Capital Gains Tax

According to the “section 102-5 of the ITAA 1997” an individual taxpayer is required to include in the net amount of capital gains for the income year in their taxable income (Baldassar, Pyke and Ben-Moshe 2017). If an individual incurs capital loss that can be only offset against the capital gains. The capital gains tax is applicable to the assets that are acquired after 20 September 1985. A capital gains asset can be defined as the asset for any kind of property or any legal or acquirable rights which is not the property. According to the “section 104-10 (1) of the ITAA 1997” a CGT event A1 happens when an individual taxpayer enters into the contract for sale of asset. Whereas, under “section 104-20(2) of the ITAA 1997” CGT event C1 happens when the asset is lost or when an individual receives the compensation for the loss or the destruction of the asset.

As understood in the present case study, the client had reported the sale of vacant block of land for a sum of $320,000 which was originally acquired for 100,000. The taxpayer also reported costs of $20,000 which was incurred in water and sewerage during the course of ownership. According to the Australian taxation office the vacant land is treated as the capital asset which is subjected to identical capital gains tax rules just like the other properties.

An individual taxpayer is required to keep the records of cost incurred in obtaining the land as well as the ongoing expenses such as council rates and interest on loan (Barkoczy 2014). Though these expenses cannot be claimed for income tax deductions however since the land did not generated income. Rather these expenses can be added to the cost base of the property for computing the capital gains or capital losses at the time of selling the property. The cost base and the incidental cost base of the property comprises of the amount that was paid for the property at the time of acquiring, holding and selling the property. The cost incurred by the client for holding the property would form the part of the cost base of property and would be added to the cost base of the property for capital gains purpose.

Under “section 108-10 (2) of the ITAA 1997” Collectables can be defined as any of the assets that are primary kept by the taxpayer’s personal use and enjoyment. This includes artwork, jewellery or the antique object that are used by the taxpayers for their own use and enjoyment (Brokelind 2014). Under “section 118-10(1) of the ITAA 1997” collectables that are acquired for $500 or less are exempted from the provision of CGT. The taxpayer in the present case stated that the Antique Bed was stolen from the house of the taxpayer. The taxpayer was compensated a sum of $11,000 from the policy and the receipt of amount constituted a CGT event C1 since the taxpayer has lost the asset when the compensation for the loss was received by the company.

Capital Gains Asset and CGT Events

Capital gains tax is applicable for the asset that are acquired on or after the 20^th September 1985. According to the “subdivision 108-C” the personal use assets such as the non-collectable asset is used or kept mainly for the personal enjoyment namely the boats, furniture, electrical goods and household items (Coleman and Sadiq 2013). Any amount of capital gains obtained by the taxpayer from the personal use asset acquired for $10,000 or less re disregarded. As evident in the present situation of the client the painting was acquired for $2,000 and the asset constitute a Pre-CGT asset since it was acquired before 20^th September 1985. Therefore, the capital gains that is made from the sale of the painting must be disregarded by the taxpayer. The painting is the pre-CGT asset and capital gains should be disregarded.  

A CGT asset includes the land and building, shares in the listed company or unit trust and options. Shares in the company or unit trust are treated for capital gains tax purpose in the similar way as the other assets (Grange, Jover-Ledesma and Maydew 2014). Profits from the sale of shares as the part of business of share trading are treated as ordinary income. As understood in the present of the client capital gains were made from the sale of the shares in Common Ltd, PHB Iron Ore Ltd and Build Ltd but the taxpayer reported capital loss from the sale of shares in Young Kids Learning Ltd. The taxpayer can offset the capital loss against the capital gains made from the sale of shares.

According to the “subdivision 108-C of the ITAA 1997” personal use assets are treated as the non-collectable asset that is mainly used by the asset for the personal enjoyment (Jover-Ledesma 2014). According to the “section 118-10 (3)” any form of capital gains that is made by the taxpayer from the personal use asset having the cost base of $10,000 would not be allowed for capital gains purpose. This signifies that the taxpayer should keep the details of the purchase of the personal use asset.

As understood in the present situation, the taxpayer reported the capital gains from the sale violin that was entirely used by the asset for the personal use purpose. Under subdivision 108-C the capital gains made from the sale of violin would be treated as exempted capital gains since the cost base of the asset that is acquired was less than $10,000.

Personal Use Assets and Collectibles

The below stated are the computation for the net amount of capital gains that is made by the taxpayer for the current tax year ended 30 June is stated below;    

The current issue is based on determining the fringe benefit tax consequences under the “FBTAA 1986” relating to the transactions reported by the taxpayer during the FBT year.

According to the “section 7 of the FBTAA 1986” there are certain circumstances that has been laid out where use the car will be held as the taxable fringe benefit (Kenny 2013). According the Australian Taxation Office, a car is considered to be available for the private use of the employee during any day if the car is available for use for private purpose or the taxpayer is allowed to use the car for private purpose.

According to the legislation of the fringe benefit tax, a fringe benefit can be defined as the benefit that is provided in relation to the employment (Krever 2013). This effectively provides that the benefit is offered to the employee. By virtue of the definition stated under the “sub-section 136 (1) of the FBTAA 1986”, any usage of the car by the employee or the associate which is not exclusively in the course of generating taxable income of the employee would be held as private use of the car and would attract fringe benefit tax.

As the general rule of “section 39A of the Fringe Benefit Tax Assessment Act 1986” the car parking fringe benefit originates for each day where the employer provides the parking facilities to the employee (Morgan, Mortimer and Pinto 2013). In other words, the car parking fringe benefit originates during the fringe benefit tax year given all the below stated criteria is stated below;

1. The car is parked at the premises which is owned or under the control of the employer
2. Inside the one-kilometre radius of the premises where the car is parked
3. The car is parked for more than four hours on a day
4. The car is provided during the course of employee’s employment
5. The car is used by the employee for the purpose of travel between his home and place of work at least once in a day.

According to the Australian Taxation Office the expense payment fringe benefit originates where the employer reimburses the employee with the expenses that they incur or paying the third party in respect of the expenses that are incurred by the employee (Pinto 2014). As the general rule where the expenditure that has been occurred by the employee as the agent for the employer and the expenses are subsequently reimbursed by the employee or paid directly to the third party the expense payment fringe benefit originates. The taxable value of the expense payment fringe benefit represents the amount that is reimbursed to the employee or the same is paid.

A loan fringe benefit originates when an employer is provided with the loan to the employee and a lower interest rate is charged during the fringe benefit tax year (Robin 2017). The lower interest rate represents the one which is less than the statutory rate of interest.

Computation of Net Amount of Capital Gains

The present case study of Rapid Heat Pty Ltd provides that the company gave one of its employee Jasmine with the car that performs a large number of travelling for the purpose of work. The case study provides that use of car to Jasmine was not only restricted for the work purpose as the employee was allowed to use the car for the private purpose as well. As held in the case of “Lunney v FCT (1958)” the position of the taxpayer affirmed that a taxpayer travel from the place of employment to business is ordinarily held as the private travel (Roe 2017).

Citing the reference of “sub-section 136 (1)” the use of car by the employee provided by the employer constitute a car fringe benefit (Sadiq 2014). This is because the car fringe benefit originated when the car that was held by the employee was not only for work purpose but for the private use of the Jasmine.   

As understood under the present situation of Jasmine the taxpayer travelled 10,000 kilometre in the car and the expenses that are incurred on the minor repairs is reimbursed by the employee. The expenses that is incurred by Jasmine on the car will be treated as the expense payment fringe benefit since her employer Rapid-Heat Ltd reimbursed the repair expense. The amount of $550 constitutes the taxable value of the fringe benefit that is reimbursed to Jasmine and hence it gives rise to the Fringe benefit taxation.  

As evident in the present situation of Jasmine the car was parked at the commercial station or in other words the car was parked by the employee at airport and did not used the car for ten days. Furthermore, the car was not used by Jasmine for additional five days while it was under the scheduled maintenance. As a result of this, a car parking fringe benefit would not originate during the fringe benefit tax year since the car was not parked at the premises of the Rapid Heat or inside the one kilometre of the commercial parking station (Woellner 2013). Therefore, no fringe benefit tax originates in this respect for Jasmine.

A loan fringe benefit happens when an employer provides an employee with the loan and a lower interest rate is charged during the FBT year. The lower interest rate represents the one which is less than the statutory rate of interest. The taxable value of the loan fringe benefit represents the difference between the interest that would have been accrued during the fringe benefit year given the statutory rate of interest has been applied. Similarly, the loan of 500,000 that is made to the Jasmine would be held as the loan fringe benefit and attracts fringe benefit tax.

Conclusion:

On arriving at the conclusion the car provided by Rapid Heat results in car fringe benefit under “section 7, FBTAA 1986”. Jasmine shall be held liable for taxable value of the fringe benefit that is provided to her during the course of employment under “subsection 136 (1), FBTAA 1986”.

As stated under the “section 8-1 of the ITAA 1997” an individual is allowed to claim deduction from their taxable income any amount of loss that are incurred in producing the taxable income (Woellner et al. 2014). furthermore, a taxpayer under the positive limbs is allowed to claim deduction “section 8-1” when the expenses are incurred in producing or gaining the assessable income. As the alternative if the remaining part of $50,000 is used by Jasmine for purchasing the share herself rather than lending the amount to her husband, Jasmine would be allowed to claim deduction under the “section 8-1 of the ITAA 1997” since the loan amount would have been used to purchase the revenue producing asset. As Jasmine has lent a portion of the sum of loan to her husband for purchase of shares she cannot claim deductions for the interest on loan that would have otherwise been deductible under “section 8-1 of the ITAA 1997”.  

References:

Baldassar, L., Pyke, J. and Ben-Moshe, D., 2017. The Vietnamese in Australia: diaspora identity, intra-group tensions, transnational ties and ‘victim’status. Journal of Ethnic and Migration Studies, 43(6), pp.937-955.

Barkoczy, S. 2014. Foundations of taxation law.

Brokelind, C. 2014. Principles of law.

Coleman, C. and Sadiq, K. 2013. Principles of taxation law.

Grange, J., Jover-Ledesma, G. and Maydew, G. 2014.  principles of business taxation.

Jover-Ledesma, G. 2014. Principles of business taxation 2015. [Place of publication not identified]: Cch Incorporated.

Kenny, P. 2013. Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.

Krever, R. 2013. Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.

Morgan, A., Mortimer, C. and Pinto, D. 2013. A practical introduction to Australian taxation law. North Ryde [N.S.W.]: CCH Australia.

Pinto, D., 2014. State taxes. In Australian Taxation Law (pp. 1763-1762). CCH Australia Limited.

Robin, H., 2017. Australian taxation law 2017. Oxford University Press.

Roe, A., 2017. The doctrine of sham in Australian taxation law. AUSTRALIAN TAX REVIEW, 46(2), pp.99-119.

Sadiq, K. 2014. Principles of taxation law.

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Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2014. Australian taxation law select.