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Fringe Benefit Tax And Capital Gain Tax: Taxation Add in library

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Questons:

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?

 

 

Answers:

Part One:

Fringe Benefits Taxes

What is FTP?

FTP is Fringe benefits Tax which is a type of tax imposed on the employer for providing benefits to their employees. FTP is not like income tax and it is levied on the taxable value of the Fringe Benefits provided to the employees. Director will also be considered as employee and any benefits provided to him will also be liable to Fringe Benefits Tax. Examples of Fringe Benefits are cited below:-

  • To give an employee a facility of car for private purposes.
  • To give an employee a loan at a rate lower than market rate.
  • Paying an employee’s health insurance cost.
  • Reimbursement of non business expenses of the employee.
  • Entertainment facilities like food, drink or recreation.
  • Giving an employee a living away from home allowance.
  • Car parking allowance facilities.

If you are liable to pay Fringe Benefits Taxes, then first thing you need to do is to get registered to pay the taxes. You need to keep proper Fringe Benefits records. Properly calculate the FBT. Understanding the exemptions which are allowed from paying FBT. After completing the above written procedure, you need to file FBT return with ATO and paying the tax regularly.

What are the rates of Fringe Benefits tax?

Tax rate for the year ending 31st March 2013-46.5%

Tax rate for the year ending 31st March 2014-46.5%

Tax rate for the year ending 31st March 2015-47%

What are the gross up rates of Fringe Benefits Tax?

Type 1- Higher gross up rates:-

This rate is used when the benefits provider are liable to Goods and Service Tax credit.

For the year ending 31st March 2013-2.0647

For the year ending 31st March 2014-2.0647

For the year ending 31st march 2015-2.0802

Type 2-Lower gross up rates:-

This rate is used when the benefits provider are not liable to Goods and Service Tax credit.

For the year ending 31st march 2013-1.8692

For the year ending 31st march 2014-1.8692

For the year ending 31st march 2015-1.8868

What are the exemptions available from FBT?

The following WORK RELATED items are exempt from FBT:-

  • Devices such as mobile phone, laptop, portable printer and GPS navigation receiver.
  • Computer software.
  • Protective clothing.
  • Tools of trade.

FBT exemption is related to only those items which are related to business purposes. Only one device from the devices having similar functional use will be allowed to have exemption benefit. But if it’s a case of replacement then both the devices will get the benefit of exemption.

Minor Benefit Exemption:-

Minor benefits are not liable to FBT. If the benefit fulfils the given below two conditions then it will be regarded as minor benefit and it will not be liable to FBT.

  • The notable taxable value of the benefit is lower than 300$.
  • The benefit given is unreasonable to consider it as Fringe Benefit.

Notable taxable value means the taxable value if the benefit was taxable.

  • What is not subject to FBT?

The following things are not liable to FBT:-

  • Payment of salary or wages.
  • Shares purchased under approved employee share acquisition scheme.
  • Employer contributions to complying super funds.
  • Employment termination payments.
  • Payment of amounts deemed to be dividends.
  • Certain benefits provided by religious institutions to their religious practioners.

What are the steps to determine FBT amount?

Step: 1- Add up taxable value of each Fringe benefits provided to every employee. The calculation of taxable value differs to the type of benefits.

Step: 2- find out all the fringe benefits which can claim GST credit(including excluded fringe benefits).

Step: 3- find out the grossed up taxable value of the benefits found out in step 2 by multiplying them with type 1 gross up rate.

Step: 4- find out all those fringe benefits provided to employees for which GST credit is not available. Like those benefits which are GST free.

Step: 5- find out grossed up amount of the fringe benefits found out in step 4 by multiplying them with the type 2 gross up rate.

Step: 6- Add up grossed up values derived in step 5 and 3.

Step: 7- find out fringe benefits tax by multiplying the taxable amount derived in step 6 by multiplying it with tax rate which is 46.5%.

 

Calculation of Fringe Benefits Tax:-

Explanatory notes to solution:-

1. Salary paid to Alan is not liable to Fringe Benefits Tax. So, it will not be counted in calculating taxable value for computing Fringe Benefits Tax.

2. The employer has paid to the employee mobile phone bills worth 220$ p.m. So, yearly mobile phone expense will be 2640$. As the mobile phone is used by Alan only for work purposes, it will not be liable to Fringe benefits tax.

Payment of Alan’s children’s school fees will attract FBT. Payment of 20,000$ per year is made as allowance. The school fees are GST free. Therefore it will be considered under type 2 gross up rate for determining grossed up values.

1. ABC provided Alan with mobile phone hand set. Mobile phone handset isn’t covered under work related exemptions. Therefore it will be covered under type 1 gross up rate for determining grossed up values as it is inclusive of GST.

2. Dinner facility was provided by ABC to their employees and partners. Under FBT laws, if the value of fringe benefit given is less than 300$ then it won’t be liable to FBT. Here, exact number of employees as well as partners is not given. Therefore, if we assume that the there were more than two partners than the amount of fringe benefit provided will be go less than 300$. Therefore, it won’t be liable to FBT.

 

Calculation of FBT liability:-

Part One

a)

Step: 1- Amount of fringe benefits given by ABC to Alan is 22,000$(20,000$+2,000$).

Step: 2- the benefits provided which are liable to GST credit are 2,000$.

Step: 3- Step 2 calculated amount will be multiplied with gross up rate of 2.0647. Which is 4,129.4$.

Step: 4- The benefits provided which are not liable to GST credit are 20,000$(education fees).

Step: 5- GST free given benefits will be multiplied with gross up rate of 1.8692. Which comes to 37,384$.

Step: 6- Total grossed up amount for calculating FBT is 41,513.4$.

Step: 7- Fringe Benefit Tax amount will be 19,303.73$(41,513.4*46.5%).

b)

If there had only been 5 employees the answer would have changed. If we assume that there are 3 partners and 5 employees then total will be 6 persons. And then 6,600$ will be distributed between 6 persons. But, as the exact figure of partners isn’t given, we can’t exactly work out the solution.

c)

If the clients also attended the dinner at the yearend then also the answer would not change as the amount of 6,600$ would still be distributed between total number of persons and therefore, the per head amount would still come to less than 300$. And it will not qualify for FBT being less than 300$ amount.

 

Part Two:

Capital Gain

a) Explanatory notes to solution:-

Note: 1- A two-storey residence at St. Lucia will fall under the category of main residence and therefore will not attract capital gains tax.

Note: 2- The net sale proceeds of the painting will be liable to capital gains tax and therefore it will be considered while calculating total amount of capital gains.

Note: 3- A luxury motor cruiser is a capital asset as per the capital gains tax provisions. Therefore, any sale consideration received from selling motor cruiser will be liable to capital gains tax.

Note: 4- Shares are capital asset and therefore sale of shares attract the capital gains tax.

Note: 5- Dave had capital loss in the previous year which will be allowed to be set off against capital gains.

 

Calculation of Net Capital Gains:-

Particulars

Amount(in $s)

Amount (in $s)

Sale of two-storey residence at St. Lucia (Note I)

Exempt

 

Sale of painting(Note 2)

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 3)

60,000$

 

Less: Purchase cost of Luxury Motor Cruiser

(110,000$)

(50,000$)

Sale proceeds of Shares(Note 4)

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(Note 5)

(10,000$)

 

 

 

 

Net Capital Gain

 

93,960.73


b)

Dave will get net capital gain after adding up all the capital gains and deducting capital losses if he had in current year or in any of the previous years. After getting the net capital gain that amount will be added up with the incomes of the person and tax will be levied on it as per the normal income tax rates.

To get the benefit of deduction like stamp duty value and any other expenses incurred to complete the sell transaction will be allowed to have only if the person has maintained proper records of the same.

So, the amount of net capital gain derived will be added to income and will be taxed with normal tax rates.

c)

If Dave has a net capital loss then the amount of capital loss will be carried forward for indefinite years to set off against capital gains. The amount of capital loss can’t be set off against any other income of the assessee, rather it can only be set off against capital gains of the assessee. So, the only treatment for capital loss is to set it off against capital gains of current year or if there is no capital gains in current year then the capital loss amount will be carried forward and will be set off against capital gains of future years.

 

References:

ANON, N.D., “Fringe Benefits taxes”, Accessed on 28th January 2015, <https://www.ato.gov.au/Business/Employers/Preparing-to-engage-workers/Fringe-benefits-tax-(FBT)/>

ANON, N.D., “Work related items Exempt from FBT”, Accessed on 28th January 2015, <https://www.ato.gov.au/general/fringe-benefits-tax-(fbt)/do-you-need-to-pay-fbt-/work-related-items-exempt-from-fbt/>

ANON, N.D., “Minor benefits Exemption”, Accessed on 28th January 2015, <https://www.ato.gov.au/general/fringe-benefits-tax-(fbt)/fbt-exemptions-and-concessions/minor-benefits-exemption/>

ANON, N.D., “FBT Rates”, Accessed on 28th January 2015, <https://www.ato.gov.au/Rates/FBT/>

ANON, N.D., “What is not subject to FBT”, Accessed on 28th January 2015, <https://www.ato.gov.au/general/fringe-benefits-tax-(fbt)/do-you-need-to-pay-fbt-/what-is-not-subject-to-fbt/>

ANON, N.D., “How to calculate your FBT”, Accessed on 28th January 2015, <https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT/>

 ANON, N.D., “Capital gains tax”, Accessed on 28th January 2015, <https://www.ato.gov.au/General/Capital-gains-tax/>

ANON, N.D., “shares and Units”, Accessed on 28th January 2015, <https://www.ato.gov.au/General/Capital-gains-tax/Shares-and-units/>

ANON, N.D., “CGT Exemptions, rollovers and concessions”, Accessed on 28th January 2015, <https://www.ato.gov.au/General/Capital-gains-tax/CGT-exemptions,-rollovers-and-concessions/>

ANON, N.D., “Capital Gains Tax Checklist”, Accessed on 28th January 2015, <https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/Capital-gains-tax-checklist/>
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