Archie,Emily And Cooper Of Their Tax Consequences Essay

Question:

Advise Archie,Emily and Cooper of their tax consequences in relation to the above income and expenses?

Answer:

Tax consequences to Archie, Emily and Cooper in relation to the provided income and expenses:

The current case study provides list of incomes and expenses, which will be reimbursed, allowed and deducted for taxation purpose under the “Income Tax Assessment Act 1936 and 1997”. In order to determine the tax consequences of Archie, Emily and Cooper, the following assumptions have been made based on the provided information (Long et al., 2016):

  • The wages and salaries paid to the staffs are not taken into account for fringe benefit tax and thus, the salary of Emily would not be incorporated for computing FBT liability.
  • Any expenditure incurred for the purpose of employee entertainment on the part of the employer are considered as “entertainment fringe benefits”. It is noteworthy that the employer could make deduction claim on such expenditure under the rule of “otherwise deductible”. However, the claim is justified only when the same is incurred for the staffs only (Woellner et al., 2016).

It was further found that Archie employed his daughter Emily holding a degree in accounting maintains his financial books of accounts to file GST. Emily only works once a week for which she is paid $40,000 however, the market salary remains $15,000. Thus, the salary received by Emily is taxable.

Tax treatment of Archie: Expenses:

      1. Archie incurs traveling expenses of $1600 incurred by Archie from home to office. A deduction is not allowable for Archie incurred for the cost of traveling for work related purpose. These expenses are generally considered in the form of private expenses.
      2. It is further found that Archie also incurs the travelling expenses from his home to the alternative place of work, which is directly related to the purpose of his work. Such kind of expenses incurred by Archie is allowed for deductions for the cost of travel from his home to the alternative place of work and then retuning back to his home or his normal place of work (edu.au 2017).
      3. Parking Fines incurred by Archie of $358 represents in the form of deductions. A deductions is not allowable for any kind of fines imposed under any kind of law such as commonwealth, state, territory, overseas nation or by court.
      4. Deductions are not allowable for the purchase and maintenance cost of non-compulsory uniform or wardrobe unless it satisfies the conditions as stated under “section 51 Al of the ITAA act”. Section 51 Al lays down the nature of expenditure upon non-compulsory uniforms or wardrobe unless the designs satisfies the conditions stated under section 51 (1) of the act (ato.gov.au, 2017). Archie incurs an expenditure on suit, which was primarily meant to impress the client hence it, represents a non-compulsory expenses for which deductions is not allowable. As stated in the case of “Federal Court of Australia v Edwards 94 ATC 4255 28 ATR 87”, where expenses on conventional clothing will not meet the test of deductibility under subsection 51 (1) of the act.
      5. As stated under the section 32 (5) of the ITAA 1997 no deductions shall be allowed for expenses incurred on entertainment purpose (Gordon & Kopczuk, 2014). The act states that the extent where an individual incurs expenses in respect of providing entertainment cannot avail deductions under section 8-1 of the ITAA 1997.
      6. Meal entertainment comes into the existence when food or drink provided represents in the character of entertainment. As stated under the section, 32-10 of the ITAA or under section 37 AD of the FBTAA meal expenses incurred by Archie represents entertainment. Thus, referring to the case of FC of T v. Cooper (1991) 29 FCR 177 division 32 of the ITAA lays down the general prohibition on the deduction of the entertainment expenses and Archie will not be liable for any deductions. Furthermore, Archie also incurs an expense of $2,000 for membership of golf club, which again falls under the entertainment expenses and no exemptions is applied to the cost incurred for membership of golf course. Exemptions benefits are not provided because the entertainment is not incidental to the provision of entertainment to the outsider.

Below listed is the tax computation of Archie for the taxable year of 2016

Computation of Income tax

In the books of Archie

Particular

Amount ($)

Salary Expenses

1,00,000

Less Travel Expenses

1600

Less: Membership expenses

2000

Total Taxable Income

96,400

Tax rate

37%

Total Tax

23615

Tax treatment for Emily:

The case study further provides that Emily receive a total salary of $40,000 for being employed in her father’s business to handle the work of bookkeeping and GST filling. Though the current market salary for accountant is $15,000, Emily receives beyond the current market salary.

Below listed is the tax computation of Emily

Tax treatment for Emily

Particulars

Amount ($)

Total Salary

40,000

Total Tax

4547

Tax treatment of Coopers:

Fringe Benefit tax represents the tax, which the employers provide certain benefit to the employee including their employee’s family or any other type of associate. The benefits may be in the kind of addition to the part of their salary or wages packages. Cooper incurred expenses while attending the international conference, which lasted for three days (Braverman et al., 2015). Archie as an employer has reimbursed the amount for expenses incurred by Cooper for a period of three days however, it was found that Cooper often visited his parents for which he incurred an additional expenses. Deductions are not allowable for the additional cost incurred by Cooper since such cost is incurred outside the course of working day.

FBT Computation of Cooper

Particulars

Amount ($)

Salary

60000

Registration Fees

1200

Plane Fare

3000

Hotel Cost

1600

Total GST Inclusive amount (A)

5800

Gross up rate (B)

2.1463

Gross up value

12448.54

Gross Taxable Fringe Benefit

12448.54

Less: Daily allowance

1500

Less: Reimbursement of Registration fees

1200

Net taxable fringe benefit

9748.54

FBT 49%

4776.7846


References

Braverman, D., Marsden, S. J., & Sadiq, K. (2015). Assessing taxpayer response to legislative changes: A case study of ‘in-house’fringe benefits rules. Journal of Australian Taxation, 17(1), 1-52.

Chirelstein, M., & Zelenak, L. (2015). Federal Income Taxation, 13th (Concepts and Insights Series). West Academic.

Fringe benefits tax (FBT) instalment. (2017). Ato.gov.au. Retrieved 16 January 2017, from

Genovese, F., Scheve, K., & Stasavage, D. (2014). The Comparative Income Taxation Database.

Gordon, R. H., & Kopczuk, W. (2014). The choice of the personal income tax base. Journal of Public Economics, 118, 97-110.

Hopkins, B. R. (2016). The Law of Tax-Exempt Organizations+ Website, 2016 Supplement. John Wiley & Sons.

INCOME TAX ASSESSMENT ACT 1997. (2017). Austlii.edu.au. Retrieved 16 January 2017, from

Long, B., Campbell, J., & Kelshaw, C. (2016). The justice lens on taxation policy in Australia. St Mark's Review, (235), 94.

TR 95/11 - Income tax: hospitality industry employees - allowances, reimbursements and work-related deductions (As at 1 June 1995). (2017). Law.ato.gov.au. Retrieved 16 January 2017, from

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation Law 2016. Oxford University Press.

How to cite this essay: