Practical Introduction To Australian Taxation: Fringe Benefits And Income Tax Essay.

Overview of Fringe Benefits Tax Assessment Act 1986

Question:

Discuss About The Practical Introduction Australian Taxation?

Fringe benefit is regarded as the benefit that is provided to the employee by the employer other than the salaries and wages. According to the “FBTAA 1986”, it is noteworthy to denote that there must exist the relation of employee and employer between the person receiving the benefit and the person providing (Brownlee 2016). The existence of the relation would enable the use of provision defined under the FBTAA 1986 to determine the tax obligations for both the employer and employee.

As it has been defined under section 7 of the Fringe Benefit Tax Assessment Act 1986 benefit provided to an employee in the form of car would constitute car fringe benefit (Schenk 2016). The act introduces that giving car to the employee or provided under the lease and the same is permitted for employee private usage then in such case, it would result in car fringe benefit tax. Given that it is noticed that employee for his or her personal use puts the car into use or the car is available for personal use even though the car is not used for private purpose then it would be regarded as fringe benefit for the purpose of taxation (Finkelstein 2014).

There are namely two methods of determining the assessable value of car fringe benefit. These methods include statutory formula method and operating cost method. Section 9 of the Fringe Benefit Tax Assessment Act 1986 is associated with the determination of car fringe benefit under the statutory method (Pope 2016). Under the statutory method, the assessable amount of the fringe benefits is determined on taking account of the value of car. Additionally section 10A and 10 B of the FBTAA 1986 is associated with the determination of the assessable value of the car fringe benefit by employing the operating cost method. As stated under the operating cost method the operating cost incurred in the administration of car is considered to determine the assessable amount of fringe benefit (Feld 2016). An important consideration in this regard is that the method that provides lowest assessable value of fringe benefit must be employed in determining the fringe benefit tax. To use the operating cost method the employee will be required to maintain the expenditure incurred in the logbook or any similar document.

The current situation of Charlie introduces that his employer Shiny Homes Pty Ltd. provides him with a car. The car is allowed for both the private and work purpose of Charlie. In compliance with section 7 of the Fringe Benefit Tax Assessment Act 1986 benefit provided to Charlie in the form of car would constitute car fringe benefit and the same would be liable for taxation (Murphy and Higgins 2014). To determine the assessable value of car fringe benefit of Charlie two methods are employed namely the statutory and Operating cost method. Under the statutory method, a statutory rate of 20% is applied to determine the fringe benefit.

Determination of Assessable Value of Car Fringe Benefit

The statutory rate of 20% is multiplied with the base value of the car to ascertain the assessable value of fringe benefit (Bloom and Joyce 2014). The degree of private use made by the employer is not considered in determining the assessable value of fringe benefit under the statutory method. While under the operating cost method the sum of operating cost incurred in the administration of car is separately segregated from the person use and work related use made by the employee to determine the assessable value of fringe benefit (Pyrmont 2014). The below stated computation determines the fringe benefit of Charlie under the Statutory method and Operating Cost method;

With reference to “section 11 (1)” the deemed depreciation is computed by employing the statutory rate of 25%.

In compliance with the “section 11 (2)” the deemed interest is computed by employing the statutory rate of 5.65% for the year 2016/17.

As understood from the figures derived under the statutory method the assessable amount of the fringe benefit for the car is lower than the operating cost method. As a result, the assessable value of car fringe benefit under the statutory method must be considered in determining the tax. Additionally it has been noticed that Shiny Homes has hired car to provide Charlie during his wedding also incurred expenditure on Charlie’s Honeymoon accommodations, which would be considered for assessment of taxable value of fringe benefit. In agreement with the 39A of the Fringe Benefit Tax Assessment Act 1986 car parking fringe benefit originates only when the car is parked at the premises that is leased or owned by employer (Coleman and Sadiq 2013). In the current situation of Charlie since the car is parked in separate entity, it does not result in fringe benefit. 

The current case study is concerned with Allan and Betty that have undertaken the decision of changing tree. The have additionally decided to sale their house that is situated in Melbourne and subsequently decided to acquire a country house that is located in Central Victoria, which will not be subjected to tax. Allan and Betty derive their income as the locum doctor and as the part time accountant. Their income would be subjected to tax with respect to the provision stated under the “section 6-5 of the ITAA 1997” (Kenny 2013). Clearly, the case study provides that Allan is a widespread locum doctor among his patients and on a regular basis receives foods and cake from his clients as the mark of token of appreciation.

Computations for Statutory and Operating Cost Methods of Determination

Additionally the fees that is charged by Allan would be liable for income tax consequences while the receipt of food and cakes would not be subjected to income tax since they do not carry any market value. However, on one occasion it is noticed that Allan has received dozens of wine bottle from his client that carried commercial value of $360. The receipt of wine by Alan would be liable for income tax consequences since it carries commercial value and the same would be included in his assessable income to determine the tax liability in accordance with the “ITAA 1997”.

According to the taxation ruling of Taxation Ruling TR 97/11, it provides an indication whether an individual is performing the activities of business (Morgan, Mortimer and Pinto 2013).  The ruling evidently provides the differences between the business activities and hobby.

1. One of the main reason behind determining whether the person is carrying on the hobby or business is to determine the commercial intent. If the activity is carried with commercial intention then it would be regarded as business whereas activities having no commercial intent would be treated as hobby.
2. The primary motive in business is to generate profit; conversely, hobby hardly has the motive of making profit.
3. In the business activities, there is an existence of employer and employee relationship while no employer and employee relationship prevails in hobby (Woellner 2013).
4. A business generally requires high amount of investment whereas hobby does not requires any investment
5. Having premises is a necessity for business while hobby does not have any necessity of having premises.

Citing the judgement of court of law in the case of “Cooper Books Pty Ltd vs. Commissioner of Taxation of Commonwealth of Australia” the value that is derived from hobby is considered as income whereas profit generated from that hobby would be considered as executing the activities of business (Woellner et al. 2014).

The case study considerably provides that Betty started making marmalade, which turned famous among her neighbour. She later opened a stall and decided to sell every second Sunday of month. Alan sold the extra amount to suppliers constantly. Citing the reference of full federal court decision in the case of “Martin v. FC of T (1953)” no lone activities is capable of providing exclusive evidences and contains place on top indicators (Willbanks 2015). In the current situation of Alan and Betty, there was the prevalence of recurring nature of activities. Consequently, their activities would amount to business in nature and would be having tax consequences regarding the income generated from such activities.

As stated by the Australian Taxation Office transactions that are arising out of the barter system would be considered for tax and GST purpose. This is because the transactions from barter system are equivalent to cash and credit transactions. With reference to “Subsection 25 (1) of the ITAA 1936”, revenue from barter transactions will be having tax consequences (Oestreich and Keane 2016). With reference to the case of “F.C. of T. v. Cooke & Sherden 1980” money that is derived by Alan and Betty from the barter transaction would account for taxation and will be liable for goods and service tax as well (GST) under the GSTR 1999 (Nossaman and Wyatt 2016). This is because the income generated from the barter system by Alan and Betty is equivalent to cash and credit transactions.  

Reference List:

Bloom, I.M. and Joyce, K.F., 2014. Federal Taxation of Estates, Trusts, and Gifts. LexisNexis.

Brownlee, W.E., 2016. Federal Taxation in Australia. Cambridge University Press.

Coleman, C. and Sadiq, K. (n.d.). 2013 Principles of taxation law 2013.

Feld, A., 2016. Federal Taxation of State Tax Credits.

Finkelstein, M., 2014. Cases on Federal Taxation (Book Review).

Kenny, P. 2013. Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.

Morgan, A., Mortimer, C. and Pinto, D. 2013. A practical introduction to Australian taxation law. North Ryde [N.S.W.]: CCH Australia.

Murphy, K.E. and Higgins, M., 2014. Concepts in Federal Taxation 2015. Cengage Learning.

Nossaman, W.L. and Wyatt Jr, J.L., 2016. Income Taxation of Trusts and Estates. TRUST ADMINISTRATION AND TAXATION, 2.

Oestreich, N. and Keane, M., 2016. ACCTG 503 Federal Taxation of Individuals.

Pope, T.R., 2016. Pearson's Federal Taxation: 2017 Comprehensive. Prentice Hall.

Pyrmont, 2014 NSW Australian Taxation Law Cases. Thomson Reuters.

Schenk, D.H., 2016. Federal Taxation of S Corporations. Law Journal Press.

Willbanks, S.J., 2015. Federal taxation of wealth transfers: cases and problems. Wolters Kluwer Law & Business.

Woellner, R. 2013. Australian taxation law 2012. North Ryde [N.S.W.]: CCH Australia.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2014 (n.d.). Australian taxation law.