Determination Of Net Income And Fringe Benefit Tax Liability - Case Study Analysis

John is a senior executive with a printing company. As part of his remuneration package his employer pays for his child’s school fees at a private school costing $15,000. His employer also provides him with accommodation in a Sydney apartment throughout the FBT year. John must pay $100 of rent per week for the apartment. The market value rent for the apartment is $800 per week.Advise John’s employer of the FBT consequences of John’s remuneration package.

ITAA 1936 and ITAA 1997: Determining Net Income of Partnership

The main issues that the current case study is concerned relates to the determination of the net income of the partnership within the meaning of “section 90, ITAA 1936”.

An explanation has been made under the “division 4 of the ITAA 1936”, which clarifies that the partnership is not treated as the separate legal entity under the meaning of general law and no taxes is paid by the partnership. The partners are required to pay taxes on the distribution of profits that is made (Ismer 2016). As per the section 91, an income tax return must be lodged by the partnership to determine the amount of profits that is distributed to the partners. According to “section 995-1, ITAA 1997” the partnership refers to the carrying the business as the partners with the view of earning ordinary income and statutory jointly.

A receipts is regarded as the normal business proceeds that is derived as the part of the ordinary business activities or the ordinary incident of business. According to “section 6-5, ITAA 1997” ordinary income constitutes the gains that originates from carrying on the business activities (Kasper et al. 2017). In order to characterise the receipts as the normal proceeds of the business it is necessary that the receipts forms the normal proceeds of the business activity.

“Section 8-1, ITAA 1997” forms the main provision that provides the taxpayers with the general deduction for the expenses (Hickman 2017). A taxpayer is permitted to claim deduction from their taxable income under the general deduction provision of “section 8-1, ITAA 1997” given the expenses are occurred in gaining or producing the taxable income or occurred necessarily while performing the business activities with the intention of producing taxable income.

It must be essentially noted that, a loss or outgoing will not be allowed for permissible income tax deduction under the rule of general deduction if the expenditure meets the negative limbs of “section 8-1 (2)” (Cvrlje 2015). Expenses such as private or domestic or capital in nature are non-deductible under the negative limbs.

As per “section 25-10, ITAA 1997” the taxpayer are allowed deduction for the repairs relating to the work done on the premises, plant or machinery. Maintenance work is also known as repair under “section 25-10” where painting of plant or premises where business is conducted for rectifying the defects is known as repairs (Jones 2017). A deduction for repairs under “section 25-10” is allowed given it amounts to replacement of damaged unit by the new unit of identical design which usually restores the effective functions and does not amounts to improvement.

Section 6-5, ITAA 1997: Characterizing Receipts as Normal Business Proceeds

The taxpayers under the instant asset write off rule is allowed to claim an immediate deduction for the depreciating business assets that is bought at a cost less than $20,000.

The circumstances that is obtained from the case study suggest that the taxpayers Daniel and Olivia are partners that are carrying the business of partnership under the general law. Both Daniel and Olivia are carrying the business as the partners with the view of earning ordinary income and statutory jointly.

As evident the partnership reported the receipts from the debtor’s payment and also included receipts from the cash proceeds from the sale. The receipts made by the partners are normal business proceeds that is derived as the part of the ordinary business activities or the ordinary incident of business. Within “section 6-5, ITAA 1997” the partnership receipts are ordinary income that has originated from carrying on the business activities.

The partnership reported expenses such as insurance, rates, bills etc. that has occurred from the day-to-day business activities. The taxpayers here are permitted to claim deduction from their taxable income under the general deduction provision of “section 8-1, ITAA 1997” for the expenses incurred (Mumford 2017). Citing “Amalgamated Zinc Ltd v FCT (1935)” these expenses were incurred in the course of producing taxable business income and hence deduction is allowed under the general deduction provision.

Meanwhile the partners made drawings of $6,000 with an addition drawings of $5,600 in cash and items amounting to $3,200 from Bottle Shop. These expenses are not allowed for deduction under “section 8-1 (2), ITAA 1997” because it satisfies the negative limbs and are private in nature.

Expenses on shop painting are allowed for deduction under “section 25-10” as repairs because it was done on the business premises to rectify the deterioration and prevent further damage (Alstadsæter and Jacob 2016). Similarly the repairs expenses occurred on replacement of refrigerator motor is allowed for deduction because it was replacement of damaged unit by the new unit of identical design which usually restores the effective functions and does not extents to improvement. Furthermore, the partners can also claim an immediate deduction under the instant write off rule for new freezer as the cost of freezer is less than $20,000.

The partners here Olivia and Daniel are required to pay taxes on the profits that is distributed from the partnership under “section 92”. Conferring to an income tax return must be lodged by the partnership to determine the amount of profits that is distributed to the partners.

Section 8-1, ITAA 1997: General Deductions for Expenses

The following case study is dealing with the issues that is based on determining the fringe benefit tax liability for the employer relating to the value of benefit provided within “section 23 and 27 of the FBTAA 1986”.

Agreeing to the legislation of FBT, a fringe benefit is better understood as the payment that is made to an employee which is a different form of wages and salary. A fringe benefit is provided to the employee in respect of the employment (Choudhary, Koester and Shevlin 2016). This effectively implies that the benefit is provided simply because they are an employee.

It is should be noted that “section 20, FBTAA 1986” is dealing with the expense payment fringe benefit. An employer is usually liable for the expense payment fringe benefit tax based on two circumstances (Goldin 2015). This includes when the employer compensates the employee for the outgoings that is occurred by the. Secondly, the employer pays the expenses to the third person as the satisfaction of the expenses that is incurred by the employee. In both the cases the expenses can be personal or work purpose.

Under “section 23, FBTAA 1986” the employer is accountable for the fringe benefit tax relating to the taxable value of the expense payment fringe benefit provided to the employee or the amount that the employer repays or recompenses.

It is must be noted that when the housing benefit is given to the employee with the exclusive right granted for the use of unit of accommodation and the lease leases or licenses that states that right exists when the unit of accommodation is given to the employee as the usual place of residence for the employee. Under “section 25, FBTAA 1986” the housing fringe benefit includes the house or unit of home (Eliot 2016). The basis of valuing the taxable amount of the housing fringe benefit is given under “section 27, FBTAA 1986”. The taxable value of the housing fringe benefit is computed by denoting the market value of the right of occupying the unit of home reduced by any employee contribution in the form of rent made.

In following circumstances of the John it is evidently noticed that the employee is working in the printing corporation as the senior executive. The employer provides here John with the private school fees of his child during the year that amounts to $15,000. Payment of school fees of John’s child results in the expense payment fringe benefit under “section 20, FBTAA 1986”. The employer of John paid the expenses to the third person as the satisfaction of the expenses that is incurred by the employee (Krever 2013). This effectively implies that the benefit is provided to John simply because he is in employment. Under “section 23, FBTAA 1986” the taxable value of the fringe benefit for the employer of John constitutes the amount of school fees paid in satisfaction of the third party obligations.  

The employer also provides John with the unit of home during the FBT year in Sydney where he contributes $100 each week as the rental payment while the market value of the rent represents $800 each week. Providing John with the unit of accommodation gives rise to housing fringe benefit under “section 25, FBTAA 1986” (Sadiq et al. 2014). The employer here will be measured for taxation under “section 27, FBTAA 1986” based on the market value of rent reduced by $100 contributions received from John in effect of the rental property.

Conclusion:

The employer will be taxable under section 23 and section 27, FBTAA 1986 for the taxable value of the fringe benefit provided to John during the FBT year. The employer can however claim an income tax deduction for the value of fringe benefit provided.

References:

Alstadsæter, A. and Jacob, M., 2016. Dividend taxes and income shifting. The Scandinavian Journal of Economics, 118(4), pp.693-717.

Choudhary, P., Koester, A. and Shevlin, T., 2016. Measuring income tax accrual quality. Review of Accounting Studies, 21(1), pp.89-139.

Cvrlje, D., 2015. Tax literacy as an instrument of combating and overcoming tax system complexity, low tax morale and tax non-compliance. The Macrotheme Review, 4(3), pp.156-167.

Eliot, G. 2016. The mill on the Floss: Open Road Integrated Media.

Goldin, J., 2015. Optimal tax salience. Journal of Public Economics, 131, pp.115-123.

Hickman, K., 2017. Thoughts on Statutory Interpretation-For Tax Specialists, Too. Jotwell: J. Things We Like, p.14.

Ismer, R., 2016. Judicial Review of Tax Laws: The Coherence Requirement (Folgerichtigkeitsgebot). In Rational Lawmaking under Review (pp. 209-232). Springer, Cham.

Jones, M., 2017. Tax Compliance Experiment: Update and Lessons Learned.

Kasper, M., Olsen, J., Kogler, C., Stark, J. and Kirchler, E., 2017. Individual attitudes and social representations of taxation, tax avoidance and tax evasion. In The Routledge companion to tax avoidance research (pp. 289-303). Routledge.

Krever, R. 2013. Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.

Mumford, A., 2017. Taxing culture: towards a theory of tax collection law. Routledge.

Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W. and Ting, A. 2004. Principles of taxation law 2014.