HI6028 Case Study of Fringe Benefits Tax and Capital Gain Tax Assessment Answer
|Assessment Details and Submission Guidelines|
|Unit Title||Taxation Theory, Practice & Law|
|Assessment Type||Individual Assignment|
|Assessment Title||Case Studies of Fringe Benefits Tax and Capital Gain Tax|
|Purpose of the assessment (with ULO Mapping)|
Students are required to follow the instructions by your lecturer to confirm any relevant information. You also need to follow any relevant announcement on Blackboard to confirm the due date and time of the assignment.
The individual assignment will assess students on the following learning outcomes:
|Weight||This assignment task accounts for 25 % of total marks in this unit.|
|Total Marks||This assignment task accounts for 25 marks of total marks in this unit.|
|Word limit||Max 2000 words (acceptable to be 10% above or below this word limit).|
|Submission Guidelines||Instructions: Please read carefully to avoid mistakes.|
Assignments’ Instructions and Requirements
Question 1(10 Marks)
Perisher Pty Ltd (Perisher) is a Ski equipment manufacturer that operates around Mt Hotham in Victoria. On 1 May 2019, Perisher provided Nikita (one of its employees) with a car as Nikita does a lot of travelling for work purposes. However, Nikita’s usage of the car is not restricted to work only. Perisher purchased the car on that date for $44,000 (including GST) plus $2,000 (including GST) dealer delivery charges.
For the period of 1 May 2019 to 31 March 2020, Nikita travelled 12,000 kilometers in the car and incurred expenses of $770 on minor repairs that have been reimbursed by Perisher. The car was not used for 10 days when Nikita was interstate and was parked at the airport and for another five days when the car was scheduled for annual repairs.
Calculate the Fringe Benefits Tax Liability for Perisher, please have a look at the matrix below on how to answer the question
|QUESTION 1: Calculate the FBT liability for Perisher Pty Ltd||Weighting|
|Identification of material facts (issues) regarding fringe benefits provided to Nikita||1 %|
|Identification and analysis of legal issues / legal question and relevant taxation law in regards to fringe benefits (e.g. FBTAA 1986).||1 %|
|Thorough application of tax law (e.g. ITAA 1936 and ITAA 1997) to material facts in Perisher’s case.||1 %|
|Accurate conclusion of the FBT calculation.||5 %|
|Correct information and taxation law have been used and properly cited. A detailed analysis has been performed.||2 %|
|QUESTION 1 TOTAL MARKS:||10 %|
QUESTION 2 - (15 MARKS)
Taryn would like to open a new business as an interior designer, to funds her ambition she sold some of the following assets:
- Antique Painting that was given to Taryn by her father 5 years ago. Taryn’s father bought it on 20 August 1984 for $2,500. Taryn sold it on 1’st June 2020 for $25,000
- Taryn sold her car (Toyota Corolla) for the amount of $12,000 on 20’th May 2020, she bought on 1’st January 2015 for the amount of $20,000
- Taryn sold her Harry Potter’s collection for the amount of $1,500 on 4’th January 2020, she bought it second hand on 10’th October 2018 for $350.
- Taryn sold her gold necklace for $2,000 on 20’th March
Q1. FRINGE BENEFIT TAX (FBT)
FBT is a type of tax that an employers has to pay to the government for the benefits they provide to their employees. Fringe benefits are of different types including car, car parking, entertainment related, etc. These benefits are provided to scale up the efficiency of the employees at the work place. They also tend to motivate and retain the employees. This tax is levied at a rate of 47% in Australia under the FBTAA, 1986 (Soled and Thomas, 2016). This tax paid by the employer is not included on the salary and the benefit is provided apart from the given salary or wages to the employees.
Collection of the facts from the case study
The case study shows the use of the fringe benefit to the employee for travelling purpose. Perisher Pty Ltd is a manufacturer of Ski equipment in Victoria. The company provided a car to Nikita, employee of at Perisher for the work purpose on 1st May 2019. All the expenses of the car are also reimbursed to Nikita that incur in the form of repair and other functions. The car was bought at a price of $44,000 with extra delivery charge of $2,000. The tax to be paid by Perisher will be based on the total cost of the car and it can be calculated using different methods of the tax calculation. From 1st May 2019 to 31st March 2020, Nikita travelled a total distance of 12,000kms. A cost of $770 also incurred in repairs that was reimbursed to her by Perisher.
Analysis of legal questions and issues in regards to fringe benefit
According to the legal regulations, the employee is not accustomed to pay any taxes related to the fringe benefit provided to them by the employer (Pasztor and Valent, 2016). In the given case study, Perisher is the owning company thus the FBT will be levied on it. This legal regulation is in compliance with the Australian act of FBT (FBTAA), 1986. Nikita is the employee, therefore, she is allowed to use the car for work purpose but none of its expenses will be paid by her. Here, Perisher is paying the tax of fringe benefit and Nikita is not forced in any way to limit the use of the car or to pay the tax. Thus the company is paying the FBT in accordance with the FBTAA, 1986.
Application of the tax law for its valuation
There are two ways in which the tax can be evaluated for the fringe benefit provided to the employees. Two majorly used methods for FBT calculation are statutory and operating. Operating method of tax calculation is applied when proper operating cost is applied on the vehicle (Hodgson, 2015). It requires a logbook because it uses the non-business % in calculation of the tax. Statutory method is dependent on purchase date, cost of vehicle, days of using it privately, distance travelled and contribution of the employee if any. Among these two methods, statutory method can be applied to calculate the amount to be paid as tax by Perisher for the car provided to Nikita for office related travels. However, operating method cannot be applied as the case study does not provide any information of the log book. The cost incurred in the purchase of the car including the GST and the delivery charge was $46,000. Calculation of the FBT will be evaluated by multiplying the cost of car with fraction of the statutory method. The result of the multiplication will be further multiplied with the number of days that the car was used privately and will be divided by 365 days (total days of year) (Barkoczy, 2017).
Particulars Amount Total cost of car $44,000 Delivery charges $2,000 Total $46,000 Particulars Amount Total tax days 365 Days for which car was parked -10 Days spent in garage -5 Total days of using the car 350
Fraction of the statutory method to be applied in calculation is 0.2
FBT= 46,000 X 0.2 X 350/365 = $8,822
Rate for calculating FBT according to FBTAA, 1986= 47%
FBT = $8,822 X 47% = $4146/-
Conclusion made from the case study
The facts that inferred are that the application of operating method cannot be utilized due to lack of the logbook. Thus, statutory method is deployed at a rate of 47% according to the FBTAA, 1986. Perisher Pty Ltd pays the amount of tax in accordance of the FBT assessment act of 1986. It was also concluded that the fringe benefit is a motivating method of business for the employees efficiency.
Q2. CAPITAL GAIN TAX (CGT)
As per the Australian taxation law, CGT is a tax that is applied on the gains made from disposing the assets either they are collectables or personal use. However, there are several exemptions for the collectable and personal use assets on which the CGT is not applied. CGT is applied as per the ITAA, 1997. It is the law that is deployed by the Australian tax regulatory bodies to calculate the tax (Faccio and Xu, 2015). The given case study focus on the use of the CGT on the various that either falls in the category of collectables or personal use assets. The act is subdivided in sections that manifest the conditions to levy the tax on the assets.
Analysis of the legal questions and issues and relevant taxation for each law
There were five cases in the case study where Taryn has to sold various assets. The legal issue arise here is that the sold commodities belong to which category according to the income tax assessment act of 1997.
Case 1: antique painting
The antique painting was sold at a price of 25,000 dollars in year 2020 that her father bought of $2,500 in the year 1984, that is before the application of the CGT amendments. According to the s.108-(10)2 of ITAA, 1997, antique assets are those that are historical or artistic and kept for personal enjoyment or use (Aquilina, 2019). The question arise here is whether the antique is a capital asset or government property. The application of the CGT however, is doubtful because it says that the taxation depends on the time when the antique is acquired and not sold.
Case 2: Toyota car
In this case, Taryn sold her car for an amount of $12,000 in 2020 that she bought in 2015 for $20,000. It is described that the capital loss or gain made on vehicle such as cars can be ignored for tax. According to the s.108-10(2) of ITAA, 1997, a car can be collectable if it is antique, that is as old as 100 year. However, in the present case, s.118-5 of ITAA, 1997, cars are disregarded for capital gain or loss.
Case 3: Harry Potter collection
Taryn sells her Harry Potter collection at a price of $1,500 that she bought for $350 and that too second hand. It is required to identify that the capital asset can be regarded in the category of personal use. According to s.118.20 of Australian taxation system, the personal use assets that were acquired at a price of $10,000 or less then they are exempted form tax (Mahar, 2016). Therefore, the Harry Potter collection will be regarded in the exempted category and Taryn would not have to pay a CGT on it. However, antique books are considered as collectable but this collection is considered as of personal use because it was used for the personal use solely.
Case 4: Gold necklace
Any jewelry as per the s.108-10 of income tax assessment act of 1997, are collectables. Most of the collectables are exempted from the tax of capital gain (Barkoczy, 2017). However, the act says that the asset will be exempted from the CGT only if it was acquired at a price of $500 or less. But the price of necklace was more than $500. She bought it for $1,200 and sold at a price of $2000. Therefore, it is a collectable asset but not exempted from tax. Thus she will have to pay a tax that can be calculated by discount or indexation method of tax calculation method.
Case 5: Sculpture
Taryn sold the sculpture for $6,000 and its acquired price is not mentioned in the given case study. S.108-10(2) of ITAA, 1997 disregard the sculpture to be considered as taxable asset as it is a product of personal use as it was bought at a price less than 10,000 dollars. Therefore, it is exempted from CGT because the law says that assets acquired for less than $10,00 will be disregarded as taxable assets.
Application of the tax laws
Case 1: Antique painting
The collectables are those that were collected as a part of hobby and they are work of artistic values such as painting, stamps, etc. The collectibles can or cannot be exempted from CGT tax based on the price they were acquired for. Taryn’s father bought the sculpture in 1984. This is when the CGT was not applied and it was acquired for $2,500 only. The painting was actually acquired before the application of the CGT therefore, it is a pre-CGT acquired asset. This collectable asset therefore, will not be considered as a CGT taxable asset.
Case 2: Toyota car
The capital gain or loss of the vehicles such as cars are disregarded from taxation of capital gain. The car was sold for $1,200 but as per the rules of the ITAA, 1997, the cars or bikes are exempted from the taxation of CGT (Jones, 2016). However, the tax on this car can be calculated by removing the sales price from the base price. The s.108-10 clears this confusion of cars being taxable or not under the ITAA of 1997.
Case 3: Harry Potter collection
The Harry Potter collection of Taryn is a personal use asset according the s.118 of income tax assessment act of 1997. This is because the assets that were previously obtained at a price equal to or less than 10,000 dollars are defined as personal use assets. The personal use assets of this price are also not under the taxable list (Jacob, 2018). Therefore, the Harry Potter collection of Taryn will not receive any taxation of CG after it was sold for 1,500 dollars. These books would have not been exempted if they costed more than 10,000 dollars.
Case 4: Gold necklace
The given case study of Taryn describes that the cost price of the necklace was $1,200 while its selling price was $2000. The law says that jewelry is a collectable asset and is not regarded as taxable if the acquired price is equal to $500 or less than that. However, the necklace costed her $1,200, therefore, a capital gain tax will be applied on the asset. The capital gain tax to be paid will be identified by discount method. The discount applied in the discount method is at 50% because the asset was owned by Taryn at individual level (Thuronyi and Brooks, 2016). However, the rate would have been different if it was acquired in partnership.
Particulars Amount Selling price $2000 Cost price $1200 Capital gains $800 Discount at 50 percent $400 CGT $400
Case 5: Sculpture
It is clearly given in the case study that the sculpture was bought in 1994 for $1,500 and she sold it for $6,000 in the year 2020. The personal use assets are exempted of the capital gain tax if they are bought at a price equal to $10,000 or less than that. This is in accordance with the s.108-10(1) of the ITAA, 1997 guidelines. The sculpture costed Taryn only $1,500 that is less than $10,000. Therefore, the asset will be free from any CGT taxation.
The ITAA, 1997 is subdivided in many subcategories and the tax is applied on the assets according to the category they fall in. The assets can be collectable or personal used ones and they both are exempted from the CGT to some extents. Taryn sold her assets but all assets are not under the taxable range