Ha3042 Taxation Law And Australian Assessment Answers

Question 1

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

• salary of $300,000;
• Payment of Alan's mobile phone bill ($220 per month, including GST). 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 are GST free.

ABC also provided Alan with the latest mobile phone handset, which cost $2,000 (including GST).

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) Advise ABC of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2017. Assume that ABC would be entitled to input tax credits in relation to any GST-inclusive acquisitions.

(b) How would your answer to (a) differ if ABC only had 5 employees?

(c) How would your answer to (a) differ if clients of ABC also attended the end-of-year dinner?

Question 2

Two years ago Peta 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 tax year the tennis club next door offered to buy the old tennis courts, but only if Peta 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 $100,000 on preparing the tennis courts for sale. This involved a great deal of work. Peta 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 $600,000 is ordinary income under s 6-5.

Question 1

The above case relates to Alan who is an employee at ABC Pty Ltd. The following salary was negotiated by him in his remuneration package:

• Salary that amounted to $300,000
• Payment of the mobile phone bill amounting $220 per month that includes GST
• Payment of the school fees of children of Alan that is $20,000 per year

In this case we would be required to discuss about the Fringe benefit Tax and the fringe benefits for making the things clear (Wilmot, 2014).

Meaning of Fringe Benefit tax: This is the tax that is paid by the employer on various benefits that are provided to the employees by the employer (Thompson, 2013). The tax that is applied on the fringe benefits is mostly the non cash benefits that the company provided to its staff.

The Fringe Benefit Tax is liable on the below mentioned items:

• Debt Waiver
• Loan
• Car
• Housing expenses
• Expenses incurred while living away from home
• Meal entertainment
• Residual
• Car Parking
• Property

In this case it is assumed that the mobile bills will not be chargeable for the FBT as the phone was used by him for the business purposes so the cost of mobile phone that is given of $ 2000 will not be liable for the fringe Benefit Tax (Cordes, 2005).

FBT calculation

Expense Related Payment: School fees that are GST free amounts to $20,000 * 1.8868 = $37736

FBT liability = $ 37736*47% = 17736

Entertainment benefit that has been provided $ 6600

FBT Value = $6600*1.1*2.0802*50%= $7551

FBT liability = 7551*47% that amounts to $3549

So the total liability of FBT comes out to be $17736+$3549= 21285

Question 2:

Ordinary Income

Ordinary Income is the income that is considered to be ordinary in general sense. According to section 6-5(1) of the Income Tax Assessment Act Ordinary Income is the income that is assessed according to the ordinary concepts.

The following three components are included in the ordinary Income:

• Income from property that includes rent , dividend and interest
• The income that is derived from personal exertion and includes salary and wages
• Income received from carrying the business(Delaney, 2010)

Statutory Income

Statutory Income is the income that is defined according to the provisions of the law. An example of the same could be the capital gain (Dickinson, 2008).

In the case of Peta where she purchased the house with two old tennis courts for her personal living and also thought of Peta was to built three units on the tennis courts and later to be sold on profit. One of the tennis clubs decided to purchase the old tennis court from Peta if she handed it over to them in good condition. An amount of $100,000 was spent by Peta on the preparation of the tennis court for the purpose of sale . There was a great deal of work involved in this repair.  Peta accepted the offer and started the work on the tennis courts and after making the court in good condition she decided to sell it for $600,000 to the club.

Issue:

The issue in the above case is weather the income from the sale of tennis court is ordinary income or not.

Facts:

According to section 6-5(1) of the Income Tax Assessment Act 1997 the profit from the sale of tennis court is not an ordinary income. Peta was not in to the business of selling and purchasing and she never purchased the tennis court for selling so it is not her business. Therefore the profit arising from the sale of the tennis court will be considered as the statutory income of Peta

References

Aggrawal, K., 2007. Corporate Tax Planning - Volume 1 - Page 42.

Cordes, J., 2005. The Encyclopedia of Taxation & Tax Policy - Page 161. Australia.

Delaney, P., 2010. Wiley CPA Exam Review 2011, Regulation - Page 566.

Dickinson, M., 2008. Federal Income Tax: Code and Regulations--Selected Sections.

Thompson, R., 2013. Fringe Benefits: A Practical Guide to Managing Your Tax Costs. New York: Springer.

Wilmot, C., 2014. Fringe Benefit Tax Compliance Guide 2014. Australia.