Ordinary Income of Residents of Australia
Describe about the Taxation Law for ITAA Sec 6-5.
1. According to the ITAA sec 6-5, the ordinary income of a resident of Australia is considered to include all concepts that are considered ordinary (Groenewegen, 2009). It is the income that will be assessed for that individual. The assessable income will be treated in a different manner. This will depend on whether one is resident of Australia or a non-resident. If you are an Australian resident, your assessable income includes any ordinary income that was derived directly or indirectly from your source of production at the income year. The income will be assessed in the country of residence that is Australia irrespective of whether it was gained in the country or oversees in the income year (Berube, & Pinto, 2010).
In Myer vs. FCT case, a person who enters in an isolated transaction with an aim of making profit shall be calculated for assessable income (Kluwer, 2015). The court stated that it is one thing to sell an asset immediately after its acquisition even if during the acquisition you did not have the intent of selling the property for profit motives. The court decided that if an asset is not a revenue asset; the profit made is capital because its proceeds are realizations made. It stated that it is quite different if one decided to sell the profit after acquiring it. If the latter were true, it would not be considered an ordinary income (Law.ato.gov.au, 2015). However, if you acquired the property with no such intention of making profit, then it would be an ordinary income. The same notion can be seen in Westfield vs. FCT case.
The income of a non-resident that will be assessed will be that income that will be derived either directly or indirectly from his or her sources of income in Australia in the income year. A non-resident person is an individual who lives in Australia but does not have an identification card of Australia (Groenewegen, 2009).). Another income that could be treated as an ordinary income if the amounts accrued from his or her source of income in Australia but was transacted on behalf of him by another person and it was directly attributed to him.
Peta purchased a house in Kew (Freebairn, 2016). The case study further states that the main reason for buying the house is so that she could live there with her family as well as build three units of tennis courts for profit motives (Freebairn, 2016).Since she wants to live there with her family, she will be considered a resident. Selling of the units could be ordinary income since it was realized from the ordinary activities from her source of income.
Assessable Income for Australian Resident and Non-Resident
The prevailing condition was that the tennis courts ought to be restored into good condition before the tennis club could purchase them (Smith, n.d.). The renovation cost is a repair and maintenance cost and it should therefore be recorded in the profit and loss account. Repairs and maintenance expenses are usually deductible for tax purposes because they are treated as capital expenses for a person or a corporation (Smith, n.d.).
Peta spent $ 100,000 to acquire the house in Kew. However, some amounts that Pet incurred while purchasing the house are disallowable and they should therefore be deducted for the purpose of calculation of taxes (Kenny, n.d.). For instance, the cost of fencing is not an ordinary business activity for Peta and it should therefore be deducted for the purpose of calculation of taxes. The disallowable expenses are those that will be incurred for business activity that is the sale of the tennis courts and those that are aimed at restoring them in good condition of a place. Therefore, fencing of the tennis courts is not one of them. The receipt of $ 600,000 should therefore be treated as ordinary income when calculating the capital gains of Peta since the income was derived from an Australian source. To calculate the capital gains, the expenses incurred while restoring the tennis courts into good condition should be deducted from the income received (Kenny, n.d.).
Fringe benefits are those benefits given to an employee by an employer, which are out of the ordinary basic salary (Woellner, Barkoczy, Murphy, Evans, & Pinto, n.d.). According to Publication 15-B of the income tax act, a fringe benefit is a form of pay for the performance of services. For example, the company may allow the employee to use the business vehicle to or from work. Some are tax exempt while others are taxable. Below are the fringe benefit consequences of Allan:
Mobile phone- ABC ltd. paid for the mobile bill of Allan worth $ 220 per month. The case study also states that Allan uses this amount for work related purposes only. Since this is an expense out of the ordinary business operations, it will be considered as a fringe benefit for tax purposes.
Mobile handset- Allan received a mobile handset from the company worth $ 2,000 inclusive of GST. Since this is a benefit to Allan from the company, it will be considered as a fringe benefit and it will be deducted for tax purposes. However, it states that it is inclusive of GST. This shows that we should first less the GST before calculating the fringe benefit tax.
Examples of Tax Deductibles for Fringe Benefits Taxation
Dinner- ABC Ltd. hosted a dinner party a local Thai restaurant for Allan and his other co-workers. The total cost of the dinner was $ 6,600 inclusive of GST. Since this is a benefit out of the ordinary income or salaries and wages of Allan, then it would be considered as a fringe benefit and it would be deducted for tax purposes. However, the case study states that the cost of the dinner was inclusive of GST. We, therefore, have to less the GST before including the dinner expenses for the computation of fringe benefits.
The company also pays for the school fees of Allan worth $ 20,000. The case study of ABC Ltd. states that this school fees is GST free. This implies that Allan will not have to pay for GST for this amount. Since this is a benefit to Allan from the company and it is out of the ordinary business income or salaries and wages for Allan, it would therefore be considered as a fringe benefit and should therefore be deducted for calculation of tax.
The case study states that all GST inclusive goods and services are entitled for input tax credits (McFadden, 2009).This implies that after paying the GST, the amount paid for GST would be credited back to the bank account of ABC ltd. and later the fringe benefit tax would be calculated. The fringe benefit tax rate that applies for the year 2016 is 49% (Woellner, 2013). Below is the calculation of the fringe benefit taxes of Allan.
If the enterprise had five employees, then the organization owed the workers a fiduciary duty or an obligation of providing them with meals (James, n.d.). This will therefore be an employee expense to the company and would be deducted from the gross income. It would also be considered an employee expense since this is a small amount incurred on the meals and therefore it would not qualify for fringe benefits (James, n.d.). Below would be the calculation of the fringe benefit tax.
If clients of ABC Ltd. attended the dinner for the company, then the cost will be treated as a normal selling and distribution costs (Berube, & Pinto, 010). This is because during the dinner, the firm can advertise about their services and be able to retain the existing customers and lure potential ones to buy from them (Berube, & Pinto, 2010). It will also be treated as an advertising cost because it will be assumed that the dinner is aimed at appreciating the clients of the corporation and ensuring that the customers of the company will retain in the next financial year of the company and attract more potential customers (Lally, & van Zijl, n.d.). The fringe benefit tax will therefore be similar to part b above. The only difference will lie when computing the income tax since we expect that the cost for the five employees would be less than when the company invites the clients.
Berube, W. & Pinto, C. (2010). Taxation, tax policies and income taxes. New York: Nova Science Publishers. Pp. 45-50. Retrieved on 19 September 2016.
Woellner, R. (2013). Australian taxation law 2012. North Ryde [N.S.W.]: CCH Australia. Pp. 55. Retrieved on 19 September 2016.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. & Pinto, D. (n.d.). Australian taxation law select. Pp. 10-20. Retrieved on 19 September 2016
Groenewegen, P. (2009). Australian taxation policy. [Melbourne]: Longman Cheshire. Retrieved on 19 September 2016.
Freebairn, J. (2016). Taxation of Housing. Australian Economic Review, 49(3), 307-316. Retrieved on 19th September 2016 from https://dx.doi.org/10.1111/1467-8462.12172
Smith, J. Australian State Income Taxation: A Historical Perspective. SSRN Electronic Journal. Retrieved on 19th September 2016 from https://dx.doi.org/10.2139/ssrn.2704627
Kenny, D. Australian Taxation and Ethics: Colonization to Costello-Risation. SSRN Electronic Journal. Retrieved on 19th September 2016 from https://dx.doi.org/10.2139/ssrn.2337369
McFadden, D. (2009). Employee Fringe Benefits Expense. Compensation & Benefits Review, 21(6), 66-69. Retrieved on 19th September 2016 from https://dx.doi.org/10.1177/088636878902100610
James, S. Fringe benefits. Retrieved on 19 September 2016.
Lally, M. & van Zijl, T. Capital Gains and the Capital Asset Pricing Model. SSRN Electronic Journal. Retrieved on 19th September 2016 from https://dx.doi.org/10.2139/ssrn.1281164
Law.ato.gov.au (2015). TR 92/3- Taxation Ruling: Myer v. FCT Case. Retrieved on 19th September 2016 from https://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR923/NAT/ATO/00001/
Kluwer, W. (2015). The Myer v. FCT Case. Retrieved on 19th September 2016 from https://www.iknow.cch.com.au/topic/tlp841/document/atagUio546518sl16809333/cases/interest-income/federal-commissioner-of-taxation-v-the-myer-emporium-ltd/
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