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HA3042 - Taxation Law Assignment - Holmes Institute, Australia

Question 1 - On 1 April 2018, Spiceco Pty Ltd provided a car to their employee Lucinda for her private use. Throughout the 2018/19 FBT year, the cost of the car was $18,000, repairs $3,300 Insurance $2,200, Fuel $ 990 (all above expenses are GST inclusive). Distance travelled 20,000 km (for the entire 2018/19 FBT year), Business use 70% Lucinda contributed $1,000 towards the cost of the car. Using the 2018/19 rates, calculate the FBT liability for Spiceco Pty Ltd for the 2018/19 FBT year, assuming Spiceco Pty Ltd would like to minimise its FBT liability. If there is more than one method of calculating the FBT liability, conclude which method should be used. Show full workings to support your conclusion.

Solution - Fringe benefit tax (FBT) is paid by the employers on certain benefits provided by them to their employees, employee's family or relatives either directly by them or through third party arrangement. Allowing the employee to use car for private purpose is in nature of Fringe benefit provided to them by employers. Fringe benefit tax is different from income tax and the value of fringe benefit is determined and tax is paid on the same.

There are two methods to compute taxable value of a car fringe benefit.

a) Statutory Formula Method (based on cost price of car): The taxable value of car benefit is the statutory rate multiplied by cars base value.

Taxable Value = ((P*Q*R)/S)-T

P = Base value of car

Q= Applicable statutory percentage

R= No. of days car was used for private use

S = Total no. of days in a year

T = the employee contribution

In the current case distance travelled is 20,000 km therefore rate is 20% use is from 1st April ,2018 , therefore the no. of days for private use is 275 days

P= 18000

Q= 20%

R= 275

S= 365

T= 1000

Taxable Value = (18000*20%*275/365)-1000 = 1712.33

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b) Operating Cost Method (based on operating cost of the car): The taxable value of the car fringe benefit is a percentage of the total cost of operating the car. The percentage is dependent upon the actual private use.

Taxable Value = (P*Q)- R

P= Total operating cost

Q = percentage of private use

R= Employee contribution

Actual Cost include the actual cost together with certain deemed costs.

Deemed cost are depreciation computed @25% and the interest cost @9% on the base value of car, which computed when the car owned.

Operating cost = ( 3300+ 2200+990)+ 18000*25%+ 9%*18000 = 12610

Taxable value = (12610*30%)-1000

= 2783

From the above computations we conclude

Depreciation @25% on base value of car

4500

Interest @9% on Base value of Car

1620

Total operating cost

6490

Taxable Value

2783

FBT@47%

1308.01

Statutory Method Formula Taxable Value

1712.33

FBT @47%

804.79

Conclusion

Use Statutory Method for lower FBT Liability

Choice of method can change on year on year basis, the method that yields lowest taxable value is chosen irrespective of the fact which method is chosen earlier. However for the operating cost method log books and other documentation is required to be kept by employer for the whole year.

In the current scenario we see FBT liability as per statutory method is $ 804.79 and as per operating cost is $ 1308.01, which is higher in comparison to statutory method of computation.

Statutory method formula to determine the FBT Liability is beneficial for the Spiceco Pty Ltd as it yields lower taxable value of $ 1712.33 in comparison to taxable value of $ 2783 by operating method.

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Question 2 - 1- A house located at Doncaster (suburb of Melbourne). Daniel lived in this property for the last 30 years. At that time, he bought the house for $70,000 and sold the house for $865,000 in an auction on Saturday 29th June 2019. Out of this, he paid $15,000 to the real estate agent for the sales commission. The buyer deposited $85.000 on the property, however after 14 days the buyer advised the real estate that he did not have enough money for proceed with the contract of [purchase, therefore forfaiting his deposit to Daniel on 151 May 2019. After this the real estate agent started looking for another potential buyer.

Solution - There is certain class of assets on which exemption is granted on capital gains like in case of a residential property if it is acquired before 20th September, 1985, these assets are termed pre CGT asset. In the current case the asset is acquired after 1985, hence is not a pre CGT asset. However Daniel lived in this property for last 30 years, hence it become in nature of residential property. Now in June in an auction he is sold the property acquired for $865000 and received deposit of $ 85000 from the buyer and paid sales commission of $ 15,000 to the real estate agent. After fourteen days the buyer due to reason of shortage of funds called off the deal and the deposit money is treated as forfeited amount received by Daniel. Therefore as per the facts of the case, the determination of capital gains and its taxability in the current year.

In the current case Daniel is selling his residential property in which he lived for 30 years. As per the law sale of residential property in which owner lives does not attract any capital gain. In the current case Daniel had received deposits from the buyer $ 85000, however the deal did not materialize and the deposit money was forfeited. The $ 85000 received by Daniel is in nature of income and is subject to capital gain tax or not is to be determined on the fact of the underlying asset and the continuum of events.

In the current case the underlying asset is the residential property and hence not subject to capital gain and the agent is searching for the next vendor, hence it is in nature of continuum of events, hence the above proceeds of the forfeited amount is not subject to capital gain tax. Had the property would have been sold then the forfeited amount would be treated as proceeds from sale of asset.

2 - Daniel has an artistic piece of painting by Margaret Preston. He purchased this on 20 September 1985 for $15,000. The painting was sold for $125,000 at an auction on 31 May 2019.

Solution - The artistic piece of painting by Margaret Preston purchased by Daniel on 20th September 1985 for $ 15000 and sold for $ 125000 on 31st May, 2019 is in nature of collectable and is subject to capital gain tax. There would be no capital gains tax if the followings conditions are satisfied

i) Acquisition of collectable for $ 500 or less

ii) Acquisition of the same before 16.12.1995 for value less than $ 500

iii) Acquisition of an interest whose marketable value is $ 500 or less .

In the current scenario all the conditions are not satisfied, hence the gain on sale is subject to capital gain tax. Capital Gain on sale of painting which is in nature of collectable is $ 125000- $ 15000 = $ 1,10,000. Capital Losses if any can be used only to reduce capital gains from other collectables. It there is not profit from which it can be set off, the same can be carried forward for indefinite period.

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3 - Daniel had a luxury yacht that he has since he was active member of Port Melbourne Yacht Club. He purchased the yacht in November 2004 for $110,000. Daniel sold the luxury yacht on 1st June 2019 for $60,000.

Solution - Daniel purchased luxury yacht in November,2004 for $ 1,10,000 and sold the same on 1st June 2019 for $ 60,000 resulting in loss of $ 50,000. Yacht being in nature of personal asset is subject to capital gain tax. If the asset was purchased for $ 10,000 or less than it then exemption would be granted. Any loss made from sale of personal asset cannot be further used to reduce the capital gain on sale of other personal assets. The same has to be ignored as personal assets are mainly kept for personal use and use of relative and friends associated to them.

4 - Daniel had shares in BHP mining company, which he has purchased these shares on 10 January 2019 for $75,000 and sold all of these shares on 5 June 2019 for $80,000. Indeed, he got a loan of $70,000 in order to buy these shares and incurred $5,000 interest on the loan. Daniel has paid $250 for stamp duty on the purchase, and $750 of brokerage fee on the sale of these shares. Daniel spoke to his tax adviser and he has advised Daniel that $5,000 interest incurred on the loan is a non-deductible expense.

Solution - Shares of company are treated in the same manner as other assets for capital gain purpose. Capital gain arises on the date shares are sold. If sale of shares is done by a person whose business is share trading then it is treated as business income and not capital gain.

In the current case the when shares are held as investment then any than any expense incurred to buy or sell the same is treated in the cost and proceeds and not normal business expense. However if funds are borrowed to buy shares then, interest cost would be treated as business expense and not form part of cost of share acquisition and charged to profit and loss account. In the current case the main business of Daniel in not to buy and sell shares and earn income from regular course of business. It is in nature of investment and hence liable to capital gains tax.

In the given case shares of BHP mining company was purchased on 10 January 2019 for $75000 and was sold on 5th June 2019 for$ 80,000. Daniel paid $250 as stamp duty on purchase which is to be included in cost of purchase of shares and paid $750 as brokerage fee on sale of shares, is to be deducted from the proceeds to get the actual sale value .As the transaction has taken place in the current tax year, the tenure being less than a year, it is subject to capital gain tax without any discounting.

Cost of Purchase = $ 75000+$ 250= $75,250

Sale Proceeds = $ 80,000-$ 750 = $ 79,250

Gain on Sale of Shares = $ 4,000

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(a) Based on the above information, you are required to determine Daniel Ray's net capital gain or net capital loss for the year ended 30 June 2019.

Based on the information provided above the net capital or loss for June 2019 of Daniel Ray's is as follows:

Forfeited Amount received on account of agreement to sale of  residential property that did not materialize and property not yet sold

$ 85000  not taxable as capital gain, Exempted

 Profit on Sale of painting

$ 1,10,000 capital gain taxable

Loss on Sale of Luxury Yacht

$ 50,000 loss cannot be set off and has to be ignored

Profit on Sale of Shares

$ 4000 capital gain is taxable, can be used to set off losses.

Net Capital Gain taxable after set of last year loss of $ 10,000 to extent of gain available.

$1,10,000

In the previous financial year (2017-18) Daniel had claimed loss of $ 10,000 loss on sale of shares of AZJ Company. Therefore while filing the current year return Daniel can set of Loss on Sale of Shares of $ 10,000, firstly from gain on sale of shares in the current year to the extent of $ 4000 and then remaining $ 6000 loss would be carried forward indefinitely. The capital gain on personal assets and collectables are of separate category and can be used to set off losses of the same category and losses can be carried forward indefinitely.

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(b) What Daniel will do with a likely net capital gain in this financial year?

In the current year Daniel had entered into an agreement to sell, his residential house in which he was living for last 30 years. The buyer had paid deposit of $ 85000 and the deal did not materialize and the deposit money became the forfeited amount receivable by Daniel. As per Australian taxation rule any proceeds from sale of residential property of the taxpayer is exempted from profit and loss calculation, hence the forfeited amount is outside the purview of capital gain taxation.

Daniel in this Financial Year has capital gain of $ 1,10,000 from sale of painting , which in nature of collectable and hence gain or loss from sales would be used to set off loss of same category and if not would taxable and loss if any would be carried forward indefinitely. Gain of $ 1,10,000 is hence taxable. Loss on sale of Luxury Yacht, which is in nature of personal asset can only be set off it there is a profit on sale of personal asset in the same year, otherwise the loss is to be ignored and no more carried forward to the next year.

(c) What Daniel will do with a likely net capital loss in this financial year?

Daniel has sold shares for a profit of $ 4000 and loss of $ 10,000 of previous year is there , therefore the gain of current year would be used to set off loss of previous year to the extent of gain i.e. upto $ 4000 and balance loss of $ 6000 shall be carried forward for an indefinite period. Any expense in the nature of interest on loan taken will not form part of cost of purchase of share and would be treated as business expense. Therefore profit on sale of share arises, otherwise loss $ 1000 would be there as per Daniel's interpretation and the same together with loss of last year of 10,000 would be carried forward totaling upto loss of $ 11000 , which is legally not correct and the interest cost in not considered in computing capital gains on sale of Shares and therefore profit have arisen and same is used to offset loss of last year and the balance loss is to be carried forward for indefinite period.

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