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Case study 1: Capital Gains Tax
Dave Solomon is 59 years of age and is planning for his retirement. Following a visit to his financial adviser in March of the current tax year, Dave wants to contribute funds to his personal superannuation fund before 30 June of the current tax year. He has decided to sell the majority of his assets to raise the $1,000,000. He then intends to rent a city apartment and withdraw tax-free amounts from his personal superannuation account once he turns 60 in August of the next year. Dave has provided you with the following details of the assets he has sold:
(a) A two-storey residence at St Lucia in which he has lived for the last 30 years. He paid $70,000 to purchase the property and received $850,000 on 27 June of the current tax year, after the real estate agent deducted commissions of $15,000. The residence was originally sold at auction and the buyer placed an $85,000 deposit on the property. Unfortunately, two weeks later the buyer indicated that he did not have sufficient funds to proceed with the purchase, thereby forfeiting his deposit to Dave on 1 May of the current tax year. The real estate agents then negotiated the sale of the residence to another interested party. (b) A painting by Pro Hart that he purchased on 20 September 1985 for $15,000. The
painting was sold at auction on 31 May of the current tax year for $125,000. (c) A luxury motor cruiser that he has moored at the Manly Yacht club. He purchased the boat in late 2004 for $110,000. He sold it on 1 June of the current tax year to a local boat broker for $60,000. (d) On 5 June of the current tax year he sold for $80,000 a parcel of shares in a newly listed mining company. He purchased these shares on 10 January of the current tax year for $75,000. He borrowed $70,000 to fund the purchase of these shares and incurred $5,000 in interest on the loan. He also paid $750 in brokerage on the sale of the shares and $250 in stamp duty on the purchase of these shares. Dave has contacted the ATO and they have advised him that the interest on the loan will not be an allowable deduction because the shares are not generating any assessable income.
Dave has also indicated that his taxation return for the year ended 30 June of the previous year shows a net capital loss of $10,000 from the sale of shares. These shares were the only assets he sold in that year. (a) Based on the information above, determine Dave Solomon’s net capital gain or net
capital loss for the year ended 30 June of the current tax year. (b) If Dave has a net capital gain, what does he do with this amount? (c) If Dave has a net capital loss, what does he do with this amount? (10 marks, max. 1000 words).
Case study 2: Fringe Benefits Tax
Periwinkle Pty Ltd (Periwinkle) is a bathtub manufacturer which sells bathtubs directly to the public. On 1 May 2015, Periwinkle provided one of its employees, Emma, with a car as Emma does a lot of travelling for work purposes. However, Emma's usage of the car is not restricted to work only. Periwinkle purchased the car on that date for $33,000 (including GST).
For the period 1 May 2015 to 31 March 2016, Emma travelled 10,000 kilometres in the car and incurred expenses of $550 (including GST) on minor repairs that have been reimbursed by Periwinkle. The car was not used for 10 days when Emma was interstate and the car was parked at the airport and for another five days when the car was scheduled for annual repairs.
On 1 September 2015, Periwinkle provided Emma with a loan of $500,000 at an interest rate of 4.45%. Emma used $450,000 of the loan to purchase a holiday home and lent the remaining $50,000 to her husband (interest free) to purchase shares in Telstra. Interest on a loan to purchase private assets is not deductible while interest on a loan to purchase income-producing assets is deductible. During the year, Emma purchased a bathtub manufactured by Periwinkle for $1,300. The bathtub only cost Periwinkle $700 to manufacture and is sold to the general public for $2,600.
(a) Advise Periwinkle of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2016. You may assume that Periwinkle would be entitled to input tax credits in relation to any GST- inclusive acquisitions.
(b) How would your answer to (a) differ if Emma used the $50,000 to purchase the shares herself, instead of lending it to her husband?
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Case Study 1 Capital gains tax
As per ITAA 1997, s 110-25; the cost base of an asset that is being disposed off comprises five elements.
Further ITAA 1997, s 110-25-1 prescribes maintenance of proper records for each element and for the adjustment of the cost base by the net input tax credit as per s 103-30.
Cost base
Acquisition cost of the asset (s 110-25 –2)
(Consideration paid in connection with the acquisition of the asset) |
Incidental costs of acquisition (s 110-25-3) |
Ownership costs (s 110-25-4) (applicable for properties acquired after 20August 1991) including
(a)intereston borrowings in connection with the asset ownership
(b) Maintenance, repair and insurance costs
(c) Rates payable in respect of land
(d)intereston borrowings in connection with refinance of such borrowings
(e)intereston borrowings in connection with related capital expenditure. |
Incidental cost in connection with the CGT event |
Capital expenditure to increase or preserve the value of asset (s 110-25-5) |
Capital expenditure to establish or preserve the title of asset (s 110-25-6) |
As per Sub section 12, the time for the calculation of the cost base is s the time of the happening of the CGT event or just after that time.
Capital gain in this connection is the difference between the sale proceeds received and the cost base of the asset. The CGT discount method is normally applicable in case of individuals for assets held for1 year or more before being disposed off. This capital gain is reduced by 50% for individuals while the capital loss related to previous year or current year are also permitted to be adjusted. (Austlii.edu.au, 2016)
(Amount in $)
Cost base of the two storey residence
Acquisition cost of the house (s 110-25-2)
(Consideration paid in connection with the acquisition of the asset) |
70,000 |
Incidental costs of acquisition (s 110-25-3) | 0 |
Incidental cost in connection with the CGT event | 15,000 |
Ownership costs (s 110-25-4) | 0 |
Capital expenditure to increase or preserve the value of asset (s 110-25-5) | 0 |
Capital expenditure to establish or preserve the title of asset (s 110-25-6) | 0 |
Net | 85,000 |
Sale proceeds from the two storey residence | 850,000 |
Less: Cost base | (85,000) |
Capital gain | 7,65,000 |
Forfeited deposit on first sale | 85,000 |
Net capital gain | 8,50,000 |
b)Capital gains calculation
Sale consideration of the Pro Hart painting | 1,25,000 |
Less: Cost base | (15,000) |
Net capital gain | 1,10,000 |
The sale attracts CGT Event A1 related to disposal of asset applicable for assets acquired on or after 20 September 1985 as the painting was acquired for more than $ 500, no exemption is available.
c)The disposal of the luxury motor cruiser that was purchased in late 2004 for an acquisition cost of $110,000 attracts CGT provisions. The exemption available in respect of personal use asset is not available to Dave as its acquisition cost exceeds $ 10,000. (Ato.gov.au, 2015)
Capital gain calculation
Sale consideration received | 60,000 |
Less: Cost base | (1,10,000) |
Net capital loss | (50,000) |
d)Disposal of Shares attracts CGT event Al in relation to the disposal of the capital asset as the shares were acquired after 20September1985. (Ato.gov.au, 2015) Interest on loan taken in this connection will form a part of the cost base of the asset under (s 110-25-4) and the ATO claim is not tenable
Cost base of the shares
Acquisition cost of the shares (s 110-25-2)
(Consideration paid in connection with the acquisition of the asset |
75,000 |
Incidental costs of acquisition (s 110-25-3)
(Stamp duty) |
250 |
Incidental cost in connection with the CGT event (s 110-25-3) (Brokerage) | 750 |
Ownership costs (s 110-25-4)
(Interest on loan) |
5,000 |
Capital expenditure to increase or preserve the value of asset (s 110-25-5) | 0 |
Capital expenditure to establish or preserve the title of asset (s 110-25-6) | 0 |
Cost base | 81,000 |
Capital gain calculation | |
Sale consideration in respect of the shares | 80,000 |
Less: Cost base | (81,000) |
Net capital loss | (1,000) |
Determination of net capital gains for Dave
Net Capital gain/loss calculation | |
Capital gain from disposal of house exempt under the main place of dwelling rule | 0 |
Capital gain from forfeited deposit for first sale | 85,000 |
Capital gain from disposal of pro hart painting | 1,10,000 |
Less: Capital loss from disposal of luxury motor cruiser | (50,000) |
Less: Capital loss from disposal of shares | (1,000) |
Less: Capital loss carried forward from previous year | (10,000) |
Capital gain | 1,34,000 |
Less: 50% deduction | (67,000) |
Net capital gain | 67,000 |
Case Study 2 Fringe Benefits tax
The provision of car by Periwinkle to Emma on 1st may 2015 qualifies as a fringe benefit under FBTAA S7 as the car was given both for work and Private use. The statutory formula rule is applicable in this case the operating costs of the car are not provided. (Ato.gov.au, 2016)
= Cost of the car (including GST)* Number of days used in the year *20%
=33,000*331/366*20% = $ 5,968.85
The statutory rate of 20% is applicable; the distance travelled is irrelevant as the car was provided after 1April 2014, no pre-existing commitment was made in this connection(Ato.gov.au, 2016)
Since the car was provided for the period 1st May 2015 to 31st March 2016, 10 days when it was parked at the airport are not deducted as it was available for private use in these days. However, 5 days when it was was scheduled for annual repairs are deducted for arriving at the total number of days the car was used in the year; so total days that the car was used are = 366-5-30 = 331 (30 days for the month of April 2015 when the car was not granted to Emma are reduced from the total number of days )
FBTAA 1986 S53 provided that any vehicle fringe benefit is exempt where it is granted in relation to a car provided to an employee in the same time period. So, $550 spent on minor repairs of the car and subsequently reimbursed by Periwinkle will be exempt from FBT.
The loan provided to Emma on 1 September 2015, at an interest rate of 4.45% is treated as a loan fringe benefit as it is provided at a low rate of interest. s 16 will be attracted in this case and no exemption will be available under s 17. (Austlii.edu.au, 2016) Since the rate of interest is less than the benchmark rate of 5.65 % for the year ending 31st march 2016. (Atotaxrates.info, 2016) Notification QC 17821 enumerates the calculation of the taxable value in these cases as the difference between the interests calculated as per the benchmark interest rate and the rate at which the loan was granted to the employee. GST provisions are not attracted in this case. (Ato.gov.au, 2016)
FBT tax liability for loan fringe benefit granted to Emma would be
= (500,000*5.65%) less (500,000*4.45%) =28,250-22,250= $ 6,000
The full loan of $500,000 is treated as loan fringe benefit as it was utilized by the employee for the purchase of the holiday home. $50,000 that were loaned interest free by Emma to her husband for the purchase of Telstra shares are not exempt even under the ‘otherwise deductible rule’ usually applicable in respect of jointly owned assets.
The purchase of the bathtub manufactured by Periwinkle for $1,300 that had cost Periwinkle $700 to manufacture and that fetched a price of $2,600 from the general public will also be treated as a fringe benefit in the hands of Emma. The FBT liability of Periwinkle in this connection would be calculated as the difference between the price charged from the general public less the price paid by Emma. So, (2,600-1,300) = $ 1,300 is the taxable value of the fringe benefit in this case.
The rule in this connection is that where an employer, provides goods and services to employees at less than the normal GST inclusive cost to the public ; FBT liability is attracted. The exemption of $ 300 available in respect of employees per quarter is not applicable here as the value of the benefits exceeds $300. (Inland Revenue, 2016)
Calculation of FBT liability for Periwinkle for the year ending 31 March 2016
(Amount in $)
Value of car fringe benefit (including GST) 5,968.85
Value of Vehicle fringe benefit -
Value of bathtub fringe benefit (including GST) 1,300
Total (GST inclusive benefits) 7,268.85
*By current gross up rate 2.1463 15,601.13
Loan fringe benefit (GST exempt) 6,000
Total (GST exempt benefits) 6,000
*By current gross up rate 1.9608 11,764.8
Total (15601.13+11764.8) 27,365.93
*Flat rate 49%
FBT Liability 13,409.31
(Ato.gov.au, 2016)
= 4, 50,000*5.65% less 4, 50,000*4.45%=25425-20025= $ 5,400
Calculation of FBT liability for Periwinkle for the year ending 31 March 2016
(Amount in $)
Value of car fringe benefit (including GST) 5,968.85
Value of Vehicle fringe benefit (including GST) -
Value of bathtub fringe benefit (including GST) 1,300
Total (GST inclusive benefits) 7,268.85
*By current gross up rate 2.1463 15,601.13
Loan fringe benefit(GST exempt) 5,400
Total (GST exempt benefits) 5,400
*By current gross up rate 1.9608 10,588.32
Total (15601.13+10588.32) 26,189.45
*Flat rate 49%
FBT Liability 12,832.83
The FBT liability would be less by $ 576.48 (13409.31 – 12832.83) in the second case.
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