Week 6

Advise the FBT consequences of Mason’s remuneration package.

Answer –

According to the tax provisions governing the Fringe Benefit Tax, employer is liable to pay FBT
on the taxable value of Fringe benefits which are being provided to the employee during the
year which runs from 1st April to 31st March. The employer is liable to provide information
regarding Fringe benefits in payment summaries of the employee if the Taxable value of Fringe
benefits exceeds $2,000.

There are two methods to gross up the Fringe benefits in order to receive their taxable value.

Grossing up rate is 2.0802 if employer can claim GST credit on Fringe benefits and 1.8868 if
employer cannot claim GST on fringe benefits.

Tax rate on Fringe benefits is calculated as 47%.

In the given scenario, Melbourne collision repair centre pays $12,000 for BPA course fees of
Mason which will be regarded as fringe benefits. Since the above course is nowhere related to
Mason employment, deduction of the same is not available to him for the same. Hence full
$12,000 will be regarded as Fringe Benefits.

Accommodation is also provided to Mason and he pays $100 rent per week whereas the market
value of rent is $500 per week.

Therefore annual value of fringe benefits is:

$12,000 + ($500 - $100)*52 = $12,000 + $20,800 =$32,800

Assuming employer does not get any GST credit, gross up rate of 1.8868 will be used:

Taxable value of fringe benefits = $32,800 * 1.8868 = $61,887.04

Therefore Fringe benefit tax = $61,887.04 * 47% = $29,087

$61,887.04 will be added in employee’s salary package as Mason gives up $61,887.04 of salary
because the FBT of $29,087 needs to be included in salary package cost.
Week 7

Required:

With reference to relevant legislation/case law, determine:

(a) Alex’s net capital gain or net capital loss for the year ended 30 June 2019 using both
Discount method and Indexation method.

Answer -

According to Section 110-25(2) of ITAA 1997, the market value of the CGT Asset or the amount
paid for the asset will be termed as cost base of the CGT Asset.

Section 110-25(5) of ITAA 1997 states that if any expenditure is done to preserve the value of
the CGT Asset, same will be added in the cost base.

In the given case, Alex has market value of land in 1986 as $110,000 and spent $100,000 for
construction to increase its value to convert it into property suitable to be rented out.

Therefore total cost base for Alex is $210,000.

Alex sold the property for $1,400,000 on March 1, 2019. Therefore Asset is held more than 12
months and hence capital gain will be payable on sale of property.

 Calculation of Net Capital gains by discounted method:

Particulars Amount
Sale price 14,00,000
Less:
Market Value of land in 1986 1,10,000
Add: Amount spent for construction 1,00,000
Total Cost 2,10,000
Capital Gain 11,90,000
Less: 50% Discounted Factor 5,95,000
Net Capital Gain 5,95,000

 Calculation of Net Capital Gain by Indexation method:

Indexation method is applicable if the asset is acquired before 21 September 1999 and is
held for more than 12 months. Both the condition is fulfilled by Alex.

The CPI for September quarter of 1986 is 43.2

Therefore indexed cost base will $210,000 * 43.2 = $9,072,000

 Particulars Amount
Sale price   14,00,000
Less:  
Indexed Purchase cost   90,72,000
Net Capital Loss   -76,72,000

(b) How would your answer to a) differ if the owner of the property was a company
instead of Alex?

Answer –

According to the provisions of income tax act regarding capital gains for a company provides
that if a company which is not an investment company, has to pay Capital Gain taxes on the
disposal of assets which are not used for business purposes.

However, for companies, Capital Gain Taxes using the discounted method is not allowed in
which 50% discount is given on capital gains.

Only Indexation methods are allowed to the companies for the calculation of the Net capital
gains and losses and are paid according to the income tax rates.

Therefore in the given case the answer will only differ in terms of discounted method not
applicable.

Therefore net capital gain/loss for the company is:

Particulars Amount
Sale price   14,00,000
Less:  
Indexed Purchase cost   90,72,000
Net Capital Loss   -76,72,000

Week 8

With reference to relevant laws, discuss the GST consequences of this arrangement for
both Bowens Pty Ltd and Builder’s Choice Pty Ltd.

Answer –

Bowens Ltd purchased 110 concrete mixers from Builder’s Choice Pty Ltd for $660 each (GST
included) in October. Total amount paid by Bowen is $72,600 including 10% GST.

However GST amount included in above transaction is $6,600. ($72,600 * 10/110)

According to accrual method both the companies have to ascertain their GST liability in the
same month the transaction has happened even if cash is received or not.

According to the GST law provisions, any business who has annual turnover of more than $20
million has to lodge BAS statement/GST return monthly clearly stating their GST liability and
GST input credits respectively for the same month even if payment is received or not as the
accrual system of accounting is followed. Bowens Ltd will have input GST credit of $6,600 for
the month of October, whereas Builder’s Choice will have GST liability of $6,600 to be paid to
Government.

However in December it was found by Bowens that 12 concrete mixers purchased in October
were faulty and the same were returned to Builder’s choice claiming full refund. Full refund was
paid by Builder’s Choice for the same.

Now According to Division 19 – Adjustment events of the GST legislation, Division 19-B
specifically deals with the adjustment of supplies, i.e. adjustment of GST payment and credits
related to product recall or returned to the supplier.

Subdivision 19-A, 19-10 clearly states that the adjustment events include the return of goods to
the supplier of a thing, or a part of the thing supplied (whether or not the return involves a
change in ownership of the thing)

Subdivision 19-B, 19-40 states that the parties have adjustment for a supply if GST was
attributable to an earlier tax period and therefore accordingly increasing or decreasing
adjustments are to be made in the month the adjustment has happened.

In the given case, Bowens returned 12 mixers to Builder’s choice in December in which GST
attributable is $720.

In the activity statement for December both the parties have to make adjustments in relation to
GST attributable in the return of mixers.

As a result, the Builder’s Choice will make decreasing adjustment to claim back $720 it has
already paid in October to the net GST payable by it in December and provide adjustment note
to Bowens for the same.

Bowens will have to repay $720 GST credit they claimed by making an increasing adjustment to
the net GST amount they are liable to pay.

Week 9

With reference to relevant provisions of ITAA 97 and ITAA 36, critically analyse the tax
consequences of the above scenario for Paul.

Answer –

Section 44 of the income tax act 1936, states that if any dividend is paid out by the company
from its profits then it will be added to the assessable income of the shareholder.

In first instance, if any distribution is made by the liquidator during liquidation, such
distribution is not paid out of profits of the company.

However section 47(1) of the same act, clearly mentions that income derived by the
shareholders in case of distribution by the liquidator will be termed as deemed dividend and
therefore will be included in the assessable income of the shareholder.
Cancellation of shares of the shareholders happens in case of liquidation/company being
winded up. Any distribution made by the liquidator will trigger CGT events C2 which will result
in capital gain/losses. It means full amount of the liquidator’s distribution would be included in
the consideration for the cancelled shares.

The cost base of the shares held in the company being liquidated will be the amount paid for the
shares originally plus any extra cost paid.

According to section 118-20 of the ITAA 1997, the amount of capital gain on the cancellation of
shares is reduced by the amount of distributions (capital proceed otherwise assessable)
received by the shareholder under section 47 of the Income tax Act 1936, i.e. any deemed
dividend received.

In the given case, Paul received $7,200 including $3,000 unfranked dividends and $4,200 for the
shares held by him (Cost paid $4,000).

Therefore as per above provisions Paul will have $200 of capital gain on capital proceed
received ($7,200 - $4,000) less $3,000 received as dividend.

Week 10

With reference to relevant provisions of ITAA 97/ITAA 36, discuss how the partnership
income is taxed.

Answer

According to section 91 of the Income Tax Act, 1936, no tax is payable by a partnership firm
registered in Australia as they are pass through entities and therefore tax is paid by the partners
on their share of income. Partnership firm only has to furnish return for the same.

According to section 92, income of a partner must include all income derived from partnership
earned in and outside Australia both.

Australian resident who is partner in a partnership has to pay taxes on his worldwide income.
Tax offset is available for any foreign tax paid for income earned outside Australia.

Non-resident Australian is not taxed on income derived from Australia but liable to furnish
return.

In given case, $300,000 is total income of partnership in which 60% ($180,000) generated in
Australia and remaining 40% ($120,000) generated in New Zealand.

Bothe Steve and Alex are 50-50 partners.

Therefore, Steve being Australian tax resident is liable to pay income tax on his share of income
earned worldwide, i.e. $150,000. He will be liable for tax offset for any income tax paid on
foreign income in New Zealand.

However, Alex being non-resident is not liable to pay income tax on his share of income derived
from Australian source, i.e. $90,000 (50% of $180,000) but has to furnish return for the same.
References:

1. Calculation your FBT – Available at https://www.ato.gov.au/general/fringe-benefits-tax-

(fbt)/calculating-your-fbt/. (Accessed on 12th June 2020)

2. Income Tax Assessment Act – Available at

https://www.legislation.gov.au/Details/C2017C00336/Controls/. (Accessed on 12th June 2020)

3. A new Tax System (Goods and service tax) Act 1999- Available at
https://www.legislation.gov.au/Details/C2014C00008. (Accessed on 12th June 2020)

4. Income Tax Assessment Act, 1936 – Available at

https://www.legislation.gov.au/Details/C2017C00242/Controls/. (Accessed on 12th June 2020)