Hi6028 Taxation Theory: Determine The Assessment Answers

(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.

(iv) 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

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.

Answers:

1.

Land Block

The computation for the capital gains would be done based on the type of transactions as the transaction for the sale of land block is considered as A1 event  as per s. 104-5, ITAA 1997 and therefore, the capital gains/loss will be calculated by subtracting cost base from the  proceeds derived from sale. Furthermore, s. 110-25(1) defines the five elements of cost base of an asset that are highlighted in the tabular format as show below (Gilders, et.al., 2016).

Taxpayer has an antique bed which he bought on July 21, 1986. Cleary, this asset of taxpayer does not belong to pre-CGT asset. Further, the taxpayer has purchased it for $3500 which is higher than $500 and hence, the CGT implication is raised and the net capital gain/loss in regards to antique bed is computed below.

The asset has not been sold by taxpayer rather it has been stolen and hence the sale proceeds would be the amount received from insurance claim of taxpayer. The insurance amount for the antique bed is $11,000. Also, the proceeds is long term capital proceeds (holding for more than a year) then 50% discount will be for capital gains under s. 115-25(1), ITAA 1997. Clearly, the given asset is eligible for discount method of capital gain concession owing to the capital gains being long term.

Violin

It is essential to differentiate between the personal use assets and collectables as the provisions for determining the capital gains/loss would be different for each of the above case. The personal use asset would be subject to CGT liability on taxpayer when the acquisition payment is higher than $10,000. In other words, if the taxpayer has personal use asset (purchase for personal enjoyment or use) and paid more than $10,000 for purchasing it, then the CGT will be levied.

2. Issue

The key issue is to comment on the FBT consequences for the three benefits which are given by Rapid Heat Ltd to Jasmine during the income tea year.  Further, the issue is also to comment on the tax deductions on the fact when the extended benefit is provided to associate by Jasmine.

Loan fringe benefit: Any monetary help in form of loan provided to employee to complete their personal work such as paying debts, purchasing home, acquiring shares and so forth would be termed as loan fringe benefit only when the interest rate is inferior to the statutory interest rate. Every year, Reserve Bank of Australia declares the minimum interest rate for loan which is termed as statutory interest rate. The deduction would be provided to employee for the interest payment when loan is used such as way that generates assessable income to employee. Further, when employee issues the extended loan to his/her family members to do any work which results in assessable income then no tax deduction will be availed by employer (Hodgson, Mortimer and Butler, 2016).

As per TD 2017/3, Reserve Bank of Australia declared statutory interest rate as 5.25% per annum  for the year 2017/2018 while Rapid Heat offered loan at 4.25% per annum. It is evident that lower interest rate loan has been offered to employee and hence, loan fringe benefit is extended.

The tax deduction will not be availed on $50,000 because Jasmine herself does not purchase the shares as when employee issues the extended loan to her family member to do any work which results assessable income then no tax deduction will be availed by employer.

Internal expenses fringe benefit:

Expenses borne by employer = Rapid Heat offered the heater to normal customers (regular rates) - Jasmine purchased the heater from Rapid Heat  

Internal expense fringe benefit = 75% of the regular rates - Expenses borne by employer = (0.75*2600) -1300 =$650

(b) Jasmine has utilized $50,000 to purchase shares in Telstra

The tax deduction will be availed on $50,000 if it is used by Jasmine to buy the shares. This is because when employee does any activity which results in assessable income production, then tax deduction will be availed by employer. In this case, Jasmine herself purchases the shares and hence she would derive the income.

References

Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9^th ed. Sydney: Oxford University Press.

Krever, R. (2016) Australian Taxation Law Cases 2017. 2^nd ed. Brisbane: THOMSON LAWBOOK Company.

Nethercott, L., Richardson, G., & Devos, K. (2016)  Australian Taxation Study Manual 2016. 8^th ed. Sydney: Oxford University Press.