FBT Consequences For Rapid-Heat Pty Ltd: A Case Study

1. Rapid-Heat Pty Ltd (Rapid-Heat) is an Electric Heaters manufacturer which sells Electric Heaters directly to the public. On 1 May 2017, Rapid-Heat provided one of its employees; Jasmine, with a car as Jasmine does a lot of travelling for work purposes. However, Jasmine's usage of the car is not restricted to work only. Rapid-Heat purchased the car on that date for $33,000 (including GST). 

For the period 1 May 2017 to 31 March 2018, Jasmine travelled 10,000 km in the car and incurred expenses of $550 (including GST) on minor repairs that have been reimbursed by Rapid-Heat. The car was not used for 10 days when Jasmine was interstate and the car was parked at the airport and for another five days when the car was scheduled for annual repairs. 

On 1 September 2017, Rapid-Heat provided Jasmine with a loan of $500,000 at an interest rate of 4.25%. Jasmine used $450,000 of the loan to purchase a holiday home and lent the remaining $50,000 to her husband (interest free) to purchase shares in Telstra. Interest on a loan to purchase private assets is not deductible while interest on a loan to purchase income-producing assets is deductible. 

During the year, Jasmine purchased an Electric Heaters manufactured by Rapid-Heat for $1,300. The Electric Heaters only cost Rapid-Heat $700 to manufacture and is sold to the general public for $2,600. 

(a) Advise Rapid-Heat of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2018. You may assume that Rapid-Heat would be entitled to input tax credits in relation to any GST-inclusive acquisitions. 

(b) How would your answer to (a) differ if Jasmine used the $50,000 to purchase the shares herself, instead of lending it to her husband?

FBT Consequences

FBT consequences will be imposed on employer and not on the employee when the employer has issued fringe benefits to employee. The potential taxation consequences are specified in “Fringe Benefits Tax Assessment Act 1986 or FBTAA 1986.” Further, the noticeable factor in this regards is that employer who provides benefits to employee but restrict the utilization of the benefits for personal usages would have FBT liability exempted (Coleman, 2016).

This benefit is extended to employee where there is ambit of utilization of offered car is for personal work of employee as defined in s. 8 FBTAA 1986 (Sadiq, et.al., 2015). Moreover, car fringe benefit is said to be constituted to employee when the professional used car will be provided for personal use of the employee. There are three steps which are followed to find the net FBT burden on employer. Car fringe benefit value will be computed based on the statutory formula as specified in s. 9, FBTAA 1986 (Nethercott, Richardson and Devos, 2016).

• Base value of the car: This is the amount which will be computed based on the total amount spent by the employer while procuring the car and also, the minor repairing expense incurred on car that borne by employer (Deutsch, et.al., 2015).
• Number of availability days during the tax year is time during the given assessment year when private usage is permissible. The car would still be available to employee when it is sent to garage for repairs provided those are minor in nature. Also, availability is not adversely impacted if the car has been parked by employee and gone out of town (Gilders, et. al., 2015).
• Amount which has been contributed by the recipient employee while procuring the car (Barkoczy, 2017).

Rapid Heat extends car (procured for $33000) to Jasmine for personal work. Further, amount which has been contributed by the recipient Jasmine while procuring the car is zero.  The count of days in 2017/2018 on which car is available to Jasmine is 335 days. The number of days in tax assessment year is 365 days.

In accordance with s. 16, FBTAA 1986, providing a loan to employee either with no interest or with less interest rate (compared with RBA’s rate) is specified as loan fringe benefit (Nethercott, Richardson and Devos, 2016). The objective behind providing less interest rate loan is to minimize the interest burden on employee. The rate defined by RBA (FY 2018) is 5.25% per annum. Therefore, any interest rate which is lesser than RBA’s interest rate will constitute extension of loan fringe benefit to employee. The deduction will be offered to employer (taxpayer of FBT) when the less interest rate loan will be used for obtaining assessable income by employee (Deutsch, et.al., 2015). However, deduction will not be offered to employer when the amount is used by concerned associates of the employee irrespective of the underlying purpose of use (Sadiq et, al., 2015).

Rapid Heat extends loan to Jasmine for personal work. The days on which loan is available to Jasmine is 212 days. The number of days in tax assessment year is 365 days. The gross up rate is taken for type II goods for March 31, 2018. Further, the FBT rate taken into account is 47% for March 31, 2018.

Car Fringe Benefit

It is apparent from case study that 90% loan is used to procure a holiday home which may bring in assessable income for Jasmine. The employer can avail deduction on this loan portion if that happens. However, 10% of loan is provided to husband by Jasmine which will not create any availability of deduction for Rapid Heat despite there being a possibility of dividend income. It is because the loan has been utilized by her husband not by Jasmine.

In accordance with s. 20 FBTAA 1986, the payment of personal expenses of employee is categorised under expenses fringe benefit (Hodgson,Mortimer and Butler, 2016). As per the ambit of expenses fringe benefits, when the expenses are paid for the company’s product so that the total personal expenses liability of employee can be brought down, then it is constituted as internal expenses fringe benefit (Wilmot, 2014).

Reduced price of heater to Jasmine is indicative of the fact that expense fringe benefit has been issued to Jasmine by Rapid Heat. This is because the normal price of heater is $2600 while the offered price to Jasmine is only $1300 and hence the remaining personal expense related to heater is borne by the employer. The gross up rate is taken for type I goods for March 31, 2018. Further, the FBT rate taken into account is 47% for March 31, 2018.

It is apparent from case study that lent 10% loan ($50,000) is now being used to procure a shares which may would bring in assessable income for Jasmine in form of dividend income. Thereby, the employer can avail deduction on this loan amount portion thereby brining down FBT liability imposed. The deduction is illustrated below.

References

Barkoczy, S. (2017) Foundation of Taxation Law 2017. 9^th ed. Sydney: Oxford University Press.

Coleman, C. (2016) Australian Tax Analysis. 4^th ed. Sydney: Thomson Reuters (Professional) Australia.

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2015) 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.

Hodgson, H., Mortimer, C. and Butler, J. (2016) Tax Questions and Answers 2016. 6^th ed. Sydney: Thomson Reuters.

Krever, R. (2017) Australian Taxation Law Cases 2017. 2^nd ed. Brisbane: THOMSON LAWBOOK Company.

Nethercott, L., Richardson, G., and Devos, K. (2016)  Australian Taxation Study Manual 2016. 8^th ed. Sydney: Oxford University Press.

Reuters, T. (2017) Australian Tax Legislation (2017). 4^th ed. Sydney. THOMSON REUTERS.

Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., and Ting, A. (2015) Principles of Taxation Law 2015. 7th ed. Pymont: Thomson Reuters.

Wilmot, C. (2014) FBT Compliance guide. 6^th  ed. North Ryde: CCH Australia Limited.

Woellner, R., Barkoczy, S., Murphy, S. and Pinto, D. (2017). Australian Taxation Law Select Legislation and Commentary Curtin 2017. 2^nd ed. Sydney: Oxford University Press Australia.