Taxation And Fringe Benefit Consequences

Question 1

1. Facts of the case:

ABC Pty Ltd. utilizes Alan. The compensation bundle of Alan with the organization incorporates the accompanying receipts/income:

• Salary adding up to $ 300,000
• The organization pays for Mobile Bill of $ 220 every month (counting GST). The Mobile is utilized just for work/work related purposes.
• GST free instalment of $ 20,000. The instalment is for the school expenses of kids are given by the organization.
• Likewise, a cell phone handset is given to Alan, the portable expenses $ 2,000 including GST.
• The organization facilitated a supper at a nearby Thai eatery at the year end. At the supper 20 representatives were welcomed with their accomplices. The supper charge added up to $ 6,600 (inclusive of GST). The company hosted the diner for all the employees including their partners.

Tax consequences for Fringe Benefit and calculation of the Fringe Benefit Tax liability

• Section 20 of Fringe Benefits Tax Assessment Act 1986: Expense Payment Benefit
• Section 38 of the Fringe Benefits Tax Assessment Act 1986
• Section 58X of FBTAA 1986, Exempt advantages: Provisions for certain business related things
• Chapter 9: Expense instalment incidental advantages
• Chapter 14: Entertainment
• Chapter 15: Tax-exempted body stimulation incidental advantage
• Chapter 20: Fringe Benefits tax excluded benefits
• Section 136(1) of the FBTAA 1986

• Salary:

No expense risk will emerge on the business since compensation gotten of $300,000 is excluded under the ambit of incidental advantages and in this manner, won’t go under the classification of incidental advantages. (ATO, 2014)

• Mobile Bill installment:

According to the two-year worker contract marked by Alan with the organization, Alan will pay a settled sum for every month as for the boundless utilization of the cell phone utilized particularly just for the business related purposes and the business will pay $ 220 (counting GST) for the portable bill of Alan. Such installment for the cost is accommodated in the Section 20 of the Fringe Benefits Tax Assessment Act 1986: Expense Payment Benefit. Such repayment for cost is an absolved incidental benefit as given in the Section 20.8 of Fringe Benefits Tax Assessment Act, 1986. The segment gives that any repayment of cost by a business to worker for the cell phone utilized fundamentally for business related design is exempted. All the unlimited bill amount are paid by the company as fringe benefit and is exempted from tax (Likewise allude area 58X, FBTAA 1986)

• Children’s school fees

Another fringe benefit is the amount spent on the education of children. The payment of the school fees of children of Alan made by ABC is a taxable benefit as provided in the Chapter 9 of the FBTAA, 1986. (ATO, 2014)

• Mobile Phone:

According to the segment 58X of FBTAA, 1986 if any installment of remaining benefit, cost or property made for advantages like, auto, telephone or cell phone (basically utilized for the costs identified with work), portfolio, mini-computer, exchange instrument, things of defensive dress, PC programming thing for use in business, tablet, note pad, PC or any such sort of convenient PC or PC, or whatever other sort of electronic gadget by the business to worker are excluded. In the given case Alan is given a Mobile telephone which costs $ 2,000 (comprehensive of GST) by ABC. All such expenses are exempted from tax and can be treated as fringe benefit for the employee.

According to the area, the exclusion exists just on the off chance that the same is utilized fundamentally for business related purposes and one thing for each FBT year that have considerably comparative or indistinguishable capacity unless and until it is a substitution thing (Section 58X, FBTAA 1986). In this way, according to the above arrangements, the $ 2000 paid on cell phone is an excluded advantage (ATO, 2014)

• Dinner at a nearby Thai Restaurant for every one of the 20 workers and their accomplices:

Question 2

The organization acquired an aggregate cost of $ 6,600 of which the worker cost was half i.e. $ 3,300 and the staying half were for the partners. On the premise of the Chapter 14 of the arrangements of the FBTAA, 1986 any cost made for the excitement of the representatives is absolved from assessment and for partners are assessable.

The exchange is canvassed in the arrangements of dinners and excitement. Be that as it may, if the business chooses to utilize one of the supper diversion incidental advantage valuation runs, the whole measure of $ 6600 will be incorporated while ascertaining their aggregate dinner amusement consumption for the FBT year. (Section 14, FBTAA 1986)

1. Yes the appropriate response will be distinctive. Regardless of whether the quantity of workers are 20 or 5 the taxability arrangements will be same, be that as it may, the numerically the appropriate response as to FBT advantages and FBT obligation will be distinctive.
2. There would not have been any tax liability, if the clients had attended the dinner. The expense for the complete dinner or any entertainment activity is exempted from employee’s tax and is include in company expensed

Conclusion:

After analyzing all the above cases and considering all the sections under the Australian tax law, we can calculate that the taxable value of FBT is $ 44197.69 and tax liability is of $ 20551.93

Peta had purchased a house in Kew two years back and the house was also having two old tennis courts but he had purchased the house with the intention of living in the house and selling the tennis courts at a profit after building three units on the tennis court. But Peta had received the offer from the tennis club that they will buy the old tennis court after the restoration of the old court. She had spent $100000 in regard to restoration of the tennis court and had sold the tennis court to the tennis club at a price of $600000.

The issue arising in this case is in regard to treatment of amount of $600000 received from the tennis club and the taxation of $600000 in the current tax year. Peta is concerned with the situation that the receipts will be taxable under the provisions of section 6-5 or not.

As per the provisions of section 6-5(1) of the income tax assessment act 1997, the income earned due to the ordinary concepts is included in the assessable income. The ordinary income as per this section covers three kinds of components which include income from personal exertion, income by way of property, and income from carrying on business. The income earned according to ordinary concepts includes wages, bonus, salaries, allowances for superannuation, allowances for gratuity and retirement received by the employee in regard to the services that are rendered by the employee to the employer. This will also include the amount that is being received as subsidy in the business. A commercial transaction which is undertaken for the purpose of undertaking profit then it will be considered as the ordinary income under the provisions of section 6-5. The profit making purpose should be there at the time of acquisition of asset and the profit should be made in the manner in which it was decided. If there is a change in the manner the profit is attained it should be proved that the change in plan was done due to the need of the situation. But the provisions of this section only apply when there is no abandonment of the intention of the owner of the property and the property had not been sold just to get the best price which is available in the market. (Ian Phillips, Deacons Graham & James, 1997) The only that will be covered under this section is the one that will be earned by way of ordinary concepts. The ordinary concepts is the one in which there is commercial transaction is attained by way of earning the profit. The provisions of Australian taxation office provide that the commercial transaction will lead to taxable income only when there is intention of earning the profit. The main pre-requirement of this particular section is that the transaction should be commercial in nature and it must be the intention of the seller was to earn the profit from the starting of the transaction. (Maurice Cashmere and Rodney Fisher, 2008)

The above provisions apply in case of Peta as he had a profit motive at the time of acquiring the house. He had the intention of the building the three tennis units and then selling the tennis units at profit. He had planned to build tennis units and then selling them at a profit hence it was a commercial transaction. If the transaction needs to be an ordinary income, then the transaction must be a commercial transaction and the intention of earning profits should be there. But in the case of Peta, he had an intention of earning the profit at the time of acquiring the house. But in case of Peta there was a change in plan and he had not constructed three tennis units and he had received an offer from the tennis club that the tennis club can be solved after improving the condition. In this case also, the motive of profit was there throughout the whole process of purchasing and selling. He had sold the tennis unit to the tennis club in lieu of earning the profit and it was not an abandonment of plan and just selling the tennis unit at the best possible price. In the above case, Peta had retained his intention of selling the tennis unit at the profit. He had renovated the building after he had received the offer from the tennis club which shows that she was having the intention of profit. Thus the amount that was received was received in lieu of a commercial transaction making it an income assessable under the ordinary income. As this is the income which is earned by way of ordinary concepts of the business, hence it will be covered under the ambit of the commercial transaction which led to profit to Peta. (ATO, 2017)

Conclusion:

In the above case, the income earned by Peta will be considered as the ordinary income under the provisions of section 6-5 of the income tax assessment act 1997. Peta had originally planned to build tennis unit and then sell them at the profit. But he had changed his plan in regard to tennis unit and sold them to the tennis club as he had offered high price and he was getting high profit through his commercial transaction. Thus the amount spent in the resurfacing the tennis courts and building new fences around the tennis court will be considered as the expenditure that had been incurred by Peta in regard to the commercial expenditure. The amount of expenditure will be eligible for deduction in regard to calculation of the net assessable income. Hence $100000 will be eligible for deduction in the business. The amount received by way of sale of courts that is $600000 will be covered under the ambit of ordinary concepts under section 6-5. Thus the net taxable income by view of this transaction will be $500000 and accordingly tax will be paid on the income. This case is similar to the case of Westfield Ltd v. Commissioner of Taxation [1991] FCA 97; 99 ALR 510.

References

1. Legal Database of Australian Taxation Office, 2014, “Chapter 9: Expense payment fringe benefits”; Available at: https://law.ato.gov.au/atolaw/view.htm?DocID=SAV%2FFBTGEMP%2F00010
2. Australian Taxation Office, 2014, “Provision of certain work-related items”; Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-%28FBT%29/In-detail/Employers-guide/FBT-exempt-benefits/?page=49
3. Australian Taxation Office, 2014, “Fringe Benefits Tax: Rates and Thresholds”; Available at: https://www.ato.gov.au/Rates/FBT/
4. Section 20 of Fringe Benefits Tax Assessment Act 1986, “Expense Payment Benefit”; https://www.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/s20.html
5. Australian Taxation Office, 2014, “Fringe Benefit Categories”; Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/In-detail/Employees/Reportable-fringe-benefits—facts-for-employees/?page=6#Entertainment_benefits
6. Commonwealth of Australia, 2006, “Fringe Benefits Tax: A guide for employer”, published by Australian Taxation Office; Available at: https://www.mcaaccountants.com.au/files/docs/nat1054%20-%20fbt%20a%20guide%20to%20employers.pdf
7. Australian Taxation Office, 2014, “How to calculate your FBT”; Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT/
8. Mark Easson, 2014, “Fringe Benefit Tax Guidelines”; Available at: https://sydney.edu.au/policies/showdoc.aspx?recnum=PDOC2011/28
9. Legal Database of Australian Taxation Office, 2014, “Section 58X: Exempt Benefits: Provision for certain work-related items”, Part III, Division 13; Available at: https://law.ato.gov.au/atolaw/view.htm?DocID=PAC/19860039/58X&PiT=99991231235958
10. Legal Database of Australian Taxation Office, 2014, “Chapter 14: Entertainment”; Available at: https://law.ato.gov.au/atolaw/view.htm?DocID=SAV%2FFBTGEMP%2F00015
11. Ian Phillips, Deacons Graham & James, 1997, “Statutory and Exempt Income”; Available at: https://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfm&PaperDisplay=https://www.tved.net.au/PublicPapers/May_1997,_Sound_Education_in_Taxation,_Stautory_and_Exempt_Income.html
12. Austlii, 2017, “ITAA 1997 – Section 6.5: Income according to ordinary concepts (ordinary income)”; Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html
13. Maurice Cashmere and Rodney Fisher, 2008, “Defining Ordinary Income after McNeil”, eJournal of Tax Research, 6, No. 2, pp. 90-121; Available at: https://www.business.unsw.edu.au/research-site/publications-site/ejournaloftaxresearch-site/Documents/paper2_v6n2.pdf
14. Australian Taxation Office, 2017, “Division 6 – Assessable Income and Exempt Income”; Available at: https://www.ato.gov.au/law/view/document?DocID=PAC/19970038/6-5
15. Alexander Psaltis, 2009, “LAWS5144- Introduction to Taxation Law”; Available at: https://www.uqls.com/wp-content/uploads/2016/08/LAWS5144_2009_N-1.pdf
16. Australian Taxation Office, 2016, “TD 2016/16: Taxation Determination”; Available at: https://www.ato.gov.au/law/view/pdf/pbr/td2016-016.pdf

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