Assessable income and ordinary income as per ITAA
Assessable income are those income where the income are made from indirect as well as direct sources that are present within or outside the national territory especially for an Australian citizen (Woellner et al. 2012). Adding up to the above statement, the income is made from the sale of assets that require proper attention as assessable income of the Australian citizen.
As mentioned in ITAA for the year 1997, it states that assessable income can be differentiated into statutory income as well as ordinary income at the same time. Furthermore, the ordinary income can be termed as the amount that is extracted from normal or in that normal course of actions (Woellner et al. 2014). It was properly mentioned in the Section 6 (5) of the Act where the ordinary incomes are explained and listed below with proper justification:
- Earnings from personal exertion such as wages, leave encashment as well as salaries (Snape and De Souza 2016)
- Earnings that are generated from property such as interest earned from deposits and dividend that is gained from the share investments as well as rent
- Earnings that are generated from various business transactions such as selling of shares as well as net income and income from farming activities (Snape and De Souza 2016).
On the contrary, statutory income is that income that cannot not be conjured by use of proper course of action. It was clearly mentioned in the Section 10 (5) where the earnings are explained or listed below with proper justification (Snape and De Souza 2016):
- Recovery of bad debts
- Insurance Bonus
- Royalty
- Capital gains at the time of conducting sale related activities to the capital properties
- Large sum of money that are received at the end of service contracts or in that case employment termination
- Credit recognition
- Income from trade exchanges
As far as statutory earnings are concerned, they are computed disjointedly for determining the assessable sum from the pay generated (Snape and De Souza 2016). In the given case scenario, it is noted that Peta has purchased a house two years back that has two old tennis courts. In addition, the main aim of Peta is to live in the purchased house lastingly and make profits through sale of the tennis courts in terms of units or value. Though, at a later point of time, Peta has sold the courts to a tennis club that amounts to $600,000 (Smith 2015).
As far as generated earning is concerned, it gets in use by selling the tennis courts could be categorized as the assessable income (Snape and De Souza 2016). The reason behind is the fact as Peta has purchased the possessions with a cause of making profits through sale of the tennis courts. Furthermore, it has also been practical that Peta has earned an amount of $100,000 resurfacing as well as building fences for establishing the tennis courts. From now on, this cost has been subtracted from net proceeds and this comes under the heading trade profits for Peta. Therefore, this could be considered as the normal profits of Peta in agreement with Section 6(5) (Shields and North-Samardzic 2015).
Assessable income in relation to the sale of assets
On the contrary, it is important to mention the fact where Peta is not concerned in any kind of real estate transactions, even although the cause is to make profit by selling the tennis courts (Snape and De Souza 2016). Furthermore, they have intended to sell the property in parts; in its place, she was bound to carry out the entire sale. Consequently, the amount determined from the possessions sale could be sorted as the legislative proceeds, as mentioned in the section 10 (5).
In addition, Peta has to acquire due on the net income, if the profits are exposed as normal profits. Addition to that, the assessable amount could be calculated by subtracting the asset obtains cost and other spending from the net income. Consequently, if the amount is portraying in the form of resources gain, Peta could benefit 50% exception on the net income (Scholes 2015).
From the above-mentioned viewpoint, the amount of $600,000 received could not be comprehended as normal profits, as mentioned in the Section 6(5) (Snape and De Souza 2016).
There are various assumptions that are created for determining the Fringe Benefits Tax Liability for the company named as ABC Limited in the background of Alan:
- The first assumption is wages and salaries that are compensated to the staff members cannot be treated as Fringe Benefits Tax. Therefore, the salary of Alan cannot be included at the time of computing Fringe Benefit Tax Liability (Saad 2014)
- The mobile bill that are used by the employee will come the heading Fringe Benefit Tax. In the given case, ABC Limited has not specified spending of mobile phone usage to Alan. Rather, ABC Limited had made the direct imbursement of the required amount to the third party (gov.au. 2016). It is essential for assessing the monthly expenses of mobile that is lower than $300 where the annual expenses amounts to $2640. Therefore, this amount will be treated as Fringe Benefits Tax for the company ABC Limited (O’Connell, Martin and Chia 2013)
- The company ABC Limited has paid the school fees of the children of Alan that explains that the business is bearing the personal expenditures of the employees. Therefore, the amount is included in the Fringe Benefits Tax (gov.au. 2016)
- ABC Limited had provided mobile phone to Alan that can be used for place of work purpose only. From the viewpoint of the owner, it could as classified as spending that arises from work reason (Snape and De Souza 2016). Consequently, the purchasing cost of the phone needs to be included to calculate the total amount of comprehensive items of GST. Following that, the gross amount needs to be expelled at the time of computing the taxable Fringe Benefits Tax amount (Norbury 2016)
- The total amount connecting to GST additional reimbursement as well as GST free reimbursement could be calculated independently. Following that, the amounts are recapitulating through increase of the gross rates, which are functional to miscellaneous range of reimbursement (Snape and De Souza 2016).
- The net assessable amount is then attuned with the price of FBT, which is 49%, at the time of computing Fringe Benefits Tax liability of the employer (Braithwaite 2017)
As mentioned in the given case situation, it is noted that cost per employee for diner for the company ABC Limited might rise up at an increasing rate. This action results to a situation where it leads to greater Fringe Benefits Tax Liability (Naik and Kohn 2013)
Below is the adding up of Fringe Benefit Tax Liability for the company ABC Limited for the financial year 2015 (Eccleston 2013).
It is important to state the fact that cost per employee remains unchanged and the reason for this is the overall dinner cost has been reduced according to the situation or present case. This results in understanding the fact where Fringe Benefits Tax might not even change as well as remain the same where the quoted amount of $22,339.35 (Miller and Oats 2016).
It is clearly mentioned in the above table where Fringe Benefit Tax is calculated. By the calculation, it is understood that Fringe Benefit Tax will be provided to the staff members. Addition to that, the given business enterprise that into account or involves clients where Fringe Benefit Tax consists of the cost that is spent on the employees. It is thereby essential for ABC Limited to gain insights of information as they could not assert any subtraction especially for client amusement (Lang et al. 2015).
Reference List
Ato.gov.au. 2016. What to include in your assessable income | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/Business/Income-and-deductions-for-business/Working-out-your-assessable-income/What-to-include-in-your-assessable-income/ [Accessed 20 Sep. 2016].
Ato.gov.au. 2016. Fringe benefits tax (FBT) | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/ [Accessed 20 Sep 2016].
Braithwaite, V., 2017. Closing the gap between regulation and the community. Regulatory Theory: Foundations and applications, p.25.
Eccleston, R., 2013. The Tax Reform Agenda in Australia. Australian Journal of Public Administration, 72(2), pp.103-113.
Lang, M., Pistone, P., Schuch, J. and Staringer, C. ., 2015. Introduction to European tax law on direct taxation. Linde Verlag GmbH.
Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.
Naik, L. and Kohn, M., 2013. Test case clarifies PBI endorsement criteria.Keeping Good Companies, 65(9), p.557.
Norbury, M., 2016. Tax cases: The right to silence and the commissioner.Taxation in Australia, 51(3), p.157.
O’Connell, A., Martin, F. and Chia, J., 2013. Law, policy and politics in Australia’s recent not-for-profit sector reforms. Austl. Tax F., 28, p.289.
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.
Scholes, M.S., 2015. Taxes and business strategy. Prentice Hall.
Shields, J. and North-Samardzic, A., 2015. 10 Employee benefits. Managing Employee Performance & Reward: Concepts, Practices, Strategies, p.218.
Smith, J., 2015. Australian state income taxation: a historical perspective. Available at SSRN 2704627.
Snape, J. and De Souza, J., 2016. Environmental taxation law: policy, contexts and practice. Routledge.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2014. Taxation of financial transactions. In Australian Taxation Law 2014 (pp. 1-81). CCH.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2012. Australian Taxation Law Select: legislation and commentary. CCH Australia.
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