PACC6006 Taxation Law

Alan is an employee at ABC Pty 13d (ABC). He has negotiated the following remuneration package with ABC

• salary of 5300.000;

• Payment of Man's mobile phone bill (5220 per month, induclmg GST1. Alan is under a two-year contract whereby he is required to pay a fixed sum each month for unlimited usage of his phone. Alan uses the phone for work-related purposes only;

• Payment of Alan's children's school fees ($20.000 per year) The school fees an GST free. 

ABC also provided Alan with the latest mobile phone handset, which cost $2,000 (Including 651). At the end of the year ABC hosted a dinner at a local Thai restaurant for all 20 employees and their partners. The total cost of the dinner was $6,600 including GST. 
(a) ASse ABC of its MT consequences arising out of the above information, including calculation of any FBT liabiety. for the year ending 31 March 2017. Assume that MC would be entitled to Input tax credits In relation to any GSTenchnive acquisitions.

(b) How wouldyour answer to tal differ if MC onlyhod S employees

(c) How would your answer to (a) ddkr d clients of ABC also attended the end-obyear dinner.

Two years ago Pete purchased a house in Kew. This house had two old tennis courts down the back which were in poor condition. She purchased the property for two reasons: 
• so that she and her family could live In the house; and

• so that she could build three units on the tennis courts and sell them at a Profit. 
In the current tav year the tennis dub nett door offered to buy the old tennis courts. but only if Pete first restored them to good condition. Peta decided to accept the club's offer instead of going ahead with her plan to build and sell units. 
Peta spent 5100,003 On preparing the tennis courts for sale. This involved a rat deal of work. Pets had to resurface the tennis courts and build new fences around them. She then sold the tennis courts in the current tax year to the tennis club for $600,000. Ignoring capital gains tax. discuss whether the receipt of 5600.000 is ordinary income under s &S. 

Issue

The issue that arises here is to offer advice with regards to the various benefits issued by ABC Ltd (employer) to Alan (employee). Also, the relevant computation needs to be performed in order to find fringe benefits tax liabilities for employer i.e. ABC Ltd.

Rule

It is noteworthy that only the noncash benefits which are extended only for private utilization of employee would be named as fringe benefits.

1. Electronic device

In the accordance of Section 58X of Fringe Benefits Assessment Act, 1986 (FBTAA 1986) the electronic devices (mobile handset, computer, laptops) issued to use for work purposes would not be considered fringe benefits.  In addition to that the payments of mobile handset’s bill of employee are not considered expense fringe benefits if the employee is using the device for work purpose only (Woellner, 2014).

2. School/college Fees

If employer has paid the college or school fees of employee’s children, then expense fringe benefits are extended by employer. As a result the employer has the accountability to pay the fringe benefits tax amount (Barkoczy, 2015).

FBT payable amount = (0.49) * (fee amount paid) * (Gross up rate)

3. Meal

Employer who hosts meal for clients, their employees and for their partner would assume to extend meal fringe benefits. The imperative aspect is that meal must be given outside from business officer premises. It is critical for the fringe benefits liability that the amount of meal expense per individual person must be higher than $300 or else no fringe benefits would be applied under the clause of minor fringe benefits exemption (CCH, 2013).

There are two methods which can be selected by employer to find their fringe benefits liabilities on the account of meal fringe benefits (Sadiq et al., 2016).

• Actual Method

In actual method, total meal expense would be used for fringe benefits liabilities calculation. Employer decides to use this method when employees and their respective partners are in the list of invitees for meal. The fact associated with this decision is that tax deduction can be claimed by employer for the meal fringe benefits and therefore employer does not mind paying a higher amount of tax on fringe benefits (Gilders et. al., 2016).

FBT payable amount = (0.49)* (meal expense) * (Gross up rate)

• 50-50 Split Method

In 50-50 split method, half of meal expense would be used for fringe benefits liabilities calculation.Employer decides to use this method when clients are in the list of invitees for meal.The fact associated with this decision is that no tax deduction can be claimed by employer for the meal fringe benefits extended to client and hence, this would result the reduction in the total fringe benefits liability because only half amount is used for calculation (Deutsch et. al., 2016).

FBT payable amount = (0.49)* (0.5) * (meal expense) * (Gross up rate)

 Application 

• Mobile handset has been issued for business related work purpose and hence, it would not be categorised as fringe benefits. Additionally, the monthly bill of handset paid on behalf of ABC Ltd would not be termed as expense fringe benefits because it has not been used for private calls by Alan.
• School fees paid by employer for Alan for his children would impose fringe benefits liability on ABC Ltd because it is an expense fringe benefit.

FBT payable amount = (0.49) * (fee amount paid) * (Gross up rate)

Fee amount paid = $20,000

Gross up rate for school fee is 1.9608 because it is GST free and type 2 goods. 

• Dinner organised at Thai Restaurant would result in meal fringe benefits and would impose fringe benefits liabilities on ABC Ltd. 

20 employees and their partners” are invited for dinner

Dinner expense = $6600

Dinner expense for employees only = ($6600/2) = $3300

Per employee Dinner expense = ($3300/20) = $165

It can be seen from the above that per employee expense is $165 and in order to term as expense fringe benefits it should be equal to higher than $300. Therefore, fringe benefits liability would not be incurred because it is under the provisions of minor fringe benefits exemption principle.

 5 employees and their partners” are invited for dinner

Dinner expense = $6600

Dinner expense for employees only = ($6600/2) = $3300

Per employee dinner expense = ($3300/5) = $660

The per employee meal expense is greater than $300 and therefore, meal fringe benefits would impose on ABC Ltd.

Actual Method

FBT payable amount = (0.49)* (dinner expense) * (Gross up rate)

Meal expense is type 1 goods and GST is applicable and hence, gross up rate for income year 2017 is 2.1463.

FBT payable amount

 “Clients are invited for dinner”

50-50 Split Method

FBT payable amount = (0.49)* (50%)* (dinner expense) * (Gross up rate)

Meal expense is type 1 goods and GST is applicable and hence, gross up rate for income year 2017 is 2.1463.

Conclusion

The conclusion can be drawn that ABC Ltd is accountable to pay fringe benefits tax on the account of expense and meal fringe benefits in the form of school fee payment and for dinner. However, no fringe benefits would be paid by employer on the account of issuing mobile handset and its bill payment. 

Issue

To ascertain the nature of income derived from the sale of tennis courts.Also, to decide that if it is an ordinary income as per section 6(5), ITAA 1997.

Rule

The income earned from ordinary income concepts would generate ordinary income of taxpayer as outlined in the section 6(5) of ITAA, 1997. The three primary resources to derive the ordinary income are given below (CCH, 2013).

• Personal exertion
• Investment
• Business

The taxpayer who has earned the income from engagement in the professional commitments derives ordinary income. Also, any action of taxpayer which has commercial value would raise assessable income from ordinary concepts (Coleman, 2011).

The proceeds from investment (shares, property, and bank account) on the part of taxpayer would raise ordinary income. Rent amount, interest amount, dividends resulted from shares would be categorised as ordinary income (Gilders et. al., 2016).

Taxpayer who has conducted business for profit then the business income would be named under assessable income from ordinary income. Further, the income which has risen from the hobby of taxpayer would not amount for the ordinary income source as it has not with the intention of profit (Deutsch et. al., 2016). Tax ruling TR 97/11 would provide the various aspects related to the definition of business and hobby which would be considered to decide the nature of the activity of taxpayer. Also, if the taxpayer has used hobby for deriving profit in systematic manner then it would be termed as business action and the income is ordinary income (Woellner, 2014).

The income earned from isolated transaction by the taxpayer for profit intention only would generate assessable incomeunder the provision of section 15 (15) of Income Tax Assessment Act 1997. This income would be taxable under assessable income (Sadiq et. al., 2016).

Relevant case facts

• Peta has bought a house in Kew.
• The house contains two tennis courts down the back in poor conditions and cannot be used for tennis.
• She has planned to sell the tennis court after the construction of new units.
• She has received an offer from tennis club regarding the purchase of tennis courts.
• Restoration and necessary development on tennis courts are the main conditions of club for the purchase.
• Peta has accepted the offer.
• She invested $100,000 in the process of restoration and also made fence around the tennis courts.
• Club purchased the tennis courts.
• As a result $600,000 has been given to Peta against the tennis courts. 

It is essential to check whether the income is generated from ordinary income sources or not.

• From the case facts, it is clear that tennis courts restoration is not the professional work of Peta. Also, she has not worked for the company whose business was the development and selling of tennis court. Therefore, the income is not from personal exertion of ordinary concepts.
• The given income is not derived from any investment.
• Peta does not run a business of tennis courts improvement and selling and also does not has the intent to start such business. She has planned to make development of new units and sale for business but there is no intent to sell the courts after restoring the same. Therefore, the income is not from business.

Based on the above three arguments, it is clear that income $600,000 is not being derived from ordinary income sources and hence, is not ordinary income under section 6 (5), ITAA 1997.

It is essential to note that Peta has made an isolated transaction in regards to get profit and also made an investment of $100,000 for the same. Therefore, it fall the under section 15(15) of assessable income.

Conclusion 

The income $600,000 is not an ordinary income under section 6 (5) ITAA 1997. However, the income would contribute into the sum of assessable income because it fall under the ambit of section 15(15) ITAA 1997. 

Reference

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

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

Coleman, C 2011, Australian Tax Analysis, 4^th ed., Sydney: Thomson Reuters

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, 9^th ed., Sydney: LexisNexis/Butterworths.

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

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