Contents

Question 1- Executive Summary

(a)     Tax Implications on Relocation Cost

(b)     Tax Implications on Miscellaneous Items

(c)      Tax Implications on Telephone Bill

(d)     Tax Implications on Car Allowance

(e)      Tax implications on Loan

Question 2- Executive Summary

(a)     Capital Gain or Loss on Sale of Property

(b)     Capital Gain or Loss on Disposal of Painting

Net Capital Gain or Loss

Sale of Property to Daughter

References 

 

 

Question 1- Executive Summary

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.

(a) Tax Implications on Relocation Cost

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).

(b) Tax Implications on Miscellaneous Items

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).

(c) Tax Implications on Telephone Bill

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%).

(d) Tax Implications on Car Allowance

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%).

(e) Tax implications on Loan

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%).

Question 2- Executive Summary

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.

(a) Capital Gain or Loss on Sale of Property

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 20^th 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 1^st October 1980 at $90,000 and the construction was taken place on 1^st 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 20^th 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 20^th 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 this date.

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.

(b) Capital Gain or Loss on Disposal of Painting

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.

Net Capital Gain or Loss

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.

Sale of Property to Daughter

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.