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Taxation Theory for Net Capital Gain

Question 1 (10 marks)

You are working as a tax consultant in Mayfield, NSW. Your client is an investor and antique collector. You have ascertained that she is not carrying on a business. Your client provides the following information of sales of various assets during the current tax year: 

(a) Block of vacant land. On 3 June of the current tax year your client signed a contract to sell a block of vacant land for $320,000. She acquired this land in January 2001 for $100,000 and incurred $20,000 in local council, water and sewerage rates and land taxes during her period of ownership of the land. The contract of sale stipulates that a deposit of $20,000 is payable to her when the contract of sale is signed and the balance is payable on 3 January of the next tax year, when the change of ownership will be registered. 

(b) Antique bed. On 12 November of the current tax year your client had an antique four-poster Louis XIV bed stolen from her house. She recently had the bed valued for insurance purposes and the market value at 31 October of the current tax year was $25,000. She purchased the bed for $3,500 on 21 July 1986. Although the furniture was in very good condition, the bed needed alterations to allow for the installation of an innerspring mattress. These alterations significantly increased the value of the bed, and cost $1,500. She paid for the alterations on 29 October 1986. On 13 November of the current tax year she lodged a claim with her insurance company seeking to recover her loss. On 16 January of the current tax year her insurance company advised her that the antique bed had not been a specified item on her insurance policy. Therefore, the maximum amount she would be paid under her household contents policy was $11,000. This amount was paid to her on 21 January of the current tax year. 

(c) Painting. Your client acquired a painting by a well-known Australian artist on 2 May 1985 for $2,000. The painting had significantly risen in value due to the death of the artist. She sold the painting for $125,000 at an art auction on 3 April of the current tax year. 

(d) Shares. Your client has a substantial share portfolio which she has acquired over many years. She sold the following shares in the relevant year of income: 

(i) 1,000 Common Bank Ltd shares acquired in 2001 for $15 per share and sold on 4 July of the current tax year for $47 per share. She incurred $550 in brokerage fees on the sale and $750 in stamp duty costs on purchase. 

(ii) 2,500 shares in PHB Iron Ore Ltd. These shares were also acquired in 2001 for $12 per share and sold on 14 February of the current tax year for $25 per share. She incurred $1,000 in brokerage fees on the sale and $1,500 in stamp duty costs on purchase 

(iii) 1,200 shares in Young Kids Learning Ltd. These shares were acquired in 2005 for $5 per share and sold on 14 February of the current tax year for $0.50 per share. She incurred $100 in brokerage fees on the sale and $500 in stamp duty costs on purchase. 

(iv) 10,000 shares in Share Build Ltd. These shares were acquired on 5 July of the current tax year for $1 per share and sold on 22 January of the current tax year for $2.50 per share. She incurred $900 in brokerage fees on the sale and $1,100 in stamp duty costs on purchase. 

(e) Violin. Your client also has an interest in collecting musical instruments. She plays the violin very well and has several violins in her collection, all of which she plays on  HI6028 Taxation Theory, Practice and Law T2 2018 a regular basis. On 1 May of the current tax year she sold one of these violins for $12,000 to neighbor who is in the Queensland Symphony Orchestra. The violin cost her $5,500 when she acquired it on 1 June 1999. 

Your client also has a total of $8,500 in capital losses carried forward from the previous tax year, $1,500 of which are attributable to a loss on the sale of a piece of sculpture which she sold in April of the previous year. Required: Based on this information, determine your client’s net capital gain or net capital loss for the year ended 30 June of the current tax year.

Question 2 (10 marks) 

Rapid-Heat Pty Ltd (Rapid-Heat) is an Electric Heaters manufacturer which sells Electric Heaters directly to the public. On 1 May 2017, Rapid-Heat provided one of its employees; Jasmine, with a car as Jasmine does a lot of travelling for work purposes. However, Jasmine's usage of the car is not restricted to work only. Rapid-Heat purchased the car on that date for $33,000 (including GST). 

For the period 1 May 2017 to 31 March 2018, Jasmine travelled 10,000 km in the car and incurred expenses of $550 (including GST) on minor repairs that have been reimbursed by Rapid-Heat. The car was not used for 10 days when Jasmine 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 2017, Rapid-Heat provided Jasmine with a loan of $500,000 at an interest rate of 4.25%. Jasmine 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, Jasmine purchased an Electric Heaters manufactured by Rapid-Heat for $1,300. The Electric Heaters only cost Rapid-Heat $700 to manufacture and is sold to the general public for $2,600. 

Required: 

(a) Advise Rapid-Heat of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2018. You may assume that Rapid-Heat would be entitled to input tax credits in relation to any GSTinclusive acquisitions. 

(b) How would your answer to (a) differ if Jasmine used the $50,000 to purchase the shares herself, instead of lending it to her husband?

Answer

HI6028 Taxation Theory, Practice & Law

Question 1 

If the assessee is found to be Australian resident, then the assets determined to be capital gain assets would be taxable under the CGT even if the assets are not located in Australia and is sold elsewhere. 

(a) Block of vacant land. 

For determining the amount of the capital again arising out of the sale of the vacant plot, the cost base of the plot would be required to e deducted form the disposal value. The cost base of the block of vacant land is given as $320,000 in this case. The other costs that would-be deductible are the legal fees which are paid at the time of acquisition and the stamp duties are also added to the cost base for deduction. However certain expenses in the nature of insurance expenses and maintenance expenses etc. is not allowed to be added to the cost base if the conditions prescribed as follows are not fulfilled:

  1. The vacant land must have been acquired before august 20th 1991.
  2. The owner of the property can’t claim deduction as the land remained vacant and was never utilized for any kind of income derivation including that of rent. 

The block of land in this case was found to be vacant and was not used for any purpose of income derivation. The amount of sale is $320,000 and the same under the provisions of the section 108-5 is a CGT event. The relevant base cost which would be deducted form the sales are estimated as shown below:

1. Acquisition cost of the land as of Jan 2001$100,000

2. water and sewerage taxes incurred $20,000

The cost base of the block of vacant land $120,000.00

As a result of the disposal of the land the capital gain to be included in the total income for the year is assessed as shown:



$
Sales value realized 
$320,000
Less:


Cost base as computed 
$120,000
Value of Capital Gian under (115 A) 
$200,000


As computed above an amount of $200,000 would be treated as capital gain ad it does not make a difference if all the money from the same is realized now or later. Thus, even if the seller receives $20,000 now and is expected to receive the balance $300,000 at the time of transfer of document the entire event being a CGT event is taxable in the current year (Barkoczy, 2015).

(b) Antique Bed. 

If assets are not specifically excluded under CGT regulations, then all the capital assets would be taxable under CGT when sold and disposed of if they were found to have been acquired after 20th august of 1985. Leased assets, real estate transactions. Sale of goodwill, collectible items etc. have been determined to come under the definition of Capital gain assets and personal use assets such as a single residence and depreciable assets are exempted from CGT. Collectible items are CGT assets but items such as jewelries and medallions and paintings of rare nature are exempted. Further it has been provisioned that if the transactions amounted to described below would be exempted or disregarded under CGT:

  1. If the value of the collectible items were less than equal to $500. This would also include acquisition of any interest in the collectibles as well. 
  2. The collectible items were acquired much before 16th December 1995. 
  3. Collectibles items disposed for amounts lesser than$500 after 16th December 1995. 

In the case of a capital loss however there is a provision to set off against any other gains from another item of collectible category an in case it can’t be set off the same can be carried forward to be set off against any form of capital gains in the future years without any limit and time limit. 

Under the provision of section 104-20, The Louis XIV bed under current analysis would be treated as a Capital gain assets ( despite being an antique) as it was acquired for more than $500 and is being disposed for an amount in excess of $500 as well  (Chow, 2015). 

Even if the Antique bed was stolen and the insurance company did not pay the full amount of claim the amount paid by the insurance firm under the home insurance would be treated as the amount of disposal of the antique bed and CGT event. Thus value of sale would be deemed to be the amount paid by insurance firm and gain would be assessed as follows:

Amount Received 
$11,000
Less:


Cost of purchase 
3,500
Alteration cost 
1,500
Total cost base 
5,000
Capital gain assessed
6,000


Thus, there is an expected capital gain of $6,000 from the antique bed. 

(c) Painting. 

If assets are not specifically excluded under CGT regulations, then all the capital assets would be taxable under CGT when sold and disposed of if they were found to have been acquired after 20th august of 1985. Leased assets, real estate transactions. Sale of goodwill, collectible items etc. have been determined to come under the definition of Capital gain assets and personal use assets such as a single residence and depreciable assets are exempted from CGT. Collectible items are CGT assets but items such as jewelries and medallions and paintings of rare nature are exempted (Hart, 2016). 

Under the definitions provided by the CGT Act, the painting under analysis is required to be regarded as a collectible item and exemptions would be applicable to the painting or gains would be disregarded only if the conditioned mentioned below are satisfied:

  1. If the value of the collectible items were less than equal to $500. This would also include acquisition of any interest in the collectibles as well. 
  2. The collectible items were acquired much before 16th December 1995. 
  3. Collectibles items disposed for amounts lesser than$500 after 16th December 1995. 

As the painting was bought for an amount which is higher than $500 the exemptions won’t apply and its not exempt. Thus, its sale is a CGT event and taxable. However, under the provisions of the CGT assets, the assets which were acquired before the mentioned date of 20th august 1985 would be treated as pre-CGT and not taxable under s104-5. The paintings were purchased on 2nd May 1985 and thus (falling before the mentioned date of 20.8.1985) would be treated as an exempted asset and would not be taxable as an CGT asset (Fisher, 2008). 

(d) Shares. 

Under the provisos of the Income Tax Assessment Act 1997, the disposal of share is a CGT event under 104-10. As the CGT were brought into effect from 20th September 1985, any asset which were acquired before the date are termed as pre-CGT and the eventual disposal would not be considered CGT events and the gains and losses would not be taxable under CGT provisions. The capital gains would be recognized in that year in which the contract for the disposal of assets is entered into even if the payment is not fully made. However, if there is no contract to dispose of the assets then the capital gain would be recognized when the ownership is transferred. The following assets (shares) disposal is treated as shown below: 

i) sale of Common Bank Ltd shares

these shares are CGT assets as they were bought after 20th September 1985 and their sale amounts to CGT event. 

Disposal value 
$46,450
Less:


Cost of purchase 
15,000
Stamp duty paid 
750
Cost base 
15,750
Capital gain 
30,700


Thus, there would be a recognizable capital gain of $30,700 form the disposal of share of common bank Limited. 

ii) Disposal of Shares in PHB Iron Ore Ltd

these shares are CGT assets as they were bought after 20th September 1985 and their sale amounts to CGT event. 

Disposal value 
$61,500 ( 62,500-1,000)
Less:


Cost of purchase 
30,000
Stamp duty paid 
1,500
Cost base 
31,500
Capital gain 
30,000

Thus, there would be a recognizable capital gain of $30,000 from the disposal of share of PHB Iron Ore Ltd.

iii) Disposal of shares in Young Kids Learning Ltd

these shares are CGT assets as they were bought after 20th September 1985 and their sale amounts to CGT event. 

Disposal value 
$500 ( 600-100)
Less:


Cost of purchase 
6,000
Stamp duty paid 
500
Cost base 
6,500
Capital gain 
(6,000)

Thus, there would be a recognizable capital gain of ($6,000 from the disposal of share of Young Kids Learning Ltd. This loss can be set off against other capital gains in the current year. 

iv) Disposal of shares in Share Build Ltd

these shares are CGT assets as they were bought after 20th September 1985 and their sale amounts to CGT event. 

Disposal value 
$24,100 ( 25,000-900)
Less:


Cost of purchase 
10,000
Stamp duty paid 
1,100
Cost base 
11,100
Capital gain 
13,000


Thus, there would be a recognizable capital gain of $13,000 from the disposal of share of Share Build Ltd.

(e) Violin. 

The violin would be part of the personal use asset as defined by s104-5. The personal use assets are employed for general use and entertainment and the would be exempt form taxation under CGT if their value does not exceed $10,000. Also the assets would be exempted if they were purchase before 20.9.1985 as these assets would eb termed a pre-CGT assets. 

He violin was purchased after 20.9.1985 and as a result of which the same would be treated as a CGT asset and it’s disposal a CGT event and thus taxable if there is any gain (kerrie Sadiq & Cynthia Coleman, 2016). Further this can’t be exempted as it acquisition value was much in excess of $500. The Estimation of the resultant capital gain is as follows:

Disposal value 
$12,000 
Less:


Cost of purchase 
5,500
Cost base 
5,500
Capital gain 
6,500

As estimated above there would be a reportable capital gain on the disposal of the violin and the same is includible in the ordinary income for calculation of tax (Preston, 2013)

Calculation of the Net capital gain 

Net capital gain is estimated as shown below:

Capital gain /loss
$
Vacant plot of land
200,000
Antique Bed 
6,000
Painting 
0.00
Shares 
67,500
Violin 
6,500
Total 
280,000
Less: 


Brought forward loss 
8,500
Net taxable gain 
271,500

Question 2 

1. Evaluation of car fringe benefit to Jasmine

Fringe benefit tax under Australian tax regime is a tax imposed on the non-cash benefits extended to individual employees by employers in excess of prescribed limits and the provisions of FBT generally would override the conditions of tax incidence as per the guidelines imposed under s 23L(1) of the income tax assessment act, 1936 and 1995. 

A car benefit or car fringe benefit would accrue as and when an employee is provided with a car for personal use or the same is availed by associates of the employee under ss 7(1). This es if the employer provides a car it owns to the employee which is not restricted form private use or the car is provided by taking the same on lease. Under this provision if the car is allowed to be garaged near employee’s home or at employees home then also it would be treated as private use. A car used by the employee for travelling to and from work is also treated as private use.

The followings are however treated as exempted car benefits:

A taxi or a car which is less than one tonne capacity then the use of the car would be exempted from FBT if:

  • The car travel is for travelling form home to work and vice versa.
  • Incidental car travel in the course of official work tending to be employment related travel.
  • Irregular private use or minor personal use of the car which is infrequent. 

Form the above description it became clear that the car provided to jasmine was meant for private and official use and there was no restriction on the use of the car for private use and private use was neither minor nor infrequent. So, the car event would be treated as a fringe benefit under sub-section 7(1) (Orow, 2016). 

The car which was provided to Jasmine was used for more than 10,000 kilometers and hence the FBT would computed as 20% basis. the capital cost of the car provided to Jasmine was 33,000 and the no of days the car was used by Jasmine for the year was 320 days. The estimation of FBT ( car benefits) is shown as follows:

Taxable value of fringe benefit = ((A × B × C) ÷ D) - E 

Where,

A = cost of the car 

B= percentage fixed on statutory basis

C=  days available for use by Employee 

D= total no of days available in the FBT year and 

E= amount paid by employee or recovered form employee

As the employee (Jasmine) was not changed nayhting by the employer the formulae used would be assessed as follows:

Taxable value of fringe benefit = ((A × B × C) ÷ D) 

Taxable value Fringe benefit = cost of the car * days available for use by Jasmine/total no of days available in the FBT *20% 

Net Fringe benefit = 33,000*20%*320/335 = $6305.

The gross amount of Fringe benefit (car) to be included in the FBT year would be $ 13,116 ( $6305*2.0802) 

2. Evaluation of Loan fringe benefit to Jasmine

A loan fringe benefit would arise if the employer company has extended to an employee a loan over which the employer either charges no interest or charges an interest rate which is found to be lower than the statutory rate. In some cases, if the employee has been granted a salary overpayment and then the employee repays the same over a longer duration the same would be treated as a loan fringe benefit as well. The current statutory rates for loan fringe benefit is 5.65%. in this case the interest charged form the employee is 4.25% , which is lower than the statutory rates specified and as a result of which the loan would be treated to be a fringe benefit and taxed accordingly (Koit, 2016). 

Loan Extended is $500,000 and interest charged is 4,25%. As a result of which the fringe benefit would be 1.40% of the loan amount for the current FBT year.

Amount of fringe benefit = $500,000*1.40%*9/12 = $5,250

So, the loan fringe benefit is of $5250 value and the employer would be needed to pay taxes on the same for the current FBT year. This amount would not be affected by the employee extending part of the loan to her husband as credit on her part (coleman, 2016).

3. Evaluation of goods sold at concession to Jasmine for FBT 

Fringe benefit tax under Australian tax regime is a tax imposed on the non-cash benefits extended to individual employees by employers in excess of prescribed limits. Jasmine haven been given a electric heater for $1300 where as the market value of he same is $2600. This means Jasmine has recovered a non-cash benefit of $1300 (2600-$1300) from the provision of the concessional sales and the same would be treated as a goods fringe benefit for FBT year. This amount would be taxable (Barkoczy, 2015). 

2(b) 

Jasmine has received a loan fringe benefit of $500,000 in the form of a concessional rate and the same is chargeable to tax irrespective of whether she uses the same for investing in the market or extends the same to her husband instead. It would not make any fundamental difference to the amount of FBT tax and its taxability. Thus, the amount of loan fringe benefit would be the same as assessed above (Koit, 2016)

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