Ha3042 Taxation Law ABC Ltd Essay

Question:

Discuss about the Ha3042 Taxation Law.

Answer:

Issue

The issue is to ascertain the fringe benefits liability for the employer ABC Ltd for the non-cash benefits provided to employee Alan in the income year 2017. Further, the applicability of FBT liability needs to be calculated for the given scenarios.

Rule

The non-cash benefits which the employer has granted to the employer for the private utilization only would be termed as fringe benefits. These benefits extend the fringe benefits liability on the employer while no incremental tax burden is levied on employee (CCH, 2013).

  1. Mobile Handset & Mobile Bill

In accordance to the Section 58X of Fringe Benefits Assessment Act 1986, FBT liability would not be imposed on employer, if the employer has granted the mobile handset or any electronic device to employee in regards to do work related activities. Hence, the payment of handset’s bill by employer would also not create any FBT liability on employer (Barkoczy, 2015).

  1. Payment of School Fee

An expense incurred in paying school fee is considered to be a private nature expense of employee. When employer has paid this amount, then FBT liability would be imposed on employer under the aegis of expenses fringe benefits (Gilders et.al., 2016).

FBT liability (payment of school fee) = FBT rate * Fee amount *Gross up rate

FBT rate and Gross up rate are variables that depend on the underlying income year for which computation is being performed (Nethercott, Richardson and Devos, 2016).

  1. Meal Expense

When employer hosts meal for business clients, employees or associated of employee and if the location of meal is not in the office area, then meal fringe benefits would be assumed to have been extended by the employer. It is necessary that the expense incurred must be higher than $300 or else no FBT liability would arise under the provision of minor fringe benefits exemption clause (Sadiq et.al., 2016). FBT liability under meal fringe benefits would be determined with the help of two methods furnished below:

  • Actual Method
  • 50-50 Split Method

Brief discussions of these methods are outlined below:

  • Actual Method

According to this method, whole of the amount would be taken to find fringe benefits liability. Further, when meal has been hosted for employee (or /and their partners) then tax deduction would be applicable for employer during the taxable income computation. As, a result, the employer opts for paying FBT on the complete amount (Deutsch et. al., 2016).

FBT liability (Meal fringe benefits) = FBT rate* Total meal expense* Gross up rate

  • 50-50 Split Method

As the name suggest, only half of meal expenses would be taken to find FBT liabilities. Therefore, to decrease the amount of FBT liabilities and take benefits, employer adopts this method when the meal has hosted for clients as no tax deduction applicable for meal expenses on clients and thus, the intent is to reduce the overall FBT liability (Woellner, 2014).

FBT liability (Meal fringe benefits) = FBT rate* 50%* Total meal expense* Gross up rate

Application

  • Mobile Handset & Mobile Bill

It is apparent from the given facts that employer ABC Ltd has granted a mobile handset to Alan only for work related purpose. Therefore, under the applicability of section 58X of FBTAA 1986, extension of mobile handset would not be categorised as a fringe benefit and hence, no FBT liability would be levied on employer. Similarly, the mobile bill payment would also not be a fringe benefit because Alan does not make private calls from the handset.

  • Payment of School Fee

School fee’s payment by employer would create FBT liability on employer because it is a expenses fringe benefit.

FBT liability (payment of school fee) = FBT rate * Fee amount *Gross up rate

FBT rate (for FY2017) = 49%

Fee amount = $20,000

Gross up rate (GST free, type 2 goods, FY2017) = 1.9608

FBT liability (payment of school fee) = 0.49 * 20000 * 1.9608= $19,215.84

  • Dinner

Location of dinner hosted by ABC Ltd - Thai Restaurant (outside from office)

It is apparent that ABC Ltd has extended meal fringe benefits and hence, FBT liability would be applicable on employer.

1st case – 20 employee and respective partners

Meal expense (for 40 people) = $6600

Meal expenses (only for 20 employees) = $3300

Spending incurred per employee = $3300/20 = $165

Expense is lower than $300 and therefore, minor fringe benefits exemption would be validated and FBT would not be created on employer.

2nd case – 5 employees

Meal expense (for 10 people) = $6600

Meal expenses (only for 5 employees) = $3300

Spending incurred per employee = $3300/5 = $660

Amount is higher than $300 and hence, FBT liability would impose on employer.

Actual method

FBT liability (Meal fringe benefits) = FBT rate* Total meal expense* Gross up rate

FBT rate = 49%

Total meal expense = $6600

Gross up rate (GST valid, type 1 goods, FY2017) = 2.1463

FBT liability (Meal fringe benefits) = 0.49 * 6600 *2.1463 = $ 6,941.1

3rd case – Clients

To reduce the FBT burden, ABC Ltd would choose 50-50 Split method.

50-50 Split method

FBT liability (Meal fringe benefits) = FBT rate* 50%* Total meal expense* Gross up rate

FBT liability (Meal fringe benefits) = 0.49* 0.5*6600 *2.1463 = $ 3,470.6

Conclusion

Based on the above ground, it can be concluded that employer ABC Ltd is liable to pay fringe benefits tax liability only for school fees and for meal. There would no FBT liability arising for mobile handset extension and its payment under section 58X of FBTAA 1986. Also, the FBT liability for meal would depend on number of head counts and invitees.

Issue

The issue is to comment on the nature of the proceeds received from the liquidation of tennis courts and to find whether the derived income is ordinary income under section 6(5) of Income Tax Assessment Act 1997.

Rule

Assessable income would be derived by the taxpayer under the two sections of ITAA, 1997.

  1. Section 6(5)

The income derived by the taxpayer from ordinary income source would amount to ordinary income. There is no direct mention of sources which highlights the exact source of ordinary income. Hence, verdict of law cases would be taken into account in order to find whether the income source is from ordinary concepts or not (Barkoczy, 2015).

  • Income received from employment of taxpayer would generate ordinary income from personal exertion. Further, any skill (having market worth) of the taxpayer which contributes to the income of taxpayer would also result in ordinary income (CCH, 2013).
  • Income of taxpayer received through the investment would be categorised as ordinary income. This can be rent income, dividends, interest and so forth (Gilders et. al., 2016).
  • Income of taxpayer derived from the business action would be ordinary income. Further, it is noteworthy that the income generated from hobby would not be classified as ordinary income (Nethercott, Richardson and Devos, 2016).. Therefore, it is essential to differentiate between business action and hobby of taxpayer under the provisions of TR 97/11. Generally, profit driven action by the taxpayer is considered a business activity (Sadiq et. al., 2016).
  1. Section 15(15)

The assessable income could also be derived through the isolated transaction made by the taxpayer mainly with the intention to profit. Hence, when the taxpayer who has performed any activity and involved in the isolated transaction in regards to derive profit, then in such scenario, the nature of the income would be assessable income (Deutsch et. al., 2016). The leading case for the testimony of this understanding is the Westfield Limited v. FCT (1991) FCA 97 case. The pre-requisite is having profit making intention as highlighted under TR 92/3 (Woellner, 2014).

Application

Relevant facts

Peta is the concerned taxpayer who purchased a house located in Kew. The house is having two old tennis courts (poor conditions) at the back. The purpose of Peta is to stay in the house with her family members and to construct new units on the tennis courts and to liquidate them in future to derive profits.

Local tennis club was keen to purchase the tennis courts from Peta and therefore, has extended an offer which included a pre-condition that she would have to restore the courts then only will they buy the tennis courts. Peta agreed to the offer and spent nearly $100,000 in the restoration work. She restored the two tennis courts and created fencing around them. The courts then were purchased by tennis club at a total consideration amount of $600,000.

There is no proof which highlights that Peta has been running a business of tennis courts restoration and liquidation. Further, she has not worked for a firm which operates the business of tennis courts improvement and selling. Hence, it can be concluded that Peta has not derived the proceeds of $600,000 from ordinary income sources (personal, exertion, investment or business). Therefore, the income is not categorised as ordinary income under section 6(5), ITAA 1997.

It can be seen that she has got involved in the restoration process which has resulted in huge profits to her. In this regards, she has made an isolated transaction of $600,000 only to earn profit. Hence, the income is assessable income under the provisions of section 15(15), ITAA 1997.

Conclusion

It can be cited that income of $600,000 is not ordinary income under section 6-(5). However, none the less, it still would be covered under assessable income as it falls under s. 15(15), TIAA 1997.

References

Barkoczy, S. 2015, Foundation of Taxation Law 2015, 7thed., North Ryde: CCH Publications

CCH 2013, Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer

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

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

Nethercott, L., Richardson, G. and Devos, K. 2016, Australian Taxation Study Manual 2016, 4th ed., Sydney: Oxford University Press

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

Woellner, R 2014, Australian taxation law 2014, 7th ed., North Ryde: CCH Australia

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