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Calculation of Fringe Benefit and Taxable Income for Brian

Question:

Discuss About The Purchase Public Infrastructure Project In Australia?

Brian is one of the executive of bank. As the part of his salary structure, his company has given him a three year loan of $1m at a special 1% rate of interest per annum which is payable in monthly instalments. Brian got the loan on 1 April 2016. Out of the total loan amount 40% is used for the purpose of producing income and the rest has been used to pay the pending interests (Edmonds et al. 2015). The issue is to show the calculation of the fringe benefit for the year 2016/17. This is also to show that whether the answer would be different if the interest is payable only at the end of the year and also what will happen if Brian is being released by the bank from repaying the loan interests.

Fringe benefit can be defined as the special facilities, (non-income related benefit) provided to some particular best employees to secure them for business purpose (Bogenschutz et al. 2014). For instance, a worker can get fringe benefit in the form of a car, low interest loans, payment of private expenses. Likewise, Fringe benefit tax is a tax which is payable by the company on behalf of an employee’s benefit. This is different from income tax and this calculation is pursued on the value fringe benefits which is taxable (Ahmad and Scott, 2015).

As per Australian bank policy the interest rate of loan is 4.69%, but Brian has got a special 1% rate of interest by the employer as fringe benefit.

The calculation of income of Brian which is taxable for the years ending on 30 June 2017 is shown below:

Date on which loan received - 1st of April 2016 for 3 years.

Loan amount - $1 million

Interest rate of loan - 1% (fringe benefit)

The actual interest rate around the country is 15%

Repayment mode - Instalments in monthly basis

Loan amount used - $400,000 (40% of $1 million)

Calculation of instalment for the period of 15 months

- ($10,00,000*1%/12 months) * 15 months                                                            

= ($ 10,000/12) *15 months

= $ 12,500

Calculation of the income of Brian which is taxable for the year 2016- 2017:

Total income of Brian - ($10, 00,000)

Less: Expenditure - $ 400,000

Less: Instalment of interest payment - $10,000

Less: Instalment of principal payment - $250,000 ($333,334 - $ 83,334)

Case Study: Joint Tenancy and Partnership in Australia

Total income which is taxable - $340,000

In this study, the taxable income of Brian is $340,000 and the month instalment which includes principal and interest on loan is (2,50,000 + 10,000)/12 = $ 21,667. Therefore it can be said that Brian need to pay the instalments and because of this the taxable income has decreased by $21,667. On the other side, if the repayment of the instalment is made at the closure of the loan, then the calculation of the taxable income will be different. This calculation is given below:

Brian’s total revenue - $ 10, 00,000

Expenditure - $ 400 thousand

Total Taxable Income - ($ 10, 00,000 - 4, 00,000) = $600 thousand

Therefore, it clearly observed that monthly instalment is more benefited for Brian as he has to pay tax on $3,40, 000 but in the other case he has to pay tax on $600 thousand which is very high (Hulse and Burke, 2016).   

As per the question, if Brian get released by bank from paying the interest amount then Brian will have to pay the principal amount only, that will decrease Brian’s expense but in that case claim of fringe benefit on the loan will not be applicable (Tang and Wan, 2015).

An architect whose name is Jack and his wife has borrowed money together to buy a property for the purpose of letting out as joint venture. Both of them has made an agreement that Jack will take 10% of the profit and his wife will take rest of the profit. But, in case of loss, Jack will be responsible for the total loss. Last year the property has got a loss of $10,000 and as agreed Jack has beard the whole loss (Burkhauser et al. 2015).

As per section 35(2) of Relationship Act 2008, a person cannot be the domestic partner of any other person on the field of co-tenancy. According to the Section 5(1) of Partnership Act 1958, partnership can be said as a relation among two or more persons, who are doing a similar business having the same goal to gain profit (Rebbeck et al. 2014).

In this scenario, Jack and Jill have a domestic relationship and agreed upon an agreement of joint tenancy where both will have a profit of 1:9 ratios. But if loss occurs then Jack will only bear the whole loss (Babie, 2016). As per mentioned in the Relationship Act and the partnership act , there is no doubt that Jack and Jill are in domestic relationship, but in the scenario of joint tenancy relationship, Partnership Act gets attracted, as both of them are said to have a partnership relation as the nature of business is same. Hence, all the loss of $10,000 will go under the responsibility of Jack and will get tax benefit on the loss amount (Meumann et al. 2015). On the other hand, if the partners want to sell the property, then they have to regain the loss, after that they can sell the property. In this scenario, there is no chance of regaining the loss. So, they will have to sell the assets for the loss.

Tax Avoidance and Ethical Tax Compliance

In this case, Duke of Westminster came into a contract with his fellow servants, which includes gardeners, domestic helpers etc. In this contract, the duke has agreed to give some money to the servants for the service they have given (AbdulRazaq and Adam, 2015). A written document has sent to the servants mentioning that they will give them salary along with additional sums, if any, like a payment for the services which they have given as domestic helpers. The Duke tries to ask for this kind of payment for a deduction of tax as a procedure to avoid tax (Bloom, 2015).

A deed is similar like a contract, like the documents which are considered to be legal need an agreement agreed mutually of two or more persons which can be used normally to allow rights like the transfer of assets or property. In this scenario, the problem is, whether the contract covenant can be treated like an employment contract. The Duke is not paying the gardeners and the servants, in weekly or monthly basis as mentioned in the employment contract, and hence there will be no consideration to the contract which is one of the main factors to form a legally binding contract (Madigan, 2015).

Bill owns a large piece of land in which he wants to graze sheep. But there are lots of tall pine trees which has become a problem and it needs to be cleaned (Behagg, 2016). Then Bill came to know a logging company is ready to give him $1,000 for each 100 metres of timber which they will take from that land. Now in this study Bill has become the seller who will get the payment from the logging company (Doyle and Feary, 2016). For example, if the land of Bill is measured in meters, suppose the timber covers 4500 meters then Bill will receive,

Bill will get $1000 for 100 meters

Then, for 4500 meters he will get (1000/100*4500) = $45000.

So, the calculation shows that for the clearance of 4500 meters of timber Bill is getting $45000. On the other hand, another company offers him $50,000 lump sum at a time by the logging company to clear off as much timber as possible (Rao et al. 2017).

Reference list

AbdulRazaq, M.T. and Adam, K.I. (2015). Anti-Avoidance Legislations: Issues & Doubts in the Application of Tax Rules in Nigeria. AGORA Int'l J. Jurid. Sci., p.1.

Ahmad, R. and Scott, N. (2015). Fringe benefits and organisational commitment: the case of Langkawi hotels. Tourism review, 70(1), pp.13-23.

Babie, P. (2016). South Australia: the meaning of" Residential Tenancy Agreement" in South Australia: Schaffer v USCA.

Behagg, C. (2016). Tax Inversions: Time to Take a Look in the Mirror Reflections on the Inversion Phenomenon. Intertax, 44(2), pp.130-145.

Bloom, D. (2015). Tax avoidance-a view from the dark side. Melb. UL Rev., 39, p.950.

Bogenschutz, M.D., Hewitt, A., Nord, D. and Hepperlen, R. (2014). Direct support workforce supporting individuals with IDD: Current wages, benefits, and stability. Intellectual and developmental disabilities, 52(5), pp.317-329.

Burkhauser, R.V., Hahn, M.H. and Wilkins, R. (2015). Measuring top incomes using tax record data: A cautionary tale from Australia. The Journal of Economic Inequality, 13(2), pp.181-205.

Doyle, J. and Feary, G. (2016). Risk watch: Who's your client?. Bulletin (Law Society of South Australia), 38(8), p.35.

Edmonds, M., Holle, C. and Hartanti, W. (2015). Alternative assets insights: Super funds-tax impediments to going global. Taxation in Australia, 49(7), p.413.

Hulse, K. and Burke, T. (2016). Private rental housing in Australia: Political inertia and market change. Housing in 21st-century Australia: People, practices and policies, pp.139-152.

Madigan, P. (2015). Ethics and tax compliance: the morality of tax compliance. Trusts & Trustees, 22(1), pp.151-158.

Meumann, E.M., Mitchell, B.G., McGregor, A., McBryde, E. and Cooley, L. (2015). Urinary Escherichia coli antimicrobial susceptibility profiles and their relationship with community antibiotic use in Tasmania, Australia.International journal of antimicrobial agents, 46(4), pp.389-393.

Rao, J., Tiwari, P. and Hutchison, N.E. (2017). No Way to Say No: Stakeholder analysis for compulsory purchase for public infrastructure project in Australia. Property Management.

Rebbeck, R.T., Karunasekara, Y., Board, P.G., Beard, N.A., Casarotto, M.G. and Dulhunty, A.F. (2014). Skeletal muscle excitation–contraction coupling: who are the dancing partners?. The international journal of biochemistry & cell biology, 48, pp.28-38.

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.

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[Accessed 05 March 2024].

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