Calculation Of Taxable Income, Fringe Benefit Tax And Ways To Reduce It

Calculation of Taxable Income

The Section 4-15 of the Income Tax Assessment Act, 1997 lays down the way in which taxable income is to be calculated for the income year (1^st of July to 30^th June), as per this section taxable income = Assessable income – Deductions, Assessable income is as explained in division 6 and the deductions allowable in division 8 where division 35 prevents losses from non-commercial business activities that may contribute to a tax loss from being offset against assessable income.

Since the applicability of any special provision does not apply in the present case the income of the partnership shall be calculated as per section 4-15.

Other applicable divisions and sections like Division 70 – Trading Stock and other information that is inter alia useful for assessing the income of the partnership is considered further (Ato.gov.au,2019).

Depreciation on assets as calculated by using depreciation calculator given by ATO (ATO,2016) :  806.20

• Air condition installation is repair expenditure as there is no asset namely air conditioner, thus charged to profit and loss account;
• $3,200 of stock taken from the bottle shop is at purchase price;
• Loan is entirely for the business and none of it is used for personal purposes;
• Union fees is completely a business expenditure;
• Bank accounting charges of ANZ bank are completely relatable to the business;
• 5600 taken by partners is added to income as this is not allowable as expenditure.

Considering all the information and data given above the net income for partnership for the year ended 30^th June 2017 is 45,068. Also, considering the facts given in the question relating to joint utilization of business premises and other expenses division 35 of the Income Tax Act,1997 have been regarded while attributing the joint expenses to the ascertain the net taxable income of the firm; apportioning only the portions of expenses used to facilitate the business operations

Net taxable Income as per section 4-15 (total of assessable income less the total deductible expenses) is:     187,655.00 – 142,587 = 45,068.00

As defined by the Fringe Benefits Tax Act, 1986 a Fringe benefit (FBT) is a tax payable by employers for benefits paid to an employee (or an employee’s associate e.g. a family member) in place of salary or wages.

Section 5A of the Fringe Benefits Assessment Act, 1986 outlines the ways and methods in which the said tax is calculated. The ways of calculating the taxable amount are given in subsections (1B) and (1C) of the said act that give the following formulae (ato.gov.au):

As per section 5C of the Fringe Benefit Assessment Act, 1986 it is quite clear that type 1 fringe benefits are the benefits against which GST credits are available to the employer whereas type 2 are the benefits against which the said GST credits are unavailable to the employer because of either of the two conditions: (i) the benefit provided does not attract the payment of GST;

Division 35 Applicability

(ii) the benefit provided are input taxed, and as per the GST Act, goods or services on which GST paid is input taxed, that is the GST is included in the price of the service and/or goods, the credits for GST are unavailable.

Considering the quoted provisions and other relevant text from the Fringe Benefit Tax Act, 1986 it can be clearly stated that the given benefits are not exempt in nature thus, the consequences of providing fringe benefits to John will be as follows:

Benefit 1: School Fees at a private school for John’s Child.

As per the governing ‘A New Tax System (Goods and Services Tax) Act, 1999 School fees is exempt from GST whether from a private or public school. Thus this benefit will fall under type 2. In the present case the employer would be liable to pay Fringe Benefit Tax on benefits provided of $15,000.00.

Benefit 2: Rental accommodation provided in Sydney on concessional rent.

As per the governing ‘A New Tax System (Goods and Services Tax) Act, 1999 Rent on residential premises is input-taxed that is not separately recovered thus GST credits on the same are not receivable by the payer of rent making this benefit fall under the type 2 category. Thus the employer is liable to pay Fringe Benefit Tax on the market value of the residential premises provided to John as reduced by recoveries made from him, which would be equal to $36,400* for the Fringe Benefit Tax year (1^st April to 31^st March).

* It is considered there are exactly 52 weeks in the Fringe Benefit Tax year

Apart from the above you will be required to furnish annual Fringe Benefit Tax returns in April each year and also required to maintain following information (ato.gov.au):

There are ways to avoid the Fringe Benefit Taxes, this could be done by the following means as laid down in the ATO article on “How to reduce the FBT you Pay” (ATO,2016):

• Substitute the fringe benefits by cash pays; that is rather than paying the accommodation in Sydney at such a nominal rent the employer could either pay cash to John so as to compensate for his rental expenses or he can recover a higher amount from John so as to reduce his own Fringe Benefit Tax liability; similarly in case of the school fees reimbursed, the employer can rather pay an extra amount to John equivalent to the school fees of his child.
• Alternatively, the employer can also opt to give tax free benefits rather than giving benefits that are chargeable to Fringe benefit tax, such benefits include, benefits such as
• Provide benefits that are tax deductible, providing benefits that are income tax deductible would give an edge to the employer as the benefits provided and the taxes paid thereon would be deducted from the profits of the employer.
• GST credits, employer can provide fringe benefits that are available for GST credits that are the benefits on which the GST is either payable or not input taxed unlike the accommodation benefit and the school fees benefit provided to John.
• Providing Cash bonus, as per the Fringe Benefit Tax act, bonuses provided to the employee do not attract fringe benefits, as when an employee receives fringe benefits it is the employee who is liable to pay tax on such bonuses received rather than the employer.

Using these alternative means the employer can save on both the compliance requirements of Fringe Benefit Tax and also the tax payable by him.

References

Australian Taxation Office. (2016, September 28). Calculators and tools_Host. Retrieved January 17, 2019, from https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=DCA#DCA/questions/assets (Office, 2016)

Australian Taxation Office. (n.d.). How GST applies to residential rent. Retrieved January 19, 2019, from https://www.ato.gov.au/general/the-sharing-economy-and-tax/renting-out-all-or-part-of-your-home/how-gst-applies-to-residential-rent/

Australian Taxation Office. (2016, September 28). How to Reduce FBT you Pay. Retrieved January 17, 2019, from https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/In-detail/FBT-and-entertainment-for-small-business/?page=8

Australian Taxation Office. (2015, June 16). Residential premises. Retrieved January 18, 2019, from https://www.ato.gov.au/Business/GST/When-to-charge-GST-(and-when-not-to)/Input-taxed-sales/Residential-premises/

GST on Fringe Benefits [Rtf]. (n.d.). Retrieved January 17, 2019, from

https://archive.treasury.gov.au/documents/168/RTF/AppA5.rtf

Office of Parliamentary Council (2018). Federal Register of Legislation – Australian Government. Retrieved January 18, 2019, from: https://www.legislation.gov.au/Details/C2013C00327

Office of Parliamentary Council (2018). Federal Register of Legislation – Australian Government. Retrieved January 17, 2019, from: https://www.legislation.gov.au/Details/C2013C00049

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