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Taxation, Theory, Practice & Law
Instructions:
This assignment is to be submitted by the due date in both soft-copy (Safeassign – Bb) and hard copy.
The assignment is to be submitted in accordance with assessment policy stated in the Subject Outline and Student Handbook.
It is the responsibility of the student submitting the work to ensure that the work is in fact his/her own work. Ensure that when incorporating the works of others into your submission that it appropriately acknowledged
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?
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, Emmas 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 GSTinclusive 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?
(15marks, max. 1500 words).
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Case Study 1: Capital Gains Tax
Calculation of Fred’s net capital gain:
Sale price 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:
Purchase price of holiday home in March 1987 = $100,000
Stamp duty on transfer = $2,000
Legal fees = $1,000
Cost of building a garage in January 1990 = $20,000
Indexed cost base:
Purchase price of holiday home in March 1987 x (Consumer Price Index (CPI) for February 2021 / CPI for March 1987) = $100,000 x (116.9 / 59.4) = $196,622
Cost base + indexed cost base = $100,000 + $2,000 + $1,000 + $20,000 + $196,622 = $319,622
Capital gain = $800,000 – $319,622 = $480,378
Net capital gain for the current year = $480,378 – $10,000 = $470,378
If the loss arose from the sale of an antique vase, the answer would be different as capital losses can only be offset against capital gains of the same nature. Therefore, if the loss arose from the sale of an antique vase, it can only be offset against any capital gains from the sale of other collectibles or personal use assets, not against the capital gain from the sale of the holiday home.
Case Study 2: Fringe Benefits Tax
(a) Calculation of FBT liability:
Step 1: Determine the taxable value of the car fringe benefit
Periwinkle provided Emma with a car that was available for private use, so the car fringe benefit is subject to FBT. The taxable value of the car fringe benefit can be calculated using either the operating cost method or the statutory formula method.
Operating cost method:
The operating cost method calculates the taxable value of the car fringe benefit as the total operating costs (including GST) incurred in providing the car fringe benefit multiplied by the percentage of private use.
Total operating costs of car:
Depreciation (10% x $33,000) = $3,300
Fuel and oil = $2,000
Repairs and maintenance (including GST) = $550
Registration and insurance = $1,500
Total operating costs = $7,350
Private use percentage:
Private use days = 355 days (365 days – 10 days interstate – 5 days for annual repairs)
Total days = 365 days
Private use percentage = 355 ÷ 365 = 97.26%
Taxable value of car fringe benefit = $7,350 x 97.26% = $7,146.42
Statutory formula method:
The statutory formula method calculates the taxable value of the car fringe benefit as a percentage of the cost of the car (including GST) based on the number of days the car is available for private use during the FBT year.
Days available for private use:
Private use days = 355 days (365 days – 10 days interstate – 5 days for annual repairs)
Total days = 365 days
Percentage for car valued at $33,000:
Days available for private use ÷ Total days x 1.7 = 355 ÷ 365 x 1.7 = 1.6575
Taxable value of car fringe benefit = $33,000 x 1.6575 = $54,602.50
As the operating cost method results in a lower taxable value
