Income Tax Assessment Act 1997: Definition And Taxation Of Perks, Benefits, Interest Income, FBT, And CGT In Australia

Definition of Perks and Benefits under Sec 15-2 of ITAA 1997

Discuss about the Taxation Law for Legislation and Commentary.

In accordance with the Sec 15-2 of the INCOME TAX ASSESSMENT ACT 1997, additional benefits provided by the employer in the form of gratuities, allowances, bonuses, benefits, compensation, and premiums are part of accessible income (Sec 15-2 of the INCOME TAX ASSESSMENT ACT 1997, 2018). It is irrespective of the fact that that provided perk can be convertible in money or not.  This section further states that assessable income of an individual is inclusive of all the perquisites provided in a direct or indirect manner in against of services rendered by employee (Burkhauser, Hahn and Wilkins, 2015).  

On the basis of the agreement with the Daily Terror were established and considered, as by this copyright would be owned by Hilary of his life story on writing it. Further, she would put the copyright into sale for $10000 for the life story, and then the entire charge would not be considered as a reward for rendering service. Despite of the Brent v FCT (1971) 125 CLR 418 case, the payment would be considered as a charge for the copyright sale. Furthermore, the payment can be still related as a general income in case Hilary was said to be operating of business engaged on purchase and selling of articles. However, it would be not likely as she has never written a story prior to this. As per the assumptions, the payment of $10000 would not be states as a general income, along with this it would not be measurable in accordance with 15-2 of ITAA 1997, it is because it is not stated as a reward for rendering services but a payment provide for putting the copyright into sale. On the other hand, it would not be considered according to the capital gain tax (Sec 15-2 of the INCOME TAX ASSESSMENT ACT 1997, 2018).

However, if the deal is interpreted in a sense that the copyright to article has never been owned by Hilary and that it will instantly vest with the article Daily Terror, then the situation will be same as the Brent case and the payment will be further states as general income because of the reward meant for services. According to the 15-2 of ITAA 1997, it would not be assessable, due to the ordinary income gains are exclusive of the section s15-2(3)(d) of ITAA 1997.

Taxation of Interest Income

The newspaper Daily Terror provides Hilary with a total payment of $10,000 for her biography, in a situation where she writes it and allots all the right, interest and title with the copyright for the amount $10000 to the newspaper. Along with this, manuscripts are also sold by her for $5,000 to the Mitchell Library and various pictures for$2,000.

In regards to the due case, section 115A of income tax act rules this case, under this any royalty gained from any individual resident outside of India, will be charged 10% tax. In this, transferring of royalty is done to any other individual and on above rate the tax will be charged. Further, it would not be assessed as payments from individual efforts as the royalty has occurred from personal talents and expertise.  In a situation where the biography is written by her for own satisfaction and the decisions of selling the same is made on the later basis, then the answer to the will be similar because the copyrights are sold by her to another individual. The three payments are considered as income from individual effort; as the book was written on a personal basis with own rights, pictures and manuscripts are sold in compliance with the law.

Fringe benefits tax (FBT) can be defined as tax obligation that is to be paid by the employer for the benefit provided by them to their employees or to their families or associates. Such cited benefits may or may not be part of their basic salary packages (Woellner and et al. 2011). This is different from the computation of income tax, and it is computed by considering the value of the benefit provided by the employer.  

As per the background aspect of this tax, the obligation of payment of this tax is on employees for collectability of tax (Fringe benefits tax (FBT), 2018). These benefits are inclusive of following aspects, but these are not limited to these only:

• The provision for motor vehicles provided in a direct manner or through a novated lease
• Recompense personal expenses even if it is part of basic salary packages
• Accommodation or housing provisions
• Provisions for entertainment and meals
• Services of Car parking
• Living-away-from-home allowances
• Provision for interest-free loans

The taxable amount computed on fringe benefits given to the employees needs to be disclosed under Pay-As-You-Go (‘PAYG’) on an annual basis as part of payment summary for each financial year 30th June 2017 at the end.

By considering the above-described aspect, it can be noticed that FBT is a tax obligation imposed on the employer and does not have an impact on tax obligation of the employees but it affect their income thresholds on a conditional basis as per the  personal circumstances  of the employee.

Fringe Benefits Tax (FBT) in Australia

For the calculation of the tax obligation of FBT, the employer is required to gross-up the taxable value of benefits provided, to provide an indication of the gross wages of employees that are earned by them by applying maximum marginal tax rate (this is to be inclusive of Medicare levy) for purchasing  benefits after reducing tax.

In accordance with the provisions of FBT, there are two gross-up rates which can be used for the computation of taxable amount:

• Type 1: Higher gross-up rate: this rate is used in a situation where the employee is entitled for the credit of GST which is paid for the benefit provided to the employee. Such FBT is also considered to be GST-creditable benefits (CCH Australia Staff, 2012).
• Type 2: Lower gross-up rate: This tax rate is used when above described condition is not satisfied.

A used car was offered by Eric to his employee for 183 days at the time of FBT tear, in this time period, the car was driven 16,000 km. The car was purchased by Eric last year, with the fair value of $50,000. The contribution of $1,000 was made by an employee to the cost of operating a car and has offered reliable and faithful documentation to Eric.

The statutory rate is at 20% or 0.2.

The taxable value of the car fringe benefit by making use of the statutory formula:

= (50,000*20%*183/365) - 1,000

= 4,000.

Any kind of interest income which is earned by an individual is part of assessable income as per ATO, and therefore it is to be included for the purpose of computation of taxable income (McCouat, 2012).  Such income from Interest is considered as ordinary income for the purpose of taxation. Normally, taxability of interest similar to the federal tax rate on the basis of income earned.

The assess is a parent, who has borrowed debt of $40,000 to her son so as to offer a temporary housing loan and the contact is that $50,000 will be repaid by the son after five years, but the housing loan was formed to the son with no formal agreements and security for the borrowed sum, and the full amount was repaid by the son at the end of two years. Inclusive in the payment, a further amount which was equivalent to 5% on the lent amount, for the total amount, a single cheque was presented, and then the parent’s assessable income will not be impacted, due to the extra amount of 5% which will not be regarded as income, as is assessable.

Nevertheless, $40,000 which is the repayment of capital will not be considered as assessable income for the client. Only the addition amount is subjected to the tax as same is considered as interest income at the end of the fifth year received by the parent.

Capital Gains Tax (CGT) and Sale of Property in Australia

In this situation, the mother’s income would be chargeable as per the head other related incomes generated from other sources, the most of interest amount gained from giving a loan to the son. Further, the client has given a housing loan of $40000 to her son, and on the same amount, interest is received of $2000. The treatment of interest will be done as income generated from other sources and the same will charged for the tax to the client. Any capital repayment is not charged for tax, one the part of interest is taxable which is gained by the mother. On the return of tax, the client must have to give interest amount gained in a specific tax year. In a situation where the son would be a minor and the child has received an amount from granted loan them the aroused income from that would be taxable to any of the parent, whichever is higher.

In the concerned case, tax obligation will not be affected by the mode of payment. Even in a situation where payment was not made by the single cheque, then also Assessability of income has been the same (McCouat, 2012). In such transactions, the intention of the parties is considered which is indicated through their actions. By considering this approach, it is essential to notice the fact ATO has authority to consider payment as a transaction instead of a gift to friend or family within the purview of Australian tax legislation.

The treatment of land and building will be done as single CGT assets. This takes place, as the land was acquired on 1 October 1980 (pre-CGT) and the building was built on one land as on 1 September1986 (post-CGT): s 108-55(2). Disposal of CGT asset as well as CGT event has been held as A1 arises: s 104-10(1) (Capital gains tax, 2018).

The value of land was assessed at $90000, and the construction cost was held at $60 000. For the time period of 30 years, the property was put on a rental basis. The current tax year, on 1^st of March, the property was sold by Scott based on auctioning at $800 000.

In accordance with the section of 104-10 of ITAA 1997, the assumption of dwelling will not be applied in the case of Scott because he is receiving rent which is part of accessible income which clearly shows that property is not used for dwelling.

The cited exemption is applied in Australia for the computation of taxpayer only in case of house property attained after 7.30pm on 20 August 1996 and primarily use for the purpose of residence. 

On the basis of above information, the new capital gain of Scott for the 30 June of the existing tax year is net capital gain will be as follows:

In a situation where the asset is provided a a gift to the family member, friends or any associate then also taxation provisions under capital gain might be attracted to impose tax obligation of the transaction as it is also considered as sales (Tax Evasion, Avoidance or Mitigation: That is the question, 2012). In such situation, the sale value of the transaction is substituted by fair market value. This factor will be applied on all following three cases:

• Partial sales proceed has been received
• No sales proceed has been received
• or transaction is not done at arm length price.

Even in a situation where the property is sold by Scott to its daughter for a consideration of $ 2, 00,000 then also amount will be taxable, In this case, amount received by him will be substituted by the fair value of the property at the point of time where the sale was made. By considering this approach and applying the provisions of the Australian tax, it can be said that this transaction will not be considered as a gift as it will be assessed as veneer gift which is conducted as sale transaction for the avoidance of tax obligation.

In case, the property is sold by Scott to his daughter for the amount of $200000 the net capital gain would be;

In a situation where the property owner was a corporate rather than an individual, then the deduction of amortization and tax payments must be made.

References

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.

Tax Evasion, Avoidance or Mitigation: That is the question! 2012. [Online]. Available through < https://www.myersfletcher.com/resources/item/tax-evasion-avoidance-or-mitigation-that-is-the-question.html>. [Accessed on 25^th May 2018]

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2011. Australian Taxation Law Select: legislation and commentary. CCH Australia.

CCH Australia Staff. 2012. Australian GST Legislation with Overview 2012. CCH Australia.

Coleman C., Hart G., Jogarajan S., Krever R. McLaren J., and Sadiq K., 2017. Principles of Taxation Law. Thompson Reuters, Sydney.

McCouat, P., 2012. Australian Master GST Guide. CCH Australia.

Sec 15-2 of the INCOME TAX ASSESSMENT ACT 1997. 2018. [Online]. Available through < https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s15.2.html>. [Accessed on 25^th May 2018]

Fringe benefits tax (FBT), 2018.  [Online]. Available through < https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/>. [Accessed on 25^th May 2018]

Capital gains tax, 2018. [Online]. Available through < https://www.ato.gov.au/General/Capital-gains-tax/>. [Accessed on 25^th May 2018].