Understanding Fringe Benefit Tax And Capital Gains Tax In Australia, Essay.

What is Fringe Benefit Tax (FBT)?

Questions:

Part One: Fringe Benefit Tax

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 2014. 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?

Part Two: Capital Gain Tax

Dave Solomon is 59 years of age and is planning for his retirement. Following a visit to his financial adviser in March of the current tax year, Dave wants to contribute funds to his personal superannuation fund before 30 June of the current tax year. He has decided to sell the majority of his assets to raise the
$1,000,000. He then intends to rent a city apartment and withdraw tax-free amounts from his personal superannuation account once he turns 60 in August of the next year. Dave has provided you with the following details of the assets he has sold:

(a) A two-storey residence at St Lucia in which he has lived for the last 30 years. He paid $70,000 to purchase the property and received $850,000 on 27 June of the current tax year, after the real estate agent deducted commissions of $15,000. The residence was originally sold at auction and the buyer placed an $85,000 deposit on the property. Unfortunately, two weeks later the buyer indicated that he did not have sufficient funds to proceed with the purchase, thereby forfeiting his deposit to Dave on 1 May of the current tax year. The real estate agents then negotiated the sale of the residence to another interested party.

(b) A painting by Pro Hart that he purchased on 20 September 1985 for $15,000. The painting was sold at auction on 31 May of the current tax year for $125,000.

(c) A luxury motor cruiser that he has moored at the Manly Yacht club. He purchased the boat in late 2004 for $110,000. He sold it on 1 June of the current tax year to a local boat broker for
$60,000.

(d) On 5 June of the current tax year he sold for $80,000 a parcel of shares in a newly listed mining company. He purchased these shares on 10 January of the current tax year for $75,000. He borrowed $70,000 to fund the purchase of these shares and incurred $5,000 in interest on the loan. He also paid $750 in brokerage on the sale of the shares and $250 in stamp duty on the purchase of these shares. Dave has contacted the ATO and they have advised him that the interest on the loan will not be an allowable deduction because the shares are not generating any assessable income.

Dave has also indicated that his taxation return for the year ended 30 June of the previous year shows a net capital loss of $10,000 from the sale of shares. These shares were the only assets he sold in that year.

(a) Based on the information above, determine Dave Solomon’s net capital gain or net capital loss for the year ended 30 June of the current tax year.

(b) If Dave has a net capital gain, what does he do with this amount?

(c) If Dave has a net capital loss, what does he do with this amount?

FBT Rates and Gross-Up Rates

Fringe Benefit Tax

FBT is a tax imposed on employer who provides non cash benefits to employees. Tax is levied on employer as per definite rates on the taxable values calculated as per laid down rules of the act. The benefits which are provided to employees apart from salary are liable to Fringe Benefit Tax. The benefit should be in respect of employment which means benefit should be provided only in respect of employment. If benefit is for business purpose then it’s allowed to have exemption (47A of Subdivision A of Division 12). Employee may be current, past or future and benefits may be provided either by the organisation or associate of the organisation.

FBT year is from 1^st April to 31^st March.

FBT rates are as follows:-

31^st March 2014-46.5%

Gross up rates are as follows:-

There are two types of gross up rates. Type 1 gross up rates are for those benefits for which Goods and Service Tax credit is available. Type 2 gross up rates are for those benefits for which GST credit isn’t available.

Type 1 gross up rates:-

31^st March 2014-2.0647

Type 2 gross up rates:-

31^st March 2014-1.8692

There are many benefits provided by the employer to the employees. The examples of different benefits which are liable to FBT are listed below:

• Car parking benefits(Division 10A of part III)
• Lower rate interest loan to an employee(subdivision A of division 4 of part III)
• Health insurance benefits
• Reimbursement of expenses
• Benefits by way of food, drink and recreation

As per division 13 Many benefits are not liable to FBT which are specifically exempted from FBT. And some of the benefits are allowed for concession as well:-

• Work related items exempt(58X of Division 13)
• Minor benefits exemption(58P of Division 13)
• Taxi travel expense exemption(58Z of Division 13)
• Small benefit car parking exemption(58GA of Division 13)
• Concessions, including specific concessions for non-profits

Particulars	Amount(in $s)	Taxable Amount(in $s)
Mobile Phone Expense(Note 2)	Exempt
Children’s school fees(Note 3)	20,000	37,384
Mobile phone handset(Note 4)	2,000	4,129.4
Dinner expenses(Note 5)	Exempt
Total		41,513.4

FBT liability will be $19,303.73(41,513.4*46.5%).

Explanation to the above solution:-

First, we have to find whether the benefit provided is following under the category of taxable benefit or not. After that, we need to decide under which category the benefit will fall. Whether under type 1 or type 2? Then after one needs to find out the taxable value by multiplying the values of benefits with gross up rates. Lastly, the taxable value will be taxed according to the prescribed rate.

Note: 1-

Salary expenditure will not be liable to FBT.

Note: 2-

Alan’s mobile phone expenses are liable to FBT. But as Alan is using mobile phone for work purposes only that’s why FBT will not apply to mobile phone expenses provided to Alan.

Note: 3-

Alan’s children’s school fees are liable to FBT as this benefit is provided over above salary payment. Children’s school fees are GST free therefore coefficient will be 1.8692. Because those benefits which are GST free are included in type-2.

Note: 4-

Mobile phone handset given to Alan is liable to FBT as this benefit isn’t included in work related exemptions and as it is including GST it will be included in type 1 and gross up rate will be 2.0647.

Note: 5-

At the end of the year, dinner facility was provided by the employer to 20 employees and the partners; the number of partners is not defined in the question. The total cost of the dinner is $6,600. Here, it is said that all the 20 employees were there with their partners. That means total 40 persons attended dinner. So, $6,600 will be distributed between 40 persons. Therefore, per person expenditure will be less than $300. Minor expenses are exempt under FBT assessment Act 1986. Therefore, dinner expenses will not be liable to FBT.

FBT Exemptions and Concessions

If total employees of ABC would have been only 5, then the answer would definitely have changed. As the employees are less than 20, the expenditure will be distributed between them and as the per person expenditure would be more than $300, therefore the amount will definitely qualify for FBT. As in the above solution we assumed that there is only one partner. Therefore, total persons will be 6. So, the total expenditure of $6,600 will be distributed between 6 persons. Therefore, per person the expenditure will be $1,100.

The solution would change in the below given manner.

37,384+4,129.4+2,271.17=43,784.57

43,784.57*46.5%=20,359.83

The answer would change in the above given manner.

The answer would not change in the given case. If the clients would have attended the dinner the total number of persons will be more, so the amount will be less than $300 per person. Therefore, the answer would not change and it will remain same as per answer 1.

Part B.a)

Particulars	Amount(in $s)	Amount(in $s)
Sale of two-storey residence at St. Lucia (Note I)	Exempt
Sale of paintings(Note II)	125,000$
Less: Purchase cost of painting (15,000*123.4/71.3)	(25,960.73)	150,960.73
Sale of Luxury motor Cruiser(Note III)	60,000$
Less: Purchase cost of Luxury Motor Cruiser	(110,000$)	(50,000$)
Sale proceeds of Shares(Note IV)	80,000$
Less: Purchase cost of Shares	(75,000$)
Less: Interest on loan	(1,000$)
Less: Brokerage on sale of shares	(750$)
Less: Stamp duty on sale of shares	(250$)	3,000$
Total Capital Gain		103960.73
Less: Capital loss of previous year	(10,000$)
Net Capital Gain		93,960.73

The most common type CGT event is disposal of an asset-selling it or giving it away.  

Some other types of events in CGT are:-

• Cancellation of share or surrender or redemption.
• A person ceased to be a citizen of Australia.
• Compensation payment.
• A person entering into a contract not to perform certain tasks.

Explanation to the above solution:-

I) Permanent residence is exempted from capital gain if sold. Therefore, two storey residence sold won’t be liable to capital gain. This transaction is disposal of an asset. A1 (disposal of CGT asset-104-10).

II) Sale of painting is liable to capital gain as per the provisions of the act. Therefore, cost of acquisition will be deducted from the sale proceeds and net sale consideration will be liable to capital gain. This transaction is disposal of an asset. A1 (disposal of CGT asset-104-10).

III) Sale of motor cruiser is liable to capital gain as motor cruiser is capital asset as per the definition of capital asset. The motor cruiser is sold by Dave. This transaction is disposal of an asset. A1 (disposal of CGT asset-104-10).

IV) Shares are always liable to FBT. Therefore, sale consideration received will be liable to capital gain and expenses incurred to complete the transaction will be allowed as deduction from sale consideration. This transaction is disposal of an asset. A1 (disposal of CGT asset-104-10).

V) Capital losses carried down from previous years are allowed as deduction from net capital gain of current as well as future years. This transaction is disposal of an asset. A1 (disposal of CGT asset-104-10).

If Dave has net capital gain then the amount of net capital gain will be added to the income of the assessee and it will be taxed as per the normal rates applicable to the income of the assessee. This is the treatment to be given when there is net capital gain derived from the sale consideration (division 6E of part III).

If Dave has net capital loss then capital loss will be carried forward for indefinite years and if there is any capital gain in current year or next year then the amount of capital loss will be set off against capital gain (division 6E of part III).

References:

ANON, N.D., “Fringe Benefits Tax”, Accessed on 31st January 2015, <https://www.ato.gov.au/Business/Employers/Preparing-to-engage-workers/Fringe-benefits-tax-(FBT)/>
 
ANON, N.D., “Fringe Benefits Exemptions and Concessions”, Accessed on 31st January 2015, <https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/FBT-exemptions-and-concessions/>
 
ANON, N.D., “Fringe Benefits Tax Rates”, Accessed on 31st January 2015, <https://www.ato.gov.au/Rates/FBT/>

ANON, N.D., “FBT Return 2014”, Accessed on 31st January 2015, <https://www.ato.gov.au/Forms/FBT-return-2014/>

ANON, N.D., “Reportable Fringe Benefits”, Accessed on 31st January 2015, <https://www.ato.gov.au/Rates/FBT/?page=12#Reportable_fringe_benefits>

ANON, N.D., “Fringe Benefits tax Assessment Act,1986”, Accessed on 31st January 2015, <https://www.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/>

ANON, N.D., “Capital Gains Tax”, Accessed on 31st January 2015, <https://www.charteredclub.com/capital-gain-tax/>

ANON, N.D., “Capital Gains Tax”, Accessed on 31st January 2015, <https://www.ato.gov.au/General/Capital-gains-tax/>
 
ANON, N.D., “Acquiring and Owning CGT Assets”, Accessed on 31st January 2015, <https://www.ato.gov.au/General/Capital-gains-tax/Acquiring-and-owning-CGT-assets/>

ANON, N.D., “Selling an Asset and Other CGT Events”, Accessed on 31st January 2015, <https://www.ato.gov.au/General/Capital-gains-tax/Selling-an-asset-and-other--CGT-events-/>

ANON, N.D., “Working out your capital gain or loss”, Accessed on 31st January 2015, <https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/>

ANON, N.D., “CGT Exemptions rollovers and concessions”, Accessed on 31st January 2015, <https://www.ato.gov.au/General/Capital-gains-tax/CGT-exemptions,-rollovers-and-concessions/>

ANON, N.D., “Shares and Units”, Accessed on 31st January 2015, <https://www.ato.gov.au/General/Capital-gains-tax/Shares-and-units/>
 
ANON, N.D., “Income Tax Assessment Act, 1936”, Accessed on 31st January 2015, <https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/>