Charlie is an employee of Shiny Homes Pty Ltd (Shiny Homes). He is a real estate agent. Shiny Homes also operates a separate business on landscaping to ‘do up’ houses before it is put up for sale.
From the period 1 July 2016 to 30 June 2017 the following events took place:
•In 1 September 2016, Shiny Homes provided Charlie with a 4 wheel drive sedan value at $70,000. From 1 September 2016 to 31 March 217 the car travelled 80,000 km. He parked his car in his garage in the evenings. Before he goes away for his Christmas holidays, the car was sent to be serviced and he could not use his car for 2 days. He estimated that he uses 70% of the time was for business purpose and the other 30% of the time for private use. Charlie also maintained a log book for 12 weeks and the following information were recorded:
a.50,000 km were work related
b.Petrol and oil per month - $2,000
c.Repairs and maintenance per month - $3,500
d.Registration per annum - $240
e.Insurance per annum - $960
Note: these expenses were incurred by Shine Homes.
•In 1 February 2017, Charlie was involved in a minor car accident and he could not use the vehicle for 2 weeks (1st to 14th February 2017). This occurred before Charlie a week before Charlie’s wedding and Shine Homes decided to hire a car for that period at a cost of $1,000 to allow Charlie and his wife Deborah to go for their honeymoon trip to Gold Coast. Shine Homes paid for their honeymoon accommodation which is worth $3,000.
•During working hours Charlie parked his car at Secure Parking (an unrelated entity) and Shine Homes paid $200 per week.
Advise both Charlie and Shine Homes about their fringe benefit consequences of these events. You are required to compute the taxable benefit where necessary.
You need to cite the relevant case law and / or legislation.
1. Allan and Betty were living and working in Melbourne. They decided on a ‘tree change’, sold their Melbourne home and purchased a large country house on a 10 hectare block in central Victoria. Betty works part-time as an accountant and Allan as a locum doctor. Allan is popular with the elderly patients in the town and regularly is given home-made cakes and scones, along with his fee. On one occasion he treated a local wine maker’s dog for snake bite when the vet was unavailable and was given a dozen bottles of Lonarch Brae shiraz in appreciation. The wine had a retail value of $360.
2. Allan and Betty enjoy gardening. They plan to establish a few hectares of grape vines and begin growing vegetables. They attend a continuing education course on organic farming and find in their second year they have a surplus of produce. Betty started making marmalade and relish using her mother’s recipes. Initially she gave them to neighbours but they became so popular that she opened a stall at the Newtown Growers Market held on the second Sunday of every month. Allan sold some of the excess to a local supermarket and now regularly supplies three retailers with sweet potatoes and pumpkin. They don’t keep records as they never intended to make a profit but estimate that in a good month gross receipts could be $500 to $600.
3. Their neighbours have a citrus orchard and throughout the year vegetables are swapped for oranges and mandarins. This seems like such a good idea Allan and Betty decide to set up a ‘barter’ system in the area. To join the system a person must pay an up-front, one-off fee of $50 to Allan and Betty as a charge for the keeping of administrative records. Thereafter people register their goods or services to be bartered. For example, Suzie is a retired hairdresser and will provide hairdressing services at her home. No money changes hands. Suzie would receive a credit to her account of 15 to 20 ‘barts’ that she can exchange for goods or services of equal value from other registered participants in the scheme (fruit, vegetables, child minding, lawn mowing etc.).
Fringe benefit tax are regarded as the important term of business that are useful in payable by the employers relating to the benefit paid to the employee apart from salary and wages. Charlie is a real estate agent and Shiny homes has provided Charlie with a sedan. The car ran a total of 80,000 kilometres with 30,000 for business purpose. According to the “sub-section 136 (1)” use of car by employee that is not related to the employment or business constitutes personal use (Somers and Eynaud 2015). Charlie has occurred cost that is in running the car and these cost is required to be separately incorporated in log book for keeping track of the business kilometres travelled.
The operating cost method is determined under “section 10A and Section 10B of FBTAA 1986”. A statutory rate of 20% is applied in determining the fringe benefit tax under statutory method (Shaw 2017). Similarly, the operating cost process separates the administrative cost in determining the fringe benefit tax. For Charlie both the method of statutory rate and operating costing method is applied in determining the fringe benefit cost. These are as follows;
A computation relating to the deemed interest and deemed depreciation for has been depicted in compliance with “section 11 (2)” of the act.
As evident from the above stated computation the fringe benefit tax under the statutory method is lower than the fringe benefit derived in the operating cost method.
Shiny homes have shouldered an expense of his employee Charlie honeymoon cost, cost of accommodation and cost relating to the car hire charges for the wedding of his employee (Fisher 2015). In compliance with the taxable value of the car fringe benefit that is computed above the cost incurred by Shiny for Charlie’s wedding and accommodation will be included in his overall tax liability. The case study of Charlie evidently provides that he has incurred expenses for car parking. Section 39A of the ITAA 1986 requires some criteria to be fulfilled before claiming car parking fringe benefit tax;
- The car should be owned by the employer
- The car must be parked in the employers premises
- Car is used for employment purpose
From the above listed criteria car was parked in separate premises by Charlie therefore it would not be considered assessable in respect of section 39A.
Alan is a practicing locum doctor and he receives from his clients cakes and scones as the mark of appreciation for treating his clients. Alan also charges fees from his clients. One day one of his client gifted Alan with a wine bottle that had the market value of $360 because he cured his client dog from a snake bite. Section 6-5 of the ITAA argues that any form of income that is related to the employment will be considered for assessment (Accounting, 2017). The cakes and scone received by Alan was not regarded assessable since it lacked commercial market value. Similarly, the receipt of fees and wine bottle would form the part of Alan assessable income because they held market value and commercially related to his employment income under “section 6-5 of the ITAA 1997”.
The taxation ruling of TR 97/11 takes account of business of primary production under ITAA 1997. The ruling provides the guiding framework that are relevant in understanding whether the person is carrying on a business or hobby (Jones 2017). The difference between hobby and business are as follows;
- A business has the significant commercial character while a hobby has no commercial purpose.
- A taxpayer under business has more than just the intention of engaging in business while a hobby has no business intentions it is generally for recreational purpose.
- In business taxpayer has the purpose of profit making while hobby lacks the profit making purpose.
An explanatory example of “Thomas v FC of T – 72 ATC 4094” considers that the business activities generally carries the intention of commercial purpose and are carried in the manner of ordinary trade.
The “taxation ruling of TR 97/11” applies on the taxpayer that executes the primary production activities under 1997 of the act (Tang and Wan 2015). Situations provides that Betty has been creating marmalade and was very famous among her neighbourhood. A decision was made by her to sell the marmalade in the market and a stall was set up on every Sunday for selling them to the customers. The extra amount of marmalade was sold by her husband Alan to the supplier and had the intention of making profit. According to the example of “FC of T v Evans (1989)” both Alan and Betty were indulged in repetitive business activities and the amount derived is taxable component (Jones 2017).
Any form of transaction taking place from the barter system would be considered taxable under “subsection 25 (1) of the ITAA 1997” (Dunne et al. 2015). The transactions of barter system are similar to cash and credit having GST consequences. The commencement of barter system by Alan and Betty and income generated from such transaction would require tax payment under “subsection 25 (1)” with GST as well. Considering the example of “FC of T v Cooke and Sherden 80” the barter transaction of Alan and Betty would require tax and GST to be paid.
ACCOUNTING, M., 2017. TAXMATTERS. Small.
Dunne, J., Aldred, J., Gorton, T. and Taylor, H., 2015. 2014 cases show a continuing trend of high ATO success rate. Taxation in Australia, 50(1), p.20.
Fisher, D., 2015. Mid market focus: No joy regarding FBT on travel expenses for FIFO arrangements. Taxation in Australia, 49(7), p.377.
Jones, D., 2017. Mid market focus: Income or capital?: Taxpayer draws a blank. Taxation in Australia, 51(7), p.357.
Jones, D., 2017. Tax and accounting income-Worlds apart?. Taxation in Australia, 52(1), p.14.
Shaw, A., 2017. Tax files: Why small really is better: Accessing the lower corporate tax rate for small business entities. Bulletin (Law Society of South Australia), 39(10), p.39.
Somers, R. and Eynaud, A., 2015. A matter of trusts: The ATO's proposed treatment of unpaid present entitlements: Part 1. Taxation in Australia, 50(2), p.90.
Tang, R. and Wan, J., 2015. Fringe benefits tax and fly-in fly-out arrangements: John Holland Group Pty Ltd v Commissioner of Taxation. Australian Resources and Energy Law Journal, 34(1), p.17.