Taxation - Capital Gains Tax - Fringe Benefits Tax - Case Study Assessment Answer

December 03, 2018
Author : Ashley Simons

Solution Code: 1HEB

Question: Taxation Case Study

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Taxation

Case Study Assignment

Case Scenario1

Dave Solomon is 59 years of age and is planning for his retirement. Following a visit to his financial adviser in March of the current tax year, Dave wants to contribute funds to his personal superannuation fund before 30 June of the current tax year. He has decided to sell the majority of his assets to raise the $1,000,000. He then intends to rent a city apartment and withdraw tax-free amounts from his personal superannuation account once he turns 60 in August of the next year. Dave has provided you with the following details of the assets he has sold

Case Scenario2

Periwinkle Pty Ltd (Periwinkle) is a bathtub manufacturer which sells bathtubs directly to the public. On 1 May 2015, Periwinkle provided one of its employees, Emma, with a car as Emma does a lot of travelling for work purposes. However, Emma's usage of the car is not restricted to work only. Periwinkle purchased the car on that date for $33,000 (including GST).

For the period 1 May 2015 to 31 March 2016, Emma travelled 10,000 kilometres in the car and incurred expenses of $550 (including GST) on minor repairs that have been reimbursed by Periwinkle. The car was not used for 10 days when Emma 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 2015, Periwinkle provided Emma with a loan of $500,000 at an interest rate of 4.45%. Emma 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, Emma purchased a bathtub manufactured by Periwinkle for $1,300. The bathtub only cost Periwinkle $700 to manufacture and is sold to the general public for $2,600.

Assignment Task1

Dave has also indicated that his taxation return for the year ended 30 June of the previous year shows a net capital loss of $10,000 from the sale of shares. These shares were the only assets he sold in that year.

(a) Based on the information above, determine Dave Solomon’s net capital gain or net capital loss for the year ended 30 June of the current tax year.

(b) IfDavehasanetcapitalgain,whatdoeshedowiththisamount?

(c) If Dave has a net capital loss, what does he do with this amount?

Assignment Task2

a) Advise Periwinkle of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2016. You may assume that Periwinkle would be entitled to input tax credits in relation to any GST- inclusive acquisitions.

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

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Solution1:

Case Study 1 Capital Gains Tax

Dave Solomon’s net capital gain/ loss for the year ended 30 June of the current tax year

ITAA 1997, s 110-25; mentions that the cost base of an asset being disposed off, normally consists of five broad categories.

ITAA 1997, s 110-25-1allows the cost base to be adjusted by the the net input tax credit mentioned in s 103-30 if existing.

Cost base categories

Sub section 12, mentions that the cost base is to be calculated at the time when the CGT event occurs or immediately after that time.

Capital gain would then be computed as net of the amount received in connection with the sale and the cost base as calculated above. Dave’s capital gain/loss computation would be done on the basis of the CGT discount method as all the assets were held for period of 1 year or more before the disposal as applicable to individuals. Thecapital gain so computed in total would then be reduced by 50% after duly adjusting the previous year capital loss related to previous year or current year are also permitted to be adjusted as applicable to individuals. (Austlii.edu.au, 2016)

The residential property is exempt from capital gain under the “main place of dwelling” exemption rule. As per details provided, it seems to be his single residential property.

The commission paid to the agent of $ 15, 000 in connection with the sale however would be treated as a cost incidental to the happening of the CGT event.The forfeited deposit received from the buyer of $ 85,000 will attract capital gain tax. CGT event H1 is normally applicable to the forfeiture of deposit.(Ato.gov.au, 2015)

(Amount in AUD)

Cost base calculation for (a)

Cost base calculation for

Cost base calculation for

b)

Capital gains calculation

Cost base calculation for

In this case, CGT Event A1 normally applicable in connection with the disposal of asset that was acquired on or after 20 September 1985 is applicable. Moreover, since the acquisition cost of the painting exceeds $ 500, exemption is denied.

c)

The proceeds received from the disposal of the luxury motor cruiser (purchased in late 2004) for a price of $110,000 will attract CGT Event A1. Moreover, since the acquisition cost of the cruiser exceeds $ 10,000, exemption under the personal assets rule is denied. (Ato.gov.au, 2015)

Capital gain calculation

Capital gain calculation

d)

The proceeds received from the disposal of the Shares will also attract CGT event Al as shares are treated as capital assets for the purpose of the computation of the capital gain/loss and these were acquired after 20September1985.(Ato.gov.au, 2015). The interest on loan will be treated as part of the cost of ownership as per (s 110-25-4). Dave is informed that the claim made by the ATO in this connection is incorrect.

Cost base calculation for (d)

Capital gain calculation

Determination of Dave’s net capital gain/loss

Determination of Dave’s net capital gain/loss

Determination of Dave’s net capital gain/loss

Where Dave makes a net capital gain on the sale of the assets, he ought to pay capital gain tax at applicable rates. A super annuation fund contribution is suggested so as to partially reduce his liability.

Where Dave makes a net capital loss on the sale of the assets, he is allowed to carry forward the loss to the next assessment year. For the current year , he need not pay any capital gain tax.

Case Study 2 Fringe Benefits taxPeriwinkle FBT consequences and liability, for the year ending 31 March 2016

The car provided by Periwinkle to Emma on 1stMay 2015 is treated as a fringe benefit as per FBTAA S7 even though the car was also for the private use of Emma. In the absence of operating cost details in the case, the statutory formula rule will be used to calculate the value of the fringe benefit. (Ato.gov.au, 2016)

= Cost base of the car (including GST)* Number of days used *20%

=33,000*331/366*20% = $ 5,968.85

The details of the distance travelled are not important in this case since the car was provided after 1April 2014. Moreover, a pre-existing commitment was not made here.(Ato.gov.au, 2016)

The duration of the use of the car from 1stMay 2015 to 31stMarch 2016 will not be adjusted for the 10 days when the car was parked at the airport as it was still available for Emma’s private use. The duration of 5 days for the scheduled for annual repairs is adjusted for calculating the number of days used. Total number of day the car was used are = 366-5-30 = 331 (30 days deduction is for the month of April 2015 when Emma was not given the benefit)

As per FBTAA 1986 S53, vehicle fringe benefit provided in relation to a car to an employee is exempt where it is provided during the same tenure. By implication, $550 incurred on minor repair by Emma that was reimbursed by Periwinkle will be exempt from FBT.

The provision of loan to Emma on 1 September 2015, granted at an interest rate of 4.45% is a loan fringe benefit as it was provided at a rate of interest that was lower than the benchmark rate. As per s 16,exemption will not be available under s 17.(Austlii.edu.au, 2016) as the benchmark interest rate is 5.65 % for the current FBT year. (Atotaxrates.info, 2016) As perNotification QC17821,the computation of the value of the benefit would be the net of the benchmark interest and the actual interest paid by Emma. GST is not applicable. (Ato.gov.au, 2016)

FBT tax liability computation

= (500,000*5.65%) less (500,000*4.45%) =28,250-22,250= $ 6,000

The full amount of loan would be valued as loan fringe benefit since Emma used ot for purchasing the holiday home. $50,000 provided interest free by Emma to her husband in connection with the purchase of Telstra shares will not be deducted as per the ‘otherwise deductible rule’ applicable for jointly owned assets.

The bathtub that was manufactured by Periwinkle by Emma for a sale consideration of $1,300 with a cost of manufacture of $700 and with a general public sale price of $2,600 is also a fringe benefit. The FBT liability would be computed as net of the general public sale price and the actual price paid by Emma.

= (2,600-1,300) = $ 1,300

To be noted that where an employer has provided goods and services to employees at a price which is less than the normal GST inclusive price charged from public ; FBT provisions are applicable. Moreover, since the value of the benefits exceeds $300, no exemption is available (Inland Revenue, 2016)

 

Determination of Dave’s net capital gain/loss

Determination of Dave’s net capital gain/lossWhere Emma uses $50,000 for purchasing the shares herself, the the loan fringe benefit value would be deducted by this amount. The computation would be

= 4, 50,000*5.65% less 4, 50,000*4.45%=25425-20025= $ 5,400

Computation of FBT liability of Periwinkle for the year ending 31 March 2016

(Amount in AUD)

Fringe Benefits tax

Fringe Benefits tax

Where Emma uses $50,000 for purchasing the shares herself, the the loan fringe benefit value would be deducted by this amount. The computation would be

= 4, 50,000*5.65% less 4, 50,000*4.45%=25425-20025= $ 5,400

Computation of FBT liability of Periwinkle for the year ending 31 March 2016

Fringe Benefits tax

Fringe Benefits tax

 

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