1. Alan is an employee at ABC Pty Ltd (ABC). He has negotiated the following remuneration package with ABC:
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.
Answers
1 a). Several assumptions have been made for computation of Fringe Tax Benefits liability of ABC Pty Ltd for the expenses made by Alan. These can be explained with the help of the following table:-
|
Wages and Salaries
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Not considered under FBT liability
|
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Mobile expenses paid to Alan
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This will be considered as FBT by ABC Pty Ltd
|
|
School fees for Alan’s children
|
This will be included under FBT
|
|
Entertainment expenses of the employees
|
This is not included under FBT calculation
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Table 1: Assumptions for the calculation of FBT
(Source: Shields and North-Samardzic 2015)
Based on the above assumptions, the FBT of ABC has been calculated, which is further shown below:-
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Figure 1: Calculation of FBT (As on 31.3.2017)
b) If ABC only had 5 employees, then, the calculation will be as follows:-
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Figure 2: Calculation of FBT if ABC had only 5 employees
c). It can be inferred that FBT is applicable only for the employees of the organization. If the organization includes its clients, then, FBT will only included the total costs incurred for its employees (Ato.gov.au. 2017).
2. From the given case study, it can be inferred that Peta had purchase a house along with a tennis court. She wanted to earn profits by selling the tennis court in units. On the other hand, she sold the entire tennis court to a tennis club. Therefore, it can be inferred that the net income after subtracting all the expenses can be considered as a business income and in this case, this can also be considered as an ordinary income for Peta under Section 6-5 (Ato.gov.au. 2017).
On the other hand, it can be inferred that Peta was not involve in real estate business. Under Section 10-5 income from sale of property is to be considered as statutory income and not under ordinary income (Burnett 2013). If, Peta shows this under her ordinary income, then, she is required to pay tax. On the other hand, if she shows it under capital gain, then, Peta can claim 50percent exemption on her net income. Therefore, the receipt of $600000 should not be considered under ordinary income.
References
Ato.gov.au. (2017). What to include in your assessable income | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/Business/Income-and-deductions-for-business/Working-out-your-assessable-income/What-to-include-in-your-assessable-income/ [Accessed 9th May. 2016].
Bender, M., Contacos-Sawyer, J. and Thomas, B., 2013, July. Benefits Strategies for Attracting and Retaining Employees. In Competition Forum(Vol. 11, No. 2, p. 165). American Society for Competitiveness
Burnett, C., 2013. Income according to ordinary concepts–the jurisprudence of Justice Graham Hill. In Australian Tax Forum, 28(1), 189-202.
Cassidy, J., Cheng, A. and Yong, S., 2013. Is a Capital Gains Tax the Answer to New Zealand's Tax Alchemy?.
Shields, J. and North-Samardzic, A., 2015. 10 Employee benefits. Managing Employee Performance & Reward: Concepts, Practices, Strategies, p.218
