HA3042 Taxation Law- FBT Liability of ABC Pty Ltd

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

salaryof $300,000;
Payment of Alan's mobile phone bill ($220 per month, including GST). Alan is under atwo-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, includingcalculation 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. Howwould your answer to (a) differ if ABC only had 5 employees?

c. How would your answer to (a) differ if clients of ABC also attended the end-of-yeardinner?

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:

sothat she and her family could live in the house; and
sothat 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

1. The concept of Fringe Benefits happens when the employee is provided over and above the normal salary. Those are in the form of additional benefits and are termed as a fringe benefit. It is taxed in the hand of an employer because the additional benefits are provided by the employer to the employee (Kokemuller, 2016). The main focus of FBT is to remove the obstacle and lessen the loss that pertains to revenue from providing the benefits that are free. Fringe benefits do not appear in the nature of normal salary yet they come under the ambit of income and subject to tax (Benjaamin, 2016). There are specific items that pertain to FBT and certain of it get attracted to tax. Hence, it is of prime importance on the part of the employer to project the benefits in their income certificate. It would appear in the form of non-cash benefits (FBT, 2017).

In the case study, where ABC Pty Ltd is the employer and Alan work as an employee. There is various benefits that is provided to Alan apart from the normal salary. Such benefits are fringe benefits and accounted to FBT. The fringe benefits tax is computed individually and not clubbed under the income tax (Benjamin, 2010). It is done on a quarterly basis and there are many scenarios when the event comes under the concept of FBT like tickets for entertainment purpose, membership of a gym, consent for using the office car for personal use, loan in the form of a discount, etc (Benjamin, 2010). The rate of FBT varies from one year to another. The current rate of FBT that is the period from 31 March 2016 to 2017 appears at 49%.

The benefits provided by ABC Pty Ltd to Alan come under the umbrella of FBT. The restaurant bill will be assessed to tax as it is for personal use. The school fees are even a personal benefit as the benefit dies not pertain to the business (Rodeck, 2015). However, the bill of mobile will be exempted from the tax if it is solely for the official purpose.

a. As per the computation,it is observed that the fringe benefit that is subjected to tax is $60591 and the payment of tax by ABC Pty Ltd is $29690.

b. On the presence of 5 employees, the concept of FBT will remain undisturbed because when additional benefits are provided it will ultimately lead to attraction of FBT and does not depend upon the number of employees (FBT, 2017).

c. When the client of ABC is invited tothe party then it will come under the ambit of FBT as entertainment is provided to them through food, party, and drinks. Such are fringe benefits and tax will be attracted to

Calculation of FBT liability of ABC Pty Ltd

FBT rate for the year ended 31 March 2017 – 49%

Fringe Benefits Tax- expenses chargeable
Particulars	Amount		Option - 1	option 2	Fringe benefits that are taxable
Employee dinner Total no - 20	6600	(GST inclusive)	2.0647		13627
Mobile Bill	2640	(GST inclusive)	2.0647		5450.81
Fees of school children	20000	(GST absent)		1.8692		37384
Mobile Handset	2000	(GST inclusive)	2.0647		4129.4
TOTAL	31240
Fringe Benefits that are Taxable					60591
Payment of tax - (a)					29690

Note: Fringe benefits cover entertainment that happens by way of food, drinks, and other recreation activities.

2. As per the provisions of Sec 6-5 of the Income Tax Assessment Tax, 1997 of Australia, ordinary income is defined as income according to ordinary concepts. This income forms part of the assessable income of the Australian resident. In simple words, ordinary income is explained to include income which is recurring in nature. Income which is not defined under section 6-5 of the Income Tax Assessment Tax, 1997 i.e. the income which is not ordinary income is also included in the assessable income of the assessee, however, the provisions relating to such income is defined under other sections of the Act (Saunders, 2015).

The main features of ordinary income are as the word suggests that is regular and recurring. If the income generated is on a periodic basis or is regular in nature then such income can be termed as regular income. When there is an income which is derived from the sale of an asset and is not regular in nature, then such income is defined as income from capital assets and is known as capital assets. The reason behind capital gain not being treated as ordinary income is that it do not possess any characteristic of ordinary income. The capital gain is derived by deducting the sale proceeds obtained for selling the capital asset from the amount incurred towards purchase of the asset and any development expenses incurred for the same.

There are three main components which would help in understanding the nature of the ordinary income. Firstly, the recurring income that is rent derived from the property which is being owned and possessed by the assessee can be termed as ordinary income. Secondly, any income which requires self-exertion that is to say income derived from the employer in the form of salary or the wages can also be termed as ordinary income (Sadiq et. al, 2014). Thirdly, if there is any income which is derived from trading business or manufacturing business i.e. earning through a regular activity can also be termed as ordinary income.

In the situation mentioned above, Mrs. Peta has sold the courtyard area for an amount of $ 6,00,000. It has also been mentioned that Mrs. Peta has purchased this property for resale in the future. Also, the courtyard area is a capital asset for her. Hence the gain derived from the sale of such property would be considered as capital gain as it meets the following mentioned criteria as:

The income being derived from the sale of the tennis court is derived after the property is being transferred i.e. the income is not derived while the property was in possession of her,
There is no self exertionbeing reflected in the sale of the tennis courts,
There is no business connection in selling the property as it is not day to day business of her.

As mentioned above, the capital gain is the difference between the sale value of the property and the amount incurred towards purchase and expenses incurred towards the sale of the property. Hence the capital gain would be calculated in the case of Mrs. Peta by reducing the purchase value and expenses incurred towards making the property saleable from $ 6,00,000. As it is not of regular nature hence will not be considered as ordinary income (Thorpe, 2012).

Also, the following points justify why such income will be considered as capital gain and not ordinary income:

The sale which has taken place is a capital asset and not any goods or services which arepurchased or sold on a regular basis (Sadiq et. al, 2014).
The nature of the transaction is very rare and is not seen on a regular basis.

The transactions of ordinary income are large in volume but the gains derived from such income are smaller in nature but in the case of capital receipts are completely opposite. The volume in term of transactions is very rare but the gains per transaction are very large. Also, ordinary income is derived from the assets in personal belonging of the assessed However capital gains are derived only after the asset is sold to someone else (Kobestky, 2005).

In the abovementioned case, it can be concluded that the income derived by Mrs. Peta from the sale of the asset is capital in nature as her ordinary business is not the sale and purchase of capital assets.

References

Benjaamin, T 2016, How to Calculate Total Wages & Fringe Benefits, viewed 25 May 2017 https://smallbusiness.chron.com/calculate-total-wages-fringe-benefits-14525.html

Benjamin A 2010, ‘Fringe benefits and job satisfaction’, International Journal of Manpower, Vol. 31, no. 6, pp.626-644, https://smallbusiness.chron.com/fringe-benefits-employee-41950.html

FBT 2017, Fringe benefits tax exempt benefits, viewed 25 May 2017, https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/In-detail/Exemptions-and-concessions/FBT-exempt-benefits/

Kobestky, M 2005, Income Tax: Text, Materials and Essential Cases, Sydney: The Federation Press

Kokemuller, N 2016, What Are Fringe Benefits for an Employee?, viewed 25 May 2017 https://smallbusiness.chron.com/fringe-benefits-employee-41950.html

Nethercott, L, Richardson, G, & Devos,K 2013, Australian Taxation Study Manual , Sydney.

Rodeck, D 2015, How to Gross Up Non-Cash Fringe Benefits, viewed 25 May 2017 https://smallbusiness.chron.com/gross-up-noncash-fringe-benefits-17424.html

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan,S, Krever, R.,Obst, W, & Ting, A 2014, Principles of Taxation Law, Sydney.

Saunders, C 2015, The Australian Constitution (annotated), Carlton: Constitutional Centenary Foundation

Thorpe, C 2012, Tax Pack dumped online returns encouraged ABC News, viewed 23 May 2017, https://www.abc.net.au/news/2012-07-09/tax-pack-dumped-online-returns-encouraged/4117784

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