Taxation Law For Guide To International Tax

Case Analysis

Describe about the Taxation Law for Guide to International Tax.

Peta bought a house in Kew two years ago and it had two ol tennis courts in the backyard that needed renovation. She made the purchase with the intention of making a living in the house with her family while constructing three units on the old tennis courts and make profit by selling them (Fong, and Pinto, 2006). In the current assessment year she received an offer from the tennis club who showed interest in the old tennis court provided it was renovated. Peta accepted the offer and changed her earlier plan. She renovated the tennis court by incurring expense of $100,000 that involved resurfacing and building new fences around the tennis court. She sold the renovated tennis court to the tennis club amounting to $600,000.

According to s6-5 as stated in the Income tax assessment act 1997 any income based on ordinary concepts can be part of assessable income. There is no proper definition of ‘ordinary concepts’ but normally all amounts earned that people consider it to income normally and that find it suitable in the concept of income in the common law (Fong, and Pinto, 2006). The three components that is normally included in the ordinary income are explained below.

The income derived from personal effort and it includes the remuneration earned in the form of salary and wages by the tax payer.

The income derived from property and it includes rent received from house property, interest and dividends.

The income earned for conducting business and commerce and it include retail sales and trading and farming activity.

The components described above  is part of assessable income it is essential to differentiate between each of them as certain deduction are related to which group of income it is deducted from, such as if tax payer is conducting any business (Nethercott,  Richardson, and Devos, 2010).

The above case is an  isolated transaction and that is generally termed as the ‘first limb of myers’ and it states if any business deal conducted with the objective of making profit the proceeds from such deal will be treated as ordinary income under s6-5 business (Nethercott,  Richardson, and Devos, 2010). On the other hand if the ‘first limb of myers’ to be applied it is essential that the objective of making profit during the time of purchase of an asset also needs to be congruent with the means by which the profit was made from the deal eventually.

Ignoring the capital gains tax whether the receipts of the above amount is ordinary income under s 6-5

According to Myers, it is mandatory that business deal and profit making intention to be explained to consider the sale to be an ordinary income. In the case of Peta who is not involved in business, it is essential that profit making intention needs to be established at the time of purchase of the property (Fong, C., 2002). From the case analysis above it is evident that that Peta does have the profit making intention as she planned to develop three units in the old tennis court and make profit by selling them when she bought the house two year ago. Thus there can be an argument that the profit making intention existed in the above case. On the other hand it is also evident from the case that the plan made originally was not executed accordingly. In the process of application of Myers it makes it mandatory to explain that the profit making intention continued to exist in the new plan that was executed (Fong, C., 2002). Contrary to this there can an argument that the original profit making intention was discarded and the new proposition provided the mere realisation for Peta to make the new deal at the price that is possibly best as established in the case of Westfield. As evident from the case analysis that the tennis club next door approached Peta with the offer establish the fact that there was a change in the plan made by Peta . Thus it can strongly debated that the original profit making intention was discarded

This can be contradicted by the commissioner supported by the evidence stated in TR92/3 AT (55-58) and present an argument that assessment would be done on the amount earned provided the tax payer

The property was acquired with the objective of profit making intention by any method identified most appropriate and later profit is derived by any method that was executed with the original profit making intention (Barkoczy et al., 2010);

The property was acquired by consider multiple methods and means of profit making and execute any of the method considered in the profit making process; or

The transaction was undertaken with the objective of profit making by one specific approach but practically derives the profit by some other approach.

The AAT stated with respect to the case 1(1999) 99 ATC 101 the related statement of TR 92/3 does not hold true and needs to be written again. That leads to the argument that what is stand of the High court in Myer? Case 1 of 1999 revolved around the profit making intention but in the practical sense the profit making was derived using some other approach. The verdict of the High court was that it was non assessable for tax purpose (Barkoczy et al., 2010). Again according to the case of FCT v  Haass (1999) 99 the verdict of the court was the amount was assessable on the ground that the profit was derived by a method that was different slightly to the method actually planned. On the other hand if the tax payer had an intention to profit making by considering multiple methods even though any of the method considered in the profit making process.

Case Analysis

Thus from the above discussion of the section related with Income tax assessment act 1997 and the case ‘first limb of Myers’  the receipt of $600,000 is not ordinary income under s6.5 as mentioned in the case discussion (Pattenden, and Twite, 2008). Again according to the case of FCT v Haass (1999) 99 the receipt of the receipt of $600,000 is ordinary income under s6.5 based on the verdict as explained.

Alan joins ABC Pty Ltd (ABC) as an employee under a two year contract with the remuneration package negotiated with the company. It comprises of fixed salary of $300,000 with other benefits and includes fringe benefits. A mobile phone allowance of $220 every month inclusive of GST and he can use the phone with unlimited usage by paying fixed sum monthly. The phone is used by Alan for office purpose (Pattenden, and Twite, 2008). The company also makes a payment of $20,000 annually as school fees for his children and it is GST free. The company also provided latest handset of the mobile phone to Alan and it cost to the company $2000 inclusive of GST. The company organized a dinner party at a local Thai restaurant at the end of the year for all the 20 employees and their partners. The cost to the company was $6000 inclusive of GST for the dinner.

Fringe benefits are part of the remuneration package that is taxable amount and it is calculated on the gross amount of benefits given to the employees during the assessment year. The concept of fringe benefits is normally related with the benefit of non cash type. The tax calculation for fringe benefits provided is different from the tax calculation for income tax as depends on the benefits given to employees (Henry et al., 2009). The rate of FBT applicable for assessment year 2015-16 is 49% though it will be revised to 47% once the TBRL (Temporary budget repair levy) in the assessment year 2017-18. There are exclusion where no liability of FBT is imposed and it includes salary of employees, contribution to superannuation and other benefits related with remuneration. In addition the below benefits are exempted from FBT as stated by FBTAA and they are

Expenses related with employee relocation

Exempt loans

Remote area housing expenses

Work related expenses

Expenses related with exempt car payments

Expenses in Tools and certain equipments related to work

Minor benefits with taxable income under $300

a) FBT consequences arising out of the above information including FBT liability

There are 13 types of benefits recognized by FBTAA and they are

Property related benefits

Car benefits

Car parking benefits

Loan related benefits

Debt waiver benefits

Housing benefits

Living away from Home allowance benefit

Board benefits

Airline transport benefits

Expense payments benefits

Meal entertainment benefit

Residual fringe benefits

Tax-exempt body entertainment

Based on the case analysis it is evident that mobile bills provided as part of the remuneration package would not be considered for FBT taxation as the mobile is used by Alan for office purpose only and it will be exempted under FBTAA  as it is part of Work related expenses (Woellner et al., 2016). Further the handset provided by the employer is also not liable for FBT as it represent Expenses in Tools and certain equipments related to work. Thus mobile bill of $220 and handset cost of $2000 would not attract FBT.

The school fees is the expense the employee is liable to pay initially but if such amount was paid by the company than it attract FBT under the category expense payment fringe benefit covered under the 13 benefits recognized by FBTAA (Kraal, Yapa,  and Harvey, 2008). Thus $20,000 borne by ABC Pty Ltd (ABC) for school fess and free of GST is liable for tax under type 2 of FBT.

The dinner party in Thai restaurant provided by the company at the end of the year to the employees and partners, it is assumed that the meal was not given during office hours and liable for FBT as it is recognized as one of the 13 types of benefits stated by FBTAA categorized as Meal entertainment benefit (Kraal, Yapa,  and Harvey, 2008). Thus $6000 borne by ABC Pty Ltd (ABC) for dinner is liable for FBT.

Expense payment fringe benefit

School fees free of GST = $ 20,000

FBT taxable value = $ 20,000 X 1.8868 = $ 37736

FBT Liability = $ 37736 X 47% = $ 17736

Meal entertainment benefit

Dinner = $ 6000

FBT taxable value = $ 6000 X 1.1 X 2.0802 X 50% = $ 7551

FBT liability = $ 7551 X 47% = $ 3549

Total FBT liability for assessment year ending 31^st March 2016  was sum of Expense payment fringe benefit and Meal entertainment benefit i.e $ 17736 + $ 3549 = $ 21285

The answer in case of A would differ if the number of employees   is reduced to 5. In taht case the dinner payment paid by ABC Pty Ltd (ABC) would naturally decrease. Thus the FBT would also be less proportionately (Reinhardt and Steel, 2006). If cost for 20 people amounted to $6000 then cost of dinner for 5 people would be $6000/20X 5 and it amounts to $ 1650 for the company, so the FBT would calculated as

Dinner = $ 1650

FBT taxable value = $ 1650 X 1.1 X 2.0802 X 50% = $ 1888

FBT liability = $ 1888 X 47% = $ 887

Based on the FBTAA the answer in case of A would be that FBT is imposed on meals provided by the company at the end of year to employees. If such dinner was attended by the clients of ABC then based on FBTAA the FBT is imposed on the benefits provided to employees as part of Meal entertainment benefit stated in 13 types of benefits mentioned in the FBTAA and it covers employees and their associates (Reinhardt and Steel, 2006). It does not cover the clients of ABC so the company is not liable to FBT in the amount pertaining to the dinner related with the clients. Thus it can be concluded that there would be any marked difference as far as the FBT calculation and amount is concerned. It is a separate issue not related the FBT of employees.

References

Barkoczy, S., Rider, C., Baring, J. and Bellamy, N., 2010. Australian Tax Casebook. CCH Australia Limited.

Fong, C. and Pinto, D., 2006. Research Guide to International Tax: An Australian Perspective, A. J. Austl. Tax’n, 9, p.82.

Fong, C., 2002. Taxation Scholarship in Australia and New Zealand: A Preliminary View. J. Austl. Tax’n, 5, p.306.

Henry, K., Harmer, J., Piggott, J., Ridout, H. and Smith, G., 2009. Australia’s future tax system. Canberra, Commonwealth Treasury.

Kraal, D., Yapa, P.S. and Harvey, D., 2008, May. The impact of Australia’s Fringe Benefits Tax for cars on petrol consumption and greenhouse emissions. In Australian Tax Forum (Vol. 23, No. 2, pp. 91-223).

Nethercott, L., Richardson, G.A. and Devos, K., 2010. Australian Taxation Study Manual: Questions and Suggested Solutions. CCH Australia Limited.

Pattenden, K. and Twite, G., 2008. Taxes and dividend policy under alternative tax regimes. Journal of Corporate Finance, 14(1), pp.1-16.

Reinhardt, S. and Steel, L., 2006. A brief history of Australia’s tax system. Economic Round-up, (Winter 2006), p.1.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. Oxford University Press.