Fringe Benefits Tax Liability for an Employer
The main aim is to determine fringe benefits tax liability for Periwinkle (employer) with regards to the given fringe benefits (car, loan and expense) to Emma (Employee).
The benefits issued to employee by their employer would lead to the applicability of fringe benefits tax liability on the part of employer. There would not be any FBT liability applicable for employee. Further, the employer can claim tax deduction on the accounting of FBT liability and hence, it is essential to determine which benefits would be considered as fringe benefits as per FBTAA 1986 (CCH, 2013).
It is apparent from the case facts that Periwinkle has issued three fringe benefits to Emma during her employment.
The case where employer has issued car (vehicle) to employee for private utilization, then in such scenario the benefits of providing vehicle would be categorised as car fringe benefits as per section 8, FBTAA 1986 (Gilders, et. al., 2016).
Periwinkle bought car on May 1, 2016. The cost of car was $33,000. At the same time, Periwinkle issued the car to Emma that she can use for private purposes.
The FBT payable can be calculated as highlighted below:
Base value for the financial year 2017 = Car price – Cost incurred on repairing
Base value = $32,450
As per the norms of ATO, when the vehicle is acquired by employer after April 1, 2011, then 20% statutory percentage would be the taken into consideration (Sadiq, et.al., 2016). It is evident that car was purchased by Periwinkle on 2016 and hence, the applicable percentage is 20%.
The car was not issued on April 1, 2016 and therefore, car accessibility for Emma would be calculated from May 1, 2016. Hence, the total days would be 335 rather than 365. Further, Emma did not use car for 5 days when the car was not assessable to her and sent for repairing. Thus, the days would be
Moreover, the time when Emma was not at town and did not use the car would not be deducted from total number of days. This is because car was assessable to Emma but she has parked the car at the parking space of airport (Woellner, 2004).
Car is type 1 good. Therefore, gross up factor would be 2.1463 for the financial year 2017.
Grossed up value of the car for FY2017
Fringe benefits tax rate for the financial year 2017 is 49%.
Taxable Amounts, Gross Up Factors, and Fringe Benefits Tax Rates
The case when loan has been issued to employee by employer at zero interest rate or at the interest rate lesser than the benchmark interest rate set by Reserve Bank of Australia (RBA) would lead to loan fringe benefits (Deutsch, et. al., 2016).
Periwinkle has issued the loan of $500,000 to Emma at an interest rate of 4.65%. The benchmark interest rate announced by RBA is 5.65%. The issued interest rate is lesser than RBA’ s interest rate and therefore, loan fringe benefits tax liability would arise on Periwinkle.
Interest amount based on RBA’s interest rate
Interest amount based on Periwinkle’s interest rate
Interest amount saved due to lesser interest rate
Loan was issued on September 1, 2016 and therefore, the loan was available for utilization to Emma for 213 days.
Taxable value
Loan amount is type 2 goods. Therefore, gross up factor would be 1.9608 for the financial year 2017.
Grossed up value of the car for FY2017
Fringe benefits tax rate for the financial year 2017 is 49%.
FBT payable
Interest amount would lead for deduction for employer only when the employee has used the loan amount to generate income (Deutsch, et. al., 2016).
The interest amount would be available for deduction for Periwinkle only when the holiday home purchased by her with loan amount would generate income for her.
Further, the part of loan i.e. $50,000 which Emma has been given to her husband to purchase the shares would not lead any deductions for Periwinkle (Kreyer, 2016).
When, employer has issued some non-cash benefits to their employee, then FBT liability would arise on employer (Barkoczy, 2015).
Periwinkle sells bathtub directly to the public and the per bathtub sale price is $2,600. Further, it can be seen that Periwinkle has given bathtub with half price to Emma i.e. $1,300.
The internal expense fringe benefits = Actual sale price of bathtub -Offered sale price of bathtub
75% of sale price would be calculated as shown below:
Taxable amount for internal expense fringe benefits =
Expense is type 1 goods. Therefore, gross up factor would be 2.1463 for the financial year 2017.
Grossed up value of the car for FY2017
Fringe benefits tax rate for the financial year 2017 is 49%.
FBT payable
It can be concluded that the fringe benefits payable for Periwinkle for all the three fringe benefits is shown below:
|
Fringe Benefits |
Fringe Benefits Payable |
|
Car fringe benefits |
$6171 |
|
Loan fringe benefits |
$2795.74 |
|
Internal expense fringe benefits |
$684 |
The main concern for the situation presented is to indicate the expense deduction which Tom can claim in lieu of the expenditures that have been incurred as indicated on the basis of the case information.
Deductible Expenses for Tom
- Tom works in Sydney as a tax consultant.
- Tom has planned to shift to Wagga Wagga in order to commence a business of organic vegetable.
- For ensuring the same, land has been purchased in Wagga Wagga on 1stJuly, 2016.
- Based on the information provided, it is apparent that Tom tends to spent a sizable time for farming during weekends especially during the second half of the year.
- Tom shifted to the farm on 1stJanuary 2017 after leaving job in the position of tax consultant.
- For the given tax assessment year 2016-2017, a loss is expected. However, for the assessment year 2017-2018, it is expected that a break-even would be achieved. But for 2018-2019 assessment year, it is expected that the profit would be $ 20,000.
Considering the facts stated above, the discussion in relation to potential deductions on account of expenditures is highlighted below.
- On June 1, 2016, a loan to the extent of $ 200,000 has been taken having an interest rate of 7% p.a. and the underlying tenure of 5 years..
With regards to the above loan, it is given that an establishment fee of $ 500 has been given to the bank as on June 1, 2016. As per s. 25(25) ITAA 1997, there is deduction available on borrowing expenses provided these are deployed for assessable income generation. Besides, deduction for the borrowing expenses would be available in the assessment year when the lent amount is actually deployed in assessable income production. As the given loan has been used for the production of assessable income starting from 2016/2017 assessment year, hence this borrowing expense would be deductible in 2016/2017 assessment year only (Barkoczy, 2015).
In relation to the interest expense, deduction as per s. 8-1 ITAA 1997 is permissible if the conditions listed below are complied with (Woellner, 2014).
- There needs to be a direct relation between the underlying interest expense and the commercial activities with the intention of production of assessable income.
- Besides, the interest character must be of revenue nature. For ascertaining the same, a host of factors need to be considered. Only after taking these can interest payment nature can be determined with accuracy..
- The deduction of interest is only available till the time, the borrowed funds are used for producing assessable income by the taxpayer.
Taking into consideration the aspects highlighted above, it becomes clear that interest related deduction on the $ 200,000 loan for business would be available starting from assessment year 2016-2017 till the time the loan is repaid i.e. 2020-2021. For these five years, a interest related deduction is available for the interest expense on the loan computed at 7% p.a.
- In relation to the pollution claims, the company has incurred certain legal expenses.
- The underlying expense is personal or private in nature.
- Instead of revenue nature, the underlying expense has capital nature.
- Non-assessable income is produced as a result of the expense.
For the underlying case, the legal expenses deduction would be contingent on the fact if the legal expense is revenue or capital in nature. The given legal expenses would not be categorised as revenue and would instead be treated as capital expenses. This is because safeguard from the charges of pollution would allow the company to keep operating and hence the underlying benefits are not limited to the current period but stretch to the future also as the closing of business is prevented. Owing to the capital nature, it is noteworthy that no deduction for legal expense is permissible under the aegis of s. 8-1 ITAA 1997 (Gilders et. al., 2016).
But, it is noteworthy that the above expense is related to the business and hence s. 40-880 would be applicable to provide deduction on this capital expense. However, the deduction instead of being availed in the given year only is actually realised over a five year period using the straight line method (Sadiq et. al., 2016). Therefore, annual capital allowance would be (2000/5) or $ 400 per year starting from 2016-2017 till 2020-2021
- A seminar has been attended by Tom which related to organic vegetables growing and the associated expense including travel expenses is $ 2,500.
As per TR 95/9, expenses incurred in relation to attending seminar will be considered as deductible only if it results in higher expertise and skills which in turn is related to the current or future activity that the taxpayer intends to engage in for production of assessable income. The following commentary from FC of T v. Finn (1961) 106 CLR 60 case further validate the above point (Krever, 2016).
“.a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling”
In line with the above discussion, it would be appropriate to conclude that the 100% of the seminar cost (including travel expenses) will be considered deductible during the assessment year 2016-2017.
- Initial repairs to the extent of $ 25,000 were incurred when Tom moved into the farmhouse with his wife
The given repairs will be categorised as initial repairs as the repairs have been incurred before Tom and his wife have settled at the farm for the first time. Since these are capital in nature, hence, s. 8-1 does not allow deduction for the same even if there is a relation to production of assessable income. But, it is noteworthy that the above expense is related to the business and hence s. 40-880 would be applicable to provide deduction on this capital expense. management, the deduction instead of being availed in the given year only is actually realised over a five year period using the straight line method (Deutsch et. al., 2016). Thus, capital allowance on annual basis commencing from 2016-2017 would be (25000/5) or $ 5,000 per year till 2020/2021.
References
Barkoczy, S. (2015) Foundation of Taxation Law 2017. 9th ed. Sydney: Oxford University Press.
CCH (2013), Australian Master taxation-law Guide 2013, 51st ed., Sydney: Wolters Kluwer.
Coleman, C. (2011) Australian Tax Analysis. 4th ed. Sydney: Thomson Reuters (Professional) Australia.
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., & Snape, T. (2016) Australian tax handbook. 8th ed. Pymont: Thomson Reuters.
Gilders, F., Taylor, J., Walpole, M., Burton, M. & Ciro, T. (2016) Understanding taxation law 2016. 9th ed. Sydney: LexisNexis/Butterworths.
Krever, R. (2016) Australian Taxation Law Cases 2017. 2nd ed. Brisbane: THOMSON LAWBOOK Company.
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, & Ting, A (2016) , Principles of Taxation Law 2016, 8th ed., Pymont: Thomson Reuters
Woellner, R (2014), Australian taxation law 2014 7th ed. North Ryde: CCH Australia
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