FBT Liability Calculation for ABC Pty Ltd
The first issue is to comment whether the benefits extended to employee (Alan) would amount to FBT on employer ABC Ltd. The second issue is to determine the FBT liabilities of ABC Ltd arising from the extended fringe benefits.
The three cases (electronic device, school fees and dinner) would be discussed here in the highlights of the relevant divisions & sections of the Fringe Benefits Assessment Act 1986.
- The noncash benefits which the employer has given to the employee in the employment period would be termed as fringe benefits only when the benefits are typically extended as personal nature benefits (Sadiq et. al., 2016). As per section 58X, FBTAA 1986 the electronic devices given to the employee for office work would not be considered as fringe benefits and thus, the bills or any expenses on the account of these device would not be extended an FBT liability for the concerned employer (Barkoczy, 2016).
- When the employer has made the payment of the school fees of employees’ children then it would amount to expense fringe benefits and employer is liable to pay FBT on the amount. FBT liability = (0.49 * Expense Borne by Employer * gross up rate) (CCH, 2013).
- The dinner planned by the employer essential outside from the business office premise would result in the meal fringe benefits. It is noteworthy that when the per head expense is lesser than $300 then in such case FBT is assumed to be exempted because of the underlying provisions of minor benefits exemption (Gilders et. al., 2016). Further, tax deduction in income tax is valid for employer if the meal benefits are for the employees and/or their associates. However, the deduction is not valid when the meal benefits are for the clients. The aim in this case is to minimize the overall tax liabilities and hence, the below highlighted method is used by employer (Deutsch et. al., 2016).
Actual Method – Total expense (food bill) would be accountable for FBT liability computation. It is because tax deduction is valid when employees are invited and thus, it reduces the overall liabilities for employer (Coleman, 2011).
FBT liability = (0.49*total meal bill* gross up rate)
50-50 Split Method – Only half of the total expense would be accountable for FBT liabilities computation. It is because no deduction is valid and to lower down the FBT liability employer uses this method especially when clients are included as invitees (Barkozcy, 2016).
FBT liability = (0.49*0.5* total meal bill* gross up rate)
Application
- As per section 58X of FBTAA 1986, electronic device (mobile) has been extended to Alan for office work. Therefore, it would not be fringe benefits and also, the payment of Alan’s mobile bill (this mobile) would not be expense fringe benefits because Alan does not use this for personal work.
- School fee would raise FBT liability on employer because it is an expense of personal nature of employee. The gross up rate is 1.9608 for FY 2017 for type 2 good and exempted from GST.
FBT liability = (0.49 * Expense borne by Employer* gross up rate)
= 0.49 *20,000* 1.9608 = $19, 215.8
- It can be seen that employer ABC Ltd has hosted dinner in a Thai restaurant which is separate from office area. Therefore, FBT liabilities would result on account of the meal fringe benefits.
- 20 employee and their partners are invited by ABC Ltd (Actual method)
Expense on meal = $6,600
Expense incurred on employees would be half of total expense = $6,600/2 = $3,300
Expense incurred for one employee =$3,300 / 20 = $165
The amount of expense is lower than the threshold limit ($300) and hence, FBT liability would be non-existent under minor fringe benefits exemption provision.
- 5 employee and their partners are invited by ABC Ltd (Actual method)
Expense on meal = $6,600
Expense incurred on employees would be half of total expense = $6,600/2 = $3,300
Expense incurred for one employee =$3,300 / 5 = $660
Amount higher than $300 and hence FBT would valid. Dinner is type 1 goods and GST is applicable and thus, gross up rate is 2.1463.
FBT liability =
- Clients are invited by ABC Ltd (50-50 Split method)
No deduction is applicable for employer and hence, in order to lower down the FBT liability half of the expense would be used for FBT liability computation.
FBT liability = 0.49*0.50*6600*2.1463 = $3,470.60
ABC Ltd can claim for the GST credits on the meal expenses incurred.
ABC Ltd has extended expense and meal fringe benefits to employees in the form of payment of school fee and dinner meal bill. No FBT is valid for the extension of mobile device and its monthly bill because they are not fringe benefits. Further the FBT liability is different for different cases under meal fringe benefit and mainly depends on the number of invitees, presence of clients.
Question 2
Issue
The issue in the case is to determine that the income which has been derived by Peta from the sale of tennis courts would be ordinary income or not for the current year 2017.
Rule
According to the provisions of Income Tax Assessment Act 1997, the assessable income of the taxpayer would be derived from various sources which are highlighted in the given sections.
As per section 6 (5), ITAA 1997, the income which has been received from the ordinary income concepts would be termed as ordinary income of the taxpayer. The ordinary concepts are the following three sources of income (CCH, 2013).
- The receipts which are generated from the employment of the taxpayer would be classified as ordinary income. Further, any income which has been generated through the skills of taxpayer which has some commercial worth would result in ordinary income (Barkoczy, 2016).
- The receipts which are received on the account of taxpayer’s investment would generate ordinary income. The investment may be in the form of shares, any property acquired to obtain rent amount or any bank account with the focus of generating interest amount would lead to the ordinary income (Deutsch et. al., 2016).
- The income which has been generated from the business of taxpayer would amount to ordinary income. Moreover, it is pivotal to note that the income obtained from the hobby of taxpayer would not lead to any ordinary income for taxpayer (Sadiq et. al., 2016). Therefore, tax ruling TR 97/11 would be applied to check whether the activity of taxpayer is a business action or a hobby. Also, the imperative fact that would be taken into consideration is the intention of taxpayer. It is because the action with the intention of carrying a business with the motive of profit would amount to ordinary income (Gilders et. al., 2016).
As per section 15(15), ITAA 1997, the income which has been generated by the taxpayer by involving in any particular course of action mainly for profit would result in assessable income. In this regards, it is essential that the taxpayer had made the isolated transaction only for making profit. The verdict given in the Antlers Pty Ltd v. Federal Commissioner of Taxation 97 ATC 4192 case is the testimony of this aspect (CCH, 2013).
Application
The information of the given case is highlighted below:
- Peta is the concerned taxpayer who has acquired a property located in Kew.
- The property has a house and two tennis courts at the back of the house.
- The condition of the courts are not good and cannot be utilized for playing tennis.
- The intention of Peta regarding the house is to utilize the house for dwelling with family and to use the tennis court to construct new units of houses. Also, to sell these units for making profit.
- The local tennis club wants to purchase the tennis court and has extended an offer to Peta that they would buy the courts only after Peta has restored the courts.
- Peta spent $100,000 on preparing the tennis courts which includes the resurfacing of courts and building of new fence for the courts.
- Finally, the courts have been purchased by local tennis club at a price of $600,000.
It is apparent from the case facts that
- Peta is not engaged in any business of tennis courts restoration and liquidation.
- There is no witness that indicates that the sale of the tennis court is a profession of Peta.
- Additionally, it is apparent that Peta does not want to start a business of tennis courts development and liquidation business.
- Peta does not acquire the property with the objective of investment of making profit from the sales of tennis courts because initially, she wanted to make new units and liquidate the same for profit.
Therefore, it can be seen that there is no evidence from the above facts which indicates that the income of $600,000 has been generated from the ordinary concepts that are ruled in the section 6(5) of ITAA, 1997. Hence, the income derived is not ordinary income as per s. 6(5).
Peta has purchased the property in order to generate profit from the sale of new units that would be constructed in the place of tennis court. However, she has not performed her initial plan and agreed to sell the tennis court for profit. It can be decided that the sale has been incurred only for profit and also, she has made necessary developments on the tennis courts as demanded by the club. Therefore, it can be said that Peta has made an isolated transaction for the profit objective. Hence, the income would be categorised as assessable income of Peta as per the rulings of section 15 (15) of ITAA, 1997.
Conclusion
The income of $600,000 is not ordinary income of Peta under section 6(5) of ITAA, 1997. Further, the income from isolated transaction would contribute to assessable income of Peta in accordance to section 15(15), ITAA, 199
References
Barkoczy, S. 2016, Foundation of Taxation Law 2016, 8thed., North Ryde: CCH Publications
CCH 2013, Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer
Coleman, C 2011, Australian Tax Analysis, 4th ed., Sydney: Thomson Reuters
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. 2016, Australian tax handbook 8th ed., Pymont: Thomson Reuters,
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. 2016, Understanding taxation law 2016, 9th ed., Sydney: LexisNexis/Butterworths.
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016 , Principles of Taxation Law 2016, 8th ed., Pymont:Thomson Reuters
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