Taxation Law assignment: Case Studies of Fringe Benefits Tax & Capital Gain Tax
Question
Task:
Question 1
Perisher Pty Ltd (Perisher) is a Ski equipment manufacturer that operates around Mt Hotham in Victoria. On 1 May 2019, Perisher provided Nikita (one of its employees) with a car as Nikita does a lot of travelling for work purposes. However, Nikita’s usage of the car is not restricted to work only. Perisher purchased the car on that date for $44,000 (including GST) plus $2,000 (including GST) dealer delivery charges.
For the period of 1 May 2019 to 31 March 2020, Nikita travelled 12,000 kilometers in the car and incurred expenses of $770 on minor repairs that have been reimbursed by Perisher. The car was not used for 10 days when Nikita was interstate and was parked at the airport and for another five days when the car was scheduled for annual repairs. Calculate the Fringe Benefits Tax Liability for Perisher.
Question 2
Taryn would like to open a new business as an interior designer, to funds her ambition she sold some of the following assets:
1. Antique Painting that was given to Taryn by her father 5 years ago. Taryn’s father bought it on 20 August 1984 for $2,500. Taryn sold it on 1’st June 2020 for $25,000
2. Taryn sold her car (Toyota Corolla) for the amount of $12,000 on 20’th May 2020, she bought on 1’st January 2015 for the amount of $20,000
3. Taryn sold her Harry Potter’s collection for the amount of $1,500 on 4’th January 2020, she bought it second hand on 10’th October 2018 for $350.
4. Taryn sold her gold necklace for $2,000 on 20’th March 2020, she bought it for $1,200 on 8’th August 2018
5. Taryn sold a sculpture for $6,000 on 1 January 2020, she bought it on December 1994 Advise the Capital Gain Tax Consequences for the above transactions.
Answer
Question 1
Material facts of the case
In the present case of taxation law assignment, the usage of the car provided to the employee (Nikita) was not restricted by the Perisher Pty Ltd. for work purpose only. The company has reimbursed the repairing expenses incurred by Nikita. Moreover, the car was not in use at time when Nikita was interstate and when it is arranged for repairing and maintenance.Based on the above facts, fringe benefit liability has to be determined.
Analysis of the legal issues
In the situation where the employees receive an addition to their compensation by the companies, it is considered as Fringe Benefits (McLaren, 2017). The necessary items comprised of life insurance, health insurance, employee stock option and use of the company vehicle, are known as Common fringe benefits. In the legal case, Hochstrasser v Mayes, it was held that, reimbursement of loss due to sale of house is not considered as income from employment.
According to the provisions of ITAA 1936 and ITAA 1937 considered in this taxation law assignment, in regards to fringe benefits, for say, FBTAA 1986, where the employer makes the holding of car available for the private use, taxation provision for a fringe benefit of the car get raised (Scheurer and Curtis, 2019). An employer can make the car available to be used by the employee on any day that either the actual use of the vehicle or it was available for the private use(Australian Taxation Office, 2020). In the case of Black v FCT considered in the present context of taxation law assignment, it is stated that, there is not any effective means by which benefit in kind could be detected, it is only possible through investigation.
An employer can use any of the following methods for calculating the taxable value fringe benefit on car
Statutory formula method (on the basis of the cost price of the car)
The changes had been made in the statutory formula method following the 2011 Budget, where a uniform statutory rate of 20% was introduced by replacing the old progressive statutory rates subject to the transition rules which is to be applied irrespective of Kilometres travelled. Apart from the case, where ‘pre-existing commitment’ has been placed for providing the car, 20% rate has to be applied for all the car fringe benefits after 7.30 pm AEST on 10th May 2011. The taxable value of fringe benefit is arrived by multiplying car’s base value with the statutory rate.
Operating cost method (on the basis of the cost of operating the car)
The % of the operating cost the car during the FBT year is the taxable value of the car fringe benefit (Australian Taxation Office, 2020). Such proportion is changed on the basis of actual use of the car personally. The less personal utilization will provide a less taxable value.
Notwithstanding the method was used in the previous year, an employer can select the method that yields the lowest taxable value. However, if the information needed for operating cost method is not available then the statutory method must be used by the employee.
Determining the Cost Price
The expense made for the purchase or associated cost incurred by the employer is termed as the Cost Price. Generally, the purchase price, including the GST amount paid, is considered as the cost price even though some engagements can impact it.
On the other hand, where the employee receives a direct payment, the terms of contracts or arrangements need to be taken care of to decide whether the price made is an employee contribution or not (Australian Taxation Office, 2020).
Determining Statutory Percentage
Statutory Percentage for computation of taxable value of FBT
Kilometres Proportion given in ITAA 1997
<15,000 26%
15,000 to 24,999 20%
25,000 to 40,000 11%
> 40,000 7%
Determining Annualised Kilometres
For calculating the Annualised Kilometres following formula mentioned in the taxation law assignmentcan be used:
A*B /C
Where,
A= Total Kilometres travelled during the year at the time of ownership or lease time
B= 365
C= Total number of days in which car used in a year
Ascertainment of contribution by employee
The total amount of car fringe benefit in any other way will get deducted by the amount of any employee contribution.
The following amount paid is considered as employee contribution:
Paid directly to the employer for the use of the car- it must be included in the employer’s assessable income and paid out of the employee’s net income (Knepper, 2020).
Paid to the third party concerning the operating cost of the car, for example, fuel and employer’s assessable income does not include it.
Application of tax law
Computing the assessable price of the car on which fringe benefit tax would be levied
Total Taxable Value = 0.20*Purchase Price of car*number of days for which benefit provided/365 – expense reimbursed
Purchase price of the car = Cost of Acquisition + Delivery Charges
= $44,000 +$2,000
= $46,000
Number of days benefit provided = 336 days (From 1st May 2019 to 31st March 2020)
Effective days for which car has been used = 336 – 15 = 321 days
For the period of 15 days, the car has been used for private purpose. It will be treated as personal use of car when it was for repairing purpose and when it was not in the employer’s premises. Thus, it is stated herein taxation law assignment that in both the cases when the car was at the repair shop, and it was parked at the airport, that time will be considered as a car available for personal use.
Therefore,
Total Taxable Value = 0.2* 46000*321/365-770
= $7320.95
Fringe benefit tax rate = 30%
Amount of Fringe Benefit Tax = 7320.95*0.30
= $2196.29
Conclusion
On the basis of the calculation done, Perisher Pty Ltd. will be liable to pay the fringe benefit tax of $2196.29.
Question 2
In the given case scenario of taxation law assignment, Taryn would like to start a new business as an interior designer and to finance her requirement, and she entered into selling several assets. Five situations have been given in the case scenario, which has its distinct tax treatment. In this case, it has been assumed that Taryn is a resident of the country, at the time when she sells assets. Due to this, all income, whether earned within Australia or outside Australia, would be taxable in Australia.
Usually, if the selling price of an asset is more than its cost of acquisition, then in such case, capital gain would arise and vice versa.Usually, capital assets have at least life of one year, along with any significant expenses on acquisition, renovation, and development of business is also included in the term capital asset (Jones, 2016). In the legal case, FCT v Myer Emporium Ltd, profit is considered as income from business, if it is generated in relation to business operations or commercial transactions.In Australia, assesse has two choices for the selection of the method of computation of capital gains such as Indexation method, and discounting method. Under the indexation method, indexation cost of purchase of an asset is considered for the calculation of capital gain tax (Freundenberg, and Minas, 2018). On the other side, in discounting method, the normal cost of acquisition is considered, but assesse could claim a 50% discount on the capital gain tax. If the assessee sells the assets after one year from the date of its acquisition, then in such case he/she would be eligible to obtain a discount of 50% on capital gain tax. On the other side, if the assessee has sold the capital asset before one year, then such a 50% discount on the capital gain is not available (Mahar, 2016). Although, ITAA 1997 also prescribes some belongings or assets on which profit on sale of capital assets is exempt for the assesse. In the legal case, Greig v Commissioner of Taxation held that, losson sale of share is considered on revenue account, and thus not any provision of capital gain would apply. In the present case scenario, the tax treatment of each situation is explained below –
Case scenario 1
Issues: In this case, Taryn sold the antique painting which has been purchased by her father in the year 1984.
Relevant law: Herein taxation law assignment, according to the ITAA 1997, Section 108-10, if any sold any collectables then in such case, on sale of such item there is not any capital gain tax would be charged. Profit on sale of such item is exempt from the capital gain tax. Further, there is not any provision of capital gain tax charged on any asset acquired before 1985, as per ITAA 1997, Section 124-10 (CGT assets and exemptions, 2019).
Application: In this case, it can be identified that antique painting is considered as collectables. Further, it is also acquired by her father before 1985.
Conclusion:Based onthe above aspects, it has been concluded that, there is not any capital gain tax would levy on sale antique painting by Taryn as profit on the same is exempt under section 108-10.
Case scenario 2
Issues: In this case, Taryn has sold a car at a price which is more than its cost of acquisition. Relevant law:Capital gain tax is not charged on the sale of personal asset as per the provision given in section 118-8 of the ITAA 1997 (CGT assets and exemptions, 2019).
Application: In this case, the car is considered as a personal use asset.
Conclusion: There is not any capital gain tax liability would arise to Taryn in case of sale of the car.
Case scenario 3
Issues: In this case of taxation law assignment, Taryn sold her collection of Harry Potter at a price which is more than the purchasing price.
Relevant law: There is not any capital gain tax would be charged on the sale of collectables as explained in ITAA 1997, section 108-10 (CGT assets and exemptions, 2019). Along with this, if at the time of purchase of collectables, its market value is not more than $500, then also there would not any liability of capital gain tax would arise on the assessee, as provided in the Section 118-10(2) of the ITAA 1997.
Application: In the present case situation, the purchase price of the collection of Harry Potter is $350 only, which is less than $500. Along with this, Harry Potter collection is considered as collectables, thus not any capital gain tax liability imposed on the sale of collectables.
Conclusion: As per Section 108-10 and Section 118-10(2), profit made by Taryn on sale of the collection of Harry Potter is exempt from the capital gain tax.
Case scenario 4
Issues: In this case scenario of taxation law assignment, the issue is related to whether the sale of gold chain assists towards the liability of capital gain tax for Taryn as it is sold at a price more than its cost.
Relevant law: In this case, the provision of Section 108-10 would be applied. The reason behind the same is that, on the collectables, there is not any capital gain tax charged for assesse (CGT assets and exemptions, 2019).
Application: On selling of gold chain, capital gain tax not charged because it is considered as collectables as per provision of the ITAA 1997.
Conclusion: Based on above aspects, it can be concluded that, there is not any liability of capital gain would arise in case of sale of the gold chain by Taryn because of application of Section 108-10 of the ITAA 1997.
Case scenario 5
Issues: In this situation, the problem is whether the sale of sculpture assists inthe liability of capital gain tax for Taryn.
Relevant law: By considering this, the provision of Section 108-10 would be applied;which shows that there is not any capital gain tax would be charged on the sale of collectables (Burton, 2018).
Application: Sculptureis considered as collectables under ITAA 1997.
Conclusion: Based on above explanation, it has been concluded that there is not any liability regardingthe sale of sculptureraised on Taryn because of implementation of Section 108-10 of the ITAA 1997.
Based onthe above case scenarios provided in this taxation law assignment, it has been seen that there is not any capital gain tax liability arises on Taryn. The reason behind the same is that usually, Taryn has sold collectables on which capital gain tax is exempt under Income Tax Assessment Act 1997 Section 108-10.
References
Australian Taxation Office, 2020. [Online] Available through
Burton, M., 2018. Extending the tax expenditure concept in Australia. Austl. Tax F., 33, p.281.
CGT assets and exemptions, 2019. (Online). Available through
Freundenberg, B. and Minas, J., 2018. Reforming Australia’s 50 per cent capital gains tax discount incrementally. eJTR, 16, p.317.
Jones, D., 2016. Capital gains tax: The rise of market value. Taxation in Australia, 51(2), p.67.
Knepper, M., 2020. From the Fringe to the Fore: Labor Unions and Employee Compensation. Taxation law assignmentReview of Economics and Statistics, 102(1), pp.98-112.
Mahar, F., 2016. The distortive effects of the capital gains tax regime. Tax Specialist, 20(1), p.16. McLaren, J., 2017. The economic development of northern Australia: A critical review of the taxation benefits and incentives both past and present and the potential taxation options for the future. J. Australasian Tax Tchrs. Ass’n, 12, p.1.
Scheurer, J. and Curtis, C., 2019. Reducing social spatial inequity with public transport in Melbourne, Australia. In A Companion to Transport, Space and Equity. Edward Elgar Publishing.
