Hi6028 Taxation Theory - Practice Assessment Answer

Answer:

Question 1

Income tax assessment act 1997 is primarily based in Australia and the companies must follow the same in relation to determination of capital gain taxes. Such capital gains taxes are generally paid by companies when they are to dispose their assets which are under the head capital gains assets. Furthermore, to determine capital losses or capital gains of an asset, the difference betwixt cost base and proceeds from sale of the asset can be performed. Moreover, if such capital gain tax has not been separately taxed in the return of companies, the same may be incorporated or added in the general income (De Cogan, 2015). Nonetheless, ascertainment of applicability of capital gains is benevolent in relation to an asset because it plays a pivotal role in deriving the net capital loss or gain associated to the same.

  1. Vacant plot

If an organization has procured a plot of land for proper utilization, it will not come under the boundary of capital gains but if the same has not been taken into use, it will be signified as a capital gains asset, thereby attracting taxes on the same (section 108.5 of the ITAA 97). Furthermore, the reason behind this is that such inadequate usage of land will result to asset disposal in general sense. Moreover, it is not necessary that a capital gains asset must be fixed asset, it can be equitable rights, legal rights, etc as well. Based on the requirements of section 108.5 under the Income Tax Assessment Act 1997, if a vacant plot of land has remained unutilized, the same will be regarded as a capital asset (Raymond, 2002). In contrast to this, the same will not be exempted from the applicability of CGT or shall be regarded as a pre-GST asset.

In this situation, the disposal of vacant plot of land amounted to $320,000 and the same has been considered as a capital gains asset. Nevertheless, such land was acquired at a value of $100000 in the year January 2001. In addition, the incidental expenses related to the land together with the taxes has amounted to $20000 under the third component of the act.

Thus, net capital gain or loss = Disposal cost of asset – incidental or associated expenses

= $320,000 – (acquisition value + water, sewerage, etc costs)

= $320,000 – (10000+20000)

= $200,000

Antique bed/collectibles

This collectible has also been considered as a capital gains asset that attracts taxes based on ITAA 97. Therefore, in relation to an antique bed, the same will also come under the purview of CGT. Moreover, in association with the given situation, the Louis XIV is an antique collectible under section 108.5 and after the date of cut-off, it is attained and therefore, it will not be exempted from the applicability of CGT (Nethercott, Richardson & Devos, 2013). Nonetheless, it is observable that the bed had been stolen on 12th of November that becomes the major disposal date of such asset. In addition, the taxpayer also complained regarding the same so that the insurance company can guarantee and take over the loss amount. However, the insurance company only received an amount of $11000. Nonetheless, the taxpayer also incurred a cost of $3500 for procuring such antique bed under section 110.25. In addition, such alteration expense under the fourth component is the primary incidental or associated expense that must form part of the cost base (Woellner et. al, 2017).

Quarter index value when sale of asset is facilitated

--------------------------------------------------------------- * Cost base or incidental expense

Quarter index value during purchase of asset

  • The index number in the loss of antique bed acquired on 12 November 2017= 112.1
  • The index number in procurement of bed on 21stJuly 1986 = 43.2

  • The index number in the occurrence of incidental costs on 21stOctober 1986 = 44.4

Indexation base cost = 112.1 / 43.2 = 2.595

Indexation of incidental cost= 112.1 / 44.4 = 2.525

The net capital loss or gain for such antique bed can be computed in the following way:

After indexation of incidental expense= 2.525*1500 = $3787.5 (i)

After indexation of purchase expenses= 2.595*3500 = $9082.5 (ii)

Hence, the net cost base = (i) + (ii) = $12,870. However, the insurance company only offered an amount of $11000 in relation to such cost.

Hence, the total loss (capital) = $12870- $11000 = $1870

  • Paintings

The paintings have come under the purview of capital gains asset as per the provisions of section 108.5 of the ITAA 97. From the mentioned scenario, the painting has been procured for $2000 on May 2, 1985. However, since this tenure is prior to September 20, 1985, it highlights that the painting cannot be exempted from the CGT applicability (Singh & Singh, 2018).


The company’s shares also come under the purview of capital gains tax. Since, these shares were not utilized for trading, these come under CGT and in contrast to this, if these shares were utilized for trading, these would attract section 6 and would form part of the general income (De Cogan, 2015). Therefore, in the present case, it is observable that many shares of PHB Iron Ore, Young Kids, and Common Bank Ltd has been sold on the date of event and has been acquired on September 21, 1999. Nonetheless, a half discount rate will also be facilitated because these shares of companies have been acquired for more than a year. Furthermore, in relation to Share Building Ltd, since all the shares have been procured and sold in the same year, hence no discount will be incurred on such (Nethercott et. al, 2013).

  1. Estimation of profit from sale of Common Bank shares

Net capital gain or loss = value disposed less (cost of purchase plus stamp duty costs)

= (47000-550) – (15000+750) = $30,700

  1. Estimation of profit from sale of Share Building Ltd

Net capital gain or loss = value disposed less (cost of purchase plus stamp duty costs)

= (25000-9000) – (10000+1100)

= $13000

  1. Estimation of profit from sale of Young Kids Learning Ltd

Net capital gain or loss = value disposed less (cost of purchase plus stamp duty costs)

= (600-100) – (6000+500)

= $6000

  1. Estimation of profit from sale of PHB Iron Ore Ltd

Net capital gain or loss = value disposed less (cost of purchase plus stamp duty costs)

= (62500-1000) – (30000+1500)

= $30000


Therefore, total capital gain in relation to the aforesaid shares = 30700+13000+6000+30000= $67,700

  1. Violin

This is the company’s property that has been accounted for private purposes and is based under section 108.5 of the capital gains tax asset. Thus, in the present scenario, such asset was procured in the year 1999 on June 1, and when it is disposed, the gain expectation from the same is depicted below:

Total capital loss or gain = amount of asset disposal – cost base of the asset (violin)

= $12000 – (rate of procurement + associated or incidental expense)

= $12000 - $5500

= $6500

Assessment of total capital loss or gain that can be incorporated in the general income

Particulars

($)

Capital loss or gain on the disposed vacant land

200,000

Capital gain or loss on the bed’s disposal

6,000

Capital gain or loss on the shares that have been disposed

67,700

Capital gain or loss in association with painting’s disposal  

---

Capital gain or loss on the violin’s disposal

6,500

Total capital gain or loss

280,200

Capital set off

8,500

 

271,700

Discount (50%)

135,850

Amount forming part of general income

135,850

Part - B

FBT (fringe benefits tax) is the tax that is expended by an employer to the employees on the value of benefits offered to them. Further, it can be referred as the advantage or payment of non-wages that the employer has provided to the employees or workforce of the company. Nevertheless, Rapid Heat Pty Ltd is the manufacturer or producer of bathtubs who has offered fringe benefits to one of their employees. During the year 2017 and 2018, Jasmine was offered a car loan and other products that had been produced by the company. Therefore, in relation to this situation, it is notable that the company must be bound to expend such fringe benefits tax to the government (Singh & Singh, 2018). Nevertheless, the calculation of FBT can be undertaken in the following manner:

Fringe benefits tax on car utilization

The employer of the company has been subject to such fringe benefits tax when Jasmine has been provided a car loan for personal purposes. In relation to this, the employer is bound to pay such FBT to the government. Moreover, if such car has not been able to address the description of car, then residual fringe benefits may come into reflection. In addition, there are several scenarios wherein the usage of car has been exempted from the applicability of fringe benefit (Renton, 2005). Nevertheless, calculation of fringe benefit can be performed through two ways that is operating costing method and statutory method.

Such statutory method of computing the fringe benefits tax has been used due to the requirement of operating cost method that necessitates log books with enhanced information of travelling implemented based on personal motives and kilometres on a whole. Moreover, in the current phase, the company has offered a car on May 2017 to Jasmine for an amount of $33,000 that was bought on the same date. Further, such costs have been incurred on the part of Jasmine has reported at $550 on the reimbursed car by the company and such car travelled approximately for ten thousand kilometres. In addition, it must be noted that the company was incapable of using the car for a tenure of fifteen days during the year. Thus, in the absence of details, the calculation of fringe benefits tax will be undertaken based on the statutory method. Hence, statutory method can be computed in the following manner:

Value of benefit =

Where, A= cost of car, B=statutory percentage, C=vehicle that was utilized for private needs, D= number of days in year, E= contribution of employees. The following information can be collected in relation to the given case.

A = 33000, B = 0.20, C = 320, D = 335 and E = 0

Therefore, the calculation can be performed through the following way:

Overall, value of benefits = (33000*0.20*320)/335-0 that gives 6304

Hence, the grossed-up value comes at 6304*2.1463 that gives 13531

Overall, the FBT calculation can be performed through the previously mentioned methods and hence, the fringe benefit tax on the car usage can be observed through this analysis.

Fringe benefit tax on the loan

Such fringe benefits tax on loan is chargeable when the employer fails to charge interest or has charged a lesser level of interest in the loan amount. When the rate of interest is lesser when compared to the rate of benchmark, then such interest rate is regarded as a lower rate of interest (Latimer, 2012). If the employee is liable to the employer and he or she has become incapable of making timely payments and further, the employer has not even asked for the same, then it shall be treated as a fringe benefit that does not attract the fringe benefit tax. In the given scenario, it is observable that the company has offered Jasmine with a loan of $500,000 at an interest rate of 4.45%. Apart from this, an amount of $450,000 was used to buy a holiday home and the rest value was provided to the husband of Jasmine and he was permitted to purchase a Telstra share without any segment of interest. Nevertheless, based on the present standard, the rate of threshold stood at approximately 5.95%. Thus, the fringe benefit that can be incurred on such loan amount is = (Rate of benchmark minus rate that is charged by the employer) * the amount of loan

It is observable from the given study that the fringe benefits value on loan = (5.95%-4.45%) * 500000*7/12 = 4375

Grossed-up amount= 4375*1.9608= 8579

When the loan has been provided by the employer to Jasmine (employee) and if the amount has been utilized for the buying of assets that generates income, such value is deductible for the calculation of fringe benefit tax. Moreover, in the present situation, the shares have been procured by Jasmine’s husband and therefore, deduction in this phase cannot be claimed by the employer. Hence, such value is deductible for the calculation of fringe benefits (Latimer, 2012).

  1. Fringe benefits tax on products

Fringe benefits tax on the products of the organization is chargeable when it sells the items to the employees at a rate that is lesser than the present price of market. In this situation, the company’s employer is subject to expend the fringe benefits tax on the variations that prevails in the amount at which the items have been sold to the employees (Sadiq et. al, 2017). Moreover, in the current environment, the company has sold its products to Jasmine at a value of $1300 whilst its products have been sold in the market at an amount of $2600. Therefore, in this scenario, the company must be bound to pay the fringe benefits tax on the variations that prevails betwixt $2600 and $1300 respectively. In other words, the company is liable to pay the fringe benefits tax on the difference that exists between $2600 and $1300.

Therefore, value of fringe benefit tax on the products = $2600-1300 = $1300

Thus, the company’s grossed-up amount is 1300 * 2.1463 that gives 4078

The aggregate amount of fringe benefits tax that is chargeable on the part of the company:

Grossed-up car value= 13531

Grossed-up value of loan= 8579

Grossed-up products’ value = 4078

Net total = 26188

Fringe benefits tax at the rate of 49.25% will give the amount of $12897 respectively. Therefore, the fringe benefits tax on products of the company shall be such value and it must pay the same to the regulatory bodies.

Furthermore, if Jasmine has utilized the value of $50,000, the loan that was attained by the employer to buy the shares of Telstra, then the company’s employer will become entitled to receive an interest deduction of a value of $50000. The new value of FBT can be undertaken in the following manner:

Value of loan’s fringe benefits = (5.95-4.45%) * 450000 * 7/12 = 3938

Grossed-up amount is equal to (3938*1.9608) that gives 7721

Nevertheless, the net fringe benefit tax that would become chargeable can be noted through the following formula:

Grossed-up car value = 13531

Grossed-up loan value = 7721

Grossed-up products’ value = 4078

Net total = 25,330

Fringe benefit tax in relation to this will become chargeable at the rate of 49.25% that gives $12475. Therefore, this must be paid by the company in relation to FBT.

References

De Cogan, D. (2015) A changing role for the administrative law of taxation. Social & Legal Studies, 24(2), pp.251-270. Doi: https://doi.org/10.1177/0964663915572672

Latimer, P. (2012) Australian Business Law 2012. Sydney, NSW: CCH Australia Limited.

Nethercott, L., Richardson, G.,& Devos,K.. (2013) Australian Taxation Study Manual. Oxford university Press

Raymond H. P. (2002) Accounting for Fixed Assets. John Wiley and Sons, Inc

Renton N.E. (2005)  Income Tax and Investment, 2nd Ed. Oxford University press

Sadiq, K, Coleman, C , Hanegbi, R,  Jogarajan,S,  Krever, R, Obst, R, Teoh, J & Ting, A. (2017)  Principles of Taxation Law 2017. Law book Australia

Singh, H.S. and Singh, P. (2018) Command-and-Control to Responsive Regulation: Taxation Administrations. GST Simplified Tax System: Challenges and Remedies, 1(1), pp.223-227. Retrieved from: https://www.austlii.edu.au/au/journals/eJlTaxR/2007/4.html

Woellner, R, Barkoczy, S, Murphy, S, Evans, C &  Pinto, D, (2017) Australian taxation law 2017. Oxford University Press Australia

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