HA3042 Taxation Law | Benefits Tax Liability of Employer

Questions:

Question 1

Alan is an employee at ABC Pty Ltd (ABC). He has negotiated the following remuneration package with ABC:

salary of $300,000;
Payment of Alan's mobile phone bill ($220 per month, including GST). Alan is under a two-year contract whereby he is required to pay a fixed sum each month for unlimited usage of his phone. Alan uses the phone for work-related purposes only;
Payment of Alan's children's school fees ($20,000 per year). The school fees are GST free.

ABC also provided Alan with the latest mobile phone handset, which cost $2,000 (including GST).

At the end of the year ABC hosted a dinner at a local Thai restaurant for all 20 employees and their partners. The total cost of the dinner was $6,600 including GST.

(a) Advise ABC of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2017. Assume that ABC would be entitled to input tax credits in relation to any GST-inclusive acquisitions.

(b) How would your answer to (a) differ if ABC only had 5 employees?

Question 2

Two years ago Peta purchased a house in Kew. This house had two old tennis courts down the back which were in poor condition. She purchased the property for two reasons:

so that she and her family could live in the house; and
so that she could build three units on the tennis courts and sell them at a profit.

In the current tax year the tennis club next door offered to buy the old tennis courts, but only if Peta first restored them to good condition. Peta decided to accept the club’s offer instead of going ahead with her plan to build and sell units. Peta spent $100,000 on preparing the tennis courts for sale. This involved a great deal of work. Peta had to resurface the tennis courts and build new fences around them. She then sold the tennis courts in the current tax year to the tennis club for $600,000.

Ignoring capital gains tax, discuss whether the receipt of $600,000 is ordinary income under s 6-5.

Answers:

Question 1

a)

The ABC Private Limited must regard the following for computing the liability of tax in case of Alan:

Remunerations and salaries must be excluded from computation
The fees paid by the company is personal and must be included
The expenses of mobile are also personal and must be included
The spending for entertainment of employees must not be included as it is complex in nature
The GST benefits must be considered by application of the gross rate multiplication methods. The gross amount must be excluded from the calculation.

The total amount is reduced by a tax rate of 49% related to the FBT as per the tax laws and rulings (Ato.gov.au. 2016).

Legal responsibility of the ABC Private Limited:

In the books of ABC Private Limited

Computation of FBT Liability as on 31.03.2017

	GST Inclusive	GST Free
Particulars	Amount	Amount
	$	$
Payment of Phone Bill	2640
Payment of School fees of Employee's Children		20000
Dinner at Restaurant	330
Providing Mobile Phone	2000
Total of GST Inclusive/Free Benefits	4970	20000
	A	B
Gross-up Rate	2.1463	1.9608
	C	D
Gross-up Value	10667.11	39216
	E = A x C	F=B X D
Total Taxable Fringe Benefit	49883.11
	G = E + F
Less : Exemption for Mobile Phone at gross-up value	4292.60
($2000 x 2.1463)	H
Net Taxable Fringe Benefit	45590.51
	I = G - H
Fringe Benefit Tax Rate	49%
	J
Fringe Benefit Tax Liability	22339.35
	K = I x J

b)

Revised Liability of the ABC Private Limited:

In the books of ABC Private Limited

Computation of FBT Liability as on 31.03.2017

	GST Inclusive	GST Free
Particulars	Amount	Amount
	$	$
Payment of Phone Bill	2640
Payment of School fees of Employee's Children		20000
Dinner at Restaurant	1320
Providing Mobile Phone	2000
Total of GST Inclusive/Free Benefits	5960	20000
	A	B
Gross-up Rate	2.1463	1.9608
	C	D
Gross-up Value	12791.95	39216
	E = A x C	F=B X D
Total Taxable Fringe Benefit	52007.95
	G = E + F
Less : Exemption for Mobile Phone at gross-up value	4292.60
($2000 x 2.1463)	H
Net Taxable Fringe Benefit	47715.35
	I = G - H
Fringe Benefit Tax Rate	49%
	J
Fringe Benefit Tax Liability	23380.52
	K = I x J

c)

The spending towards the clients has to be considered under the tax liability as the same is different to the employees and the same must not have deductions (Zelenak 2012).

Question 2

Ordinary proceeds as per the ITAA Act constitute:

Receipts of salaries and remunerations
Receipts from the sale of shares and securities
Receipts from the rentals, dividends and interests.

Statutory proceeds as per the ITAA Act constitute:

Recognition of Credit
Royalty
Insurance
Capital gains
Retirement and Termination payments

The building obtained by Peta was obtained for the revenues that could be generated from the tennis court attached to the building. The main objective had thus been the generation of revenues. Hence, the revenues will be considered as the assessable income.

Peta had taken steps to repair and carry on the maintenance for the enhancement of the total income and hence, the same will be ordinary income assessable.

The sale of the property took place and the same was sold in whole. The sale was to be done in parts but on receipt of a good offer by the club, the property was sold fully. Hence, the same will be treated as statutory income assessable under the ITAA Act with an exemption up to 50% on the sales amount (Tang and Wan 2015).

Reference

Ato.gov.au. (2016). Fringe benefits tax (FBT) | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/ [Accessed 20 Sep 2016].

Roine, J. and Waldenström, D., 2012. On the role of capital gains in Swedish income inequality. Review of Income and Wealth, 58(3), pp.569-587.

Shiftan, Y., Albert, G. and Keinan, T., 2012. The impact of company-car taxation policy on travel behavior. Transport Policy, 19(1), pp.139-146.

Sikes, S.A. and Verrecchia, R.E., 2012. Capital gains taxes and expected rates of return. The Accounting Review, 87(3), pp.1067-1086.

Tang, R. and Wan, J., 2015. Fringe benefits tax and fly-in fly-out arrangements: John Holland Group Pty Ltd v Commissioner of Taxation. Australian Resources and Energy Law Journal, 34(1), p.17.

Tiley, J. and Loutzenhiser, G., 2012. Revenue Law: Introduction to UK tax law; Income tax; Capital gains tax; Inheritance tax. Bloomsbury Publishing.

Van Ommeren, J. and Wentink, D., 2012. The (hidden) cost of employer parking policies. International Economic Review, 53(3), pp.965-978.

Zelenak, L., 2012. Custom and the Rule of Law in the Administration of the Income Tax. Duke LJ, 62, p.829.

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