at the parking area of airport will not be deducted from 335 days as the access of car was there but owing to not being in city, she could not use it (Barkoczy, 2017).

Therefore, Rapid Heat has a FBT liability of value $25823.70 on the account of providing car fringe benefits to Jasmine.

Loan fringe benefits

Lower interest rate used by employer as compared with the benchmark interest rate decided by Reserve Bank of Australia while extending loan to their employee would be classified under loan fringe benefits. In current scenario, Rapid Heat has extended a sum of $500,000 to Jasmine and the interest rate charged by Rapid Heat is 4.25%. Further, in accordance to TD 201/3, the benchmark interest rate decided by Reserve Bank of Australia for loan is 5.25%. It is witnessed that Rapid Heat has used low interest rate and thus, extended loan fringe benefits to her (Reuters, 2017).

Therefore, Rapid Heat has a FBT liability of value $2580.43 on the account of providing loan fringe benefits to Jasmine.

Here, $450,000 out of $500,000 has been taken by Jasmine for purchasing a holiday home. This loan payment ($450,000) will be tax deductible for Rapid Fire. It will happen only when the holiday home of Jasmine would generate income for her. It means when the holiday home is not used for deriving income, then tax deduction cannot be availed by Rapid Fire. Further, the leftover amount of loan $50,000 would not result any deduction for Rapid Fire because it has not been used by Jasmine rather is used by her husband to buy shares (Woellner, 2016).

Internal expenses fringe benefits

Employer has sold their manufactured product i.e. electric heater to Jasmine at lower price. It implies that company is giving internal expense fringe benefits in the form of providing 50% discount on normal rates (Wilmot, 2014).

Therefore, Rapid Heat has a FBT liability of value $635.50 on the account of providing internal expense fringe benefits to Jasmine.

(b) Here, $50,000 has been taken by Jasmine for purchasing Telstra shares. This loan payment ($50,000) will be tax deductible for Rapid Fire only for the case when shares have been acquired by Jasmine. As a result, the total fringe benefits tax liability will be lowered for Rapid Heat. Thus, the additional deduction due to $50,000 will take away from the fringe benefit tax liability found in above scenario (Nethercott, Richardson and Devos, 2016). 

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.

Nethercott, L., Richardson, G., and 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

Wilmot, C. (2014) FBT Compliance guide. 6^th  ed. North Ryde: CCH Australia Limited.

Woellner, R. (2016) Australian taxation law 2014. 8^th ed. North Ryde: CCH Australia.