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Jordan lives in Sydney and is interested in purchasing investment properties in regional Melbourne, in Bendigo and thus he gets introduced to a local real estate agent of Bendigo. Jorrdan air travelled to Melbourne and to return to Sydney. The hotel accommodations expenses for Jordan were paid by the agent. Jordan finalized a property out of many of the properties the real estate showed him. The details for the purchase of the property are as follows:-
- The property was valued at AU$ 450000.
- The settlement date for the purchase was 20 December 2019
- The contracts got exchanged on 11 November 2019
- From the 21 December 2019m, Jordan starts receiving rent from tenants.
- The rental income received from the investment property remained AU$ 30,000 for the income year 2019-2020.
- Jordan took a loan to purchase the investment property
- The interest liability on the prescribed loan remained AU$ 15,000 for the income year 2019-2020.
The items that have been identified in the above case of Jordan are discussed as below:
- Salary: Income from salary is considered to be a statutory income under specific provisions of ITAA97 or ITAA36. These provisions consists the specified amounts that are included in the assessable income of a tax payer. Jordan for the income year. It will be consider to be ordinary income u/s 6-5 of ITAA97
- Airfares: The Airfair is not an deductible expense as per ATO
- Hotel Accommodation: This expenses have been reimbursed by the agent
- Acquisition of property in Bendigo
Generally, the time you acquire a CGT asset (your acquisition date) is when you become its owner, most commonly because you’ve bought it or received it as a gift.
However, there are two common situations where your acquisition date is likely to be different from the date you become the owner:
When you buy an asset under contract and don’t take immediate possession, such as with real estate – in this case your acquisition date is the time you enter into the contract (normally the date on the contract) and not the date of settlement (except for certain transfers to trusts)
When you inherit a CGT asset – in this case the acquisition date is the date of when Jordan actually purchased the property.
- Rent: The rental income is assessable under specific provisions of ITAA97 or ITAA36. It will be consider to be ordinary income u/s 6-5 ITAA97
- Interest: The interest on loan is a deductible expense
Jordan makes renovations and improvements in a separate property in Coogee by arranging for a concrete ramp at the investment property. The related details are:-
- Cost of installing = $ 4,000
- the contractor started work on = August 21, 2017
- The ramp was completed on = August 30 2017.
- Jordan purchased the property back in December 2017 for $350,000.
The above improvement work can be considered to be Capital Works under Division 43. As per this provision, deductions are attracted for the cost of construction over a statutory period (usually 40-years) where item used for income production. Basically cost of construction forms a part of the cost-base of a CGT asset.
As per the type of expenditure on capital works has been made and the timing of the cost of of the improvements work decides the rate of deduction per annum which can be either 4% or 2.5% per year. Generally, a rate of 2.5% rate applies for improvements made after 15 September 1987.
Therefore, the annual deduction on the improvement made by Jordan in her Coongee property as per Division 43 is as follows:-
- Cost of installing = $ 4,000
- Rate of deduction = 2.5%
- Deduction Amount = 100 (4000 * 2.5%)
Jordan has decided to sell the Coogee property. He made advertisements to sell the property. Later he sold the property to an investor for $ 400,000. Other details are: -
- Exchange of contracts = 25 May 2019
- Settlement date = 15 August 2019
- The real estate agent’s commission on the sale = $ 6,000 and
- The solicitor’s fees for the sale = $ 4,500.
|real estate agent’s commission on the sale||6,000|
|the solicitor’s fees for the sale||4,500|
|Cost Base Unindexed||-||10,700|
|Capital Gain (Net Gain – Costs Base)||-||39,300|
Actual costs incurred (construction or acquisition) attract cost base inclusion, most likely under the fourth element of the cost base of a CGT asset. This is the case even if the construction costs to original owner attracted Division 43 deductions. Considering Division 43, the Cost of installing ramp in the Congee property has been added in the cost of the property or has been capitalized after making deduction for capital works under Division 43.
The staffs at Bendigo Bank at the level of assistant manager and above have been entitled by the company to receive a one year membership of gym above the normal salary. The value is cannot exceed AU$ 2,000. On 1 March 2019, Bendigo Bank paid for the gym membership for an amount of $1,800. Also, both Fitness A and Bendigo Bank are registered for GST.
Fringe Benefits Tax (FBT) – a tax payable by employers imposed at the rate of 47% of the taxable amount of certain benefits provided to employees in connection with their employment. Fringe Benefits Tax is governed mainly by the Fringe Benefits Tax Assessment Act 1986.
Employers are required to self-assess their FBT liability. The FBT year of tax runs from 1 April to 30 March (s 136(1) FBTAA). Employers that are liable to pay FBT for a year of tax must lodge FBT returns by 21 May in the following year of tax, or such later date as the Commissioner allows (s 68 FBTAA). For example, for the 2018–19 FBT year (1 April 2018 to 30 March 2019), FBT returns are due on 21 May 2019.
Employers are generally liable to pay FBT by quarterly installments and report these on their ‘activity statements’ (s 102 FBTAA). These installments are credited against the employer’s actual FBT liability as assessed from their annual FBT return.
Quarterly installments are not required where the employer’s previous year’s FBT liability was less than $3,000 (s 111 FBTAA). The benefit is an external expense payment fringe benefit that has a taxable value of $1,100. It is a GST-creditable benefit and is therefore a ‘type 1 benefit’ that must be grossed up by the proportion of 2.0802 for FY 2018/19. The grossed up taxable value of the benefit is therefore.
- $ 2000 × 2.0802 = $ 5604
Bendigo Bank will have to pay FBT on this benefit calculated as follows:-
- $ 5604 × 47% = $ 2634
Jordan has decided to start a restaurant and the location is selected to be the main street of Coogee Beach. The details are:-
- Opening date of restaurant = 15 December 2019
- restaurant will be managed by John, Jordan’s friend
- The premises are leased
- The lease rent = $1,000 per week.
As per ATO, a property fringe benefit can only arise when employer provide employee with property, either at a discount or for free. The following property includes under FBT:
- Goods, including clothing items, television, etc.
- Real property, like building or land
- Financial assets, like bonds or shares
In the case of Jordan, there is no employer employee relationship; hence there will be no FBT event.