Q1

The case concerns about disposal of a capital asset. The vacant land, which is acquired by Colourvision Pty Ltd at $12,000,000 on 1 January 1986, is sold for $3,000,000 on 1 January 2014. As the land is acquired after 20 September 1985, the old law cannot apply, capital gains need to be caught by CGT according to Part 3-19(ss. 100-1- 121-435) and Part 3-3(ss. 122-1- 152-430).

As all the discussion can be only in the progress based on a “CGT event”(s 102-20 ITAA97), and “CGT event” are always related to “CGT asset”. It is necessary to identify if the land belongs to CGT asset. In the case, although the land was supposed to build into a new factory but actually not, it is obviously that the vacant 5-hectare block of land is a tangible CGT asset according to the definition in s 108-5(1), which is defined as “any kind of property”. Concerning the case, among three different kinds of CGT assets, this land belongs to “ordinary” CGT assets (Subdiv 108-A).

As mentioned, only a CGT event is able to trigger capital gain and capital loss. 54 recognized CGT events(s 104 of ITAA 1997) are listed in a table. The Colourvision case is about the acquisition and disposal of a land, which is also a CGT asset, so it is in respect of Event A1, which describe disposal of a CGT asset(s 104-10) and Event D1, which specify in creating contractual or other rights(s 104-35). To be specific, the timing of acquisition, is when creating contractual or other rights, and in this case, it is 1 January 1986. Considered in FC of T v Sara Lee Household & Body Care (Aust) Pty Ltd 2000 ATC 4378, the timing of disposal is when entering into disposal contract, and in this case, it is 1 January 2014 when it signed the contract.

Another point that needs to be discussed is about the residence. In the case, Colourvision Pty Ltd is a Victorian manufacture and an Australian resident, so it is subject to CGT relating to all CGT event no matter where the land is located, that is to say, it is subject to CGT whether inside or outside Australia. Also, this block of land is located in Frankston, a suburb of Melbourne in Australia. So, disposal of this land is absolutely with respect to CGT. Moreover, there is no changing in residence status during the whole process.

Choosing method
In this case, the land is acquired before 21 September 1999, and there is no expenditure incurred after 21 September 1999. Also, the land has held for more than 12 months(s 110-36, s 960-275(4), Div 114). So, indexation method is available for calculating CGT gain on disposal this land. Neither discount nominal method nor non-discount method is available for this case. The nature of this case is company, however, discount nominal method is only used for individuals. For non-discount nominal method, it is used when the two last methods cannot apply. Overall, the only method can be apply is indexation method.

The CPI number is 74.4 for January 1986, 75.6 for May 1986, and is frozen at September 1999 quarter (123.4)(s 960-275(2)).
Indexed cost base:
$3,000,000×123.474.4+$180,000×123.475.6+$4,500×123.475.6
=$3,000,000×1.658602151+$180,000×1.632275132+$4,500×1.632275132
=$4,975,806+$293,810+$7,345
=$5,276,961
Legal fee: $16,000
Real estate agent’s commission: $75,000
CGT gains
Capital proceeds-ICB
=$12,000,000-$5,276,961-$16,000-$75,000
=$6,632,039

It is clearly that net capital gains for this disposal is $6,632,039, then any other disposal should be considered. Division 102 ITAA97 contains the rules for capital gains. What the company needs to figure out is whether there is any capital loss during the income year or earlier year, whether there are capital gains that can be reduced by the “discount percentage”. Also, whether small business concessions could be applied is taken into consideration. A small business concession is a social policy used to encourage small company. It can be found that the company has an annual turnover in excess of $100,000,000. However, small business concessions can be only available to entities with a turnover less than $2,000,000 or with CGT assets’ net value less than $6,000,000. It can be implied that small business concessions may not apply to Colourvison Pty Ltd. So, net capital gains should be included in the company’s assessable income.

Q2

The question 2 is concerning about operation of the fringe benefit tax (FBT). Australian government is used to tax employees on fringe benefit, but it seems ineffective before 1 July 1986 because some kinds of fringe benefit were not taken into consideration. In the case, the car is for Li’s personal use, as it is a non-cash benefit provided and paid by Colourvison Pty Ltd in respect of employment relationship with Jane Li, according to Fringe Benefits Tax Assessment Act 1986, the case belongs to car fringe benefit among 12 specific benefits. Under the Act, the FBT tax year is 1 April 2013- 31 March 2014 and the FBT rate is 46.5%.

Colourvison Pty Ltd is a manufacturer of paint products in Australia, it is not a religious body, International body or public benevolent institution, so it is not an exempt employer. That is to say, FBT cannot be exempted or discounted in this case.

Each specific category has its own method to calculating, some may have more than one valuation method. For car fringe benefit, statutory formula method and operating cost formula method are both available. In this case, we choose statutory formula method as operating cost of the car and business use percentage are not given.

According to the case, the car was purchased on 30 March 2008. Under the clause, if the provider has already hold a car for more than four years, the base value of car is calculated by multiplying the original cost base by two thirds, and this year is 2013. That is to say, the base value of car should be multiply $90,000 by two thirds, equal to $60,000.

Since 2008, the car has been for Li’s personal use as part of her salary package. However, it is not sure that when the contract enters into. There are two possibilities, one is that Colourvison and Li signed the contract just after they bought the car in 2008, the duration of contract has already included 2013-2014. In this way, the statutory fraction is 0.07 according to the table. Another possibility is that Li entered into this contract after on 1 April 2013, under this circumstance, statutory fraction is 0.17. Assume: (entering into contract on 1 April 2013) 1. Base value of car: $60,000 2. Distance travelled: 62,000kilometers (statutory fraction: 0.17) 3. Days of private use: 365 4. Days in the FBT year: 365 5. Employee’s contribution (petrol): $1,000

Taxable value:
$60,000×0.17×365365-$1,000=$9,200
Fringe Benefit Tax:
$9,200 ×46.5%=$4,278

Assume: entering into contract before 10 May 2011(Statutory fraction: 0.07)
Taxable value:
$60,000×0.07×365365-$1,000=$3,200
Fringe Benefit Tax:
$3,200×46.5%=$1,488

In fact, as there is no description in the case, the contract can be entered into at any time during 30 March 2008 and 1 April 2013. Besides the two situations discussed before, statutory fraction is 0.10 if they enter into contract from 10 May 2011 to 31 March 2012 and is 0.13 if they enter into contract from 1 April 2012 to 31 March 2013.

Q3

This part is relating to deductions. As we known, taxable income equals to assessable income minus deductions (s.4-15 (1) ITAA 1997). General deductions (s. 8-1 ITAA 1997) and specific deductions (Div 12 ITAA97) are two types of deductions. In this case, bad debt is one of specific deductions under s.25-35.

Firstly, we need to identify the nature of the entity to make sure how many conditions should be taken into consideration. If the entity is a company, it needs to satisfy four conditions while it is not, just three of four conditions are used to have a check. In this case, the entity is obviously a company and we have to consider whether the bad debts meet all the four conditions.

The first condition is that the debt must be “bad”, which means the debt must be treated as cannot be recoverable any more. A ”doubtful debt” should not be accounted while the debts must impossible to recover. In the Colourvision case, it stated clearly that debts owed to the company would not be recoverable. So for condition one, the company has met the requirement.

The second condition is that the debt must be “written off”, which means write off in the books of account. The importance of writing off the debts has shown in Point v FC of T 71 ATC 4014. As far as I concerned, “written off” bad debts indicates that written evidence must be available to trace in the year when taxpayer decides to claim the bad debts, otherwise, the debts cannot be treated as bad debts if there is not enough evidence. Obviously, in the case, there is no evidence that we could find to identify whether the bad debts have been written off or not.

The third condition is that the debts must have already been added to income. As we known, cash basis accounting and accrual basis accounting are two types of accounting system. Condition three is happened when the company has already sent the product, but the purchasers did not pay the money. Only in accrual basis accounting can this situation exist. However, we have no idea about what accounting system is Colourvision finance department used. That is why we cannot figure it out.

The forth condition is that a company must pass either continuity of ownership test (s 165-123 ITAA 1997) or continuity of business test (s 165-126 ITAA 1997). To be specific, continuity of ownership test require that, when the company claims the bad debts deduction, at least half owners of the company compared with when the debts incurred, could not change. In other word, if more than 50% owners have changed, the company will fail the test. Continuity of business test claims that if a company wants to satisfy the test, it cannot change the ownership before the company change for another business which is different with the relating bed debts one and before the company has derived income from a different business compared with the bed debts one. The case provides so little information that we cannot figure out either of them.

In conclusion, the company cannot get bad debts deduction based on the information, which is given now. What the company satisfied is only the first condition, while all the rest three conditions are unclearly for testing. So, next step is to find out more information about the ownership and finance department. Then we can identify whether the debts can be treated as bad debts deductions or not.

Q4

The forth part is also relating to specific deductions. Section 25-10 ITAA 1997 provides the deduction rising on repairs to premises or assets that used only for income-producing purpose. If the assets are partly for income purpose and partly for other purpose, only the repairs from the part that used for income purpose can be reasonable deductible. In this case, the company spent much money to fix the driveway, and materials have changed from

The nature of repair is widely discussed in many cases. Basically,