Car Fringe Benefits Statutory

Question: Discuss about the Car Fringe Benefits Statutory. Answer: The relevant information from the case study given is highlighted as shown below. Fred, an Australian tax resident has liquidated Blue Mountains located holiday home at a price of $ 800,000 in FY2016. It is noteworthy that both the contract for sale of holiday home and receipts of proceeds have been enacted in the same financial year at a gap of almost six months, and hence the capital gains if any would be taken into consideration in FY2016 only. Fred took ownership of this home almost couple of decade ago in March 1987 and the price paid at that time was $ 100,000. In relation to the holiday home , there are other costs besides the purchase cost that Fred has incurred which essentially would contributed to the determination of holiday homes cost base. Besides, it is also known that there are certain capital losses accumulated from FY2015 which have been derived due to shares and antique sale. By taking the above information into cognizance, the core concern is to calculate the capital gains that would fall under the CGT (Capital Gains Tax) ambit in the year FY2016 for an individual taxpayer Fred. CGT applicability Holiday Home The primary step for determination of the CGT liability is to ascertain whether the sale of asset (i.e. holiday home) is liable for application of CGT. In accordance with the thumb rule in this regard, all assets purchased before September 20, 1985 are exempted from the aegis of CGT irrespective of the timing and amount of capital gains (Gilders et. al., 2016). The given holiday home as per the information has been purchased only after the above date and hence the derived capital gains would be CGT applicable. Taxable Capital Gains- Calculation In the quest of capital gains determination, the first endeavour is to ascertain the assets cost base as per Section 110-25. As per this section, the underlying assets cost base is deemed to constitute the below mentioned costs (Nethercott, Richardson Devos, 2016). Asset purchase price Cost incurred in the process of taking possession of asset Cost incurred during asset disposal Construction cost that result in significant increase in asset valuation Expenses for ensuring that owner continue to maintain ownership and possession of the underlying asset. With regards to the given holiday home, the cost base can be ascertained in the following manner. Buying price of Holiday Home (1987) = $ 100,000 Cost incurred in the process of taking possession of asset = 1,000 (Legal Fees) + 2,000(Stamp Duty) = $3,000 Cost incurred during asset disposal = 1,100 (Legal Fees) + 9,900 Real Estate Agent Commission = $ 11,000 Cost incurred during construction of garage = $ 20,000 Hence, Holiday Homes cost base (Section 110-25) = 100,000 + 3,000 + 11,000 + 20,000 = $ 134,000 It is known that the holiday home was purchased before 1999 and also Freds status is that of an individual taxpayer. Hence, the available methods for computation of taxable capital gains would include discount method and indexation method (Deutsch et. al., 2015). However, out of the above two methods, Fred can minimise his derivable capital gains by the application of discount method as it allows for concession to the tune of 50% in capital gains which is not present in the indexation method as it solely relies on adjustment of cost base in the wake of inflation differential (Section 115-25, 114-1) (Barkoczy, 2015). Proceeds realised from home liquidation = $800,000 Holiday homes cost base = $ 134,000 Capital gains on Holiday Home sale = Proceeds realised from home liquidation Holiday homes cost base = 800,000 134,000 = $666,000 Additionally, it is also known that a capital loss of $ 10,000 is available from FY2015 which arose due to share investments. Due to the comparable nature of share and property as asset classes, the capital losses can be mutually settled and thus in this case, firstly the net capital gains would be ascertained and based on the same the discount method would be applied for deriving the taxable gains for FY2016 as indicated below (Sadiq et. al., 2014). Net Capital Gains after adjustment of previous capital losses = 666,000 10,000 = $656,000 Concession of 50% as per discount method = 0.5*656000 = $ 328,000 Hence, taxable capital gains for Fred (FY2016) = 656000 - 328000= $ 328,000 Antique vase contributing to capital loss of $ 10,000 in FY2015 As per the provided information, the capital loss in FY2015 of $ 10,000 instead of being caused by shares is now caused due to antique vase sale. The taxable capital gains in this case would undergo a change as losses arising from antique are to be balanced against the future gains caused in the same segment i.e. antiques. Clearly, holiday home is a property asset that lies outside the ambit of antiques and therefore the FY2015 capital loss would not be adjusted in this year but would rather be extended to the next year for balancing against any potential gains from selling of antique item (CCH, 2013). Net Capital Gains after adjustment of previous capital losses = 666,000 0 = $666,000 Concession of 50% as per discount method = 0.5*666000 = $ 333,000 Hence, taxable capital gains for Fred (FY2016) = 656000 - 333000= $ 333,000 If employer of a firm extends non-cash benefits (of personal nature) to their employees specifically in the course of the employment, then these are entitled as fringe benefits. However, the fringe benefits lead to the incidence of the fringe benefits tax (FBT) liability on behalf of the employer. The application of this liability is governed by the Fringe Benefits Tax Assessment Act, 1986 (Wilmot, 2012). According to the given case facts, employer Periwinkle has potentially issued fringe benefits to her employee Emma in the following regard. Car fringe benefits Loan fringe benefits Expense fringe benefits (Bathtub related) FBT liability for employer Periwinkle on the account of given fringe benefits Car fringe benefits Employer Periwinkle bought a car in May 1, 2015 with the cost of $33,000. The car was passed on the same date to Emma. The company had not mentioned any restriction for the usage of the car. Emma utilized car for personal use and thus, same FBT liability is valid on Periwinkle under the car fringe benefits of the section 8 of FBTAA, 1986 (Barkoczy, 2015). FBT value (Car fringe benefits) is examined based on the mentioned formula (Section 9, Division 2B) (Deutsch et. al., 2015) FBT value = Base value of car car accessibility for employees in days Statutory % Gross up factor Cost of car for employer ( in the year 2015) $ 33,000 Cost incurred during annual repairing in FY2016$550 Base value of car = Cost of car for employer Cost incurred during annual repairing = 33000 - 550 $ 32,450 Statutory percentage would be taken as 20%, if the vehicle is purchased after April 1, 2014, irrespective of the usage in days and distance covered by the car in the given financial year (ATO, 2016b). In the present case, car is acquired by Periwinkle in May 1, 2015, which is after April 1, 2014. Statutory % for the car (For FY2016) 20% The total number of accessible days would be calculated for the duration of FY2016. Car was acquired by Emma on May1, 2015 not from April 1, 2015 and hence, the days counted as 335 for the year. Additionally, car was not available for Emma for the 5 days when it was sent for the annual repairing. It is noteworthy that the airport parking period of ten days would not be deductible from the total number of car accessible days for Emma, because she was out of town and hence could not use the car, but she had the accessibility for the car (CCH, 2013). Car accessibility for Emma in days (in FY2016) = 335 5 330 days FBT value (Car fringe benefits) = FBT base value of car car accessibility for employees in days Statutory % Gross up factor = 32450 2.1463 $12,593.80 FBT liability to be paid by Periwinkle = FBT value (Car fringe benefits) 0.49 = 12593.80 0.49 $6,171 Loan fringe benefits On September 1, 2015, Periwinkle extended the loan amount of $500,000 to her employee Emma. The interest rate decided by Periwinkle is 4.45%. For the financial year FY2016 the benchmark interest rate specified by RBA is 5.65% (ATO, 2015). Hence, the offered interest rate is less than the specified interest rate i.e. 5.65%. Therefore, the loan fringe benefits are extended to Emma on account of savings in interest cost and related FBT liability on employer would be levied (Section16, Division 4A) (Sadiq et. al., 2014). Loan amount issued to Emma $500,000 Interest amount based on benchmark interest rate (set by Reserve Bank of Australia) =0.0565 500000 $28,250 Interest amount based on charged interest rate by Periwinkle = 0.0445 500000 $ 22,250 Saved interest cost by Emma on the loan taken = Interest amount based on benchmark interest rate - Interest amount based on charged interest rate by Periwinkle =28250 - 22250 $ 6,000 Duration of loan in financial year FY2016 (in days) (Loan issue date was September 1, 2015) 213 Taxable value (loan fringe benefits) = Saved interest cost by Emma on the loan taken Duration of loan (in years) = 6000 $3491.80 Grossed up value of loan fringe benefits given to Emma = Gross up factor Taxable value (loan fringe benefits) = 1.9608 3491.8 $ 6,846.72 FBT liability to be paid by Periwinkle =0.49 6846.72 $3,354.9 If the issued loan amount of $450,000 was utilized for the purpose of earning incremental income by Emma, then the deduction would be claimed for Periwinkle on the interest component of this amount. However, for the amount $50,000, there would be no deduction claimed by Periwinkle since, it was utilized by Emmas husband not by Emma (Barkoczy, 2015). Expense (bathtub) fringe benefits Periwinkle sold the bathtub to Emma at lower rate in comparison to the market sale price, thus, the expense fringe benefits is extended to Emma in the form of bathtub. Manufacturing cost of bathtub by Periwinkle Company $700 Sale price of bathtub in market $2,600 Price at which bathtub sold to Emma $1,300 Expense (bathtub) fringe benefit to Emma = Sale price of bathtub in market - Price at which bathtub sold to Emma = 2600 1300 $1,300 Gross up factor (bathtub) for FY2016 as GST applicable (ATO, 2016a) 2.1463 Grossed up amount (expense fringe benefit) = Expense (bathtub) fringe benefit to Emma Gross up factor =1300 2.1463 $4,078 FBT liability to be paid by Periwinkle =4078 2.1463 $1,998 The amount of $50,000 is now deployed by Emma for buying the shares then this respective amount would be liable for the tax deduction for Periwinkle, if it generates profits for Emma as shown below (Gilders et. al., 2016). Interest amount based on benchmark interest rate (set by Reserve Bank of Australia) =5.65% loan amount =0.0565 50000 $2825 Interest amount based on charged interest rate by Periwinkle = 4.45% loan amount = 0.0445 50000 $ 2,225 Incremental interest cost savings = Interest amount based on benchmark interest rate - Interest amount based on provided interest rate =2825 - 2225 $ 600 FBT liability reduction for employer Periwinkle =600 0.49 $294 References ATO (2015), TD 2015/8, Retrieved on September 21, 2016 from https://law.ato.gov.au/atolaw/view.htm?docid=%22TXD%2FTD20158%2FNAT%2FATO%2F00001%22 ATO (2016a), Gross-up rates for FBT, Retrieved on September 21, 2016 from https://www.ato.gov.au/rates/fbt/?page=3 ATO (2016b), Car fringe benefits statutory formula rates, Retrieved on September 21, 2016 from https://www.ato.gov.au/rates/fbt/?page=4 Barkoczy,S. 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