Provisions Of Fringe Benefit Tax And Income Tax Assessment Act In Australia

Issue: This is a case of an employee named as Alan who used to work with a company named as ABC Pty Ltd. This case study would help us to know about the provisions relating to fringe benefit tax in Australia. There are various benefits which are given to Alan by the company on which fringe benefit tax needs to be charged. Apart from this if any transaction includes GST then input tax credit is also available in that case. The benefits which are given by the company to Alan are given below:

1. He was getting $300,000 as salary.
2. His mobile phone bill was paid by the company amounting to $220 (inclusive of 10% GST, Base amount would be $200). The phone was used only for work related purposes.
3. Apart from this company also paid school fees of Alan’s children amounting to $20,000 every year. There was no GST on this amount. Hence $20,000 is the base price.
4. Company even provided him a mobile handset amounting to $2,000. This amount includes GST as well.
5. At the end of the year company hosted a dinner at a local Thai restaurant for all the 20 employees and its partners. The total cost of the dinner including GST was $6,600. Hence the base price for this was $6,000.

Rule: Australian Fringe Benefit tax needs to be discussed in this case. Fringe benefit tax would be attracted whenever a company gives any benefit to its employees. The fringe benefit tax rate applicable for the year ended 31^st March 2017 was 49%. Hence the company needs to pay fringe benefit tax on the fringe benefit value. All the benefits are taxable but there are certain benefits from which fringe benefit would not be taxed.  Those items are discussed below:

1. Computer Software
2. Briefcase
3. Protective Clothing
4. Tools of trade
5. Any electronic device used by an employee

If any benefit of the above kind is given by the company to its employees then it would be exempted from fringe benefit tax. Now there is a change in law, that from 1^st April 2016 these fringe benefit benefits will be allowed even to small scale business having turnover of less than $2 million. (AustralianGovernment, 2017)

Section 54 of the Fringe Benefit Assessment Act, clearly states that if a company takes its employees outside for a lunch or dinner, and the food was consumed in the premises of the company and is not provided at a function or a party then such cases would be exempt from fringe benefit tax. (Fedderal Register of Legislation, 2017)

Apart from fringe benefit tax, GST also has to be considered in this case, since certain transactions are there where GST has been included. GST rate for the year ended 31^st March 2017 was 10%. Hence all those transactions on which GST is applicable has to be taken excluding GST. The reason behind this is that input credit is available on GST Paid.

Application: all the provisions mentioned above has to be applied in the given case study. There were several benefits given by ABC Pty Ltd to Alan, which has to be assessed to know the fringe benefit tax liability of the company. All the benefits provided by the company are discussed below in detail: (Australian Government, 2017)

Rules and provisions of fringe benefit tax

The first benefit which was given by the company to Alan was paying his mobile bill. Monthly mobile bill of Alan was $220 including GST. Hence the value excluding GST would be $200. The value for the entire year would come to $200*12 - $2,400. This $2,400 is a benefit given to Alan so that he can use it for work purposes. Alan has used it only for work purposes and not for his personal purposes. This is not exempted from fringe benefit tax and so company needs to pay tax on it. (Fringe Benefit tax, 2017)

The second benefit which was given by the company was the school fees paid for Alan’s children. The was the benefit given by the company to Alan so it would not come under the category of exemption. School fees paid by the company for Alan’s children was $20,000. There was no GST charged on it and so the amount on which fringe benefit tax has to be paid is $20,000.

The third benefit given by the company to Alan was the mobile handset. Company had gifted him a mobile handset costing $2,000. This $2,400 is a benefit given to Alan so that he can use it for work purposes. Alan has used it only for work purposes and not for his personal purposes. This is not exempted from fringe benefit tax and so company needs to pay tax on it.

Finally during the end of the year company took its 20 employees and their partners for a dinner. They all went to a restaurant which was not inside the company premises. If it was inside the company premises then this benefit would have been exempted. But since it was outside the company premises so it has to be taxable. The total bill for the dinner including GST was $6,600. Hence the base amount on which tax has to be charged was $6,000. Company needs to pay fringe benefit tax on this amount. (CAP Australia, 2017)

Conclusion: all the provisions relating to fringe benefit tax has been discussed above along with the description of the case study. As per the provisions and the given case study, ABC Pty Ltd has to pay tax. The amount on which fringe benefit tax has to be paid would be $2,400 + $20,000 + $6,000 = $28,400

The Fringe Benefit tax rate for the year ended 31^st March 2017 was 49%. Hence the amount of fringe benefit tax to be paid by the company on the above given amount would be 49% of $28,400 = $13,916 (Australian Government, 2017)

Benefits that are exempt from tax

This part is exactly the same with the first case, except the number of employees working for the company. The total number of employees were 5. It was a small company but still this benefit has to be taxed under fringe benefit tax. Hence the fringe benefit tax to be paid by the company would be same i.e. $13,916.

This part is completely different from the above two parts since even clients went for diner with the employees. Now since clients were also there in the dinner party, this party becomes for business purpose. Hence dinner expenses paid by the company would not attract fringe benefit tax.

Hence fringe benefit value would be $2,400 +$20,000 = $22,400

Fringe Benefit tax would be 49% of $22,400 = $10,976

Issue: This is a case relating to the provisions of ordinary income as per Section 6-5 of the Income Tax Assessment Act. There was a person named as Peta who had purchased a house in Kew. The house which was purchased by him had two old tennis courts which were not in good condition. The reason for which Peta had purchased this house was because of the following factors: (Commonwealth Consolidated Acts, 2017)

Firstly, she intended to live with her parents.

Secondly, the intention was to rebuild the tennis court and sell it at profit.

A very popular tennis club in Kew was very keen on buying the tennis courts from Peta. After the club’s offer, Peta decided to change her decision and was interested in selling these courts to the club. However, a minor issue was that the condition of the tennis courts was not worth selling. Therefore, based on the condition of the courts, the club demanded that they will purchase it only on the condition that they are renovated by Peta. Hence, Peta agreed towards the renovation of the tennis court and spent around $100,000 in renovating both the tennis courts. Renovation of tennis courts involved a lot of hard work. The Pets didn’t mind working hard for it because she was being paid well for selling the tennis court. After all the renovations, the tennis court was ready and was sold to the club at an extremely high amount of $600,000. Since the case has clearly mentioned that capital gain tax can be ignored in it. Hence, to conclude, there is a need to understand the provisions of Australian Income Tax Act. The provisions for the same are described as follows: (Austii, 2017)

Provisions of GST in Australia

Rule: The provisions from Income tax Assessment Act 1997 will be applied to this case.

Section 6-5 of the Income Tax Assessment Act 1997, describes all the provisions that are associated with income in relation to ordinary concepts. Assessable Income entails all the sources of income that can be related to the ordinary concepts which is known as ordinary income. If a person is a resident of Australia then his assessable income would entail all the sources of ordinary income that are obtained by direct or indirect means from  various sources, and whether the income is earned in or outside the country of  residence during the current income year. For instance, if the person is a foreign resident then ordinary income would entail the sources of income which are derived either directly or indirectly from the Australian sources during the current income year. In addition, it will also be associated with the income that a provision entails in the residents’ assessable income for the current income year on any other accountable parameter except an Australian source. (McNeil, 2017)

This implies that if a person is an Australian citizen then, under the Australian Income Tax, his entire income earned in Australia or outside Australia is taxable. Hence, any foreign resident’s incomes that are earned in Australia are taxable in this case. The income earned by a person needs not be treated as his ordinary income. This is because some incomes are to be excluded from ordinary income. The incomes exempted from being considered as ordinary income are as stated under:

1. In the circumstance that a person borrowed a specific amount from any other person or the bank itself, then it is exempted from being treated as ordinary income.
2. Under the circumstance that the income protection insurance policy gave a sum to the person.
3. Under the condition of the goods and service tax that is collected by a person. This does not form a part of ordinary income because it is a tax that is paid the government and hence is not the responsibility of the individual. (Australian Government, 2017)
4. Under the condition that a person who is involving himself in acts like betting or gambling, then in such a case, any income earned from these sources will be exempted from ordinary income. However, if a person owns a business of betting or a gambling place, then it will be included as a source of ordinary income.
5. Under the condition that a person has been the recipient of any prize which is not associated with the business, then in such a case this will also be excluded from ordinary income.
6. Under the condition that a person has received a gift from any other person, it will not form a part of ordinary income.
7. Under the condition if there is any income that is earned by pursuit of some hobby, it will be excluded from being treated as ordinary income.

Application: The provisions described above will be applied in this case. The application can be explained as follows. Under the condition that an asset is old to another party, such a case would be identified as a capital gain. However, the asset under consideration must be a capital asset. In the above case, Peta bought a house and a house is recognized as a capital asset. Tennis court is also attached with the house. Hence the tennis court too, falls under the category of a capital asset. But, contrary to this, the tennis court cannot be identified as a capital asset.  This is due to the fact that the percentage of tennis court is not specified. In the above case we have relied on the assumption that it comprises of only 20% of the total share of capital assets. The house was purchased by Peta with an intention to make profits. In addition, the amount received by Peta from the club as payment cannot be treated as revenue. It is because the payment done is a part of capital assets, therefore it has to be treated as a capital receipt and not revenue. Thus, since it is a capital receipt it will also not fall under the category of ordinary income. The case under consideration is quite similar to the case that was decided by the High Court. The case was pertaining to FCT v cooling.  In the case discussed above, She renovated the tennis court by spending $100,000. Hence this would fall under the category of cost of construction. Although capital gain needs to be avoided under this case, it does not form a part of revenue receipts. Also, since it is not treated as revenue income for Peta, it will not be treated as ordinary income in the above case. It may be regarded as a form of special income that Peta has received from the club. (epublications.bond.edu, 2017)

Conclusion: Hence after discussing the case with the provisions of the Income Tax Law the income received by Peta is a capital receipt and cannot be considered as ordinary income. 

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