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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?

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

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.

Fringe Benefit tax (FBT) consequences of a remuneration package provided by an employer

1. Fringe Benefit tax (FBT) is paid when the employer provides the employees certain benefits that are over and above the normal salary or wages. Further, the payment does not relate to salaries hence FBT will not be computed on  the salary component that is $300000. When it comes to the fringe benefit tax, the category comprises of various fringe benefits. The cost of the dinner at the restaurant came $6,600 and it will come under the fringe benefit that is taxable. Further, it is a common parlance that the telephone is utilized for the office purpose and hence not contained in FBT and not taxable. The introduction of FBT can be traced to the year 1986. The vital function of FBT is to put the emphasis on tax on the employer that cannot be enchased. The computation of FBT is done for the period April to March therefore, the bill of restaurant comes under the amount that is taxable. School fees come under the personal benefit because it is an expense that is not related to business. The bill of mobile will be classified under the exempt category if the utilization of the mobile is solely for the office use (Sadiq et. al, 2014).

The importance endowed by the organization on the employees needs to be highlighted in the certificate of earnings. In the case of ABC Pty Ltd, it is a company and Alan work as an employee. Therefore, any benefit apart from the salary will be considered as fringe benefits and comes under the purview of FBT. Further fringe benefits are not linked to income and hence, a different aspect.’

Year of FBT

Rate of FBT

Year Ending 31 March 2014 (and previous years)

46.5%

At the end of 31 March 2015

47%

Period between  31 March 2016 & 31 March 2017

49%

Period ending  31 March 2018 onwards

47%

 

Various cases are deemed cases and comes under the FBT purview such as permitting the employee to use the case of work for personal purpose, providing loan in the form of a discount, providing membership of gym, facility of entertainment by providing free tickets to the show, etc. as per the table mentioned above, it can be said that the FBT rate varies at each year and the current rate is 49%

FBT Liability of ABC Pty Ltd          

Rate for year ending 31.03.2017

49%

Notes:

Entertainment by way of food, drinks or recreation is covered under fringe benefits

Expense payment benefit is where an employee incurs an expense and the employer
either reimburses or pays the third party directly.

Chargeable expenses under FBT

Gross-Up Rate

Particulars

Amount

Type 1

Type 2

Taxable Fringe Benefits

Dinner for 20 employees

6600

(Incl GST)

2.0647

13627

Mobile Bill

2640

(Incl GST)

2.0647

5450.81

Children School Fees

20000

(No GST)

1.8692

Mobile Handset

2000

(Incl GST)

2.0647

4129.4

TOTAL

31240

Taxable Fringe Benefits

60591

Tax Payable - (a)

29690

 

As per the case study, it is imperative that the advantages provided by the company ABC to the employee Alan are beyond the normal salary that is drawn. Moreover, Alan gets various other services and benefits that are over and above the normal salary. The benefits come under the concept of FBT (Ross, 2012). Further, it is an important matter that the benefits provided to the employee and is highlighted in the emoluments must be projected even knowing the fact that the tax is not attracted. In no circumstances, the employee will pay the tax on the benefits that are of non-cash feature and consideration will be taken that the final tax is paid.

a. The calculation done above reflects that the Fringe benefit that is subjected to tax is $60591 and the tax that needs to be paid by ABC Pty Ltd is $29690.

Calculation of any FBT liability

b. If 5 employees were present then also the provision of FBT will be the same because when fringe benefits are provided, FBT ultimately comes into picture. The number of employees or composition is irrelevant while computing FBT. When the benefits are provided it needs to be considered for tax.

c. When the employer clients attend the party then the same answer will be projected. Therefore, when the client of ABC comes for the party it will come under the purview of FBT because entertainment by means of drinks, food, and party is treated as fringe benefits. In this case, when the client goes for the party then the non-cash advantages happens to them (Nethercott, 2015. Thereby, it attracts the provision of FBT. Here, the money is spent for the entertainment purpose and the employee is deriving the benefit.

2. Ordinary Income as per the provisions of Section 6-5 of the ITAA 1997 includes the income according to ordinary concepts which is included in the assessable income of the assessee. The ordinary income or the income according to ordinary concepts is that income which is generally considered as income of regular nature (Ross, 2009). Where the income is not of ordinary or regular nature, there are special provisions specified by ITAA as statutory income provisions to assess and include such income in the assessable income.

An income is generally considered as ordinary income if it includes three components:

i. If the income has been derived through personal exertion such as working for salaries and wages in a factory or with any employer, or

ii. If the income has been derived from the property owned by the assessee such as rental income from a house let out for rent, or

iii. If the income has been derived from carrying of any business of any nature or type such as income from a trading business of food items, dairy products, etc.

Further, the ordinary income has other characteristics such as recurrence & regularity. The ordinary income is generally recurrent in nature and is derived on a regular or period basis. The other incomes which are irregular in nature and generally derive income of a huge sum of money from the sale of an asset are said to be capital income or receipts (FBT, 2017). The difference between the capital receipt and the expenses incurred to purchase and develop the asset sold is termed as capital gain. The capital gains are not treated as ordinary income as these do not have any characteristic of income of ordinary concepts (Saunders, 2015).

The ordinary incomes are directly related to the regular earning activity of the assessee. In the given situation, Mrs. Peta has received $ 6,00,000 from the sale of a capital asset i.e the courtyard area that she has purchased for the purpose of resale in future. This receipt is capital in nature and cannot be considered as ordinary income of Mrs. Peta as it does not constitute any feature or component of ordinary income:

i. The capital receipt from sale of tennis courts after making improvement to them have not been derived through personal exertion (Thorpe, 2017

ii. The receipt has not been derived from the rent of any property, rather the property has been transferred to possession to some other assessee.

iii. The income has not been derived from carrying on any business as the selling of owned property is not the business of Mrs. Peta.

The expenses done by Mrs. Peta were incurred by her to make the property saleable as it was the condition of the buyer that he will purchase the same only if Mrs. Peta restores the tennis courts to a good condition. The difference of capital receipt and the expenses incurred along with the cost of acquisition of the property is treated as capital gain. And, as mentioned earlier also, the capital gain is not considered as ordinary income (Nethercott & Richardson, 2013)).

Firstly, it is not- recurring nature of income which means that it does not arise very frequently. One can only enter into such transactions once in a while (Sadiq et. al, 2014).

Secondly, it has aroused due to the sale of a fixed asset or immovable asset and any receipt arising from the sale of fixed asset is known as a capital receipt (Nethercott & Richardson, 2013,).

Ordinary income is the income which arises due to personal earnings of the assessee which are recurring in nature and which usually arise due to the sale of goods or services. One more difference is that ordinary income is usually small in nature while capital receipts are huge and are received in lump sum amount of money, which is very evident in the case of Mrs. Peta (Nethercott et. al, 015).

This could be an ordinary income if Mrs. Peta was having a business of selling and purchase of immovable property. In the given case, Mrs. Peta does not carry a business of sale and purchase of property and such income is not a recurring income for her.

Hence, we can conclude that the receipt of $ 6,00,000 is not an ordinary income for Mrs. Peta and it is a capital receipt.

References

23 May 2017, The Age.  https://www.abc.net.au/news/2012-07-09/tax-pack-dumped-online-returns-encouraged/4117784 Retrieved

Fringe benefits tax exempt benefits (2017). Retrieved 23 May 2017, https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/In-detail/Exemptions-and-concessions/FBT-exempt-benefits/

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

Ross, Gittins (2009). A 'light on the hill' for our future tax reformers. The Age, 23 May 2017, Sadiq,K, Coleman, C., Hanegbi, R., Jogarajan,S., Krever, R.,Obst, W.,& Ting, A.(2014). Principles of Taxation Law ,Sydney.

Ross, G.  (2009). A 'light on the hill' for our future tax reformers, . Retrived May 23 2017 https://www.smh.com.au/business/a-light-on-the-hill-for-our-future-tax-reformers-20090614-c7dt.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. Retrieved

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