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Capital Gains Tax : Transation Discount

Question:

Describe about the Capital Gains Tax for Transation Discount.

Answer:

1. Fred is a resident of Australia for the tax purposes and the core issue in the case is to determine his capital gains subject to CGT (Capital Gains Tax) for the current year i.e. FY2016. The CGT transaction that has been enacted in the given year pertains to the sale of the Blue Mountain located holiday home for a net sales price of $ 800.000. There is a time lag of about six months between the sales contract execution (August 2015) and actual inflow of cash receipts for Fred (February 2016) but as both events have took place in the same financial year i.e. FY2016, there is no discrepancies in relation to the time period as to when these should be taxable. The given house as per the case information was bought in March, 1987 which is significant in light of the CGT scheme coming into force on September 20, 1985 (Nethercott, Richardson & Devos, 2016).  For calculation of the capital gains subject to CGT, there are two choices available as Fred is an individual taxpayer in the form of discount method and Indexation method (Barkoczy, 2015).

As per Section 115-25, discount method as the name suggests tends to offer 50% discount in the capital gains and thus only the remaining 50% is subject to CGT. This method is however applicable only for capital gains that are long term i.e. on assets whose holding period is in excess of 12 months.  As per Section 114-1, indexation method tends to increase the cost base of the asset by providing consideration to the increased inflation level in September 1999 as compared to the time that the asset was actually purchased (Gilders et, al., 2016).  With regards to computing capital gains on house, discount method has been selected in favour of indexation method since it is expected to provide lower estimates of CGT applicable capital gains in comparison with the indexation method.

Cost base (Holiday Home) – The various constituent elements of the asset’s cost base have been highlighted in Section 110-25 and listed below (Gilders et, al., 2016).

Price at which holiday home is acquired by Fred

Costs related to buying and selling of the holiday home.

Cost of construction of garage as it enhances the asset valuation

Capital gains computation for Fred

Selling price of home (2015/2016) = $800,000

Buying price of home (1987) = $100,000

Expenses related to buying of holiday home = (Legal Fees + Stamp Duty) =      1,000+2,000 = $3,000

Expenses related to selling of holiday home = (Legal Fees + Agent Commission) = 1,100 + 9,900 = $ 11,000

Construction cost incurred for garage = $20,000

Hence, Holiday Home’s capital base = 100,000 + 3,000 + 11,000 + 20,000 = $ 134,000

Capital gains (Holiday Home) =Selling Price (Holiday Home) – Cost Base (Holiday Home)

= 800,000 – 134,000

= $666,000

It is known that for the previous year FY2014, there was an outstanding capital loss of $ 10,000 caused on account of share sale

The sale of shares can be compared to the sale of property or real estate asset, hence the previous losses from shares would be accommodated against the current year gains as shown below (Deutsch et. al., 2015).

Net capital gains for the taxpayer (Fred) = Capital gains (Holiday Home) –Accumulated capital loss (Shares) = 666,000 – 10,000 = $656,000

The holiday home has been apparently held for a period of 28 years and thus gains would be long term on which discount method is applied as shown below.

Capital gains for Fred that would be levied CGT = 0.5*656,000 = $ 328,000

Accumulated capital loss of $ 10,000 on account of antique vase

Unlike the adjustment of shares loss, the antique loss cannot be accommodated by the capital loss as antique is a specific asset whose losses can only be adjusted against the gains made through sale of antiques only. Hence, the holiday home derived capital gains would not get altered as the $ 10,000 capital loss would be carry forwarded to the next year to get balanced against potential gains from antiques. (Sadiq et. al., 2016).

Capital gains for Fred (FY2016) = 50% of capital gains (Holiday Home)

=

=$333,000

2. The given case highlights the various fringe benefits that have been extended to Emma (employee) by Periwinkle (employer) and discusses the potential tax liability arising on these in wake of the Fringe Benefit Tax Assessment Act, 1986 (FBTAA, 86)

Car fringe benefit

The relevant section of FBTAA86 which define car fringe benefit is Section 8 which advocates that it arises only under the circumstance when the employee uses an employer owned car in personal usage. Limiting of employer owned car usage only to professional usage would not result in car fringe benefits. From the case, it is apparent that Emma uses the car owned by Periwinkle for personal use and thus Car Fringe Benefit (CFB) is indeed present (Barkoczy, 2015).

For calculation of the related Fringe Benefit Tax (FBT) liabilities arising from CFB, the approach highlighted in Section 39F needs to be adhered  (Wilmot, 2012).

The computation of the host of inputs required in the above approach is carried out below.

Employer owned car capital value = Cost price of car for the employer – Expenses related to repairs = (33,000 – 550) = $ 32,450

With regards to statutory percentage, the applicable value is 20% in line with the rule that for all vehicles bought after 1st April, 2014, the statutory percentage would be applied at 20% without any reference to the distance travelled and days of usage (ATO, 2016b).

Car availability for Emma’s usage= 366 – 30 (Car made available after one month delay) – 5 (Unavailable due to repairs) = 331 days

The ten days period when the car was lying in the airport parking has not been included above as it was not that car was unavailable but due to Emma being away she was not is  a position to use the car  (Gilders et. al., 2016).

Grossed up value (CFB) = $ 32450 × 20% × 331/365 × 2.1463 = $ 12,631.95

FBT liability for employer on account of CFB = 12,631.95 *0.49 = $ 6,190

Loan fringe benefit

In circumstances, where the employees obtains financial assistance from the employer and the same is provided either interest free or at very low interest rate, then loan fringe benefit may result if the offered rate is lower than the RBA (Reserve Bank of Australia) rate applicable for that particular year (Deutsch et. al., 2015).

The interest rate on offer by employer (Periwinkle) to Emma = 4.45% pa

The interest rate declared by RBA for FY2016 (TD 2015/8) (ATO, 2015) = 5.65% pa

Since employer interest rate < interest rate given by RBA, hence Emma would be able to save on the interest costs and hence is reaping loan fringe benefits from her employer  (Sadiq et. al., 2016).

The timing of the loan is another key imperative feature as loan was given to Emma on September 1, 2015.

Hence, days of loan assessibility in FY2016 = March 31, 2016 – September 1, 2015 = 213 days

Loan Fringe Benefit (LFB) absolute value = 500000*(5.65% - 4.45%)*(213/366) = $ 3,491.8

Grossed up value (LFB) = 3,491.8*1.9608 = $ 6,846.72

FBT liability for employer on account of LFB = 6,846.72*0.49 = $ 3,355

Expense fringe benefit (Bathtub)

The relevant details are summarised below.

Selling price of bathtub by company to customers = $ 2,600

Discounted price offered to Emma for the bathtub = $ 1,300

Considering that bathtub is a good of personal usage and the employer is offering it at a lower price, hence this amounts to expense fringe benefit being extended to Emma (CCH, 2013).

The sale of bathtub would levy GST, hence relevant gross up factor would be that for Type 1 good or 2.1463 (ATO, 2016a).

Grossed up value (Expense Fringe Benefit (EFB)- Bathtub) = (2600-1300)*2.1463 = $ 4,078

FBT liability for employer due to EFB = 4078*0.49 = $ 1.998

In contrast to the above arrangement, now the $ 50,000 which was earlier being used by Emma’s husband for making share investment is now being used by Emma instead. Since Emma is using this money for earning income, hence tax deductions would be claimed by the employer in regard to this $ 50,000 also as indicated below (Nethercott, Richardson & Devos, 2016).

Extra deduction available to the employer = 50000*(5.65% -4.45%) = $ 600

Hence, as a result of Emma using $ 50,000,the FBT liability of the employer has witnessed a drop  of $ 600.

Reference

ATO 2015, TD 2015/8, Australian Taxation Office, Available online from http://law.ato.gov.au/atolaw/view.htm?docid=%22TXD%2FTD20158%2FNAT%2FATO%2F00001%22 (Accessed on September 20, 3016)

ATO 2016a, Gross-up rates for FBT, Australian Taxation Office, Available online from https://www.ato.gov.au/rates/fbt/?page=3 (Accessed on September 20, 3016)

ATO 2016b, Car fringe benefits statutory formula rates, Australian Taxation Office, Available online from https://www.ato.gov.au/rates/fbt/?page=4 (Accessed on September 20, 3016)

Barkoczy, S 2015, Foundation of Taxation Law 2015, 7th eds., CCH Publications, North Ryde

CCH 2013, Australian Master Tax Guide 2013, 51st eds., Wolters Kluwer, Sydney

Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2015, Australian tax handbook 8th eds., Thomson Reuters, Pymont

Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2016, Understanding taxation law 2016, 9th eds.,  LexisNexis/Butterworths.

Nethercott, L, Richardson, G & Devos, K 2016, Australian Taxation Study Manual 2016, 4th ed., Oxford University Press, Sydney,

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2014 , Principles of Taxation Law 2014, 7th eds., Thomson Reuters, Pymont

Wilmot, C 2012,  FBT Compliance guide, 6th edn, CCH Australia Limited, North Ryde

 

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