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Goods And Services Tax Analysis Of Policies

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Question:

Discuss about the Goods and Services Tax Analysis of Policies.
 
 

Answer:

Fringe Benefit means a benefit or allowance provided by the individual employers or company to the employees for the services rendered by them during the financial year. Employers are required to pay tax on the value of such allowances as per Fringe Benefit Tax Assessment Act (FBTAA) 1986 as well as TR 97/17 of ITAA 97. However, there are certain benefits provided by the employers that are exempted from tax liability in the hands of the employers and companies (Nijland and Dijst 2015). According to section 58X, FBTAA 1986, exempted allowances means the expenses incurred or reimbursement made by the employers to the employees for the allowances utilized for the work purpose. Such exempted fringe benefits include expenses for electronic device, computer software, briefcase, protective clothes or any other work tool. Further, as per the section 136 in FBTAA 1986, tax on fringe benefits provided by the employer or companies are determined as per higher gross- up rates and lower gross up- rates (Clement et al. 2016).

As per TR97/17, higher gross up rate applies to the taxpayers for measuring the taxable value of fringe benefits who pay Goods and Services Tax (GST) on the allowances and further eligible to claim credit on GST. On the other hand, lower gross- up rate applies to the taxpayers who do not pay GST on the expenses of the benefits paid to the employees and are not eligible to claim credit on GST (Ahmad and Scott 2015).

In the present case, Periwinkle Pty Ltd, a manufacturing company provided allowance on car to its employee Emma for the purpose of travelling related to work and personal. The cost of car for the company amounted $33,000, which is inclusive of GST. It is given that Emma used the car travelling 10,000 kilometers incurring $550 including GST. Further, the car was not in use for 10 days and it was parked at the airport including the schedule for annual repairs for five days.

Considering the regulations of FBTAA 1986, it has been observed that if the car is used or allowed to use by the employee for personal purpose then it will be taxable in the hands of the company. However, if the car is used for the work purpose then it falls under the category of exempted benefits as per FBTAA 1986 (Massiani 2015). Moreover, the rules apply to the allowances if the car includes a sedan or a station wagon, any car having the capacity to carry for less than one tone or if the car carrying maximum nine members. Further, car-parking benefit arises if it has been parked at the employee’s premises or at any other place, including station or airport in case the employee uses the car. Similarly, in case the car is used for repairs or maintenance then it will not be considered as a car used for personal purpose (Gbadago and Awunyo-Vitor 2015). 

 

Accordingly, the Periwinkle is liable to pay tax on the fringe benefit on car in proportionate to its use by Emma for the year ending 31 March 2014.

Cost of the car

$33,000.00

car used for

10,000 Kms

Number of days car was not in use

10 days

Proportionate cost of car as per the use

33,000*350/360

 

                                       = $32,083.33

Higher gross- up rate

2.0647

Taxable value

$66,242.46

Amount of FBT on the taxable value @46.5%

$30,802.74

Table 1: Taxable amount of FBT

(Source: Created by author)

Since the cost of the car included the charges of GST, higher gross up rate has been used to compute the taxable value of car benefits. On the contrary, expenses on the maintenance and repairs amounted to $550 would not be constituted as taxable benefit as per the provisions under FBTAA 1986 because it does not constitute the use for personal purpose. Additionally, the car parked at the airport shall be taxable as it was in possession of Emma even though she was travelling interstate.

Cost of car for 10 days $

33,000.00 - 32,083.33

 

                                          = 916.67

Higher gross- up rate

2.0647

Taxable value

                                        = 1,892.64

Amount of FBT on the taxable value @46.5%

880.08

Table 2: Taxable amount of FBT

(Source: Created by author)

Further, the company provided Emma a loan amounted to $500,000 at an interest rate of 4.45% on 1 September 2013. It constitutes as fringe benefit because the loan has been provided at the interest rate less than the benchmark specified under FBTAA 1986. The benchmark interest rate for the year ended 31 March 2014 is 6.45% per annum whereas the company provided the loan at the rate of 4.45%. Therefore, Periwinkle is liable to pay tax on the loan amount of $500,000 at the differential interest rate (6.45% - 4.45%) = $10,000 at the rate of 46.5% amounted to $4,650.00. However, the use of loan amount by Emma does not affect the taxability of the amount of benefit in the hands of Periwinkle Ltd. Use of loan amount would affect the deduction in measuring the taxable income in the books of Emma.

In the taxation year 2014 Emma acquired a bathtub amounted to $1,300 while it costs $700 to the company. On the other hand, the company sells the product to the consumers for $2,600. Considering the provisions of FBTAA 1986, any benefit paid by the company to the employees is known as fringe benefit and the employer is liable to pay tax on the taxable value of such benefit (Côté, House and Willer 2015). Since Periwinkle provided its product to Emma at an amount less than it sell to the public, the company is liable to pay tax on the allowance amount i.e. $2,600- $1,300 = $1,300 at the rate of 46.5%. 

 

FBT consequence if the amount used to acquire shares

In case the amount of loan provided by Periwinkle Ltd to Emma during the financial year 2014 used to acquire the shares instead of lending, it to husband then also section 136 of FBTAA 1986 would be attracted. The company is liable to pay tax on the amount of benefit provided to Emma because the purpose and the nature of use of loan amount is not relevant to determine the taxability of the loan amount (Larsen 2015). Accordingly, the taxable amount for the loan amount would be same as it was measured in the solution (a) i.e. $4,650.

Determination of income in ordinary concepts

According to the Income Tax Assessment Act 1997, any gift received by the taxpayer or assessee whether in cash or in kind do not constitute the ordinary income. Based on the case of Scott vs. FCT it has been stated that if the taxpayer receives cash prize from personal qualities or if the receipt is not on regular basis then such receipt would not be considered as an ordinary income (Mihaela and Corina 2015). In the present situation, a student received a cash prize as the best student award which cannot be considered as an ordinary income as per ITAA97. However, youth allowance received by the student from the government constitutes as ordinary income because it has been assumed to be received on regular basis.

In case of allowances received by the employers or members of Defense Force, then such allowances should be considered as an ordinary income and to be included in the assessable income u/s 6-5 ITAA97. The allowances include superannuation fund, amount of gratuity, dividend or unused leave encashment, then such amount shall be included in the assessable income of the taxpayer (Gow and Frazer 2015). In the given case, the employer’s wife has received amount of gratuity from the previous service in the financial year. According to the provision of section, 15.2 ITAA 97, amount gratuity if received by an employee’s wife on his death and if the period of 5 years have not been lapsed then such income would be considered as ordinary income. However, in the given case the period of death of the employer is not mentioned therefore, it is assumed that the 5 years has not been lapsed (Jayaram 2015). Therefore, the amount of gratuity received by the employer’s wife would be regarded as ordinary income. 

 


As per the TR 2002/21 ITAA97 payment made, as an honorarium is not regarded as an ordinary income because it is paid as gesture on personal grounds. Further, the amount is considered as ordinary income if it is received by the taxpayer on the regular basis. In the present case, honorarium was received by a student against the act of honorary secretary of a football club. Considering the provision of ITAA 97 it can be said that if the honorary payment received by the student is on regular basis then it would be considered as ordinary income (Ford, Myrden and Jones 2015). On the contrary, if the payment is received as honorarium on temporary basis then the income would not be considered under ordinary concept.

Receipt of bonus from the employer constitutes as assessable income as per ITAA97 because it is the income earned in context to the regular service rendered by the employee. Any amount of allowance or benefit if received by the employee against the services is termed as ordinary income in ITAA97 (Sigler and Sigler 2015). Accordingly, as per the present situation, bonus received by the employee for a suggestion adopted by the management would be regarded as income under ordinary concepts. As the amount of bonus received by the employee is under the terms of regular service provided to the employer on personal qualifications therefore, it would be considered an income under ordinary concept.

Tax Liability of Peter

According to the provision of capital gain section 104.5 ITAA97, if the land is inherited by the taxpayer from the ancestors then it will be taxable if it is sold by the inheritor. The inherited land is not taxable in the hands of the taxpayer who gifted the land as an inheritance but it is taxable if the land is sold by the receiver (Voußem, Kramer and Schäffer 2016). Further, the cost of land in this case would be considered as the cost of acquisition incurred by the ancestor who gifted the land. However, the cost would be considered after providing the indexation factor on the cost. The cost would include the cost of improvement or any other incidental expenses incurred by the taxpayer subjected to the indexation (Tsoutsoura 2015).

In the present case, Peter acquired a farm land as inheritance from his father which was 15 hectares and decided to sell in later years due to complains for urban developing and pesticides. Peter incurred incidental expenses by borrowing $120,000 and completed the development by creating 200 blocks. The taxpayer further sold around 150 blocks during the year for an average amount of $150,000 for the purpose of constructing residential housing. 

 


In view of the taxation rules of capital gains in ITAA97, it can be analyzed that peter is liable to pay tax on the taxable value of land since he sold the same after developing it for residential house. On the contrary, Peter’s father is not liable to pay tax on the land because he transferred the land to Peter as a gift and inheritance. However, the taxable value of the land would be taxable to Peter under the head Capital Gain, ITAA97 (Gruver et al. 2016). In order to determine the taxable value of land cost of acquisition incurred by Peter’s father is required to be considered which is not available in the given case. Such cost would be valued by using the indexation factor of the current taxation year in which the land was sold. Further, the borrowing cost of $120,000 shall also be considered as cost of improvement and deducted from the sale consideration of $150,000 each block. Peter is eligible to claim deduction for the borrowing amount because it was acquired for the purpose of developing the land (Ainembabazi and Angelsen 2016). In addition to this, peter is eligible to claim discount at the rate of 50% since the land was held by Peter for more than one year. 

 

Reference List

Ahmad, R. and Scott, N., 2015. Fringe benefits and organisational commitment: the case of Langkawi hotels. Tourism Review, 70(1), pp.13-23.

Ainembabazi, J.H. and Angelsen, A., 2016. Land Inheritance and Market Transactions in Uganda. Land Economics, 92(1), pp.28-56.

Clement, R.C., Olsson, E., Katti, P. and Esther, R.J., 2016. Fringe Benefits Among US Orthopedic Residency Programs Vary Considerably: a National Survey. HSS Journal®, pp.1-7.

Côté, S., House, J. and Willer, R., 2015. High economic inequality leads higher-income individuals to be less generous. Proceedings of the National Academy of Sciences, 112(52), pp.15838-15843.

Ford, D., Myrden, S.E. and Jones, T.D., 2015. Understanding “disengagement from knowledge sharing”: engagement theory versus adaptive cost theory. Journal of Knowledge Management, 19(3), pp.476-496.

Gbadago, F.Y. and Awunyo-Vitor, D., 2015. Gift tax compliance in Ghana: Evidence from Kumasi Metropolis. Journal of Accounting and Taxation, 7(2), p.29.

Gow, A. and Frazer, A., 2015. Who owns tips? Hospitality workers and the distribution of customer gratuities. Australian Journal of Labour Law, 28(2).

Gruver, J.B., Metcalf, A.L., Muth, A.B., Finley, J.C. and Luloff, A.E., 2016. Making Decisions About Forestland Succession: Perspectives from Pennsylvania's Private Forest Landowners. Society & Natural Resources, pp.1-16.

Jayaram, N., 2015. Entering an Expanding Academia. Young Faculty in the Twenty-First Century: International Perspectives, p.141.

Larsen, L.B., 2015. Common sense at the Swedish Tax Agency: Transactional boundaries that separate taxable and tax-free income. Critical Perspectives on Accounting, 31, pp.75-89.

Massiani, J., 2015. Cost-Benefit analysis of policies for the development of electric vehicles in Germany: Methods and results. Transport policy, 38, pp.19-26.

Mihaela, I.A. and Corina, D.G., 2015. TIP TAXATION-Necessity or Inconvenience?. Ovidius University Annals, Series Economic Sciences,15(1).

Nijland, L. and Dijst, M., 2015. Commuting-related fringe benefits in the Netherlands: Interrelationships and company, employee and location characteristics. Transportation Research Part A: Policy and Practice, 77, pp.358-371.

Sigler, K. and Sigler, J., 2015. CEO Pay Complexity Necessary to Reduce Agency Problems. Compensation & Benefits Review, p.0886368715582114.

Tsoutsoura, M., 2015. The effect of succession taxes on family firm investment: Evidence from a natural experiment. The Journal of Finance,70(2), pp.649-688.

Voußem, L., Kramer, S. and Schäffer, U., 2016. Fairness perceptions of annual bonus payments: The effects of subjective performance measures and the achievement of bonus targets. Management Accounting Research,30, pp.32-46.

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