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HA3042 Taxation Law

tag 0 Download 0 Pages / 0 Words tag 20-06-2022
  • Course Code: HA3042
  • University: Holmes Institute
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  • Country: Australia

Answers

Business Law

FBT And Ordinary Income

Question 1

Issue

The issue in the case is to determine whether the benefits given to employee (Alan) would be termed as fringe benefits or not and also to compute the FBT payable by employer (ABC Ltd).

Rule

According to the provisions of Fringe Benefits Assessment Act, 1986, the non-cash benefits which have given by employer only for the personal usage of employee would account as fringe benefits. For the fringe benefits, the employer has to pay the Fringe Benefit Tax or FBT (Barkoczy, 2015).

Mobile Handset:The mobile handset issued to the employee for business related work only then it would not be termed as fringe benefits as per section 58X of FBTAA 1986 (Sadiq et. al., 2016). Therefore, the device and the payment of the headset’s bill would not create any accountability of FBT for employer. In addition to that, any expense borne by employer on behalf of employee which are not higher than $300 would not create any FBT liability for employer under the minor fringe benefits exemption (CCH, 2013).

School Fees: It is apparent that it is a type of private expense for the employee and hence, the payment of school fees by employer would create FBT liability. The FBT liability would be determined with the help of formula shown below (Nethercott, Richardson and Devos, 2016).

FBT liability (school fee) = 49% * Total Fee amount * Gross up rate (Type 2 Good)

Dinner: The meal fringe benefits would be extended by employer only if the location of dinner is not the office premises. There are two main methods (Actual Method & 50-50Split Method) from which the employer can select one to determine the total FBT liability for meal fringe benefits (Woellner, 2014).The essential factors related to meal fringe benefits are stated below

  • Employer would not get any income tax deduction when they are hosting any meal for the customers (clients). Therefore, they use 50-50 split method because in this method only 50% of the meal expense would be taken into consideration. This would lower the total FBT liability for employer (Gilders et. al., 2016).

The FBT payable would be determined from 50-50 split method as follows

FBT payable (meal fringe benefits) = 49%* 50%* Total bill amount * Gross up rate (Type 1)

  • Further, employer gets income tax deduction when they have hosted meal for their employees and for their partners (CCH, 2013). Hence, to get complete deduction, the employer adopts actual method where total amount would be taken into consideration. This would result in higher FBT liability but the employer is compensated in the lower of lower taxable income (Barkoczy, 2015).

The FBT would be determined from Actual Method as

FBT payable (meal fringe benefits) = 49%* Total bill amount * Gross up rate (Type 1)

Application

  • The mobile handset was limited only for office work only and therefore, this would not lead to any FBT liabilities on employer (section 58X- FBTAA 1986). Further, the mobile handset’s payment by the employer would also not be considered as fringe benefits because Alan does not make even a any single personal call.
  • Employer paid the school fee of Alan’s children and hence, the FBT liability would be levied on employer.

Total Fee amount

$20,000

FBT rate (FY2017)

49%

Gross up rate  (FY 2017)

(Type 1 goods - No GST)

1.9608

FBT liability

= 49% * 20,000 * 1.9608

= $19,215.8

  • Dinner has been hosted by employer at the location rather than office area (at the Thai Restaurant). Therefore, meal fringe benefits would be extended by employer.
  • ABC Ltd has hosted dinner for their twenty employee and their partners

It is apparent that clients are not in the list and thus, preferable method is actual method.

Employees (and their partners)

20

Total expense on meal

$6600

Total expense on employee only

= 6600 / 2

= 3300

Total expense for one employee

 = 3300 / 20

 = $165

The expense per employee is $165 only.It can be said that the amount is lower than $300 and therefore, no FBT liability would be imposed on the employer.

  • ABC Ltd has hosted dinner for their five employee and their partners

Employees (and their partners)

5

Total expense on meal

$6600

Total expense on employee only

= 6600 / 2

= 3300

Total expense for one employee

 = 3300 / 5

 = $660

The expense per employee is $660. It can be said that the amount is higher than $300 and therefore, FBT liability would be imposed on employer. It is apparent that clients are not in the list and thus, preferable method is actual method.

FBT rate (FY2017)

49%

Gross up rate  (FY 2017)

(Type 2 goods – GST valid)

2.1463

FBT liability

= 49% * 6600 * 2.1463

= $6,941.13

  • ABC Ltd has hosted dinner for clients

It is apparent that clients are in the list and thus, preferable method is 50-50 split method.

Total expense on meal

$6600

FBT rate (FY2017)

49%

Gross up rate  (FY 2017)

(Type 2 goods – GST valid)

2.1463

FBT liability

= 49% * 50% 6600* 2.1463

= $3,470.6

It is noteworthy that GST has been paid by employer on meal and thus, GST input credit can be claimed by employer on half the amount spent.

Conclusion

Based on the above ground, it can be said that mobile handset and payment of bill would not result in any FBT liability. Further, school fee and hosting of dinner would result in FBT liabilities on employer which have been computed above. The number of people, presence of clients would change the tax deduction and FBT liability for employer.

Question 2

Issue

The issue is to find whether the receipts derived through the liquidation of tennis court would contribute to the ordinary income of Peta as per section 6 (5), ITAA1997.

Rule

The income derived in cash from either ordinary income sources or from isolated transaction (profit intention) would term as assessable income.  

Section 15 (15), ITAA 1997

The income received from any sources by doing isolated transaction mainly to make profit would result in assessable income. The imperative element is the profit driven intention of taxpayer as illustrated in Westfield Limited v. FCT (1991) FCA 97 case (CCH, 2013).

Section 6 (5), ITAA 1997 –

The income received from the below highlighted sources would result in ordinary income for taxpayer.

  • Income received through the employment such as salary, remuneration and the income which is driven from any skill of taxpayer which has some commercial worth would be termed as ordinary income from personal exertion (Barkoczy, 2015).
  • Income received through the investment of taxpayer would result in derivation of ordinary income. These investments may be in the form of property to earn rent amount, bank account to earn interest and shares resulting in dividends (CCH, 2013).
  • Income received through the involvement of taxpayer in any business action would amount to ordinary income. However, it is imperative to differentiate between the income received from business and from hobby. Tax ruling TR 97/11 would be applied to check whether the income has received from hobby or from business of taxpayer. The profit making objective would be considered a critical factor in this regards (Nethercott, Richardson and Devos, 2016).

Application

It can be deemed from the extracted information of the given case that Peta is the respective taxpayer who bought a house for dual purposes. One is to use the house for residential purpose and another to use the old tennis courts (poor conditions) located at the down side of house for making new units and selling to derive revenue. However, the local tennis club was  looking for tennis courts and directed an offer to Peta on the  condition that they would buy the courts only if she would restore them to playing condition. Peta who does not have any pre-planning regarding the restoration of tennis courts agreed to the offer. Finally, she spent $100,000 in order to restore the tennis court and for fencing around it. The local club then bought the tennis court from Peta at a compensation of $600,000.

It can be decided that Peta is not running a business of tennis court restoration business and fencing business. Further, she is not working for any company which is engaged in similar business. Also, she has not bought the house with the purpose of investment to sell the tennis court after restoration. Therefore, it can be ascertained that no evidence highlights that the sale of tennis courts is with the ordinary concepts (personal exertion, investment, business). Therefore, the receipts $600,000 would not be considered under the ordinary income of taxpayer Peta in the accordance of section 6 (5), ITAA 1997.

However, it would be fair to indicate that she has been involved in the action of making profits from developments and improvement on tennis court.She has also dropped her initial plan of creating new units because she has received an attractive offer that would result in significant proceeds. Therefore, the act would be categorised under the section 15(15), ITAA 1997 of performing isolated transaction only driven by high profits. Therefore, the income would assumed to be assessable income as per section 15(15) of Income Tax Assessment Act 1997.

Conclusion

Based on the above, it can be cited that receipts of $600,000 is not ordinary income for Peta as per section 6(5), ITAA 1997. However, the income would contribute to the total assessable income of Peta for the respective financial year because it is from isolated transaction for profit under section 15(15) of ITAA 1997.

References

Barkoczy, S. 2015, Foundation of Taxation Law 2015, 7thed., North Ryde: CCH Publications

CCH 2013, Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer

Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. 2016, Understanding taxation law 2016, 9th ed., Sydney: LexisNexis/Butterworths.

Nethercott, L., Richardson, G. and Devos, K. 2016, Australian Taxation Study Manual 2016, 4th ed., Sydney: Oxford University Press

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016 , Principles of Taxation Law 2016, 8th ed., Pymont:Thomson Reuters

Woellner, R 2014, Australian taxation law 2014, 7th ed., North Ryde: CCH Australia

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