HI6028 Taxation Theory, Practice and Law Oz Assignments

HI6028 Taxation Theory, Practice and Law Oz Assignments

HI6028 Taxation Theory, Practice and Law Oz Assignments

 Question 1

Provisions

In Australia 1985, Capital Gain Tax was introduced, and it applies on an asset that has obtained after unless it is specially exempted.

In accordance with the Australian Tax Office, the difference between the amount received and cost of asset is the capital loss or a capital gain. As per assertions of Barkoczy (2016), the individual compensates tax on capital gains is the portion of its income tax, and it is not measured as a separate tax and it is refereed as CGT. If the asset is held not less period of 12 month than 50% of gain is first discounted for individual taxpayers and for superannuation funds it is discounted by 33.3%.

It is required to determine capital gain or loss for each and every capital gains tax event that takes place to assets during the year. Moreover, in case an individual has earned both capital gain, and capital loss than an individual has to determine net capital gain or net capital loss for the year. Furthermore, individuals, as well as small business analysis apart from companies, could normally discount capital gain by 50% if the asset is held for more than a year (Capital gains tax, 2017). In addition to this, there are three methods for computing capital gain. An individual can choose the method which gives the best result. The same implies that the method which leads to least capital gain is applied by the assessee.

In case capital asset is sold, for example, shares, asset etc. then there will be capital gain or loss. The same is the difference between what the cost of acquirement of the asset is and consideration obtained when it is sold. Further, it is important to account capital gains and losses in the income return and to reimburse tax on the capital gains. Though it is referred to as CGT that is capital gains ,and it is the element of income tax and not a separate tax. In case the individual had acquired capital gain on the selling of asset than the gain will be added in the assessable income and the same might increase the tax amount to which is to be paid. Since the tax is not withheld for capital gains, it might require finding out how much tax is to be paid and setting aside the adequate funds in order to cover the related amount. On the other hand, if there is a capital loss then, in that case, an individual cannot claim it against the other income, but it could be utilised to adjust against capital gain.

Methods for calculating capital gain taxation

CGT discount method: In order to apply this method it is necessary that asset should have been held for the period of twelve months or more. At the same time, it is not applicable to the companies. For foreign individuals the 50% discount is deducted on capital gains which are made subsequent to 8 may 2012. Moreover, the percentage to which capital gain could be reduced for life insurance companies and complying super funds is 33.33%. Capital gain is evaluated after reducing base cost from sale proceeds; further, any existing capital loss is deducted from same and then reduced by a specified discount percentage.

Indexation method: The specified method is applied only for assets which have been acquired before 21st September 1999 and held for a period of twelve months or more. In this method, the value of cost base is increased through application of indexation factor which is based on consumer price index. Thus, the specified indexation rate is applied in order to attain deductable base cost from sale proceeds.

Another method: In accordance with the study of Woellner and et al. (2016), the specified method is applied for assets which have been held for less than twelve months before the CGT event. In this situation, the basic method of reducing cost base from sale proceeds is applied in order to ascertain capital gain or capital loss.

Capital losses are in adjusted against of Capital gains, in a tax year however if amount of loss it higher then the net capital losses are carried forward indefinitely. Nevertheless, capital losses are not counterbalanced against other taxable income. As per the Australian Taxation Office (ATO), CGT exempted on so many personal assets, which includes individual’s car, residence, and mainly those assets that are taken as a personal use like example furniture. Capital Gain Tax is also not applied on depreciating assets that are used exclusively for the purpose of taxable, like as fitting in a rental property and business equipment (Jacob and Jacob, 2013).

Faccio and Xu (2015) asserted that establishing the timing of CGT is also important because the reason behind this is that it informs the individual that in which year the capital loss or capital gain is to report and probably have an effect on how an individual computes the tax liability. If an individual disposes of a CGT asset, then the CGT events generally occur at that time when the individual entries in the contract for disposal. In the real state situation, for instance, CGT event usually happens at that time when an individual enter in the contract- i.e. the contract date, not when an individual settle.

Calculations

Particular

Notes

 

Calculations

Amount

Long Term Capital Gain

 

Block of Land

1

   

$200,000.00

Antique Bed

2

   

$6,000.00

Antique Painting

3

   

$123,000.00

Gain / loss from the sale of shares

4

     

Common Bank Shares

 

$29500

   

PHB Iron Ore

 

$30000

   

Young Kids Learning

 

($6000)

 

$53,500.00

Violin

5

   

$6,500.00

The total long-term capital gain for the current year

$389,000.00

Taxable long-term capital gain

($389000*50%)

$194,500.00

Short term capital gain

Share Build Ltd

 

$13000

Total taxable capital gain

($13000+$194500)

$207,500.00

Less: Capital loss of the previous year

 

($1,500.00)

Net capital gain

$206,000.00

Note 1

Block of Land

Amount

   

Amount received on sales

$320000.00

Less: Purchase Cost

($100000.00)

Less: Local council expense

($20000.00)

Capital gain

$200000.00

Note 2

Antique Bed

 

Amount received on sales

$11000.00

Less: Purchase Cost

($3500.00)

Less: Alteration expense

($1500.00)

Capital Gain

$6000.00

Note 3

Painting

 

Amount received on sales

$125000.00

Less: Purchase Cost

($2000.00)

Capital Gain

$123000.00

Note 4

Note: 4 Shares

Workings

Amount

Common Bank Share

   

Selling proceeds

(1000*$47)

$47000

Cost of acquisition

(1000*15)

($15000)

Brokerage Fees

 

($1000)

Stamp duty cost

 

($1500)

Capital Gain

 

$29500

PHB Iron Ore

   

Selling proceeds

(2500*$25)

$62500

Cost of acquisition

(2500*12)

($30000)

Brokerage Fees

 

($1000)

Stamp duty cost

 

($1500)

Capital Gain

 

$30000

Young Kids Learning Ltd.

   

Selling proceeds

(1200*$0.5)

$600

Cost of acquisition

(1200*$5)

$6000

Brokerage Fees

 

($1000)

Stamp duty cost

 

($1500)

Capital Loss

 

($6000)

Share Build Ltd

   

Selling proceeds

(10000*$2.5)

$25000

Cost of acquisition

(10000*$1)

($10000)

Brokerage Fees

 

($900)

Stamp duty cost

 

($1100)

Short-Term Capital gain (as holding period is less 12 months

 

$13000

Note 5

Violin

 

Amount received on sales

$12000.00

Less: Purchase Cost

($5500.00)

Capital Gain

$6500.00

Question 2

Provisions

Fringe benefits tax is considered as a tax which is paid by the employer to an employee covering benefits and replacing the salary. The calculation of FBT is done by considering the given fringe benefit’s taxable value. For this purpose, the provider is required to be aware of the taxation obligations (Australian Taxation Office, 2018).

The FBT or Fringe benefits tax is applied inside the Australian tax system through ATO. Mostly this tax is levied on non-cash benefits, which an employer offers ‘in respect of an employee’. FBT is not levied on the employee; it is only levied on employer and also levied irrespective of that whether the benefit is offered straight to the employee or to the employee associate (Fringe benefits tax – rates and thresholds, 2017).

A wide variety of benefits are classified as a fringe benefit. Some common are as follows:

1. make the use of a company car
2. inexpensive loans
3. fitness memberships or Gym memberships
4. Entertainment expenditures such as drink, housing, foodstuff, low-priced movies tickets,
5. personal health insurance
6. Living-away-from-home allowance (LAFHA)
7. assets like as construction, land, shares, bonds
8. school fees and the costs of childcare
9. The items those are required to do the job like as clothing, mobiles, all such are not included in fringe benefits although possibly claimable.

Fringe benefits tax on car

Car fringe benefit arises in the case when the employer provides car for private use to an employee. A car is treated as to be available for private purpose in case it is used by the employee for a private purpose, or it was available for private use of the employee. The taxable value of the fringe benefit of the car can be calculated by a statutory formula or operating cost method. In the first method, the i.e. statutory method a single rate, i.e. 20% is applied regardless of kilometre travelled (Australian Taxation Office, 2018). The rate is applied in all situations except to the situation where a pre-existing commitment is available to provide the car for private use. The taxable value is equal to the amount which has been ascertained after multiplying car base value to statutory rate. Another method which is operating cost method ascertains fringe benefit value as a percentage of total cost of operating car during the specific year. Moreover, the percentage in this situation is evaluated on the basis of the extent to which car has been used for private purpose. The higher the actual private uses, the more the taxable value.

Statutory Formula Method:

The taxable value of FBT = (((Base value of car x Statutory % x no. of days in FBT year car was applied for private use) / Total no. of days in FBT year) – employee contribution)

The statutory method is necessary to be followed in the general situation. In case the operating cost method is to be applied for calculation of FBT than it is necessary to maintain adequate FBT records so that information could be rechecked.

A flat statutory rate of 20% applied, in spite of the travelled distance, towards all fringe benefits car that offers from 1 April 2014 (the same is not applied only in the case where a pre-determined commitment exist before 7.30pm AEST on 10 May 2011 to provide a car).

Fringe benefits tax on the loan

Fringe benefit relating to loan will arise in the case where a loan has been provided to an associate or employee and interest rate charged is less than the relevant statutory interest rate. Moreover, the loan should not be exempt (Loan and debt waiver fringe benefits, 2017).

Fringe Benefit relating to loan will be available in each year in which employee is required to pay either whole or part of the loan. Moreover, the rate of interest is less than the statutory rate of interest. A loan comprises advance of money, any form of financial accommodation, payment of a certain amount which eventually leads to the rise of obligation to repay the amount or any transaction which in substance is a form of a loan.

The statutory interest rate is determined in accordance with standard variable rate relating to owner-occupied housing loans of significant banks. The same is published by Reserve Bank of Australia prior to the initiation of the financial year. Moreover, the statutory interest rate can be referred as a base for evaluation of fringe benefit value relating to the loan provided to the employee whether at a lower rate or interest-free. Statutory benchmark interest rate for 31 March 2017is 5.65% (Division 7A – benchmark interest rate, 2018). In order to ascertain the taxable value of fringe employee benefit relating to loan the interest which is actually accrued is reduced from the interest which would have been accrued during the specified year relating to the outstanding balance of the loan of the specified year.

Fringe benefit on other benefits

Fringe benefit taxation provision is applicable in the case specified fringe benefit during a financial year is more than $2000 (Australian Taxation Office, 2018). Thus, an employee is required to report the grossed value of the taxable fringe benefit provided to the employee in the form of summary for the corresponding income year. The fringe benefit which is required to be reported by the employer is to be presented in grossed up values with application of lower gross up rate.

The rate at which FBT will be taxable for the year ending 31 March 2015 is 47%. Further taxation on the same will be paid by the employer. Tax rate of 47% comprises 45% of marginal income tax rate and 2% of the medical levy. The specified rate is applied to gross up the value of all the benefits which are received to the employee decreased to the extent of contribution provided by the employee. Moreover, in case some benefits are exempt from FBT than same are charged to tax only in case they supersede the specified threshold amount.

Calculations

Part A: Taxable FBT

Particular

Amount

FBT on Loan (Note 1)

$7000.00

FBT on Car (Note 2)

$5055.00

FBT on Heater (Note 3)

$611.00

Total Taxable FBT

$12666.00

Note 1

Loan taken by Jasmine

 

$ 500000

Interest paid to employer

 

4.25%

Benchmark interest rate

 

5.65%

Concession on interest rate

5.65%-4.25%

1.4%

Thus the FBT on loan

$500000*1.4%

$7000

Entire loan will be considered for the use by Jasmine.
Note 2

Cost of Car

$33000

Days used by cars after adjustments

310 days*

The taxable value of the car fringe benefit

$5605**

Less: Amount paid by Jasmine

(550)

Fringe benefit on the tax

$5055

* (356-10-5-30) Days in which car was not accessible to Jasmine.

** By using statutory formula (33,000*20%*310/365)

Note 3

Cost of heater

$2600

Amount paid of Jasmine

($1300)

Benefit

$1300

Taxable rate on FBT

47%

Taxable value on FBT (Benefit* Taxable rate on FBT)

$611

Part B: Taxable FBT

Particular

Amount

FBT on Loan (Note 1)

$4875.00

FBT on Car (Note 2)

$5055.00

FBT on Heater (Note 3)

$611.00

Total Taxable FBT

$10541.00

Note 1

Loan taken by Jasmine

 

$ 500000

Interest paid to employer

 

4.25%

Benchmark interest rate

 

5.65%

Concession on interest rate

5.65%-4.25%

1.4%

Thus the FBT on loan

$500000*1.4%

$7000

Amount of interest paid to the company for the invested amount

$50000*4.25%

$ 2125

The taxable value of FBT

($7000-$2125)

$4875

Entire loan will be considered for the use by Jasmine.
Note 2

Cost of Car

$33000

Days used by cars after adjustments

310 days*

The taxable value of the car fringe benefit

$5605**

Less: Amount paid by Jasmine

(550)

Fringe benefit on the tax

$5055

* (356-10-5-30) Days in which car was not accessible to Jasmine.
**By using statutory formula (33,000*20%*310/365)
Note 3

Cost of heater

$2600

Amount paid of Jasmine

($1300)

Benefit

$1300

Taxable rate on FBT

47%

Taxable value on FBT (Benefit* Taxable rate on FBT)

$611

References

1. Australian Taxation Office, (2018). Fringe benefits tax (FBT) (Online). Available from < https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/>. [Accessed on 27 September 2018].
2. Barkoczy, S., (2016). Core tax legislation and study guide. OUP Catalogue.
3. Capital gains tax. (2017). [Online]. Retrieved from <https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-net-capital-gain-or-loss/> on 28th September 2018
4. Loan and debt waiver fringe benefits. (2017). [Online]. Retrieved from <https://www.ato.gov.au/law/view/document?_What_is_a_loan_fringe_benefit_> on 28th September 2018
5. Division 7A – benchmark interest rate. (2018). [Online]. Retrieved from <https://www.ato.gov.au/Rates/Division-7A---benchmark-interest-rate/> on 28th September 2018
6. Faccio, M. & Xu, J.(2015). Taxes and capital budgeting structure. Journal of Financial and Quantitative Analysis. 50(03). Pp.277-300.
7. Fringe benefits tax – rates and thresholds. (2017). [Online]. Retrieved from <https://www.ato.gov.au/rates/fbt/> on 28th September 2018
8. Jacob, M. & Jacob, M. (2013). Taxation, dividends, and share repurchases: Taking evidence globally. Journal of Financial and Quantitative Analysis. 48(04), Pp.1241-1269.
9. Woellner, R. & et.al .2016. Australian Taxation Law 2016. Oxford University Press.