PSI/PBI Test Steps
Discuss about the Personal Tax Treatment of Company Cars.
Section 6 of ITAA1996 defines personal exertion as personal service income earned as a result of own personal skills, efforts, and determination on the individual basis. Ideally, this income is derived from personal innovation, aggression and practical knowledge regardless of the market structure the person operates in Daley (2018.p.40.)
Over the years there have been difficulties in differentiating between which income is classifiable as personal service income and which is to be classified as personal business income. At some point, this is seen to swap the other by the face of it hence a wrong tax application on the wrong income. It is this that has seen Australian Tax Office Woellner(2012.p.13) come up with tests and steps of weighing whether an income is classifiable as personal exertion or not.
Hilary case involves testing whether the incomes are indeed personal service or personal business service. The three incomes under the first circumstance of writing the book, at the request of the Daily Terror Newspaper of course upon payment and that of writing it first for her own satisfaction and later on sale. By evaluating the PSI/PBI test steps I wish to say that all the income has passed the first test of ensuring that more than 50% of income earned in operation it was as a result of your own effort Morini (2018.p.1000.)
This is indeed true because all the income earned is as a result of an activity that he was involved directly or indirectly for instance photographs income Hilary herself is the one who took the photos, the 10000 earned is as a result of writing the book herself, while 10000 is for her copyright that she did herself and final is the income on books she sold to Mitchel library. Hilary through step two has likewise met the PSI minimum threshold since according to this step Hilary was indeed paid to write and publish the book.
She likewise provided and assigned all the copyright, title and interest to the Daily Terror Newspaper at of course a fee of 10000. She did writing, publish, and everything not at her expense but the expense of Daily Terror Company hence the process goes to step three because he has not attained 75% of especially on the issue of who fixes her mistakes expense it is not her. Hilary total income is 27000 resulting from this book, all these income do not come from one person hence the need to check out whether the percentage contribution is less than 80%. The highest income is 10000 hence=10000/27000=37.03% hence the income threshold is less than 80% will proceed to step 4 that in the long she has not passed the three test hence Hillary income qualifies to be a personal service income or exertion eligible to claim psi deductions but only to the first condition of writing the books since she was to be paid by Daily Terror Newspaper and not out of her own satisfaction.
Fringe Benefit Car Taxable Value Calculation
If she did the writing herself without any assistance fund-wise the first step of 50% of income coming from solely her effort is fulfilled when she decides to sell the book at a later date. This owns income out of her own satisfaction does not satisfy the 75% threshold condition since she is never required to produce any tool or equipment to anyone because she did everything herself Woellner (2016.p.23.)
Step 3 is what hinders the income from being a personal exertion mainly because she is herself did the writing for her own satisfaction hence any income from it will start with utmost 100% rate or a rate higher than 80% because she may also decide to sell in later date to only one customer hence her income will becoming more than 82% in it. Step 3 limits Hilary from claiming a personal service income deduction as per ATO office since she has not satisfied condition in step 3 so as to proceed with step 4 conditions.
This question is tasking us to calculate the taxable value of fridge income using the car cost price method as per the ATO regulations Harding (2014.p.5.) Statutory method does not consider the number of kilometers or miles a car has gone instead it considers just the base value of the car, prevailing statutory rate, duration the car is to be used for private expense, employee or worker portion of contribution and finally the period in which the fringe benefit lasts in that year. This method involves the use and application of the formulae as referenced in Benefit (2017.p.6.)
Taxable Value for Fringe Benefit= ((A × B × C) ÷ D) – E, where;
A=car base value, B=statutory rate, C=no of days the car was to be used for the private expense, D=No of days in Fringe Benefit Year while E=employee contribution on the car expense
In this case of Eric, the statutory tax rate is at 20%, car base value is at $50000
Taxable Value=50000*20%*183 days=1830000/366= 5000, here have assumed the tax year is a leap year hence used 366days tier. We now less employee contribution of 1000 from this hence;
Eric’s Taxable Value for Car Fringe Benefit=5000-1000=$4000.
Australian Tax Office regulation states that one is eligible to claim interest on the loan or apply deductibility aspect of the lending loan only if the amount loaned was to be used for an economy based activity. From my thinking the loan lends to the son by the parent is for a housing refurnish program that generates income for the son, hence to me I feel economic stand and position on this lending process is fulfilled Ryder (2012.p.350.)
Interest on Loan
However although there is no agreement or formal contract binding this loan process it is at ab-initial illegal because of the tax avoidance claim all the same there is nothing that limits the parent from reporting the interest paid of 5% of the principal value hence need to declare this interest income of 5% of 40000=8000 that now she has been paid to be safe. Initially the mouth to mouth agreement expected the son to pay interest of 10000 but even before the lapse of the payment period the parent had informed him not to pay interest but the son honored the interest promise although it was at a figure less than the 10000 agreed in the mouth agreement thus tasking the parent to declare this interest since the payment was done formally through a cheque.
Likewise, it is clearly seen that the interest done on this loan was reasonable hence the need to declare this interest in her assessable income statement Arthur (2016.p.28.) On the other hand the son if the loan was used to generate income as I presumed to be on furnishing or repairing the house he can claim for the interest on loan deductibility by providing the payment check details while receiving and paying the loan this will show he received 40000 but paid 48000 hence can claim the difference as the other party (parent) records it as income.
Ideally although there is a gap in the process of accounting for this loan i.e. through failing to uphold the legal agreement ATO requires the taxpayer or victim to correct the mistake by first accepting it through honoring the present possible obligation which in parents case was to include the 8000 amount in her income as interest on loan issue Saad (2014.p.1070.)
Capital gain or loss is ideally the difference between the sales residue values of an asset against its net book value.
The land value before construction is seen to be=$90000 while construction cost amounts to 60000 thus the cost of the asset immediately after construction is deemed to be the land value you add the construction cost hence;
=90000+60000=150000, in this case, since we have not be informed of any loss of value we are tasked to hold everything constant thus assuming there is no depreciation of these item taking place Hu(2015.p.930.) Similarly, since no information on revaluation is given on this item this consideration is likewise to be held constant.
Capital Gain Calculation
Capital Gain or Loss=Sales Residual Value Less Cost base Value, hence
Capital Gain or Loss=800000 the amount Auctioned Less The 150000 cost Value
Capital Gain or Loss=800000-150000=650000
Capital Gain or Loss=$650000, this figure indeed is high hence even if loss value is considered there would still be the gain.
This gain is to be included as part of the income for individual purposes and subjected to the tax brackets together with other income and if the assets i.e. land and building have stayed for more than 15years he can only subject 50% of this 650000 to form part of the taxable income.
Similarly to the above case, indeed the slogan on loss value is expected to deter since there is no concrete information concerning it Facts (2012.p.5.) Hence even if it is at a daughter the capital gain or loss aspect applies for instance;
Capital Gain or Loss=residual sales value-cost value
Hence=200000-150000=$50000, however, though this is the gain I presume the effect of loss value was there and the duration the item has been in operation this asset would be a capital loss most likely.
If the owner of the property was a company, instead of subjecting the full amount or rather the 50% special treatment exemption of the gain, the company is expected to subject only 10% of the gain as tax and if loss 10% to be settled off in the next financial year Hicks (2014.p.367) This is different because tax calculation for companies is done at standard direct corporate taxation method on the profit and not income.
References:
Arthur, G., 2016. Tax files: Taxation duties of executors. Bulletin (Law Society of South Australia), 38(2), p.28.
Benefit, C.F., 2017. What is a Car Fringe Benefit?.
Daley, M., Paskin, J. and Pallone, V., 2018. Now that decision was simply’unfair and unreasonable’!. Superfunds Magazine, (432), p.40.
Facts, A., 2012. Figures.
Harding, M., 2014. Personal tax treatment of company cars and commuting expenses.
Hicks, A. and Tran, A., 2014. Small business concessions. Taxation in Australia, 48(7), p.367.
Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.
Morini, M. and Pellegrino, S., 2018. Personal income tax reforms: A genetic algorithm approach. European Journal of Operational Research, 264(3), pp.994-1004.
Ryder, L., Elaine G. Ryder, 2012. Personal or family financial accounting and management system. U.S. Patent 8,099,350.
Saad, N., 2014. Tax knowledge, tax complexity, and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2012. Australian taxation law. CCH Australia.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.
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