Introduction to Fringe Benefit Tax
Case: In the below mentioned case Alan is an employee of ABC Pty Ltd and the following remuneration package has been negotiated by him :
- Salary of $300,000
- School fees of the Alan’s children that amounts to $20,000 a year
- Mobile bill payment of Alan
The company has also provided Ala with a latest handset which had a cost of $2,000. Along with this the company also hosted a dinner at the local restaurant and all the employees and the partners. The total dinner cost amounted $6,000 including the GST.
Fringe benefit tax is generally paid to the employees on various benefits that are provided by the employer to the employees (hr360, 2014). The fringe benefits are considered as an important part of the business and they prove out to be very useful for attracting the quality staff. There are few taxation obligations on the fringe benefits. There is a lot of difference among the fringe benefit tax and the income tax and the fringe benefits tax is usually calculated on the benefits that are provided to the employees. The Fringe benefit tax is taxable on the specific items and the rate for the tax is 47% that also included Medicare levy. The Fringe benefit tax is the annual tax and it includes the tax on any benefit that is provided to the employee during the period of 1st April to 31st march (Austrlain Taxataion Officer, 2016).
The fringe benefit tax contains little exclusion on which there is no fringe benefit tax levied. The exclusions include superannuation contribution, wages, salary and the benefits that are received under the employee benefit scheme (Kokemuller, 2015).
There is no fringe benefit tax levied on certain benefits that are notified by the government of Australia. Some of the benefits that are exempt from the fringe benefit tax are:
- Relocation expenses of the employee
- Expenses related to the work of the employees
- The car payment benefit expenses that are exempt
- Minor benefits that have the taxable value of less than $300
- Various equipment and tools that are related to the work
- Housing at the remote area(Otundo, 2015)
- Housing
- Debt waiver
- Car
- Home allowance if the employee is living away
- Board
- Transport related to airline services
- Meal entertainment
- Property
- Car parking
- Body entertainment that is exempted from tax
Fringe benefits are basically provided to the employees so that the best workers can be secured in the business. The fringe benefits are the non income related benefits.
In the above case we can assume that the mobile bills that are covered under the salary packaging are not chargeable to the fringe benefit tax as the phone is basically used for the purpose of business so it falls under the category of exclusion so the cost of mobile phone that is $2000 is not liable for Fringe benefit tax as it is related to employment benefit of the employee.
The expenses that the employee is liable to pay initially and is paid by then employers than that expense would fall under the fringe benefit category and hence the employer is liable to pay fringe benefit tax. So in the above case the school fee of Alan’s children was paid by the employer and hence the same is liable for tax. The school fee that was paid by the employer was GST free so it would be taxable according to the type 2 of fringe benefit tax.
FBT Exclusions and Inclusions
The meal that was provided by the ABC pty limited was provided to the employees at the end of the year so it is being assumed that the meal was not provided during the working hours so such expenses would be treated as entertainment expenses and hence are liable for fringe benefit tax.
In the above case ABC Pty limited had provided mobile phones to the employees and also reimbursed the mobile bills of Alan and hence such payment is not liable for fringe benefit tax as these expenses were incurred for business purposes and according to the FBT provision if any expense is incurred for business purposes than the same is not liable for fringe benefit tax.
- Expense related payment: GST free school fees $ 20000*1.8868=$37736
- FBT liability = $37736*47% = 17736
- FBT taxable value= $6600*1.1*2.0802*50%= $7551
- FBT liability = $ 7551*47%= $3549
- Total liability of FBT was $17736+$3549 which amounts to $ 21285
If there would have been less employees that is 5 than the answer in the above case would have been different. If there would have been fewer employees than the payment for the dinner would automatically reduce that would affect the FBT amount than the cost of dinner per employee would be 6600/20which amounts to 330 per employee. The number of employees in this case is 5 therefore the total expense for the dinner would be $1650. So here the FBT amount would be $1650*1.1*2.0802*50% which amounts to 1888*47%= $887.
In the above case the FBT is leviable on the dinner that is provided to the employees at the end of the year and if such dinner would have been provided to the employees if the clients of the ABC also attended the end of the dinner than in that case according to the FBT legislation FBT would be levied on the parts of the benefits that is provided to the employees and the partners and associates of the company are not liable for the FBT .
Ordinary income is the income that is considered to be ordinary in general course. Ordinary income is the income according to the ordinary concepts (Delaney, 2010). Section 6-5(1) of the Income Tax Assessment Act explains the ordinary income as the assessable income according to ordinary concepts. The income according to the ordinary concepts is not defined anywhere but it is considered to be the income that is considered to be ordinary by the people or the income that fits within the common law concepts (CCH Editorial Staff Publication, 2008).
- The income derived from personal exertion that includes wages and salary
- Income from any property that includes dividend, rent and interest
- Income that is received from carrying on a business that includes farming or retail sales(Dickinson, 2008)
The income that is not ordinary income is referred to as statutory income and that is also included in the assessable income as there are specific rules in the tax law. As for example the net capital gain is considered to be statutory income.
FBT Calculation and Scenarios
Payments that are considered outside the ordinary business activities
An individual can sell non trading stock assets like land, office furniture, building and equipment as a part of running a business (Freeland, 2007).
- The amount that is received over the written down value while selling certain depreciating assets.(Peroni, 2008)
- A net capital gain that is received from selling some of the capital assets that includes land and buildings
- The value of the goods that is taken from selling some of the capital assets or trading stock from the private use.
- The market value of the transactions that does not involve money for example the barter transactions(JK Lasser Instiute., 2007).
Payments that is received from the activities that are outside the ordinary course of running the business are also included in the assessable income. Two of the example is:
- Payments that are received from the isolated transactions that are outside the ordinary course of business and the intention of the transaction is for making the profit.
- Prizes or awards that are received for the business that includes the cash prize for being a best business in a particular region.
In the above case Peta decided to purchase a house two years ago in Kew. The house had two old tennis courts that were in a very poor condition. The property was purchased by her for two reasons:
- The first reason was for living happily with her family in that house
- The second reason was that she could built three units on the tennis courts and that could be sold on profit.
While in the current tax year one of the tennis clubs decided to purchase the old tennis courts but they had a condition that Peta handed over the tennis court to them in good condition (Finance Foundations : Income Taxes, 2007). The offer of the club was decided to be accepted by Peta and decided to build and sell the tennis court to the club at a profit. She further spent $100,000 on the preparation of the tennis court for the sale purpose. There was a great deal of work involved in same. The tennis court required resurfacing and new fences were required to be built around the court. After that the Tennis court was sold for $600,000 to the club (Annoynomous., 2011).
The issue that has arisen in the above case is whether the receipt of $600,000 is ordinary income or not.
In the above case the profit that is derived from the sale of the tennis court is not ordinary income according to section 6-5(1) of the Income Tax Assessment Act 1997. The profit that is received by Peta from the sale of tennis court is statutory income because the selling and purchasing is not ordinary business of Peta , she never purchased the house and the adjoining the tennis court initially for entering in to the business of sale purchase and earning profit (CCH Australia Staff., 2012).
Decision:
According to the taxation law of Australia’s it is decreed that every year ending 30 June, most of the people in Australia that includes the individuals as well as companies have to pay tax on which the tax is called and that income is known as the taxable income of the person .After the calculation of the amount of the taxable income of the person the scale of tax rates are applied by the tax law so that it can be worked out as to on how much amount an individual is required to pay the tax in that particular year.
As per the guidelines of the Section 6-5 of the Taxation Law , it is said that the assessable income of the person includes all the ordinary income that is derived by him during that particular year (Graham, 2007).
Further in Section 6-10 it is explained that the assessable income of a person also includes the amounts that are not the ordinary income but which are already included in the assessable income of the individual according to the provisions of law and that income is known as the statutory income.
So here it can be concluded that basically an assessable income of the individual is made up of two amounts that is :
- Amounts that are the ordinary incomes
- Amounts that are not the ordinary income but which are said to be the income according to the provisions of law that is the statutory income.
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A Capital receipt is not regarded as an ordinary income |
So, in the above case the sale of tennis court is not an ordinary income rather it is the statutory income of Peta
References
Annoynomous., 2011. Australian Income Tax Legislation 2011: Taxation Administration Act. New York.
Austrlain Taxataion Officer, 2016. ATO. [Online] Available at: https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/types-of-fringe-benefits/ [Accessed 21 May` 2017].
CCH Australia Staff., 2012. Australian Master Tax Guide 2012 – Page 368.
CCH Editorial Staff Publication, 2008. U.S. Master Tax Guide – Page 570. London.
Delaney, P., 2010. Wiley CPA Exam Review 2011, Regulation – Page 566. New York: Springer.
Dickinson, M., 2008. Federal Income Tax: Code and Regulations–Selected Sections.
Finance Foundations : Income Taxes, 2007. Lynda.com. [Online] Available at: https://www.lynda.com/Business-Accounting-tutorials/Ordinary-income-capital-gains-income/188210/368083-4.html [Accessed 21 May 2017].
Freeland, J., 2007. Federal Income Taxation of Estates, Trusts & Beneficiaries 2007. LOndon.
Graham, R., 2007. Financial Management for Agribusiness – Page 149.
hr360, 2014. hr360. [Online] Available at: https://www.hr360.com/Employee-Benefits/Fringe-Benefits/Introduction-to-Fringe-Benefits.aspx [Accessed 21 May 2017].
JK Lasser Instiute., 2007. J.K. Lasser’s Your Income Tax 2008: For Preparing Your 2007 Tax Return. London.
Kokemuller, N., 2015. Chron.com. [Online] Available at: https://smallbusiness.chron.com/fringe-benefits-employee-41950.html [Accessed 21 May 2017].
Otundo, E., 2015. Fringe Benefits Strategy on Growth of Employee Productivity.
Peroni, R., 2008. International Income Taxation: Code and Regulations, Selected Sections. Australia.
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