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Taxation Law And Fringe Benefit Tax

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Question:

Discuss about the Taxation Law And Fringe Benefit Tax.
 
 

Answer:

Issue

The central issue in the present case is to offer an advice to employee Charlie and employer Shine Homes Pty Ltd (Shiny Homes) for the fringe benefits consequences for the given events for the income year 2017.

Law

Fringe benefits are the non- cashable benefits (for personal use) which are extended on the part of the employer to their employee during their employment with the company. These types of benefits result fringe benefit tax liability on the employer. The various fringe benefits are highlighted in the Fringe Benefits Tax Assessment Act 1986 (Cth) “FBTAA86.” The various relevant fringe benefits and their respective FBT computation is discussed below.

Car Fringe Benefit

When an employer has provided car to the employee for his/her own personal usage, then it is termed as car fringe benefit. Tax Ruling TR 96/26 indicates the various aspects related to the Car Fringe Benefit and the computation of the Fringe Benefit Tax (FBT) liability on the part of employer (CCH, 2013). The necessary steps related to the computation of fringe benefit tax liability are highlighted below.

  • Total duration of utilization of private use of car in the assessment year

It is essential to find the actual date on which the car is available for the personal usage of employee.  According to section 7 of FBTAA86, the private usage of car is assumed in any of the following two circumstances (Woellner, 2014).

  • Actual car use for personal work by the employee
  • The date on which the car has been offered to employee for personal utilization. In this case, the date on which car is offered would be taken into consideration irrespective of the fact that whether the employee has started using car for personal purposes or not.

Additionally, there are certain implicit situations which also hint towards private usage. For instance, the parking of the car owned by the employer at the employee’s residence garage on aa regular basis automatically implies that the said employee has the authorization for personal use of car irrespective of an actual permission being extended. As per Section 7, FBTAA, the assumption of car being available for use in personal purposes can also be made when the residence is used as office (Gilders et. al., 2016). Also, on account of previous rulings, the use of car provided by the employer by employee for commutation between home and work amount to personal use of car which leads to FBT liability on employer (CCH, 2013).

 


Also, it is crucial to highlight the deductions in private usage. The private usage availability is hampered only when the car is in the workshop to undergo serious repairs which are typically caused when there is some accident leading to vehicle being damaged badly. It is noteworthy that regular services along with trivial maintenance issues do not provide any deduction in private use (Sadiq et. al., 2016).

  • Determination of the taxable amount of FBT related to extension of car fringe benefit

There are two methods which the employer may use in order to determine the taxable fringe benefit. These are outlined below.

  • Statutory Formula Method – This method involves determination of taxable value on the basis of the statutory rate multiplied with the car’s base value as highlighted in section 9, FBTAA. The complete formula is as indicated below (Deutsch et. al., 2016).

Car Fringe Benefit Taxable Value = (Base value of car * Applicable statutory percentage *(Days of private purpose/365)) – Employee Contribution 

The discussion about the various inputs mentioned in the above formula is carried out below.

  • The car base value is often assumed to be price at which the car is bought. However, there are certain other costs which are included such as accessories cost which are not related to business, delivery charger paid to the dealer and GST applicable on the same. Further, according to Section 9 FBTAA, the expense on registration and stamp duty is not included in the base value. Although on account of general wear and tear the value of the car diminishes but instead of annual depreciation, a one third base value reduction is possible to claim after four years have elapsed with no depreciation charged (Sadiq et. al., 2016).
  • Before May, 2011, the statutory percentage was determined taking into consideration the distances travelled in the consideration year. However, post May 11, 2011, the statutory percentage is independent of the distance travelled and instead levied at a flat rate of 90% in accordance with section 9, FBTAA (Barkoczy, 2017).
  • The private usage days have already been discussed in the previous section but computation of these is done between April 1 and March 31 as FBT year is separate from tax year. Also, these days are then divided by 365 to estimate the yearly duration of private car use (CCH, 2013).
  • It may so happen that certain operating costs related to fuel, repair may be paid by the employee and in such cases a deduction needs to be made for the same as per Section 9, FBTAA (Gilders et. al., 2016).
 

Operating Cost Method

The basic approach of this method is to determine the taxable value by computing the operating costs that have been spent in the given FBT year and multiply by a suitable percentage (Woellner, 2014).  The choice of percentage is essentially driven by the private use extent. Hence, higher is the personal use, higher would be the percentage value and higher would be the taxable value of the fringe benefit extended to the employee as per Section 10, FBTAA. The formula used in this method is outlined below (Gilders et. al., 2016).

Car Fringe Benefit Taxable Value = (Cumulative operating costs * Percentage) – Employee contribution

In the above two methods, it is the taxpayer who has the choice to decide on the method leading to lesser FBT payable. With regards to the operating cost method, it has to be specified at the commencement of private usage that this method would be used. The statutory formula method primarily is the one which is commonly in use (Barkoczy, 2017).

FBT payable computation in relation to the car fringe benefit

The above computed taxable value of the fringe benefit is then used to compute the FBT payable at the end of the employer as illustrated below (Sadiq et. al., 2016).

FBT payable by the employer = Car Fringe Benefit Taxable Value * Rate of FBT * Gross up factor

The fringe benefit tax rate tends to alter from year to year but for the current computations, the rate applied would be 49% applicable for the year ending on March 31, 2017. In relation to the gross up factor, two options exist based on the underlying good type. Goods that tend to levied GST have a higher gross up factor in comparison with those which are not levied GST. Since a car cost attracts GST, hence the higher gross up factor of 2.1463 would be used (Barkoczy, 2017).

 

Expense Related Fringe Benefit

The above fringe benefit when the employer tends to bear expenses which would be considered as private for the employee and should ideally be borne by the employee. This may involve several benefits such as payment of expenses like children fee. The applicable provisions in this relation are outlined in Section 20 FBTAA. According to this section, the computation of the FBT payable by the employer on account of this is highlighted below (Gilders et. al., 2016).

FBT payable by the employer = Expense borne by employer * Rate of FBT * Gross up factor

Again the value of gross of factor would essentially be driven by the presence or absence of GST on the underlying goods.

Car Parking Fringe Benefit

The car parking fringe benefits are extended when certain conditions outlined in the tax ruling TR96/26 are satisfied  These include that duration of car parking must be for atleast four hours and lie between morning 7 am and evening 7 am. Also, the parking benefits are extended to car controlled by the employee on account of the employment. Further, it is also necessary that this place of car parking must be in close proximity of the employment primary place. Also, section 39A, FBTAA levies additional two conditions for the realisation of the car parking benefits. One condition is that the venue of car parking must lie within a radius of 1km in respect of the employer’s car park provided (CCH, 2013). Also, the lowest fee for parking must exceed the annual threshold value which amounts to $ 8.48 for the FBT year ending on March 31, 2017 as per TD 2016/17 (Barkoczy, 2017). While based on the extent and type of data available, various methods can be used to compute the car parking fringe benefits, but the one relevant to the given situation is the market value approach based on which the following formula is valid (Woellner, 2014).

Car Parking Fringe Benefit Taxable Value = Car parking market value –Contribution from employee

FBT payable by the employer = Car Parking Fringe Benefit Taxable Value * Rate of FBT * Gross up factor

 

Application

Car Fringe Benefit

The car owned by company was parked at Charlie’s own garage and hence, it can be said that Charlie can utilize the car.  It is apparent from this fact that employer Shine Homes Pty Ltd has provided car to its employee Charlie for personal utilization. Hence, the fringe benefits liability would be applicable on the part of Shine Homes Pty Ltd. The computation of car fringe benefits tax liability is highlighted below:

Date at which car (Sedan) has provided to Charlie = September 1, 2016

Value of car = $70,000

The total number of days on which the car has been used by Charlie i.e. from September 1, 2016 to March 31, 2017 = 212 days

Deduction in private usage would be made for the 2 week spent in workshop in February but not for 2 days during Christmas as the former was major repair and latter was regular service.

Annual private usage during FBT year ending on March 31, 2017 = 212 – 14 = 198 days

Taxable value as per statutory formula method = = 70000*0.20*(198/365) = $ 7,594.52

The same also needs to be determined in accordance with the operating cost method so as to allow the employer to choose the better option.

Operating cost borne by company during private usage = 5500*7 (Petrol & Repairs) + 240*(7/12) (Registration)+ 960*(7/12) (Insurance) = $ 39,200

Taxable value as per operating cost method = 39200*0.3 (Extent of private use) = $ 11,760

The statutory method is the better method as it results in lower FBT related tax outflow for the company,

FBT payable by the employer (Car Fringe Benefit) = 7594.52*0.49*2.1463 = $ 7,987.06

Expense Related Fringe Benefit

The employer has spent the money on the following two.

  • Hiring a car in the week of marriage for Charlie ($1,000)
  • Paying for honeymoon accommodation ($ 3,000)

It is apparent that the above are expense of personal type which ought to be spent by Charlie himself. Hence, the payment of these constitutes a expense related fringe benefit for which the company would have to pay FBT. The computation in this regards is highlighted below.

FBT payable by the employer (Expense Related Fringe Benefit) = (3000+1000)*0.49* 2.1463 = $ 4,206.75

Car Parking Fringe Benefit

Based on the given facts, it is apparent that the employer is provided car park by a third party to the employee Charlie who uses the company owned car for private purposes. Also considering the $ 200 weekly charge, it is evident that the rate per day is significantly higher than the applicable value which is acting as the threshold for the FBT year ending on March 31, 2017.

Considering the weekly parking charges of $ 200, the benefit has been extended for 28 weeks leading to a taxable value of $ 5,600.

FBT payable by the employer (Car Parking Fringe Benefit) = 5600 * 0.49 * 2.1463= $ 5,889.45

Conclusion

In line with the discussion of relevant law and the computations performed, it is apparent that total FBT liability to the tune of $ 18,083. 26 (i.e. 5889.45+ 4206.75 + 7987.06) is payable by the employer while Charlie has no tax liability arising on account of the events highlighted.

 

References

Statutes & Tax Rulings

Fringe Benefit Tax Assessment Act, 1986 (Cth)

TR 96/26

TD 2016/17

Books

Barkoczy, S. (2017), Foundation of Taxation Law 2017 (9thedition), North Ryde: CCH Publications

CCH (2013), Australian Master Tax Guide 2013 (51st edition), Sydney: Wolters Kluwer

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian tax handbook (8th edition), Pymont: Thomson Reuters,

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

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A (2016) , Principles of Taxation Law 2016 (8th edition), Pymont: Thomson Reuters

Woellner, R (2014), Australian taxation law 2014 (7th edition), North Ryde: CCH Australia

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