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HI6028 Taxation Theory Practice And Law T3 2018

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Question:

i.Some of the creditors were paid directly from the cash receipts account.

ii.Overall, $31,155 of stock was purchased in this method. Additionally, $5,600 in cash has been used for private purposes.

iii. The owners have taken $3,200 from Bottle Shop items for private use...iv. There was a $3,000 reduction in the loan repayment, as this was the loan principal. The business loan repayment was $8,500.

v. The business has two cars: a van used 90% for business purposes and a SUV used 60% for business purposes. The cost of maintaining the van wa $1,260 and the SUV $2,050.
 

Answer:

Introduction

The Section 4-15 of the Income Tax Assessment Act, 1997 lays down the way in which taxable income is to be calculated for the income year (1st of July to 30th June), as per this section taxable income = Assessable income – Deductions, Assessable income is as explained in division 6 and the deductions allowable in division 8 where division 35 prevents losses from non-commercial business activities that may contribute to a tax loss from being offset against assessable income.

Since the applicability of any special provision does not apply in the present case the income of the partnership shall be calculated as per section 4-15.

Other applicable divisions and sections like Division 70 – Trading Stock and other information that is inter alia useful for assessing the income of the partnership is considered further (Ato.gov.au,2019).

 

Working papers to assess the taxable income for Brekkie and Lunch and Oz bottle shop:

Calculation of Credit Sales

Amount ($)

Debtor balance as on 1st July 2016

 3,925.00

Cash Received from debtors

 32,800.00

Debtor balance as on 30th June 2017

 3,010.00

Credit Sales

 31,885.00

Cost of Goods Sold during the year

 

Cash Paid to creditors

128,678.00

Goods taken away by partners

3,200.00

Opening Balance

6,500.00

Closing Balance

7,010.00

Cost of Goods

125,988.00

Depreciation on assets as calculated by using depreciation calculator given by ATO (ATO,2016) :  806.20

Assumed that:

  • Air condition installation is repair expenditure as there is no asset namely air conditioner, thus charged to profit and loss account;
  • $3,200 of stock taken from the bottle shop is at purchase price;
  • Loan is entirely for the business and none of it is used for personal purposes;
  • Union fees is completely a business expenditure;
  • Bank accounting charges of ANZ bank are completely relatable to the business;
  • 5600 taken by partners is added to income as this is not allowable as expenditure.

Considering all the information and data given above the net income for partnership for the year ended 30th June 2017 is 45,068. Also, considering the facts given in the question relating to joint utilization of business premises and other expenses division 35 of the Income Tax Act,1997 have been regarded while attributing the joint expenses to the ascertain the net taxable income of the firm; apportioning only the portions of expenses used to facilitate the business operations

Computation for the taxable income is as follows:

Particulars

 Income

 

 Expenditure

Sales

 

 

 

   Cash

150,170.00

 

 

   Credit

31,885.00

 

 

Air Conditioner Installation

 

 

1,200.00

Shop Painting

 

 

150.00

Cash Taken by Partners

5,600.00

 

 

Cost of Goods Sold

 

 

125,988.00

Car Expense (90% for van and 60% SUV)

 

 

2,364.00

Mobile Bill (90% allocable to business)

 

 

633.6

Electricity bills (80% used for business)

 

 

1,176.00

Council Rates (60% allocated)

 

 

310.2

Insurance (Completely for business)

 

 

1,250.00

Union Fees

 

 

284

Account Charges

 

 

595

Interest Expense

 

 

5,500.00

Repair Expenses

 

 

1,350.00

Depreciation

 

 

806.20

Loss on sale of asset

 

 

980

Total

187,655.00

 

142,587.00

Net taxable Income as per section 4-15 (total of assessable income less the total deductible expenses) is:     187,655.00 - 142,587 = 45,068.00

As defined by the Fringe Benefits Tax Act, 1986 a Fringe benefit (FBT) is a tax payable by employers for benefits paid to an employee (or an employee's associate e.g. a family member) in place of salary or wages.

Section 5A of the Fringe Benefits Assessment Act, 1986 outlines the ways and methods in which the said tax is calculated. The ways of calculating the taxable amount are given in subsections (1B) and (1C) of the said act that give the following formulae (ato.gov.au):

As per section 5C of the Fringe Benefit Assessment Act, 1986 it is quite clear that type 1 fringe benefits are the benefits against which GST credits are available to the employer whereas type 2 are the benefits against which the said GST credits are unavailable to the employer because of either of the two conditions: (i) the benefit provided does not attract the payment of GST;

(ii) the benefit provided are input taxed, and as per the GST Act, goods or services on which GST paid is input taxed, that is the GST is included in the price of the service and/or goods, the credits for GST are unavailable.

Considering the quoted provisions and other relevant text from the Fringe Benefit Tax Act, 1986 it can be clearly stated that the given benefits are not exempt in nature thus, the consequences of providing fringe benefits to John will be as follows:

Benefit 1: School Fees at a private school for John’s Child.

As per the governing ‘A New Tax System (Goods and Services Tax) Act, 1999 School fees is exempt from GST whether from a private or public school. Thus this benefit will fall under type 2. In the present case the employer would be liable to pay Fringe Benefit Tax on benefits provided of $15,000.00.

Benefit 2: Rental accommodation provided in Sydney on concessional rent.

As per the governing ‘A New Tax System (Goods and Services Tax) Act, 1999 Rent on residential premises is input-taxed that is not separately recovered thus GST credits on the same are not receivable by the payer of rent making this benefit fall under the type 2 category. Thus the employer is liable to pay Fringe Benefit Tax on the market value of the residential premises provided to John as reduced by recoveries made from him, which would be equal to $36,400* for the Fringe Benefit Tax year (1st April to 31st March).

* It is considered there are exactly 52 weeks in the Fringe Benefit Tax year

Apart from the above you will be required to furnish annual Fringe Benefit Tax returns in April each year and also required to maintain following information (ato.gov.au):

Information required

Explanation

Employee name

The name of the employee who was

provided the benefit

Employee's ANU ID

The ANU ID number of the employee who

was provided the benefit.

Description of benefit

A short description of the benefit

provided.

Date Benefit Provided From

 

Date the employee was first provided

with the housing benefit.

Date Benefit Provided To

Date ANU ceased providing the

housing benefit.

Value of the benefit

Market value of the accommodation.

Amount of employee contribution

The amount that an employee has

contributed to the cost of the benefit.

There are ways to avoid the Fringe Benefit Taxes, this could be done by the following means as laid down in the ATO article on “How to reduce the FBT you Pay” (ATO,2016):

  • Substitute the fringe benefits by cash pays; that is rather than paying the accommodation in Sydney at such a nominal rent the employer could either pay cash to John so as to compensate for his rental expenses or he can recover a higher amount from John so as to reduce his own Fringe Benefit Tax liability; similarly in case of the school fees reimbursed, the employer can rather pay an extra amount to John equivalent to the school fees of his child.
  • Alternatively, the employer can also opt to give tax free benefits rather than giving benefits that are chargeable to Fringe benefit tax, such benefits include, benefits such as
  • Provide benefits that are tax deductible, providing benefits that are income tax deductible would give an edge to the employer as the benefits provided and the taxes paid thereon would be deducted from the profits of the employer.
  • GST credits, employer can provide fringe benefits that are available for GST credits that are the benefits on which the GST is either payable or not input taxed unlike the accommodation benefit and the school fees benefit provided to John.
  • Providing Cash bonus, as per the Fringe Benefit Tax act, bonuses provided to the employee do not attract fringe benefits, as when an employee receives fringe benefits it is the employee who is liable to pay tax on such bonuses received rather than the employer.

Using these alternative means the employer can save on both the compliance requirements of Fringe Benefit Tax and also the tax payable by him.

 

References

Australian Taxation Office. (2016, September 28). Calculators and tools_Host. Retrieved January 17, 2019, from https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=DCA#DCA/questions/assets (Office, 2016)

Australian Taxation Office. (n.d.). How GST applies to residential rent. Retrieved January 19, 2019, from https://www.ato.gov.au/general/the-sharing-economy-and-tax/renting-out-all-or-part-of-your-home/how-gst-applies-to-residential-rent/

Australian Taxation Office. (2016, September 28). How to Reduce FBT you Pay. Retrieved January 17, 2019, from https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/In-detail/FBT-and-entertainment-for-small-business/?page=8

Australian Taxation Office. (2015, June 16). Residential premises. Retrieved January 18, 2019, from https://www.ato.gov.au/Business/GST/When-to-charge-GST-(and-when-not-to)/Input-taxed-sales/Residential-premises/

GST on Fringe Benefits [Rtf]. (n.d.). Retrieved January 17, 2019, from

https://archive.treasury.gov.au/documents/168/RTF/AppA5.rtf

Office of Parliamentary Council (2018). Federal Register of Legislation – Australian Government. Retrieved January 18, 2019, from: https://www.legislation.gov.au/Details/C2013C00327

Office of Parliamentary Council (2018). Federal Register of Legislation - Australian Government. Retrieved January 17, 2019, from: https://www.legislation.gov.au/Details/C2013C00049

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