Understanding Capital Gains Tax in Australia

Capital Gains Tax (CGT) in relation to the Australian Taxation System, refers to a tax levied on the capital gain made subsequent to sale/disposal of an asset, with a series of particular exemptions, the most considerable being the family home. Rollover provisions are applicable to certain disposals, one of the most notable of which is a transfer made to beneficiaries on death (Littlewood & Elliffe, 2017).

CGT works by regarding net capital gains as taxable income in the tax year in which the asset is disposed or sold. If an asset is kept for a minimum of one year, then any gain will first be discounted by 50% for an individual taxpayer, or by 33.3% for superannuation funds. Capital losses could be offset against CG. The net capital loss in one tax year cannot be balanced against regular income but could be carried forward any number of times.  

Capital gain/loss needs to be determined for every CGT event that happens to an asset during the taxable year. Plus, if a person/entity has earned both capital gain and loss, then they have to determine net capital gain/loss for that year (Edmonds, Holle & Hartanti, 2015).  There are three techniques of calculating capital gain. The assessee may select any method which best suits him/her.

CGT Discount method – The assessee may use the discount method for computing the capital gain on the majority of the assets they have owned for a year or more. The eligibility for this method is that the assessee must be an individual, complying superannuation fund or trust. Plus, the CGT event occurred to their asset after 11:45am on 21 September 1999. Moreover, they acquired the asset in question at least a year before the CGT event. Lastly, they did not select to use the indexation method. This method usually is not applicable to companies, though it may apply to some capital gains made by life insurance firms. The discount percentage is the proportion by which the assessee will reduce their capital gain (Jacob, 2018). They can reduce the capital gain only once they have applied every capital loss for the tax year and any unapplied net loss from previous years. The discount percentage is 50% for trusts and individuals, and 33.33% for complying superannuation funds and qualified life insurance firms. For foreign residents, the 50% discount has been eliminated or decreased on gains made after 8 May 2012.

Three Techniques of Calculating Capital Gain

Indexation method – The assessee can utilize the indexation technique to compute CGT if a) a CGT even occurred to an asset they obtained before 11:45 am on 21 September 1999, and b) they owned the asset for a year or more. If the assessee is not a company but satisfies the two criteria, and they want to employ indexation, they may do so. Otherwise the discount technique will apply by default. If the assessee is a company and the and the gain satisfies the two criteria, they must employ the indexation technique to compute the CGT (Evans, Minas & Lim, 2015). Under this method, the assessee will increase every amount covered in a component of the cost base by an indexation factor. This indexation factor is determined by to utilize the consumer price index (CPI).

Other method – As per the research performed by Woellner and et al., (2016), this method is used for assets that have been acquired for less than a year before the occurrence of the CGT event. Under this case, the basic technique of reducing cost base from the sale amount is applied for ascertaining capital gain/loss.

Davidson, & Evans (2015) claimed that setting the timing of CGT is also crucial as the reason behind this is that it informs the assessee that in which year the gain or loss is to be reported and perhaps has an impact on how a person calculates the tax liability. If an individual is disposing of a CGT asset, then the event normally happens at the time when the person enters into the contract of disposal. For example, in the case of real estate, CGT event normally occurs at the time when a person enters into the control and not when a person settles.

1. Block of vacant land

1. Antique Bed

1. Painting

1. Profit/loss on shares

1. Violin

Fringe benefits are a crucial component of business and could be a helpful means of drawing quality employees. Nonetheless, if a company is going to offer fringe benefits to its staff, it ought to be mindful of its tax obligations. Fringe Benefits Tax (FBT) refers to the tax payable by employers for benefits given to a worker in place of wages or salary. This is different than income tax and is computed on the taxable amount of the benefits given. To obtain the best employees, employers often have to appeal to them with non-income related benefits (Barkoczy, 2018). A worker can get fringe benefits in the form of:

• Low-interest loans,
• A car,
• Free car parking,
• Entertainment
• Living away from home allowance
• Payment of personal expenses

Understanding Fringe Benefits Tax in Australia

FBT on car

Car fringe benefit emerges in the situation when the company gives the car for private use to a worker. Hence, if an employer makes a car it owns or leases available for the personal use of its staff, then it is said to be provided as a fringe benefit. For the purpose of FBT, a car is any of the below mentioned:

• A station wagon or sedan
• Any other vehicle which carries goods with a carrying capacity of not more than one ton.
• Any other carrying vehicle built to carry less than 9 passengers (CCH Australia Ltd. 2011).

To compute fringe benefit on the car, the employer should determine the taxable value of the benefit utilizing either:

• The legal formula technique based on the cost price of the car; or
• The operating cost technique based on the cost of using the car

The employer can pick whichever technique produces the lowest taxable value, irrespective of which technique was utilized in the preceding year. However, if the employer has not maintained needed documentation for the operating cost technique, then it must employ the legal formula. Under the statutory formula, a single rate, i.e. 20% is used irrespective of the distance travelled. This rate is applicable in all cases except in the case where a pre-established commitment is present to give the car for private use (CCH Australia Ltd. 2011). Under the operating cost formula, a fringe benefit is determined as the percentage of total cost of using the car during the taxable year. Plus, the percentage is assessed based on the degree to which car has been utilized for personal use. The greater the actual personal use, the higher the taxable value.

FBT on loan

Fringe benefit pertaining to loan arises in the event where a loan is given to an employee, and the interest rate is less than the normal industry rate. Plus, the loan must not be exempt for taxation purposes. Fringe benefit pertaining to loan is available every year in which the employee is obligated to pay either complete or part of the loan. Plus, the interest rate is less than the industry standard. The statutory interest rate is worked out as per the standard variable rate pertaining to owner-occupied housing loans of major banking institutions. This is also published the Reserve Bank of Australia before the beginning of the new financial year (Wilmot, 2012).

FBT on other benefits

The provision of FBT is applicable if fringe benefit during the taxable year is above $2,000. Hence, a worker is obligated to report the gross value of taxable fringe benefit given to him/her in the way of a summary for the relevant income year. The rate at which FBT is taxable for the financial year ending 31 March 2015 is 47%. A further tax on the same is paid by the employer. Taxation rate of 47% includes 45% of marginal IT and 2% of the medical charge (Deutsch et al., 2017). This rate is applicable to grossed-up value of all benefits that are obtained by the employee reduced to the degree of contribution given by the employer.

Total taxable fringe benefit tax

1. Calculation on FBT on Loan

 
It has been considered that the whole amount of loan taken by jasmine is used.

1. Calculation on FBT on Car

*Calculation of the number of days in which car is not used by Jasmine

** By using statutory formula (33,000*20%*310/365)

1. FBT on the electronic heater

Part (B)

Total taxable fringe benefit tax

1. Calculation on FBT on Loan

It has been considered that the whole amount of loan taken by jasmine is used.

1. Calculation on FBT on Car

*Calculation of the number of days in which car is not used by Jasmine

By applying statutory formula

1. FBT on the electronic heater

References

Barkoczy, S. (2018). Core Tax Legislation and Study Guide 2018. OUP.

CCH Australia Ltd. (2011). FBT Compliance Guide 2011. CCH Australia Ltd.

Davidson, P., & Evans, R. (2015). Fuel on the fire: Negative gearing, capital gains tax & housing affordability. ACOSS Papers, 29.

Deutsch, R., Friezer, M., Fullerton, G., Hanley, P. & Snape, T. (2017). Australian Tax Handbook: Tax Return Edition 2017. Thomson Reuters.

Edmonds, M., Holle, C., & Hartanti, W. (2015). Alternative assets insights: Super funds-tax impediments to going global. Taxation in Australia, 49(7), 413.

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

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

Littlewood, M. & Elliffe, C. (2017). Capital Gains Taxation: A Comparative Analysis of Key Issues. Edward Elgar Publishing.

Wilmot, C. (2012). FBT Compliance Guide 2012. CCH Australia Ltd.

Woellner, R. (2016). Australian Taxation Law 2016. OUP.