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TAXATION, THEORY, PRACTICE & LAW
Case study 1: Capital Gains Tax
Fred is a resident who signed a contract to sell his holiday home in the Blue Mountains in August last year. The sale was settled in February this year when Fred received $800,000 from the purchaser. Fred incurred legal fees of $1100 (Inclusive of GST) and real estate agent’s commission of $9,900 (Inclusive of GST) in relation to the sale. Fred purchased the holiday home in March 1987 for $100,000 and paid $2,000in stamp duty on the transfer and $1000 in legal fees. In January 1990, Fred engaged a builder to build a garage on the property for $20,000,
Calculate Fred’s net capital gain for the current year. Assume he also has a net capital loss from last year of $10,000 arising from the sale of shares.
Would your answer be different if the loss arose from the sale of an antique vase?
(10 marks, max. 800 words).
Case study 2: Fringe Benefits Tax
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.
(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?
(10 marks, max. 800 words).
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Case Study 1: Capital Gains Tax
Fred’s Net Capital Gain Calculation:
Proceeds from sale of holiday home = $800,000
Less: Legal fees (inclusive of GST) = $1,100
Real estate agent’s commission (inclusive of GST) = $9,900
Cost base of holiday home:
Purchase price (March 1987) = $100,000
Stamp duty on transfer = $2,000
Legal fees = $1,000
Cost of garage built (January 1990) = $20,000
Cost base = $123,000
Capital gain = $800,000 – $123,000 = $677,000
Less: Net capital loss from last year = $10,000
Net capital gain for the current year = $667,000
If the loss arose from the sale of an antique vase, the calculation would be different as the asset sold would be a personal use asset and not a CGT asset. Personal use assets are exempt from capital gains tax unless the proceeds from their sale are more than $10,000. Therefore, if the loss arose from the sale of an antique vase, it would not affect the calculation of Fred’s net capital gain.
Case Study 2: Fringe Benefits Tax
(a) Calculation of FBT liability:
Step 1: Calculate the taxable value of the car fringe benefit
There are two methods for calculating the taxable value of a car fringe benefit – the statutory formula method and the operating cost method. As Emma’s usage of the car is not restricted to work only, we will use the operating cost method.
Operating cost method:
Car’s cost price (including GST) = $33,000
Operating costs (fuel, repairs, etc.) = $550
Total operating cost = $550
Private use percentage = [(10,000 km ÷ 365 days) x 100%] = 27.4%
Taxable value = Total operating cost x Private use percentage = $150.70
Step 2: Calculate the FBT liability
FBT rate = 47%
FBT liability = Taxable value x FBT rate = $150.70 x 47% = $70.84
Periwinkle’s FBT liability for the year ending 31 March 2016 is $70.84. Periwinkle can claim a tax deduction for the FBT paid.
(b) If Emma used the $50,000 to purchase shares herself instead of lending it to her husband, the FBT consequences would not change. The loan was provided to an employee and not for business purposes, so it is subject to FBT regardless of how the loan is used. However, if Emma used the $50,000 to purchase income-producing assets such as shares, the interest on the loan would be deductible for Periwinkle. This would reduce Periwinkle’s taxable income and consequently, the FBT liability.
