Introduction
This article offers specific taxation information to Cool Clothes Enterprises Pty Ltd (Cool Clothes) — Chris and Joe for all income tax, fringe benefits (FBT) and capital gains (CGT) issues for the 2023/24 income year. In this section we will examine income tax and FBT implications from Part A, CGT for property sales in Part B, Part C and Part D, as well as relevant legislative precedents, tax decisions and cases.
Part A includes analysis of income tax and fringe benefits tax (FBT)
The cool clothes enterprises Pty Ltd in the income year 2023/24. Chris and Joe’s company must operate within Australian taxation rules set out in the Income Tax Assessment Act 1997 (ITAA 1997) and the Fringe Benefits Tax Assessment Act 1986.
Income Tax Implications
Cool Clothes Enterprises is required to publish assessable income and claimable expenses under Division 6 and Division 8 of the ITAA 1997 for income tax purposes. Assessable income includes all income received while operating the business such as sales or other operating income.
As per Section 6-5 ITAA 1997, ordinary income such as the sale of a product or service comes under assessable income. The cost incurred in earning this income is typically deductible under Section 8-1 of the same Act. These include labor costs, salaries, wages, utilities, and other overheads. Wages paid to employees at Cool Clothes are deductible, but fringe benefits that employees are provided with could result in FBT payments.
Fringe Benefits Tax (FBT) Implications
FBT includes non-monetary payments to employees made by the employer and Cool Clothes Enterprises Pty Ltd will be bound by the Fringe Benefits Tax Assessment Act 1986. FBT is charged to the employer and not to the worker and therefore you have to report and pay FBT correctly or else you are penalised[1].
If, for instance, the business offers car, house or travel allowances to employees, FBT is payable. Company cars constitute the usual source of FBT. When workers are permitted to take their own company cars, FBT is set either on the operating cost basis or under the statutory formula basis (according to Taxation Ruling TR 2011/3). This includes FBT if the company also gives housing to workers to live in themselves.
In accordance with Section 136(1) of the FBT Assessment Act, benefits received by the company will be appraised in order to establish the FBT burden. – "exempt" benefits (such as modest benefits under Section 58P, or workplace benefits under Section 58X) will not be subject to FBT, lowering the firm’s tax bill.
Relevant Case Law
Court cases such as FC of T v Cooke and Sherden (1980)[2] illustrate that the courts interpret benefits in FBT terms so that the benefits given to employees for enjoyment are FBT. The benefits provided to workers must be carefully considered by Cool Clothes Enterprises Pty Ltd as a way of determining whether there are any FBT requirements.
Part B: Tax Implications for Sale of Property
The disposal of land by LandCo, the land-owner associated with Cool Clothes Enterprises Pty Ltd, has significant income tax and capital gains tax (CGT) implications. The Income Tax Reward & CGT Impact of the Sale: It is important to calculate the Income Tax Refund (and related CGT Impact) for the income year 2023/24.
Income Tax Implications
The selling price of the property should be included in LandCo’s assessable income. Under the Income Tax Assessment Act 1997 (ITAA 1997), any profit earned on the disposal of property becomes assessable income. In particular, profit from the sale goes toward LandCo’s taxable income and deductions that have something to do with ownership of the property (eg, mortgage interest or repairs) can offset the taxable profit.
This gain will be used to calculate the loss in LandCo’s taxable income. Under section 6-5 of the ITAA 1997, all income from ordinary business transactions is counted towards the computation of assessable income, including income on property transactions where the property was part of the entity’s investment portfolio or employed for the purpose of conducting a business[3].
Capital Gains Tax (CGT) Implications
The disposal of the property also creates a CGT event as provided under Section 104-10 of the ITAA 1997. CGT Event A1: A change of ownership in an asset such as a property sale. The CGT event triggers the sale contract regardless of the date of settlement[4].
In order to determine the capital gain or capital loss you have to calculate the cost base of the property. Prices typically include:
- Acquisition Costs: This is based on the original price you paid for the property.
- Incidental Costs: Attorney fees, stamp duty, and other costs associated with acquisition, ownership, and disposition of the property (Section 110-25 of the ITAA 1997).
- Capital Improvements: Expenses applied to the property that have increased its worth[5].
This capital gain is a number that is equal to the cost base divided by the sale price. With more than 12 months’ ownership, LandCo could also receive a 50% CGT rebate as permitted by Division 115 of the ITAA 1997. This discount is available for non-corporate entities, and may lower the total capital gain that you need to include in assessable income. But because LandCo probably does not sell itself as a company, the discount wouldn't be available here.
Assessable Income Impact
The net profit arising from the property sale goes toward LandCo’s annual assessable income, which can make a big difference in your total tax bill. If the house was held as an investment, this income is treated as a capital gain and allowed deductions are allowed to offset this gain. It can be used to offset future capital gains if the property is sold and it leaves a capital loss that can be carried forward to offset normal income.
Legislation and Case References
These include the provisions of Section 102-5 – Net capital gains definition, Section 104-10 – CGT Event A1 and Section 110-25 – Cost base elements. One useful point of reference is the Commissioner of Taxation v McDonald (1987) decision[6], where they argue that you need to establish the cost base as accurately as possible so that you get the correct CGT liability.
Part C: Tax Implications for Sale of Haberfield Property to Tina
With the sale of the Haberfield to Tina, there are significant capital gains tax (CGT) concerns that arise for the 2023/24 tax year. It describes the relevant CGT event, the cost base, and the capital gain or loss on the sale.
CGT Event Identification
The transfer of the Haberfield property to Tina results in CGT Event A1 under Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997). CGT Event A1 is a transfer of ownership of a CGT asset. Here, the transaction triggers when the sale contract is issued and not during settlement. This means that the gain or loss in capital should be expressed in terms of what the price is at the moment the sale contract takes place.
Cost Base Elements
Cost of the Haberfield asset is crucial to determining capital gain or loss. Under Section 110-25 of the ITAA 1997, the cost base is defined as follows:
- Cost of Purchase: The cost at which the property was purchased. This is the heart of the expense curve.
- Other Fees: This includes the fees of purchasing and selling the property, for example:
- Stamp Duty: Stamp duty payable at the time of purchase.
- Legal and Conveyancing Costs: Costs for the conveyancing or legal assistance in purchasing or selling the property.
- Agent’s Fees and Advertisement: Any money paid to agents or for selling the sale.
- Capital Improvements: Anything the property had been structurally improved during ownership that made it worth more. Renovations or additions of substantial size, for example. This lower cost base, which may apply if the property becomes a loss, is calculated at the same rate as the cost base but excludes variables, such as inflation indexing for properties purchased after September 1999[7].
Calculation of Capital Gain or Loss
The capital gain is computed by subtracting the cost base from the capital proceeds (what Tina gets as compensation for selling it). If the proceeds of the capital are greater than the cost base, a capital gain arises. Capital loss happens if cost base outstrips capital proceeds.
Example Calculation:
- Sale Price: $800,000
- Cost Base:
- Acquisition Cost: $500,000
- Stamp Duty: $20,000
- Legal Fees: $5,000
- Capital Improvements: $50,000
- Total Cost Base: $575,000
Capital Gain: $800,000 (sale price) - $575,000 (cost base) = $225,000.
The discount of 50% CGT would be provided if the property had been owned for over 12 months, as per Division 115 of the ITAA 1997. However, this discount applies to individuals, trusts or superannuation funds – not corporations. The discount can be applied to both Chris and Joe if each owned the property independently so that the assessed gain becomes $112,500.
Relevant CGT Considerations
If the property was a primary residence, the main residence exemption under Section 118-110 of the ITAA 1997 might allow some or all of the gain to be taxed. But as it is being sold to Tina, who is likely an unrelated person, it is probably an investment property and thus the main residence exemption would not apply.
Appeals Court Cases cited.
In FCT v Whitfords Beach Pty Ltd (1982)[8], the High Court said that it was crucial to set the cost base, including all the associated expenses, correctly so as to calculate the correct taxable capital gain. This is how Chris and Joe get all the qualifying deductions and a true CGT amount.
Part D: CGT Implications for Sale of Beach House
The beach house sale increases capital gains tax (CGT) for the 2023/24 income year. This step is addressing the CGT event in question, the elements of the cost base, and the capital gain or loss on the sale.
CGT Event Detection:
The sale of the beach house causes CGT Event A1 as defined in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997). CGT Event A1 occurs if there is a transfer of the ownership of a CGT asset, in this instance at the date of signing the sale contract. That is, the capital gain or loss must be calculated according to the profit you obtained at that moment.
Cost Base Elements
The beach house cost base includes the following elements as prescribed in Section 110-25 of the ITAA 1997:
- Purchase Cost: The price the beach house originally was bought at.
- : These are expenses related to the purchase and sale of the property, including but not limited to:
- Stamp Duty: Paid at the time of purchase.
- Legal & Conveyancing Charges: When purchasing/selling the property.
- Agent’s Fees: Fees to the real estate agent for selling the property.
- Capital Improvements: Any other improvements to the beach house that helped sell the property — including construction, repairs, etc.
Calculation of Capital Gain or Loss
The capital gain is the ratio of the total cost base to the capital proceeds (the value of the beach house that is sold). If the purchase price exceeds the cost base, you are capitalizing a gain. However, if cost base exceeds selling price, the capital loss occurs.
Example Calculation:
- Sale Price: $1,000,000
- Cost Base:
- Acquisition Cost: $700,000
- Stamp Duty and Legal Fees: $20,000
- Capital Improvements: $50,000
- Total Cost Base: $770,000
Capital Gain: $1,000,000 (sale price) - $770,000 (cost base) = $230,000.
If the property occupied the house for 12 months or more, a 50% CGT discount will be available under Division 115 of the ITAA 1997 to cut the taxable capital gain in half for the relevant person. That would be a taxable profit of $115,000.
Conclusion
Income tax, FBT and CGT are among many aspects of Cool Clothes Enterprises Pty Ltd’s taxation in the 2023/24 tax year. For Chris and Joe, it is extremely important to make sure they’re reporting assessed income, fringe benefits, and claiming the right capital gains tax treatment on any property sold. In the case of Australia tax compliance, taxes can be reduced and the company remains tax compliant.
Bibliography
Rulings
Tax Assessment Act 1997 (ITAA 1997).
Income Tax Assessment Act 1997 (Cth) s 6-5.
Fringe Benefits Tax Assessment Act 1986 (Cth).
Fringe Benefits Tax Assessment Act 1986 (Cth) s 136(1).
Income Tax Assessment Act 1997 (Cth) s 104-10.
Income Tax Assessment Act 1997 (Cth) s 110-25.
Income Tax Assessment Act 1997 (Cth) s 110-25.
Income Tax Assessment Act 1997 (Cth) s 110-25.
Case Laws
FC of T v Cooke and Sherden [1980] HCA 42, [15].
Commissioner of Taxation v McDonald [1987] FCA 29, [33].
FCT v Whitfords Beach Pty Ltd [1982] HCA 8, [11].
Argente, David and Jorge García, ‘The Price of Fringe Benefits When Formal and Informal Labor Markets Coexist’ (2015) 4(1) IZA Journal of Labor Economics 1
Secondary sources
Australian Taxation Office, ‘What Is Capital Gains Tax?’, www.ato.gov.au (30 June 2023)
Butler, Callum and Paul Calcott, ‘Optimal Fringe Benefit Taxes: The Implications of Business Use’ (2017) 25(3) International Tax and Public Finance 654