Fringe Benefit Tax And Assessable Income From Isolated Transactions In Australian Tax Law

Question 1

Alan is an employee at ABC Pty Ltd (ABC). He has negotiated the following remuneration package with ABC:  salary of $300,000;  Payment of Alan's mobile phone bill ($220 per month, including GSM Alan is under a two-year contract whereby he is required to pay a fixed sum each month for unlimited usage of his phone. Alan uses the phone for work-related purposes only;  Payment of Alan's children's school fees ($20,000 per year). The school fees are GST free. 
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

Inelusive acquisitions. (b) How would your answer to (a) differ if ABC only had S employees? (c) How would your answer to (a) differ If clients of ABC also attended the end-of-year dinner? 
Question 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. 

Issue

The issue in the case is to determine whether the benefits extended to Alan by ABC Ltd would be termed as fringe benefits or not. Further, Fringe Benefit Tax (FBT) payable on behalf of ABC Ltdneeds to be computed for various cases.

Rule

• Electronic device:

According to section 58 X of FBTAA, 1986, any electronic device such as mobile handset, laptop, MacBook which are extended by employer to the employee for work purpose would not be considered as fringe benefits. Moreover, it has been highlighted in this section that any remuneration provided by the employer for mobile on the account of work related process would not be categorised as fringe benefits (CCH, 2013). It means the mobile bill expenses which the employer is paying on behalf of the employer for his/her personal work would result in fringe benefits. Also, any expenses provided to the employee that are lower than $300 would be categorised under minor fringe exemption clause and would not account to any FBT liabilities on employer (Barkoczy, 2015).

• School fee:

School fee of children is a personal work of the employee and if the employer is making payment of school fee of employee’s children than it would result FBT which would be taxed on the part of the employer (Division 5, FBTAA 1986) (Gilders et al., 2016).

Fringe benefits taxable amount = Amount of school fee borne by the employer* Gross up rate

FBT liability = 0.49 *Fringe benefits taxable amount

It is noteworthy that gross up rate would be different for the different products/ services because it is associated with the applicability of the GST. If GST is applicable and GST input credits could be claimed, then the good would be Type1 or else Type 2. Since school feels is typically exempted from the aegis of GST, then Type 2 gross up rate would be used (Nethercott, Richardson and Devos, 2016).

• Dinner:

Mean fringe benefits would be applicable only if the employer has planned the meal outside the office premises. In this case, FBT would depend on the invited number of individuals and whether they are employees, clients and the associates of employees and so forth. Further, if the per person expenses comes out to be lower than $300, then it would categorised under minor fringe benefits exemption clauses and no FBT is payable (Sadiq et. al., 2016). Moreover, if the invitees are the clients of the employer then no tax deduction is applicable whereby if the employees and/or their associates are the part of the dinner, than tax deduction would be applicable for the employer (Division 9A, FBTAA 1986) (Deutsch et. al., 2015).

Rule

The FBT for the meals would be determined with the help of the two methods shown below:

• Actual Method:

This method is generally used when the invitees are the employees and/or their associates because total expenses would be taken into account for the computation of FBT. Further, tax deduction is also applicable and hence, the overall tax liabilities would be reduced. Moreover, GST input credits would also be offered to the employer on GST paid on meal expenses (Barkoczy, 2015).

FBT liabilities = 0.49 * Total meal expenses * Gross up rate (Type 1 good)

• 50-50 Split Method:

No tax deduction is applicable when clients are the part of the dinner. In this method, only fifty percent of the actual amount of meal expense is considered for FBT computation and hence, would be used by the employer to lower down the FBT tax liabilities. Further, if clients and employees both are the part of the dinner then the deduction in corporate tax is applicable on the amount which is spent on the employees only that too only to the extent of 50% (Nethercott, Richardson and Devos, 2016).

FBT liabilities = 0.49 *0.5* Total meal expense * Gross up rate (Type 1 good)

Application

Employee - Alan

Employer – ABC Ltd

• According to the given information, it is apparent that Mobile handset is extended to Alan that he used for business/work related process only (i.e. no personal work) and hence, the mobile handset and its monthly bill ($220) amount would not consider as fringe benefits.

• School fees

Amount of school fees = $20,000

(No GST is applicable on school fees and hence, the 1.9608 would be applied to determine the grossed up taxable amount for FY2017) (Sadiq et. al., 2016).

FBT liabilities

• Dinner

1. Invitees – 20 employees and their associates (at Thai Restaurant)

It is apparent that dinner has been planned outside from office and hence, FBT would be applicable on the dinner.

Total expenses in dinner = $6,600

Only fifty percent of the expense is incurred on 20 employees and hence,

Total expenses in dinner for employees = 0.5 * 6,600 = $3,300

Per employee expenses in dinner = 3,300/20 = $165

It can be seen that the amount is lower than $300 and hence, minor benefits exemption clause would be applicable. Therefore, FBT would not be payable in this case.

1. Invitees – 5 employees only

Per employee expenses in dinner = 3,300 /5 = $ 660

The total expense in dinner for an employee is higher than $300 and hence, FBT would be applicable on the part of the employer and it would be computed as per the actual method since there are no clients.

FBT liabilities

The GST input credits could be claimed by the employer

1. Invitees –  clients

No deduction is applicable on the expense incurred on the dinner when clients are the invitees. Therefore, 50-50 split method would be used for FBT computation. Half of the amount of dinner expense would be used for FBT liabilities.

Application

FBT liabilities

The GST input credits could be claimed by the employer.

Conclusion

It can be concluded from the above discussion that no FBT liability would be applicable on the account to mobile handset and monthly mobile bill because they are used by Alan for work only. Further, the amount of school fees paid by ABC Ltd on behalf of Alan would attract a FBT liability of finally, FBT liabilities on the account of expense on meal would mainly depends that whether the invites are employees and their associate or clients.  

The issue is to determine whether the proceeds earned through the sale of tennis courts would be categorised as ordinary income under section 6-5.

Rule

According to the provisions of Income Tax Assessment Act 1997, the two sections considered to determine the source of assessable income that would be generated by the taxpayer from various sources.

• Section 6 -5

The income derived by the taxpayer from the ordinary income sources would be termed as ordinary income and would be taxed under section 6-5 of ITAA, 1997. The various sources of ordinary income are listed below (CCH, 2013).

• Income received from the professional work would result ordinary income.
• Income derived from various investments such as dividends on the shares, interest amount, payment received from the securities or the income derived from the rent would be considered as ordinary income of taxpayer.
• Any income derived from the business action of the taxpayer (not from hobby) would be termed as ordinary income. Tax ruling TR 97/11 would be used to determine the nature of action of the taxpayer whether the action is repetitive and systematic and with the intention of carrying business (Gilders et. al., 2016).

• Section 15 -15

The income derived by the taxpayer from any isolated transaction with the intention of making higher profit would be termed as assessable income. The judgement of Antlers Pty Ltd v. Federal Commissioner of Taxation 97 ATC 4192 case is the testimony of this aspect. The imperative aspect would be the presence of profit driven intention of the taxpayer (Deutsch et. al., 2015).

• Peta had acquired a house located in Kew.
• The house had two old tennis courts down back in the house.
• The condition of the tennis courts was very poor and could not be used for tennis.
• Peta acquired the house for two purposes. She and her family’s would abode and to make three new units in place of old tennis courts and then to sell to earn profit.
• Local tennis club had extended an offer to Peta regarding the purchase of the courts.
• The offer contained the condition that they would buy the tennis courts only if Peta resurfaced them to good condition.
• Peta accepted the offer and dropped the initial plan of constructing new units and performed restoration on the tennis courts and spent nearly $100,000.
• She sold the tennis courts to tennis club with a consideration of $600,000.

Based on the above case facts,it is apparent that Peta is not carrying a business of tennis court restoration and selling and hence, it cannot be said that income of $600,000 would be ordinary income under section 6 -5. Moreover, there is no evidence present that indicates that the income is derived from ordinary source of income. Because,

• Tennis court restoration, resurfacing is not a professional work or business of Peta.
• She has not acquired the house with the purpose of profiting after making necessary improvement action on the courts and selling them to earn profit.
• There is no information present that indicates that Peta is carrying a tennis courts improvement and selling business. Further, the sale is not repetitive and hence, would not be termed as business action for deriving higher proceeds.

Hence, it can be concluded that income of $600,000 would not be categorised as ordinary income from ordinary income concepts.

However, it is apparent that Peta has made an isolated transaction by selling the tennis courts to local tennis club. Moreover, Peta has accepted the offer of tennis courts because they offered an amount of $600,000 for the tennis court. Further, Peta already knew that in order to fulfil the conditions associated with sale of tennis court, she has to spend only $100,000. Therefore, in order to derive higher income, she accepted the offer and made necessary improvement on tennis courts. Therefore, according to section 15-15 of Income Tax Assessment Act 1997, the isolated transaction for profit motive would result in assessable income.

Conclusion

It can be concluded from the above discussion that the income received from the sale of tennis court would not be considered as ordinary income under Section 6-5. However, the income would be termed as assessable income from isolated transaction of profit making under Section 15-15 of ITAA, 1997.

References

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

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

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. 2015, Australian tax handbook 8th ed., Pymont: Thomson Reuters,

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

Nethercott, L., Richardson, G. and Devos, K. 2016, Australian Taxation Study Manual 2016, 4^th 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, 8^th ed., Pymont:Thomson Reuters.