Question 1- Executive Summary. 2
Capital Gains Tax | Australian Tax
Question 1- Executive Summary. 2
(a) Tax Implications on Relocation Cost 2
(b) Tax Implications on Miscellaneous Items. 2
(c) Tax Implications on Telephone Bill 2
(d) Tax Implications on Car Allowance.. 2
(e) Tax implications on Loan.. 2
Question 2- Executive Summary. 2
(a) Capital Gain or Loss on Sale of Property. 2
(b) Capital Gain or Loss on Disposal of
Net Capital Gain or Loss. 2
Sale of Property to Daughter 2
Mary is a marketing consultant at Elite
Retail and has been offered various fringe benefits by her employer. Mary and
her employer were worried about the tax consequences of the respective benefits
and how it could be addressed in income tax return.
The employer of Mary paid her $4,000
for the transfer of furniture for her recent relocation at Brisbane. The amount
is an exempt benefit for Mary because section
61B, Div 13 of Fringe Benefit Tax Assessment Act 1986 concludes relocation
expense as an exempt benefit provided relocation is important for the performance
of her job responsibilities (ATO, 2004).
Mary has received an entertainment
allowance of $5,000 which she had spent on entertaining customers, so it falls
under the ambit of reimbursement rather a taxable benefit. Further, in
accordance with section 58x, Division 13
of Fringe Benefits Tax Assessment Act 1986, any work related items such as
laptops or mobiles which has been provide to Mary by her employer is an exempt
benefit because such miscellaneous items were particularly necessary for her to
effectively execute her responsibility (ATO, 2011).
Mary also gets a reimbursement of home
telephone bill from her employer, so she is liable to pay tax on such fringe
benefits. Though the telephone has partially been used for personal and
partially for business purpose, so under
section 20, Division 5 of Fringe Benefit Tax Assessment Act 1986, she is
not liable to pay tax on the use of business portion (ATO, 2014).
She is liable to pay tax on half
portion of the bill i.e., $165 ($330 x 50%). The benefit will be gross-up by
Type -2 benefit rate of 1.9608 because we assume that employer will not be able
to obtain any GST credit. The taxable fringe benefit of Mary will be $323 ($165
x 1.9608) which will arise a fringe benefit tax liability of $158 ($323 x 49%).
The employer of Mary has also provided
her car, so she is liable to pay tax on such fringe benefit. The taxable value
of the FBT Liability can be determined through The Statutory Formula Method or
The Operating Cost Method. Once the taxable value of the car is determined, we
will gross the figure by applicable factor and then apply a tax rate to
calculate FBT Liability (PWC, 2016).
Under section 9(1), Division 2 of fringe benefit Tax Assessment Act
1986, the formula of The Statutory Method is described below (ATO, 2014)
The taxable value of the car is $6,000
and we will gross this amount by Type 2 benefit rate of 1.9608 because we
assume that Mary’s employer is not obliged to get a GST refund on this amount.
It will give a taxable value of $11,765 ($6,000 x 1.9608) and FBT Liability as
$5,765 ($11,765 x 49%).
The employer of Mary has also provided
her a loan of $500,000 at a reduced rate of only 4%. When an employer grants a
loan to an employee at a rate lower than market rate then section 16, Division 4 of Fringe Benefit Tax Assessment Act 1986
requires to pay tax on loan fringe benefit at the difference of benchmark rate
and payment rate. In accordance with Australian Tax Office (ATO), the current
benchmark rate is 5.45% (Deloitte, 2016).
The taxable value will be gross-up by
Type 2 benefit rate of 1.9608 because we assume that the employer is not
obliged to get a refund on this amount. It will give a taxable value of $14,216
($7,250 x 1.9608) and when this amount is charged by current tax rate of 49%
then it will give FBT Liability of $6,966 ($14,216 x 49%).
Scott is an accountant and wants to
know the tax consequences on the sale of his property and the disposal of his
stolen paining. Further, he is also worried about the tax implications if he
sales his property to his daughter at a price less than the market value.
Division 100.2 of Income Tax Assessment
Act 1997 requires
payment of Capital Gain Tax (CGT) on items which have been purchased on or
after 20th September 1985. The Capital Gain Tax (CGT) has been
adopted by Australian Tax on or after that date so any capital assets purchased
before that date is exempt from tax (Clark, 2014).
Scott had originally purchased the land
on 1st October 1980 at $90,000 and the construction was taken place
on 1st September 1986 which cost around $60,000. The total cost of
the asset amounts to $150,000 and sales took place at $800,000 which generates
a capital gain of $650,000. The major problem in this scenario is that partial
of the asset’s cost belong to purchase before 20th September 1985
and partial asset’s cost belongs to purchase after this date.
Where there is an apportionment in
asset’s cost, subdivision 112.25 of Income Tax Assessment Act 1997 requires
to split the capital gain in the ratio as it has originally been purchased
(Burman, 2009). The capital gain of 60% ($90,000/$150,000) is an exempt benefit
from tax because the land was purchased before 20th September 1985
whereas on the other hand, 40% ($60,000/$150,000) of the capital gain is susceptible
to normal Capital Gain Tax (CGT) because the property was constructed after
Scott is liable to pay CGT on taxable
value of $260,000 ($650,000 x 40%). The tax payer initially needs to set-off
the current capital losses for the period and then charge current capital gain
tax rate to determine the current capital gain tax liability for the year.
Under subdivision 108B of Income Tax
Assessment Act 1997, any
item purchased for enjoyment or personal
use are exempt from tax purposes provided they have been acquired for less than
$500 (ATO, 2011).The painting had been purchased by Scott for $16,500 which
restricts him from claiming such exemption and entitle him to pay CGT under
normal tax regime.
The sales proceed of the asset would be
actual selling price or net insured amount if the asset has been lost or
damaged. Scott had lost the asset and it was not insured also, so in such
scenario, the tax payer shall consider the market value of the asset nil. It
will generate a capital loss of $16,500 ($0-$16,500) from the disposal of
paining which will be netted-off against current capital gains.
Scott generated a capital gain of
$260,000 from the sale of property and a capital loss of $16,500 from the
disposal of his paining which resulted in a net loss of $243,500
($260,000-$16,500). The tax payer is liable to pay tax on such amount after
setting off any brought forwarded capital losses from previous year (Burman,
2009). In order to settle brought forward capital losses, Scott fist sett-off
capital losses of the current year.
Australian Tax Authorities promotes
integrity and requires tax payers to avoid any biasness in filling tax returns.
Division 116.3 of Income Tax Assessment
Act 1997 requires that all the transactions processed between friends and
family are critically viewed and ensured that they have been executed at arm’s
length transaction (Deloitte, 2015).
The current market value of the
property if $800,000 whereas on the other hand Scott is willing to sell the
respective property to his daughter at a reduced price of $200,000. The
Australian Tax restricts this approach and requires to consider the market
value of property, i.e. $800,000 during filling the tax return. It will confirm
that all the transactions have been processed at arm’s length transaction and
there is no biasness in filling tax return.