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Foundation of Taxation Law for Tax Year 2015/16

Question:

Describe about the Foundation of Taxation Law for Tax Year 2015/16.

Answer:

1. The central aim is to evaluate the net capital gains received from the sale of the capital asset (holiday home) for Fred for current tax year i.e 2015/16.

Details of the case study

Fred who is an Australian tax resident purchased a holiday home in Blue Mountain in March 1987, at a purchase cost of $100,000. He signed an enforceable agreement with the prospective purchaser to sell his holiday home. This agreement was enacted in August of last year (i.e. 2015). However, the agreement amount of home i.e. $800,000 was obtained in February in the current income year. This shows that signing and payment both are completed in the same tax year. Additionally, taxpayer Fred paid several incidental costs like legal fees, stamp duty, payment given to the agent besides a capital cost for the construction of a garage.

If the given capital asset is acquired on or before September 20, 1985 then in such cases, the proceeds received from the sale of the asset would not be liable for the capital gain tax (CGT) and if the capital asset is purchased after September 20, 1985 then it would be accountable for the CGT in the accordance with Income Tax Assessment Act 1997 (Nethercott, Richardson & Devos, 2016).  For the given case, Fred acquired the holiday home in March 1987, which means the derived proceeds from the sale would be chargeable for CGT assessment.

Methods for net taxable capital gains

  • Indexation Method (Section 114-1)
  • Discounted Method (Section 115-25)

Discount method is applicable for the long term capital asset (acquired for more than 12 months).  50% discount is employed on the capital gains received from sale of the long term asset and the remaining 50% would be chargeable for CGT (Barkoczy, 2016). Indexation method accounts for difference in inflation rate for the calculation of the net taxable capital gains. The difference in the value of the inflation rate between September 1999 and purchase year would be considered for the evaluation of the cost base of the asset (CCH, 2014). Since, the discount method offers 50% discount on the capital gains. therefore, the value of the net taxable capital gains would be lesser then the corresponding value obtained by indexation method. Discount method is selected for the evaluation of the Capital gain tax for Fred for current tax year FY2016 (Gilders et. al., 2016).

Cost base is another imperative element for the calculation of the net capital taxation gain. It includes purchase cost and the relevant incidental cost incurred in the process of purchasing or selling of asset. The investment made on the capital assets in regards to increase the commercial worth will also be considered in cost base (Section 110-25) (Woellner, 2014).

Calculation-taxable capital gains

Purchase Price (Home) in the year 1987

$100,000

 

Selling price (Home) in the year 2016

 

$800,000

Additional costs –Expenditure incurred

·         Total legal fees - $2100

·         estate agent’s commission - $9900

·         stamp duty - $2000

·         Creation of garage (investment)  - $20000

= (sum of additional costs)

= (2100+2000+9900+20000)

 

$34,000

Net cost base (home)

=(Purchase Price + additional cost)

=(100000+34000)

 

134,000

 

 

 

Capital gains received from liquidation of the Home

=( Selling price – Net cost base  )

=(800000-134000)

 

$666,000

Accumulated capital loss - sale of the shares

Last year’s capital losses would be accommodated with the capital gains derived from the sale of the capital asset in the current year.  The imperative factor is nature of the asset.  Any particular capital loss from the liquidation of the capital asset would be adjusted with the capital gains obtained from the sale of the capital asset only if the previous year’s capital loss and current year’s capital gains are from similar asset sources (Sadiq et. al., 2016).

Fred had past year’s capital loss from the sale of the shares, which would be adjusted with the capital gains received from sale of the home in the current tax year.

Previous year’s capital loss

(from sale  of the shares)

 

$10,000

 

Net capital gains

=( Capital gains derived from sale of Home -  previous year’s capital loss)

=(666000-10000)

 

$656,000

Applied method  - Discount method

50 % (concession on the derived capital gains)

 

Net capital gains tax

=(Net capital gains× 0.50)

=(656000 × 0.50)

$328,000

Accumulated capital loss – sale of Antiques vase

In this case, the capital loss incurred from sale of the antiques vase. Moreover, the source of the capital gains and capital loss are from different sources (capital loss - antiques vase and capital gains – home). Therefore, the capital loss from antiques vase could not accumulated with the capital gains from property. This capital loss would be forwarded to next year and respectively nullify with the capital gains derived from the antique vase only in the upcoming years (Deutsch et. al., 2015).

Net capital gains

(without accumulating the previous year’s capital  losses)

$666,000

 

Applied method  - Discount method

50 % (concession on the derived capital gains)

=(Net capital gains× 0.50)

=(666000 × 0.50)

 

$333,000

2. When the employer of a company provides certain additional benefits to their employees for personal usage, irrespective of wages and incentives, then in such cases, the additional benefits would be named as fringe benefits. However, in the accordance of the Fringe benefits Tax Assessment Act 1986 (FBTAA, 1986), the concerned employer would be liable for the Fringe benefits tax (FBT) on the offered fringe benefits (Wilmot, 2012).

Highlights of the case study

Employer Periwinkle is owner of a bathtub manufacturing company, who offered certain benefits to the employee Emma. Three benefits have been given to Emma, which are listed below

  • Car
  • Loan
  • Expense in the form of bathtub.

The objective is to ascertain the FBT liabilities for the offered fringe benefits on employer Periwinkle.

Car fringe benefit

  • Capital value of car

On May 1, 2015 Periwinkle acquired a car for $33,000 and on the same date, she offered the vehicle to Emma. The usage of car is not limited to the professional work for Emma. As per the outline of section 8 of FBTAA, 1986, the activity on the part of the Periwinkle results car fringe benefit to Emma and FBT liability on Periwinkle (Barkoczy, 2016).

The various inputs required to determine the taxable value of this benefit are computed below.

Net purchasing cost of car

 

$ 33,000

Cost incurred during car repairing

$550

 

Net capital value of the car

=( Purchasing cost – Cost incurred during car repairing)

= (33000 - 550)

 

$ 32,450

(b) Statutory percentage

For the evaluation of the statutory percentage, the actual purchasing date of the car along with the total distance covered during the personal utilization by the employees would be taken into consideration (Hodgson, Mortimer & Butler, 2016).

If the car is acquired after 2011 and covered the distance of less than 15,000 km, then the statutory percentage is considered as 20%  (Gidlers et. al., 2016).

Periwinkle purchased the car in the year

2015

 

Personal utilization of car by Emma

(the distance covered by car during the income year)

 

10,000 km

Statutory percentage

 

20%

(C) Number of days

The duration of accessibility of the vehicle would be calculated based on the income year, as Emma received car on May 1, 2015 not on April 1. Therefore, the accessibility time would be counted according to the shortfall days to complete a tax year. 10 days period, when the car was parked at airport would not be counted under the non- available period as Emma had the accessibility for the car and she willingly did not use the car for the period of 10 days when she was out of city (Sadiq et. al., 2016).

Non –accessibility of car to Emma (in days)

(Car sent for repairing)

 

5

Accessibility of car  for Emma (in days)

(accessibility started from May 1, 2015 )

 

335

 

Actual accessibility of car to Emma FY2016 (in days)

= (335-5)

330

(d) According to the highlights of GST Act, 1999, car is considered as a Type 1 goods and the GST value is 2.1463 for the current tax year 2015/16 (Barkoczy, 2016).

Gross up factor

2.1463

Fringe benefits tax accountability for Periwinkle - for car fringe benefits

FBT value  -  Car fringe benefit

 

= (FBT capital value of the car × Number of days when car is accessible to the employee × Statutory% ×  gross up factor )

=( 32450 ×  × 0.20  ×  2.1463)

 

$12,593.80

FBT liability for car fringe benefit

=(0.49 × 12593.80)

 

$6,171

Loan fringe benefit

On September 1, 2015, Periwinkle has provided amount of $500,000 to Emma with the interest of 4.45% pa. It has observed that the benchmark interest rate for the income year 2016 is 5.65% pa as declared by Reserve Bank of Australia (Sadiq et. al., 2016).  It can be seen that the issued interest rate is lower than the benchmark interest rate. This would indicate a loan fringe benefit to Emma and consequent FBT liability on Periwinkle. The saved amount between the RBA interest rate with the issued interest rate would be paid on the part of the Periwinkle (CCH, 2014).

Interest amount at benchmark interest rate (declared by RBA)

=( 5.65% of the issued loan amount)

=(500000 × 0.0565)

 

$28,250

Interest amount at offered interest rate given by employer

=( 4.45% of the issued loan amount)

=(500000 × 0.0445)

 

$ 22,250

Difference in the Interest amount that were saved

=( Interest amount at benchmark interest rate - Interest amount at offered interest rate given by employer)

=(28250  - 22250)

 

$ 6,000

Total number of days, when the loan amount is utilized by Emma in the current financial year

(the loan issued on September 1, 2015)

 

213

Taxable amount - loan fringe benefits

=( Difference in the Interest amount that were saved

× Total number of days, when the loan amount is utilized in the current financial year)

 

= (6000 × )

$3491.80

According to the highlights of GST Act, 1999, loan is considered as type 2 goods and the significant GST value is 1.9608 for the current tax year 2015/16.

Gross up factor

1.9608

 

Gross up value for loan fringe benefits

=( Taxable amount for loan fringe benefits × Gross up factor)

=( 3491.8 × 1.9608)

$ 6,846.72

FBT amount that would be paid on the part of  Periwinkle for the loan fringe benefit

=(Gross up value for loan fringe benefits × 0.49)

=(6846.72 × 0.49)

$3,354.9

It is significant about the loan fringe benefits that if Emma utilized the loan amount to derive income, then the relevant tax deduction would be made on Periwinkle (Woellner, 2014).

According to the given information $450,000 from the loan amount was utilized to acquire a home by Emma and thus, if the home acts as an income source for Emma, then the subsequent tax deduction is applicable for Periwinkle. The rest $50,000 is utilized by her husband and therefore, no tax deduction is valid on Periwinkle on $50,000.

Expense fringe benefits

Periwinkle has liquidated the bathtub at lower value and therefore, an expense fringe benefit is given to Emma in the form of bathtub (Barkoczy, 2016).

Manufacturing  cost (bathtub)

$700

Selling price of bathtub (set by  Periwinkle Company)

$2,600

Bathtub offered to Emma at the price

$1,300

Expense fringe benefit to Emma

=(Selling price of bathtub - Bathtub offered to Emma at the price)

= ( 2,600 – 1,300)

$1,300

Gross up factor for  bathtub (for FY2016)

2.1463

Gross up amount for expense fringe benefit (bathtub)

=( Expense fringe benefit to Emma × Gross up factor for  bathtub)

=( 1300 × 2.1463)

$4,078

FBT amount for Periwinkle (under expense fringe benefits)

=( Gross up amount for bathtub× 0.49)

=(4,078 × 0.49 )

 

$1,998

If $50,000 of the loan amount also utilized by Emma and she herself purchases the share, in the place of giving it to her husband and also the shares results in gains to Emma then incremental tax deduction is considered on the part of the Periwinkle which would reduce FBT liability (CCH, 2014).

Interest amount at benchmark interest rate (declared by RBI)

=( 5.65% of the issued loan amount)

=(50000 × 0.0565)

 

$2825

Interest amount at offered interest rate given by employer

=( 4.45% of the issued loan amount)

=(50000 × 0.0445)

 

$ 2225

Difference in the interest amounts on $ 50,000

=( Interest amount at benchmark interest rate - Interest amount at offered interest rate given by employer)

=(2825  - 2225)

 

$ 600

Significant tax deduction in the FBT for employer

=(Tax deduction in the tax amount × 0.49)

=(600× 0.49)

$294

References

Barkoczy, S 2016. Foundation of Taxation Law 2016, 8th edn, CCH Publications, North Ryde

CCH 2014, Australian Master Tax Guide 2014, 52nd eds., Wolters Kluwer, Sydney

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

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

Hodgson, H, Mortimer, C & Butler, J 2016, Tax Questions and Answers 2016, 5th ed., Thomson Reuters, Sydney,

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 2016, Principles of Taxation Law 2016, 9th edn, Thomson Reuters, Pymont

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

Woellner, R 2014, Australian taxation law 2014, 8th eds., CCH Australia, North Ryde

 

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