Taxation law - Capital Gains Tax - Fringe Benefits Tax - Assessment Answer

Taxation law Assignment

Case Scenario1

Fred is a resident who signed a contract to sell his holiday home in the Blue Mountains in August last year. The sale was settled in February this year when Fred received $800,000 from the purchaser. Fred incurred legal fees of $1100 (Inclusive of GST) and real estate agent’s commission of $9,900 (Inclusive of GST) in relation to the sale. Fred purchased the holiday home in March 1987 for $100,000 and paid $2,000in stamp duty on the transfer and $1000 in legal fees. In January 1990, Fred engaged a builder to build a garage on the property for $20,000,

Case Scenario2

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.

Assignment Task1

Calculate Fred’s net capital gain for the current year. Assume he also has a net capital loss from last year of $10,000 arising from the sale of shares. Would your answer be different if the loss arose from the sale of an antique vase?

Assignment Task2

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 GSTinclusive 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?

Part a: Capital Gains Tax

Law of Taxation Subjected to Selling a Non-Residential House in Australia

Selling a residential house in Australia is different from selling a non- residential house in terms of taxation. The primary home is usually exempted from Capital Gains Tax (CGT). This is the tax accrued on profits made from disposing off one’s assets. The Federal Government of Australia collects this tax through Australian Taxation Office (ATO) (Nevile, 2015). For those properties that one have been a previous occupant, then later used as rentals, CGT applies for the period that they served as rentals. A property is termed as a primary resident if, your kindred and their belongings reside in it (Austin, Gurran, & Whitehead, 2014). It serves as your primary mail address. It is your electoral roll address. It has a connection to gas, power, and phone. This criterion disqualifies holiday homes, and hobby farms as primary residents. However, there are two types of exemption to CGT (Nevile, 2015). These are a full and partial exemption. One is legible for full exemption if, the residence has served as home for your kindred throughout the period of ownership. The residence has never been used for commercial purposes from which it could have accrued profits. It must be based on two hectares and below. Partial exemption on the other hand applies if the dwelling served as your primary residence for a period of time (Faccio & Xu, 2015). You and your dependents live separately. As such, part of the residence has been in the past used for commercial purposes that accrued income. In this case, the house resides on a land that is more than two hectares. In addition, when selling your home, it is not subjected to GST and at the same time, one cannot claim GST credits (Steenekamp, 2012).

Goods and Services Tax (GST)

This is a 10% tax broadly based on all transactions taking place in Australia. All businesses are required to register for GST; they included in the price charged for goods and services offered (Verikios et al.,2016). When these businesses acquire new services or goods they usually claim this tax. For a transaction to qualify to be charged GST, it should be a payment to goods or services; this does not only include monetary transaction but also barter based transactions. It also includes payments that are meant by not doing something, but that have occurred during a business transaction (Steenekamp, 2012). It should have taken place in Australia. Goods are said to be Australia based if they have been availed to the buyer in Australia, their origin was Australia, imported to Australia. However, exports from Australia are not subjected to GST. Other than services and goods, a transaction is Australian based if, it took place in Australia, and the transaction took place via an Australian based business. Transaction involving properties are said to be Australian based if they are, buildings or land, interest accrued on land, land-based rights, license issued to facilitate someone to occupy a piece of land (Woellner et al., 2016).

Partly Taxable Sales

Some sales are exempted from GST if they can be disassembled into constituents parts which are fall into the category of GST-free. GST will only apply on the parts to which accrue the tax. Capital asserts based transactions attract GST taxes (Verikios et al.,2016).

Exemptions to Capital Gains Tax

Apart from the above-mentioned exemptions to Capital Gain Tax, the following assets are also exempted from GST: motor cycles or other vehicles falling in that category, a car that ferries nine passengers and below and less than a tonne. Assets acquired prior to 20^thSeptember 1985. Items used for personal needs which were acquired for $10,000 or less, collectables are also exempted from GST (Woellner et al.,2016). Depreciating assets which are meant for trading stock and taxation. In addition, awards unless they were acquired via a transaction. Proceeds acquired through gambling, compensation from an injury suffered during one’s occupation. Some testamentary gifts are also exempted from GST. Shares which are associated with development fund, financial transactions which fall under the TOFA rules are also exempted from GST (Woellner et al., 2016).

In order to calculate Fred’s net capital gain, the loss accrued from the sale of shares will not be included in the calculation as they fall into the categories of those assets which are exempted from calculating capital gain. Had the loss been accrued from selling antiques the results would not be different as antiques fall in the same category as the sale of shares which are not included in the calculation. To calculate capital gain accrued from the sale of Fred’s holiday home.

Selling price= $800,000 legal fees= $1100 (Inclusive of GST) real estate agent’s commission = $9,900 (Inclusive of GST) buying price= $100,000 stump duty=$2,000 legal fees= $1000 building garage= $20,000.

Capital gain = $(800,000-1,100-9,900-100,000-2,000-1,000-20,000) = $. 666,000.

Part b: Fringe Benefits Tax

Fringe benefits tax is subjected to employers for benefits extended to employees instead of being awarded wages and salaries. It is treated separately with income tax, and its calculation is based on the value of the fringe benefits extended. Any Australian business enterprise that offers fringe benefits to its employees must register for Fringe Benefits Tax. Fringe benefits serve as a technique to retain the best workers in the firm and prevent them from leaving the firm. Some of the forms of fringe benefits include cars, parking slot, loans which attract low interest. The fridge benefit taxation period run through from 1^stApril all the way to 31^stMarch (Hodgson & Pearce, 2015).

Ways in which a Business Enterprise can Provide Fringe Benefits

Determine how much fridge benefits is payable, register your business for Fridge Benefit Tax. In addition, make sure to maintain proper records based on the fridge benefits offered. Finally, always pay a FBT to ATO after lodging a return, and make sure you know benefits that are exempted when paying FBT and report the fridge benefits extended to your employees.

Benefits Exempted From Fridge Benefits

Some benefits are exempted from fridge benefit tax. For example, paying employees their wages and salaries, shares which were obtained via share schemes approved by the employees, contributions made by the employer in order to comply with the superannuation employee’s funds, instances when an employer gives or sells their car to the employee on closure, and payments of dividends or amount that is deemed as dividend (Shields & North-Samardzic, 2015).

Ways in Which an Employer Can Lower Fridge Benefit Tax Liability

An employee can reduce the amount accrued through benefits offered to the employee through the following way: offering benefits that are exempted from FBT, offering a salary in form of cash instead of providing fridge benefits (Woellner et al., 2016).

Forms of Fringe Benefits

Car fridge benefit is the benefit that takes place when an employer offers their car to their employee for personal use. A car is considered as a fridge benefit if it serves as a station wagon or sedan, a car that has been designed to fit below nine passengers, a vehicle whose load capacity is below a tonne. Vehicles which do not meet the above criteria and happen to be used by the employee for personal gains, the fridge benefits associated from which such vehicles are considered residual (Woellner et al., 2016). A car is considered to have been used for private purposes if an employee or any other person associated with the employee uses it for private activities irrespective of the day, on the occasion that a car has been in the garage in their homes or a garage near their place of residence irrespective of the fact that it might have been there due to security reasons. It is still considered to have been used privately. If the employee resides in the place of work, the car is assumed to be accessible for private purposes. However, there are circumstances when the use of a car can be exempted from the FBT (Gupta & Sawyer, 2015). For instance, when an employee uses a taxi privately, utility or panel van whose load capacity is below a tonne and is used for travelling to work from home. Travels made incidentally in the course of fulfilling employment duties which are travel related. In addition, attending to activities that are not related to work, for instance, the use a car to aid in domestic waste disposal (Tang & Wan, 2015). The following occasions are considered as residual fridge benefits. When an employer reimburses any expenses accrued during transport, when an employer allows an employee utilise their electronic toll tags, by allowing your employee to utilise a motor vehicle which does not qualify as a car for private purposes.

The other form of fringe benefit is in terms of car parking services. Car parking services offered to an employee qualify as a fringe benefit if the employer owns or controls the car park if the car remains in the car park for a period exceeding four hours which fall between 7.00 am in the morning and 7.00 pm in the evening irrespective of the day of the week.The employee owns the car or has been provided by the employer; the parking services have been offered for the benefit of the employee; the car is parked to a location that is in close proximity to the employee’s place of work (Pearce & Pinto, 2015). The next form of fringe benefit is the entertainment fringe benefit. For a benefit to be considered as an entertainment fridge benefit, it has to be in term of drink, recreation, accommodation, and food. Activities that fall under recreation include activities that are used to derive amusements like playing golf and so on. When an employer reimburses an employee or a third party expenses, this is considered as an expense fridge benefit. These expenses could have been incurred privately or through business activities. The other form of fridge benefit is loan fridge benefit, which occurs when an employer offers a loan to the employee that does not attract any interest or a loan whose interest is low. When an employer does not need their employees to pay their debts, this is called debt waiver benefit. Nevertheless, when a debt is written off genuinely as a bad debt, it does not fall in this category. The next fridge benefit is called housing fridge benefit, which is when an employer provides a place of accommodation to their employees for free or at a lowered rental fees (Pearce & Pinto, 2015). Accommodation that is located in a remote area is exempted when determining fridge benefits. If the same employees are entitled to not less than two meals per day, then this becomes board fridge benefit. If an employee spends considerable time away from their primary place of resident, the employer is supposed to reimburse them all the expenses incurred during this period this is called living away from home allowance (LAFHA) fringe benefit (Mather, 2013). Property fringe benefit, on the other hand, occurs when an employer sells at a reduced price or gives an employee a product free of charge (Pearce & Pinto, 2015).

In the case of Periwinkle Pty Ltd, they will incur FBT for the period 1 May 2015 to 31 March 2016 in which Emma used the car; the company will also incur expense fridge benefit for reimbursing Emma the money used for repairs during the business activities she was attending to. Despite the fact that the car was at the airport car park for ten days, the company will pay car parking fringe benefit due to the fact that the car was in the parking slot in respect to Emma business activities. The company will also pay loan fringe benefit for the loan that Emma took because the interest rate was below the benchmark interest rate of 5.95%. The company will also pay property fringe benefit for the bathtub that Emma bought from the company at a discounted price. The company will also pay living away from home allowance (LAFHA) fringe benefit for the period that Emma spent away from home for a business related reason. A 49% FBT rate is to be charged for any fridge benefits offered for the FBT year ending 31 March 2016.

FBT= ($33,000 + $550 + $500,000 + $1,300) * 49%= $ 262076.50

Had Emma bought the shares herself there would not have been any difference since acquiring of new assets does not fall in any form of fridge benefit.