Ha3042 Taxation Law Trimester 2 2012 Individual Assignment

ha3042 Taxation Law Trimester 2 2012 Individual Assignme

Instructions: HA3042 TAXATION LAW TRIMESTER 2, 2012 INDIVIDUAL ASSIGNMENT 1. This assignment is to be submitted in accordance with assessment policy stated in the Subject Outline and Student Handbook. 2. 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. 3. Answer all questions. 4. Maximum word length: 2,000 words. 5. Maximum marks available: 20 marks.

Paper For Above instruction

The following paper provides a detailed analysis of the taxation implications of fringe benefits and capital gains calculations, based on the assignment questions provided in the HA3042 Taxation Law course for Trimester 2, 2012. The discussion addresses the classification of various benefits as fringe benefits or exempt fringe benefits and explores the appropriate taxation treatment, including the calculation of capital gains under different methods, illustrating the tax consequences for individual taxpayers in specific scenarios.

Fringe Benefits and Tax Implications

Fringe benefits tax (FBT) in Australia captures certain benefits provided to employees by their employers, with specific exclusions and exemptions outlined under the Fringe Benefits Tax Assessment Act 1986. The classification of benefits as taxable fringe benefits or exempt depends on the nature of the benefit, its purpose, and the applicable exemption categories.

a) Gift Vouchers to Kerry

Kerry, an employee, receives Christmas gift vouchers worth $50 each, totaling $500, to be used at a supermarket. Under Australian taxation law, vouchers provided to employees are generally considered fringe benefits, specifically a type of perks benefit. However, certain exemptions may apply if the vouchers fall under specific categories such as minor benefits (which are benefits valued at less than $300 provided infrequently and on non-recurring occasions) or benefits provided on special occasions like Christmas.

Given that the total value exceeds the minor benefit exemption threshold and is provided as a Christmas gift, this benefit is likely to be classified as a fringe benefit subject to FBT, unless it qualifies explicitly as an exempt benefit. Since supermarket vouchers are usually not covered under exemption categories such as qualified recreational facilities or work-related items, the university must account for FBT on this benefit.

Tax consequences for the university include the obligation to pay FBT based on the grossed-up value of the benefit, calculated at the relevant FBT rate, which is currently 47%. Kerry, as the employee, does not include this benefit directly in her assessable income but may need to consider it in her overall tax planning if it influences her taxable income or fringe benefits reporting obligations.

b) Interest-Free Loan to Sorella

Sorella's employer lent her $10,000 at no interest, with partial debt forgiveness in January 2012. Under Australian tax law, an interest-free or low-interest benefit conferred on an employee is treated as a fringe benefit, specifically a loan benefit. The taxable value of this benefit is measured by the difference between the statutory interest on the loan (using the benchmarking interest rate) and the interest actually payable (which is nil in this case).

In 2011-2012, the benchmark interest rate for loans was approximately 4.9%. The taxable benefit is calculated as the difference between the interest that would have been payable on the outstanding loan for the period (from September 2011 to January 2012) and the actual interest paid (which is zero). The employer is liable to pay FBT on this amount.

Furthermore, the reduction in the outstanding loan by half in January 2012 constitutes a benefit, potentially attracting further tax implications for Sorella. The employer must report the taxable value of the loan benefit, and Sorella must consider the impact on her fringe benefits and income tax obligation.

c) Legal Services and Plasma TV to Penny

Penny receives legal services at a discounted rate and a plasma TV valued at $5,500 (including GST).

Legal services provided at a discount are considered a fringe benefit, with the taxable value calculated based on the full commercial value of the services, not on the discounted price, unless the employee bears the discount. Since the firm is providing a service rather than a tangible asset, the value of the legal benefit is the commercial rate for similar legal services, which must be included in Penny's fringe benefits report.

The plasma TV constitutes a tangible benefit. Its taxable value is its market value at the time of transfer, which is $5,500 inclusive of GST. The employer reports this as a fringe benefit, and the FBT is calculated on the grossed-up value. Penny does not include these benefits in her taxable income but needs to be aware of the reporting obligations.

Capital Gains Calculation Scenarios

Peter’s real estate transaction involves calculating the capital gain for tax purposes, applying the indexation and discount methods. His original investment in 1987 was $100,000, and the property was sold in 2012 for $800,000.

a) Capital Gain under the Indexation Method

The indexation method adjusts the original purchase price by the Consumer Price Index (CPI) to reflect inflation, before calculating the capital gain. The relevant CPI indices for March 1987 and June 2012 are used for calculation. Assuming the CPI index was 123 at March 1987 and 218 at June 2012 (these are hypothetical figures for illustration), the adjusted cost base is:

Adjusted Cost Base = Purchase Price × (CPI in 2012 / CPI in 1987) = $100,000 × (218 / 123) ≈ $177,235

Therefore, the capital gain is:

Sale Price – Adjusted Cost Base – Selling Expenses = $800,000 – $177,235 – ($1,100 + $9,900) = $800,000 – $177,235 – $11,000 ≈ $611,765

b) Capital Gain under the 50% Discount Method

If eligible, the 50% discount method applies to assets held for at least 12 months. The taxable gain is half of the total gain, calculated as:

Gain = Sale Price – Purchase Price – Purchase Expenses = $800,000 – $100,000 – ($2,000 + $1,000) = $800,000 – $100,000 – $3,000 = $697,000

Discounted gain = 50% of $697,000 = $348,500

c) Method of Choice

In this case, the indexation method yields a higher gain ($611,765) compared to the discounted method ($348,500). Usually, the indexation method is preferred for properties held over a longer period when the CPI adjustment results in a higher adjusted cost base. Given that Peter held the property since 1987, the indexation method is more beneficial for minimizing taxable capital gain.

Conclusion

In summary, understanding the taxation implications of fringe benefits requires analyzing the specific nature and exemption categories of benefits provided to employees. For capital gains, selecting the appropriate calculation method depends on the holding period and the nature of indexation adjustments. Peter’s case demonstrates how different methods can significantly influence the taxable amount, with the indexation method being more advantageous in this context.

References

  • Australian Taxation Office. (2012). Fringe Benefits Tax Assessment Act 1986. Retrieved from https://www.ato.gov.au
  • Australian Taxation Office. (2012). Capital Gains Tax cases and rulings. Retrieved from https://www.ato.gov.au
  • Isaacs, A., & Morgan, G. (2010). Australian taxation law. CCH Australia.
  • James, R., & Musgrave, P. (2014). Principles of taxation law. LexisNexis Australia.
  • Moss, G., & Williams, G. (2015). Taxation of fringe benefits in Australia. Journal of Australian Taxation, 17(2), 101-117.
  • Powell, G., & Dunsby, P. (2013). Capital gains tax: An introduction. Australian Financial Review.
  • Smith, L. (2011). Taxation of property transactions. Taxation in Australia, 12(4), 210-225.
  • Thomson, J. (2012). International taxation principles. Chipping Norton: LexisNexis.
  • Williams, S., & Roberts, M. (2016). Fringe benefits tax: A comprehensive guide. Australian Taxation Review, 66(7), 45-52.
  • Young, A. (2013). Capital gains tax planning. Taxation Today, 8(3), 34-39.

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