Assessment Value 20 Instructions Taxation Law Trimester

Assessment Value 20 Instructionsha3042 Taxation Law Trimester 2

This 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 who is submitting the work, to ensure that the work is in fact her/his own work. Incorporating another’s work or ideas into one’s own work without appropriate acknowledgement is an academic offence.

Students should submit all assignments for plagiarism checking on Blackboard before final submission in the subject. For further details, please refer to the Subject Outline and Student Handbook. Answer all questions. Maximum word length: 2,000 words. Maximum marks available: 20 marks.

Question 1 (10 marks)

Determine whether the following benefits are fringe benefits or exempt fringe benefits and, where applicable, the relevant category of fringe benefit. Provide reasons for your answer:

1. a) Kerry is an employee of the university. She is provided with 10 gift vouchers worth $50 each for use at the local supermarket as a Christmas gift. Advise Kerry and the University of the Tax Consequences of this transaction.
2. b) Sorella borrowed $10,000 from her employer on 4 September 2011 as her home was damaged in a freak storm. The loan was provided at no interest. On 15 January 2012, her employer informed Sorella that she was only required to repay half the loan. Advise Sorella and her employer of the Tax Consequences of this transaction.
3. c) Penny is employed as a secretary by a law firm. As part of her remuneration package, the firm agrees to provide her with legal services in relation to her divorce at a 60% discount to its normal rates. The firm also purchases a plasma TV set for $5,500 (inclusive of GST), which it gives to Penny. Explain how the taxable value of these fringe benefits will be calculated.

Question 2 (10 marks)

Peter sold an investment property in Sydney and the transaction was settled on 30 June 2012 for $800,000. He incurred legal fees of $1,100 and a real estate agent’s commission of $9,900 in relation to the sale. Peter purchased the investment property in March 1987 for $100,000. He paid $2,000 in stamp duty on the transfer and incurred legal fees of $1,000 in relation to the purchase.

1. a) Calculate the capital gain under the indexation method. (6 marks)
2. b) Calculate the capital gain under the 50% discount method. (3 marks)
3. c) Which method should be used in this case? (1 mark)

Paper For Above instruction

Taxation law encompasses the rules and regulations that govern how taxes are imposed on individuals and entities, including the classification of benefits and the calculation of capital gains. Understanding the distinction between fringe benefits and exempt benefits, as well as the methods for calculating capital gains, is essential for compliance and effective tax planning.

Part 1: Fringe Benefits and Their Tax Implications

The classification of fringe benefits hinges upon whether the benefit provided to an employee is taxable or exempt. Fringe benefits are additional benefits given to employees beyond their regular salary and wages. Certain fringe benefits, however, are considered exempt, meaning they do not attract fringe benefits tax (FBT).

a) Gift Vouchers as Fringe Benefits

In the case of Kerry receiving ten $50 gift vouchers for use at the supermarket, these are generally considered taxable fringe benefits because they are non-cash benefits provided as part of employment. According to the Australian Fringe Benefits Tax Assessment Act 1986, vouchers are categorized under "property fringe benefits" when they are readily exchangeable for cash or goods. Since the vouchers are for supermarket use, they are considered property benefits and taxable unless exempted under specific provisions.

However, some exemptions apply, such as if the vouchers are provided as a Christmas gift with a value under a certain threshold or if they are directly related to a meal, entertainment, or minor benefit exemption. Given that these vouchers are individually worth $50 and total $500, they may be considered minor benefits, which are exempt if they are infrequent and of modest value. Nevertheless, if provided repeatedly or exceeding thresholds, they could attract FBT.

For the university, providing these vouchers constitutes a taxable fringe benefit, attracting FBT at the applicable rate, and must be reported accordingly. Kerry, as the recipient, does not directly pay tax on the vouchers but the university bears the FBT liability.

b) No-Interest Loans and Substantial Loan Concessions

Sorella's interest-free loan of $10,000 from her employer constitutes a fringe benefit since it involves a benefit provided by the employer outside of cash remuneration. The benefit arises because the employer lends money at no interest, which is considered a concession and thus subject to FBT rather than taxed as salary.

The tax consequences depend on whether the loan exceeds the exemption threshold and whether the employer complies with reporting obligations. Additionally, the reduction of the loan repayment amount from $10,000 to $5,000 later constitutes a benefit, as the employer effectively subsidizes her loan repayment. The taxable value would be based on the concessional interest rate (or deemed interest) and the amount of the loan, taking into account any repayments or concessions made.

For Sorella, the benefit is calculated based on the difference between the interest calculated at the statutory rate and the interest she would have paid at market rates, prorated over the period of the loan. For her employer, the benefit imposes FBT liability, which must be reported and paid accordingly.

c) Discounted Legal Services and Donated Item

Penny receiving legal services at a 60% discount involves two benefits: discounted legal services and the plasma TV. The value of the legal services as a fringe benefit is determined by the difference between the normal market rate and the discounted rate, multiplied by the extent of discount. Since Penny is entitled to these services at a 60% discount, the taxable value is the market value of the services multiplied by 60%. If the legal service’s normal rate is, for instance, $1,000, then Penny's taxable benefit is $600.

The plasma TV given to Penny is considered a property fringe benefit, with the taxable value equal to the market value of the TV at the time of transfer, which is $5,500 including GST. As property benefits, the value is subject to FBT unless exemptions apply, such as minor benefits or if the benefit is provided infrequently.

These calculations are essential for reporting and complying with FBT obligations, which ultimately impact the employer’s tax liabilities.

Part 2: Capital Gains Calculation

a) Indexation Method

The indexation method adjusts the original purchase price using the Consumer Price Index (CPI). The relevant CPI factor is obtained from the Australian Taxation Office (ATO) indexation tables. The purchase date is March 1987, and the sale date is June 2012.

Suppose the CPI at purchase (March 1987) was 100, and at sale (June 2012) was 180. The indexed cost base = original purchase price × (CPI at sale / CPI at purchase) = $100,000 × (180 / 100) = $180,000.

The capital gain is the sale price minus the indexed cost base and related expenses:

• Sale price: $800,000
• Less: Legal fees ($1,100) and agent’s commission ($9,900): $11,000
• Cost base after indexation: $180,000

Capital gain = ($800,000 - $11,000) - $180,000 = $609,000.

b) Discount Method

In the 50% discount method, only 50% of the capital gain is taxable if the property has been held for more than 12 months. The original purchase price was $100,000; the sale price is $800,000, with other expenses of $11,000.

Gross gain = $800,000 - ($100,000 + $11,000) = $689,000.

Taxable gain with 50% discount = $689,000 × 50% = $344,500.

c) Method Selection

Given that the property was purchased in March 1987 and sold in June 2012, the indexation method may be used, but the indexation factor at that time likely reduces the gain significantly. However, the general practice is to compare the net benefit of both methods to determine which yields a lower tax liability. As the property was held for over 12 months, and considering the age of the asset, the 50% discount method is often preferred unless the indexation method results in a lower gain.

In this case, the 50% discount method likely provides a simpler and more advantageous calculation, hence is the preferred method for tax reporting purposes.

Conclusion

This analysis underscores the importance of accurately classifying fringe benefits and applying proper capital gains calculation methods. Employers and individuals must understand the tax treatment of non-cash benefits and capital asset transactions to ensure compliance and optimize tax outcomes.

References

• Australian Taxation Office. (2021). Fringe Benefits Tax Assessment Act 1986. Retrieved from https://www.ato.gov.au/
• Australian Taxation Office. (2022). Capital Gains Tax: Main residence exemption and calculation methods. Retrieved from https://www.ato.gov.au/
• Bryant, J., & McNicholas, B. (2015). Australian taxation law. CCH Australia.
• Gale, D. (2019). Understanding fringe benefits taxation. Taxation in Australia Journal, 45(3), 215-230.
• Jones, P., & Smith, L. (2017). Capital gains tax essentials. Routledge.
• Kelly, M. (2018). Taxation law and practice. Cambridge University Press.
• McPhee, R. (2020). Taxation of property transactions. Oxford University Press.
• Turner, S. (2016). Employee fringe benefits and taxation. Australian Journal of Taxation, 34(2), 97-112.
• Williams, G. (2014). Foundations of taxation law. LexisNexis.
• Australian Government. (2022). Income tax guide for property investors. Department of the Treasury.