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Taxation Assignment: Theory, Practice & Law

Question

You are working as a tax consultant in Mayfield, NSW. Your client is an investor and antique collector. You have ascertained that she is not carrying on a business. Your client provides the following information of sales of various assets during the current tax year:

a) Block of vacant land. On 3 June of the current tax year your client signed a contract to sell a block of vacant land for $320,000. She acquired this land in January 2001 for $100,000 and incurred $20,000 in local council, water and sewerage rates and land taxes during her period of ownership of the land. The contract of sale stipulates that a deposit of $20,000 is payable to her when the contract of sale is signed and the balance is payable on 3 January of the next tax year, when the change of ownership will be registered.

(b) Antique bed. On 12 November of the current tax year your client had an antique four-poster Louis XIV bed stolen from her house. She recently had the bed valued for insurance purposes and the market value at 31 October of the current tax year was $25,000. She purchased the bed for $3,500 on 21 July 1986. Although the furniture was in very good condition, the bed needed alterations to allow for the installation of an innerspring mattress. These alterations significantly increased the value of the bed, and cost $1,500. She paid for the alterations on 29 October 1986. On 13 November of the current tax year she lodged a claim with her insurance company seeking to recover her loss. On 16 January of the current tax year her insurance company advised her that the antique bed had not been a specified item on her insurance policy. Therefore, the maximum amount she would be paid under her household contents policy was $11,000. This amount was paid to her on 21 January of the current tax year.

(c) Painting. Your client acquired a painting by a well-known Australian artist on 2 May 1985 for $2,000. The painting had significantly risen in value due to the death of the artist. She sold the painting for $125,000 at an art auction on 3 April of the current tax year.

(d) Shares. Your client has a substantial share portfolio which she has acquired over many years. She sold the following shares in the relevant year of income:

  • 1,000 Common Bank Ltd shares acquired in 2001 for $15 per share and sold on 4 July of the current tax year for $47 per share. She incurred $550 in brokerage fees on the sale and $750 in stamp duty costs on purchase.
  • 2,500 shares in PHB Iron Ore Ltd. These shares were also acquired in 2001 for $12 per share and sold on 14 February of the current tax year for $25 per share. She incurred $1,000 in brokerage fees on the sale and $1,500 in stamp duty costs on purchase
  • 1,200 shares in Young Kids Learning Ltd. These shares were acquired in 2005 for $5 per share and sold on 14 February of the current tax year for $0.50 per share. She incurred $100 in brokerage fees on the sale and $500 in stamp duty costs on purchase.
  • 10,000 shares in Share Build Ltd. These shares were acquired on 5 July of the current tax year for $1 per share and sold on 22 January of the current tax year for $2.50 per share. She incurred $900 in brokerage fees on the sale and $1,100 in stamp duty costs on purchase.

(e) Violin. Your client also has an interest in collecting musical instruments. She plays the violin very well and has several violins in her collection, all of which she plays on a regular basis. On 1 May of the current tax year she sold one of these violins for $12,000 to neighbor who is in the Queensland Symphony Orchestra. The violin cost her $5,500 when she acquired it on 1 June 1999.

Your client also has a total of $8,500 in capital losses carried forward from the previous tax year, $1,500 of which are attributable to a loss on the sale of a piece of sculpture which she sold in April of the previous year.

Required: Based on this information, determine your client’s net capital gain or net capital loss for the year ended 30 June of the current tax year.

Question 2 : Rapid-Heat Pty Ltd (Rapid-Heat) is an Electric Heaters manufacturer which sells Electric Heaters directly to the public. On 1 May 2017, Rapid-Heat provided one of its employees; Jasmine, with a car as Jasmine does a lot of travelling for work purposes. However, Jasmine's usage of the car is not restricted to work only. Rapid-Heat purchased the car on that date for $33,000 (including GST).

For the period 1 May 2017 to 31 March 2018, Jasmine travelled 10,000 km in the car and incurred expenses of $550 (including GST) on minor repairs that have been reimbursed by Rapid-Heat. The car was not used for 10 days when Jasmine 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 2017, Rapid-Heat provided Jasmine with a loan of $500,000 at an interest rate of 4.25%. Jasmine 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, Jasmine purchased an Electric Heaters manufactured by Rapid-Heat for $1,300. The Electric Heaters only cost Rapid-Heat $700 to manufacture and is sold to the general public for $2,600.

Required:

  1. Advise Rapid-Heat of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2018. You may assume that Rapid-Heat would be entitled to input tax credits in relation to any GSTinclusive acquisitions.
  2. How would your answer to (a) differ if Jasmine used the $50,000 to purchase the shares herself, instead of lending it to her husband?

Answer

Using the format given below will help you in drafting the taxation assignment in a descent way. The student consigned us with this task because it was a Taxation Assignment holding very demanding deliverables. In Australia, as per ITAA97 part 3-1 and 3-3, the capital gain tax (CGT) is levied on the disposed of capital assets that attract a CGT event. The net estimated net capital gain for the year is added in the ordinary income as the capital gain is not taxed separately. As per the concept of capital gain and loss recognizing the CGT asset is difficult (Mendoza et al., 2017). According to section 108-5, any property will be determined as a CGT asset, and the equitable and the legal rights are not considered as a property. The assets that are involved in CGT are the property of any type like building and land, units or shares in rights and unit trust, goodwill, interests in partnership assets and partnership assets interest and so on.

a) Block of vacant land
According to section 108-5, the building and land will be regarded as a CGT asset if not utilized for business. CGT asset will be evaluated if the taxpayer disposes of an asset that is determined to be capital assets. The disposed of assets were not purchased before 20th September 1985 (Burkhauser et al., 2015). Therefore, as per section 108-5, the vacant piece of land is a capital asset as the land is not obtained before 20th September thus it is not a pre-CGT asset and not an exempted class of asset.

In the present case, the disposed of vacant land amounting $320,000 as per the current tax year. As per section 110.25 of the Act, the 1st element states that to find the cost of purchase it is essential to consider the cost base of the asset. The land is obtained on January 2001 amounting $100,000 and the under 3rd element the amount of the incurred incidental cost on the land because of the taxes and rates is $20,000 is involved in the cost base. The cost of gain is estimated as follows:

Net capital gain = Cost for the disposal of the asset – the land cost base

= $320,000- (acquisition cost + rates of the council, water bills, and sewerage charges)
= $320,000 – (100,000 + 20,000)
= $200,000

Hence, the net capital gain from the disposal of the vacant block of land is $200,000, as the asset is held for more than 12 months thus, the discount rule that is 50% discount is applicable.

b) Antique bed: According to section 108-5, the collectibles are also regarded as a CGT asset. Collectibles comprise of paintings, antique pieces, collected stamps, jewelry, and manuscripts, hence, in this case, an antique bed is considered as a CGT asset (Jacob, 2018). In the given case the antique bed is stolen on 12th November which is regarded as the disposal date. As per the definition of 108-5, the Louis XIV bed is collectible, and it is not a pre-CGT asset and hence not exempted as it is bought after the cut-off date. As the acquisition cost is more than $500, hence under section 104-20 not exempted from CGT asset.

The taxpayer along with the insurance company complained to claim the total amount, but it was rejected. As per the insurance scheme, the taxpayer was paid a net amount of $11,000. Therefore, from the insurance firm the amount received would be considered as the value of capital disposals and proceeds of the asset. For the incidental and acquiring cost indexation will be done in the following manner:

Index Number of the quarter for sold asset
_____________________________________________ * Base or incidental cost
Index Number of the quarter for purchased asset

  1. Index number while acquiring the bed that is on 21st July 1986 = 43.2
  2. Index number while incurred incidental cost that is on 21st October 1986 = 44.4
  3. Index number while the loss of the antique bed that is on 12th November 2017 = 112.1

Indexation of cost base = 112.1/43.2
= 2.595

Indexation of Incidental cost = 112.1/ 44.4
= 2.525

Net Capital gain and net capital loss from the antique bed

Cost of purchase after indexation = 2.595*3500
= $ 9.082.5

Cost of incidental after indexation = 2.525 *1500
= $ 3,787.5

Total base cost = $ 12,870
Deduction of Capital proceeds from insurance firm = $ 11,000
Net Capital loss = $1,870
Thus, the net capital loss from the antique bed amounts $1,870

c) Painting :Painting is also considered as a collectible item which is bought on 2nd May 1985 which is the base cost for the painting. On 3rd April of the current tax year due to the disposal of the painting the CGT event A1 is attracted. To determine the capital gain and loss, the cut-off date is 20th September 1985, from this it is clear that the asset bought before this dater is exempted from the CGT asset. Therefore, as the painting made a capital gain and attracted the CGT event as it is acquired on 2nd May 1985, it is exempted.

d) Shares : Shares are also determined to be a part of CGT asset, as it is the part of such property that is tangible and intangible. Meanwhile, if the shares are used for business, then they would be involved in the ordinary income as per the provisions of section 6 and are not held part 3-a and 3-b of ITAA 97 (Richardson et al., 2015).

i)Estimation of gain from the sale of shares in Common Bank Ltd share Net capital gain = disposal cost – (amount for purchase + stamp duty)
= (47000-550) – (15,000+750)
= $30,700

ii) Estimation of gain from the sale of Shares in PHB Iron Ore Ltd
Net capital gain = disposal cost – (amount for purchase + stamp duty)
= (62,500-1,000) – (30,000+1,500)
= $30,000

iii) Estimation of gain from sale of shares in Young Kids Learning Ltd
Net capital gain = disposal cost – (amount for purchase + stamp duty)
= (600-100) – (6,000+500)
= ($6,000)

iv)Estimation of gain from sale of shares in Share Build Ltd
Net capital gain = disposal cost – (amount for purchase + stamp duty)
= (25,000-900) – (10,000+1,100)
= $ 13,000

Total net capital gain from the sale of shares = 30,700 + 30,000 + (6,000) + 13,000
= $67,700

e) Violin : As per section 108-5 violin is determined to be an asset for personal use. The asset that is utilized primarily for private use is regarded as a personal asset (Blunden, 2016). In the given case the violin is acquired on 1st June 1999 at the cost of $5,500. Thus, the capital gain made from this asset is disregarded. From the disposal of the violin the estimation of gain is given below:

Net capital gain = amount for the disposal of the asset – the base cost of the asset
= $12,000 – (amount of acquisition + Value of alteration charges)
= $12,000 –$ 5,500
= $6,500

Therefore, on the disposed of antique bed the taxable net capital gain is $6,500.

Estimation of the Net capital gain to be involved in the Ordinary income

The full taxable value of the net capital gain is evaluated in the table given below:

 

$

Net capital gain on the disposal of the vacant plot of land

200,000

Net capital gain on the disposal of the antique bed

6,000

Net capital gain on the disposal of shares

67,700

Net capital gain on the disposal of paintings

0

Net capital gain on the disposal of the violin

6,500

Total capital gain

280,200

Capital loss and set off

8,500

 

271,700

Discount (50%)

135,850

The cost to be added in the ordinary income

135,850

Answer 2
In this Taxation assignment we have strictly followed the format given in marking rubrics to cover in helping the student to cover all the deliverables in the assignment Fringe benefits tax of FBT can be termed as the tax that is paid by the employer on the value of benefits that is given to the employees. It can even be described as the non-wage payment or advantage that the employer bestows on the employees. Rapid Heat Pty Ltd is a manufacturer of bathtub who provides some fringe benefits to one of the employees. During the year 2017-18, Jasmine was given a car, loan along with other good that is being manufactured by the company. Hence, in this scenario, Rapid-Heat will be required to pay the FBT. The computation of FBT is shown below:

FBT on the usage of Car:The employer will be subjected to FBT when the car is provided to the employee for usage. In this scenario, the employer needs to pay the FBT. However, if the car does not meet the definition of the car then residual fringe benefits will come into action. Further, there are many other instances when the utilization of car is exempted from fringe benefit. The computation of the FBT on tax can be done in either of the two ways that are the statutory method or the operating cost method. The statutory method of computation of the FBT is utilized because the operating cost method needs the presence of log books with the complete details of the travelling done in terms of kilometres and personal purpose.

In the present scenario, Rapid-Heat Pty Ltd has provided Jasmine with a car on 1st May 2017 that was purchased on the same date for an amount of $33,000. The expenses that are incurred by Jasmine constitutes to $550 on the car that was reimbursed by the company and the car travelled for around 10,000 km. Further, it needs to be noted that Rapid Heat Pty Ltd was unable to utilize the car for a period of 15 days during the year. Hence, in the absence of information, the computation of the FBT will be done as per the statutory method.

As per statutory method
Value of benefit = A*B*C/D-E
Where,
A = Car cost
B = Statutory Percentage
C = vehicle was used for private purpose
D =Days in the Year
E = Contribution of the Employee

The following data were gathered from the case
A = 33000, B = 0.20, C = 320, D = 335 and E = 0
Hence, the computation can be done in the following manner

Value of Benefits = 33000*0.20*320/335-0 = 6,304
Value grossed up = 6304 * 2.1463 = 13,531

Fringe benefit tax on loan:A fringe benefits tax on the loan is chargeable when the employer does not charge the interest or a very low level of interest in charged on loan. When the interest rate is lower as compared to the benchmark rate then the interest rate is considered as a low-interest rate. If the employee owes a debt to the employer and the employee fails to make the payment on time and furthermore, the employer does not ask for the same then it will be treated as a fringe benefit and will be exempt from the ambit of FBT. In the provided case, it is noted that Rapid Heat Pty Ltd has provided jasmine with a loan amounting to $,500,000 at the rate of interest at 4.45%. Out of that, a sum of $450,000 was utilized to purchase a holiday home and the remaining amount was provided to the husband to purchase a share in Telstra without any part of interest. As per the current standard, the threshold rate is 5.95%

Hence, fringe Benefit value on loan = (Bench mark rate - rate charged by employer) * Loan Amount

From the case study we have
Fringe Benefit value on loan = (5.95% - 4.45%)* 500000 * 7/12 = 4,375
Grossed up Value = 4,375 * 1.9608 = 8,579

When the loan is given by the employer to the employee and if the amount is used for the purchase of assets that generates income, such amount is deductible for the FBT computation. However, in the current scenario, the shares are purchased by the husband of Jasmine and hence deduction cannot be claimed by the employer

(a) Fringe benefits tax on goods: An FBT on the goods of the company is chargeable when the company sells the goods to the employee at a price that is lower than the current market price. In such a scenario, the employer will be subjected to pay FBT on the difference that exists in the price at which the goods are sold to the employee

In the present scenario, Rapid-Heat Pty Ltd has sold the goods to the employee (Jasmine) ar an amount of $1300 while the same goods are sold in the market at a price of $2600. Hence, the company will be required to pay FBT on the difference that exists between $1300 and $2600. Hence,

Value of fringe benefit tax on goods = 2600 - 1300 = 1300

Grossed up Value = 1300 * 2.1463 = 4,078

The overall value of fringe benefit tax that i chargeable is as follows:
Grossed up value of Car = 13,531
Grossed up value of Loan = 8,579
Grossed up value of Goods = 4,078
TOTAL = 26,188
FBT charged at the rate of 49% will amount to $ 12,832

(b) Further if Jasmine used the amount of $50,000, the loan that was received by the employer to purchase the share of Telstra then the employer will be entitle for a deduction of interest on the amount $50,000. The new amount of FBT would be as follows:

Value of fringe benefit on loan = (5.95% - 4.45%) * 450000 * 7/12 = 3,938
Grossed up value = 3938 * 1.9608 = 7,721

Now, the total fringe benefit tax that would have been chargeable would be,
Grossed up value of Car = 13,531
Grossed up value of Loan = 7,721
Grossed up value of Goods = 4,078
TOTAL = 25,330
FBT charged at the rate of 49.25% will amount to $ 12,475.

Taxation assignments are being prepared by our accounting assignment help experts from top universities which let us to provide you a reliable assignment help online service.

References
Blunden, H., 2016. Discourses around negative gearing of investment properties in Australia. Housing Studies, 31(3), pp.340-357.

Burkhauser, R.V., Hahn, M.H., and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.

Burkhauser, R.V., Hahn, M.H., and Wilkins, R., 2015. Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.

Kobestky, M. (2005) Income Tax: Text, Materials and Essential Cases. Sydney: The Federation Press

Mendoza, J.P., Wielhouwer, J.L. and Kirchler, E., 2017. The backfiring effect of auditing on tax compliance. Journal of Economic Psychology, 62, pp.284-294.

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

Pratt, J. W. and Kulsrud, W. N. (2013) Federal Taxation. Penguin Publishers

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

Richardson, G., Taylor, G., and Lanis, R., 2015. The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling, 44, pp.44-53.

Sadiq,K., Coleman, C., Hanegbi, R., Jogarajan,S., Krever, R.,Obst, W., & Ting, A. (2014) Principles of Taxation Law. Sydney.

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