HI6028 The CGT Asset
(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.
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.
$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 neighbor 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.
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.
Answer:
The key agenda in the given scenario is to consider the transactions enacted by the taxpayer involving asset sale and provide advice to client on the manner in which the requisite transactions would be dealt with regards to tax implications. One of the key facts to be noted that for all the given transactions, the client does not have a related business and hence these would not give rise to ordinary income, thereby implying the discussion would be restricted to discussion of respective capital gains and the taxation of the same.
It is imperative to define certain key terms with regards to computation of capital gains and the relevant taxation treatment associated with the same.
Pre- CGT Asset
This term has been defined by s. 149(10) ITAA 1997 and refers to those assets which are purchased in the pre-CGT era (i.e. before September 20, 1985). The significance of these assets lies in the fact that no CGT would be levied on any capital gains or losses that arise from the liquidation of these assets (Austlii, 2018 a).
Capital Event
The capital gains computation needs to be carried out whenever there is a capital event, The various capital events have been outlined in s. 104-5,
ITAA 1997. One of these events is A1 event which relates to the asset disposal. In accordance with this event, the asset disposal related capital gains can be computed by finding the difference of the capital proceeds and the asset cost base (Barkoczy, 2017).
Cost Base
The cost base of an asset is defined as per s. 110-25 ITAA 1997 which highlights the inclusion of the following five elements for the cost base computation (Kreyer, 2016).
- The first element is the purchase price or asset acquisition price.
- The second element corresponds to the incidental costs which tend to be incurred by taxpayer while asset purchase or asset sale.
- The third element includes the ownership costs related to the underlying asset in the form of various non-deductible taxes along with interest on the loan taken for asset acquisition.
- The fourth element includes the capital expenditure that the taxpayer undergoes for either preserving the asset value or enhancing the same.
- The fifth element includes the capital expenditure that the taxpayer undergoes for maintaining the title on the property.
Discount Method-Capital Gains
Section 115-25 ITAA 1997 highlights that for long term capital gains, discount method of taxable capital gains computation may be used for individual taxpayers which allows for 50% concessions. Long term capital gains would only arrive when the underlying capital asset was held in excess of 12 months before disposal (Kreyer, 2016).
Treatment of Capital Losses
The capital losses derived on asset sale cannot be adjusted against the taxable income of the concerned taxpayer but instead can only be used to reduce the capital gains to the extent of the capital loss. However, if the relevant capital losses cannot be adjusted in a given tax year, they can rolled over for five years till capital gains are available (Kreyer, 2016).
Asset 1: Block of vacant land
The information given highlights that the land block acquisition took place in 2001 which implies that the asset is not a pre-CGT asset. Therefore, CGT would not be exempted. The sale of land triggered the A1 capital event. Additionally, tax ruling TR 94/29 highlights that the capital gains arising from a capital event must be taxed in the year of execution of sale contract of the asset irrespective of when the actual cash receipt takes place (ATO, 1994). Therefore, the CGT on the capital gains derived from land block sale would be levied on the client in the returns of the current year only.
Calculation of Capital Gains
Asset 2: Antique Bed
The antique bed was acquired by the taxpayer in 1986 and hence cannot be classified as a pre-CGT asset. The act of the bed being stolen amounts to capital event A1 in accordance with s. 104-5. The given asset is recognised as a collectable item as has been highlighted by TD 1999/40 (ATO, 1999). With regards to collectables, CGT would be applicable only if the underlying asset has been bought for a price greater than $ 500. In the given case, the antique bed purchase has been made for a higher price than $ 500 and hence corresponding capital gains cannot be ignored from the CGT ambit.
Calculation of Capital Gains
Asset 3: Painting
This particular asset has been acquired in the pre-CGT era and hence as per s. 149(10) ITAA 1997, no CGT would apply on the corresponding capital gains or losses that tend to be derived from the underlying disposal of painting (Austlii, 2018 a).
Asset 4: Shares
The shares that have been bought by the client have been acquired after the introduction of CGT and further the disposal of these shares corresponds to the enactment of capital event A1 in accordance with s. 104-5 (Barkoczy, 2017).
Calculation of Capital Gains
Asset 5: Violin
The given violin is not a pre-CGT asset as the underlying date of purchase lies in the time period when CGT was already present. Therefore, CGT cannot be ignored on violin on this account. In the given case, the client is a keen player of violins and has a huge collection of violins and each of these is used by her for own entertainment purpose whereby the violin is played (Woellner, 2014). As a result, instead of being a collectable, the violin would instead assume the nature of a personal use item. For the personal assets, if the purchase price is lower than $ 10,000, then the respective capital gains or losses are disregarded for CGT computation.
Summary of Capital gains
Question 2
- Fringe benefits refer to the personal benefit extended not in the form of cash to employees or their associates by the employer. The underlying taxation treatment of these benefits is as per the relevant provisions of Fringe Benefit Tax Assessment Act (FBTAA) 1986. The key provision of this Act is that for the fringe benefits availed by employees, the relevant tax burden in the form of FBT would be completely borne by the employers with no liability extending to the employees in this regards (Wilmot, 2014). The various fringe benefits that are relevant in the underlying situation are highlighted as shown below.
Car Fringe Benefit
This is one of the widely extended fringe benefits whereby the employer provides a car to the employer for his/her personal use. This car can also be used for professional use but the key aspect is the personal use. This is because for professional use, the employer ought to provide a vehicle but the extension of the same for personal usage amounts of extension of benefit to employee (Austlii, 2018 b).
Based on the scenario outlined, it is apparent that the employer (Rapid Heat Pty Ltd) has extended an employer owned car to Jasmine (employee) which she can use consider for personal usage as well besides professional use. Considering the above arrangement, it would be appropriate to conclude that Rapid Heat would have to bear FBT related liability. Further, in determining the car cost base, deduction for minor repairs which has been paid by the employer would be made from the purchase price of the car..
Based on the information provided, it becomes evident that employer has extended the car to employee and allowed the same for personal use on May 1, 2017. It has been assumed that she can use the car for personal use from May 2, 2017. As a result, the total days in the 2017/2018 tax year for which car is available for private usage excludes the month of April along with one day in May and accordingly a deduction of 31 days has been made.
Further, deduction for the period when the car was left at the airport parking has not been considered as the car was available for private usage but Jasmine could not use it since she was out of town. Additionally, in relation to the minor repairs days spent in garage, deduction is not permissible as the repairs were not major and hence availability of car would not be impacted (Reuters, 2017).
As transactions involving car are levied GST, hence the relevant gross up rate for the year ending March 31, 2018 would be 2.0808 with the underlying FBT rate being 47%. Using the given data, the FBT liability for Rapid Heat Pty is computed as follows.
Loan Fringe Benefit
Financial help is extended by employers to employees as loans which can be used by the employee for income generation purpose or to purchase any asset or meet some personal expense. It is imperative that these loans must be extended at the benchmark interest rate which is provided by the RBA on an annual basis (ATO, 2018). However, if the employer does provide loan to employee and the underlying interest rate is lower than the RBA benchmark rate, then savings on interest would be realised by the employee and it would be concluded that loan fringe benefits have been extended to the employee. On account of these fringe benefits being extended to employee, FBT liability would be levied on the employer and no liability on employee would arise (Coleman, 2016).
Considering the given scenario, a loan of $ 500,000 has been extended by Rapid Pty Ltd to Jasmine. The rate of interest charged on the same is 4.25% p.a. which is 100 basis points lower than the benchmark interest rate given by the RBA. Hence, FBT liability would arise. For the computation of the same, the non-GST gross up rate of 1.8868 has been considered along with the underlying FBT rate being 47%. Using the given data, the FBT liability for Rapid Heat Pty is computed as follows.
The loan amount extended to employee may be used by employee only or his/her associate. The exact usage of loan by employee is critical for the employer since as per FBTAA 1986, deduction in FBT would be provided to the employer if the underlying employee uses the proceeds of the loan for assessable income generation (Coleman, 2016). However, if this amount is used by the associate for income generation, then employer cannot claim any deduction. In the given case, only $50,000 is extended by Jasmine to her husband. The remaining amount of $ 450,000 has been used by her and if the underlying house does produce assessable income, then deduction would be available for Rapid Heat.
Internal Expenses Fringe Benefit
The employer can also provide benefit in regards to meeting the private expense of employees and such actions may give rise to expense fringe benefit. The employee Jasmine wanted to buy a heater made by her employer (ATO, 2018). The retail price is $ 2,600 but Rapid Heat provided the employee the same heater as half the retail cost. This led to savings on the part of the employee to the tune of $ 1,300 and hence expense benefit is extended.
Jasmine buys heater from employer company Rapid Heater for $1300 while the market price of heater is $2600. It implies that employer gives low rate to Jasmine as she works for them and hence, internal expense fringe benefit has extended to Jasmine. Using the given data, the FBT liability for Rapid Heat Pty is computed as follows.
- In the given scenario, the loan amount which was previously extended by Jasmine to her husband is instead now being used by Jasmine herself for shares which would lead to assessable income production in the form of dividends. Hence, employer can now obtain deduction on this amount which would lower the FBT liability. The amount by which FBT liability is lowered is as calculated below.
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.
ATO, (1999) Taxation Determination –TD 1999/40
ATO, (2018) Loan Fringe Benefits
Austlii, (2018 a) Income Tax Assessment Act 1997- SECT 149.10
Austlii, (2018 b) FRINGE BENEFITS TAX ASSESSMENT ACT 1986- SECT 148
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.
Krever, R. (2016) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON LAWBOOK Company.
Reuters, T. (2017) Australian Tax Legislation (2017). 4th ed. Sydney. 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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