Taxable Capital Gains for Fred

Discuss about the Taxable Capital Gains for Fred.

1. The issue at hand in the given case is to ascertain the taxable capital gains for Fred who as per the information provided had sold a holiday home situated in Blue Mountains.  In the given case, even though there is a time lap between the enactment of sale contract and the payment receipt, but it is not a concerning matter as both the dates tend to converge in the current financial year and hence the capital gains derivable from the sale of the house would also be taxable in the given tax year only.

Further, another relevant information extended in the question is that the house was acquired by Fred in the year 1987 and hence the capital gains derived on it would be subject to CGT as only the assets purchased before September 20, 1985 are CGT exempt (Barkoczy, 2015).  Since Fred is an individual taxpayer, hence with regards to computation of capital gains on the sale of holiday home, there are two approaches that may be deployed namely the discount method and indexation method.

Discount Method: This method is highlighted as per Section 115.25 and takes into consideration only half of the actual capital gains that are realised on the asset sale. Hence, effectively, it offers a discount of 50% on the table gains. But the same is applicable only for long term capital gains (Sadiq et. al., 2016).

Indexation Method: This method is highlighted as per Section 114.1 and adjusts the cost base of the underlying asset for the change in inflation that occurs between the purchase date of the asset and September 1999. However, once the capital gains have been computed, no discount can be availed on the same unlike discount method (Gilders et. al., 2016).

For the given case, the taxpayer would be able to avail lower capital gains tax liability using the discount method and hence in the given case, computation has been carried out only discount method (Woellner, 2014).

As per Section 110.25, the cost base of the asset tends to constitute the following items  (Nethercott, Richardson & Devos, 2016).

Purchase price of the asset

Incidental costs associated with asset acquisition

Incidental costs associated with asset disposal or liquidation

Capital costs incurred which lead to significant appreciation in asset value

Cost incurred to keep possession and title of the asset

Thus, the cost base of the holiday home situated in Blue Mountains needs to be computed based on the above understanding.

Cost base of holiday home = Acquisition Price ($ 100,000) + Incidental costs related to purchase of holiday home (1000 + 9900) + Improvement in capital value (20000 for garage) + Incidental costs related to sale of holiday home (1100 + 2000) =  $134,000

Capital gains realised from liquidation of house = Selling price of the house ($ 800,000) – Cost base of the house ($134,000) = $ 666,000

However, the question brings to light that on account of loss in shares sale the previous year, the taxpayer has accumulated losses to the extent of $ 10,000. These accumulated losses would be adjusted against the property gains made by Fred in the ongoing tax year due to similar nature of share and property (Sadiq et. al., 2016).

Hence, Capital gains after adjustment for accumulated losses = Gross Capital gains – Accumulated capital loss = 666,000-10,000 = $656,000

Further, in line with the discount method, a 50% rebate would be available in the capital gains calculated above.

Thus, capital gains subject to CGT = (50/100)*656000 = $328,000

Capital Losses- Antique

In the event, the accumulated capital losses were attributed to antique vase sale, then such losses cannot be offset or adjusted for the capital gains made through sale of property or shares. It is imperative that antique losses must be recouped against antique gains only and therefore the above loss would continue to be taken forward on a yearly basis till adjustment happens against the future gains derived from antique liquidation (Hodgson, Mortimer & Butler, 2016).  Thus, the capital gains would not undergo any adjustment on account of previous accumulated losses.

Hence, capital gains subject to CGT for the current year = (50/100)*666000 = $ 333,000

2. As per the details provided, Periwinkle Pty Ltd is the employer which in the given case is providing certain fringe benefits to Emma, the employee and the FBT implications of the same need to be analysed based on relevant provisions of the FBTAA 1986 i.e. Fringe Benefit Tax Assessment Act, 1986.

Car fringe benefit:

The conceptual definition of car fringe benefit is provided by Section 8, FBTAA in accordance with which, this benefit arises when the employee has been provided employer owned car for personal purpose. Based on the provided information, there is no doubt that the care provided by Periwinkle is used by Emma for usage in personal life. Therefore, Periwinkle would be liable to pay FBT applicable based on this fringe benefit. (Sadiq et. al., 2016).  Further, no tax liability of any nature would be borne by Emma(employee) on account of the car fringe benefit being given to Emma. The relevant formula for estimation of car fringe benefit has been spelled out in Section 39F, FBTAA and represented below (Barkoczy, 2015).

The various inputs for the above approach are calculated below.

Vehicle’s capital value = Acquisition Price – Cost regarding repairs = (33,000 – 550) = $ 32,450

Further, the applicable statutory percentage for the current computation would be 20%  as for FY2016, the personal usage of the car has not exceeded 15,000 km (infact has been only 10,000) and also the purchase year of the car is after 2011 (2015 for this car) (Woellner, 2014).

Days when Emma had the car available for her use = 336 (Made available after one month) -5(Car out for repairs) = 331 days.

It is apparent that no deduction or adjustment has been done for those 10 days when the car was not in use as it was parked in the parking of the airport as Emma had the car but could not use it as she was not in town (Nethercott, Richardson & Devos, 2016).

Car Fringe Benefit (FBT taxable value) = $ 32450 × 20% × 331/366 × 2.1463 = $ 12,597.4

FBT payable by Periwinkle due to car fringe benefit = 12,597.4 x 0.49 = $ 6,172.7

Loan fringe benefit:

The loan fringe benefit results when financial help in extended by the employer to the employee at either zero interest or an interest rate that tends to be lesser than the Reserve Bank of Australia dictated statutory rate. The applicable statutory rate for FY2016 as given by the RBA stands at 5.95% per annum (Hodgson, Mortimer & Butler, 2016). However, Emma (employee) has been extended a loan to the tune of $ 500,000 by her employer i.e. Periwinkle with the subsidised interest rate of 4.45% that tends to be lower than the corresponding RBA prescribed rate of 5.95% pa. Since interest benefit is being given to Emma, hence, FBT would be payable by Periwinkle on the loan fringe benefit.

The amount of loan fringe benefit is the equivalent of the savings in interest cost that the employee derives in any given year on account of interest rate being lower than the RBA rate. This has been calculated as has been demonstrated below (Wilmot, 2012).

Applicable annual interest cost in accordance with the RBA rate = 500,000 × 0.0565 = $ 28,250

Applicable annual interest cost in accordance with the rate offered by the employer i.e. Periwinkle = 500,000 x 0.0445 = $ 22,250

Loan fringe benefit = $ 28,250 - $ 22,250 = $6,000

For the given year, the amount of loan fringe benefit would be lower than the above amount since the loan was availed by Emma not at the financial year starting but only in September, 2015. Also, as the interest payments do not attract GST, hence it would be termed as a Type II good with the applicable GST factor being 1.9608 (Wilmot, 2012).

Loan Fringe Benefit (FBT Taxable Value) - $ 6,000 x 213/366 x 1.9608= $ 6,846.72

FBT payable by Periwinkle due to loan fringe benefit = 6846.72 x 0.49 = $ 3,354.9

Fringe Benefits (Bathtub):

As per the given information, the company has provided a bathtub to the employee Emma at a discount of 50% to the retail value of $ 2,600. Since, it is not an item of use for professional purposes, hence FBT liability would arise for the employer based on this and same would be taxable at the applicable rate of 49% for FY2016 (Gilders et. al., 2016).

Fringe benefit extended due to price rebate = 2600-1300 = 1300

Expense fringe benefit (Taxable value)= Benefit extended x Gross up value = 1300 x 2.1463 = $ 4,078

FBT payable on account of expense fringe benefit on bathtub = 4078 x 0.49 = $ 1,998

b) For money that is extended to employee and deployed for earning income, deductions are available for the employer but the same does not apply when the employee does not use the money himself/herself (Barkoczy,2015).

The situation presented in the given case informs about the usage of $ 50,000 by Emma for deriving gains through share trading while earlier this money was given to the husband. Therefore, this would imply that the employer would be able to claim additional deduction and thereby the FBT liability would become lower.

Applicable annual interest cost in accordance with the RBA rate = 50000 × 0.0565 = $ 2825

Applicable annual interest cost in accordance with the rate offered by the employer i.e. Periwinkle = 50000 x 0.0445 = $ 2225

Difference in taxable value = 2825 -2225 = 600

Hence, applicable FBT deductions on account of the given change  = 600 x 0.49 = $ 294

References

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

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

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

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

Nethercott, L, Richardson, G & Devos, K 2016, Australian Taxation Study Manual 2016, 4^th 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, 9^th edn, Thomson Reuters, Pymont

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

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

 

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