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 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 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.
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.
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