Discuss about the Taxation Law for Peta Investment.
Peta invested in a housing property two years ago in Kew. The house included two tennis courts at the back and it was not in good condition. Peta bought the house for residing with her family members and she also had the intention to construct three units in the Backyard so that she can sell them and make profit (Barkoczy et al., 2010). She received an offer in this assessment year whereby the neighbourhood Tennis club intends to buy the tennis court if it was converted to working condition. Peta changed her plan to take benefit of the attractive offer. She decided to invest $100,000 to renovate the old tennis court by fencing and resurfacing and convert it into working condition. The property now in good condition was sold for $600,000 to the tennis club.
According to Income assessment act 1997 s5-6, ordinary income is subject to income assessment for tax purpose based on ordinary concept. There is no standard explanation of ‘ordinary concept’ and generally all earning considered as income by people and identified as part of income by the law (Barkoczy et al., 2010). The concept of ordinary income is generally by identifying three components namely
The income earned from individual endeavour such as remuneration of the taxpayer. It is the wages and salary component of the remuneration.
The earning generated from property such as house rent earned, interest and dividend received.
The earning made from undertaking business activities such as trading, retail business and farming.
The various components explained above is taken into account for income assessment, it is mandatory to find the difference between the component to identify which group of deduction it relate to, for example business activity undertaken by tax payer (Fong, and Pinto, 2006).
The case mentioned above exhibit an isolated business activity and it can be related with the ‘first limb of Myers’ and it explain all business activities undertaken with the purpose of earning profit then the income generated from that business activity will be considered as ordinary income with respect to ITAA s6-5 (Fong, and Pinto, 2006). Nevertheless if it is examined in the light of first limb of Myers’ it is mandatory that the purpose of earning profit at the time of buying the property required to be matching the approach of making profit from the business activity subsequently.
Based on ‘first limb of Myers’ it is significant that the business activity and the purpose of making profit need to support the deal to consider it to be an ordinary income. In context to the case where Peta has no business activity, it is important that the purpose of making profit must be present during the time the business deal occurred (Henry et al., 2009). As is evident from the case analysis above Peta expressed her intention to make profit when she stated that she plan to construct three units in the backyard where tennis court existed and sell them to earn profit during the purchase of property two years ago. It leads to an argument that with regard to the case there does exist in the purpose of making profit. Nevertheless it is clearly visible from the case analysis that the execution of original plan was done subsequently. With reference to the first limb of Myers ‘it urge for the explanation of the purpose of making profit and its presence in the modified plan which occurred (Henry et al., 2009). Here there can be a counter argument that the actual purpose of making profit was disposed based on the fact that the new deal offered better scope for Peta to accept the deal at the offered price making it the best offer as evident from the case of Westfield. From the case analysis it was established that the neighbourhood tennis club gave a purchase offer and Peta changed her initial plan based on the offer made. This makes for the argument that the initial purpose of making profit was disposed of.
Again there can be an argument presented by the commissioner citing the case of TR92/3 AT (55-58) and it will, be supported by the fact that the income assessment would be applicable on earning made by the tax payer
The acquisition of property was done the with purpose of making profit by any approach chosen based in suitability and subsequently profit is made by any approach which was undertaken with the initial purpose of making profit (Fong, 2002).
The acquisition of property was undertaken by multi approach and way of making profit and use any of the approach to make profit; or
The business deal was considered with the purpose of making profit by certain approach and ultimately another approach used to make the profit.
The AAT with reference to the case of 1(1999) 99 ATC 101 and statement related with TR 92/3, lack element of truth and demand revision. This promotes the debate with regard to the opinion of high court in ‘first limb of Myers’? In this regard the case 1 of 1999 deal with the purpose of making profit while in the actual situation the making of profit was made from different method. Here the opinion of the court was with respect the taxation was non assessable (Fong, 2002). Further with regard to the case of FCT v Haass (1999) 99 the court expressed the opinion that the earning was assessable by stating the fact that though the profit making approach was not similar to the initial approach of plan. There is also probability that the taxpayer had purpose of making profit by undertaking multi approach and way of making profit and uses any of the approach to make profit.
Therefore with regard to the illustration of the income tax assessment act 1997 and the related section along with the reference of ‘first limb of Myers’, the earnings of $600,000 is not ordinary income with respect to s6-5 as evident in the above explanation (Nethercott et al., 2010). Further in context to the case of FCT v Haass (1999) 99 it is ordinary income as explained above.
2. Alan takes the employment at ABC Pty Ltd (ABC) with contractual agreement for two years and he negotiated his remuneration that included salary and fringe benefit. The fixed salary amounted to $ 300,000. The other component included $220 every month as mobile phone allowance with GST included and the option of unlimited usage where Alan needs to pay fix monthly sum. He used the phone strictly for work. ABC Pty Ltd (ABC) paid the school fees and it amounted to $ 20,000 annually and it is free of GST (Nethercott et al., 2010). The company further gave the latest mobile phone handset and it amounted to $ 2000 that covered the GST. At the end of the year the company organized for employees and partners a diner at a local Thai restaurant for 20 people and it amounted to $ 6000 along with GST in the account of the company.
Fringe benefits are additional benefit in the remuneration provided to the employee and it attracts tax liability. FBT is calculated on the gross amount of employee benefit provided for the given assessment year. The fringe benefit provided by company is generally non cash in nature. The calculation of tax with respect to fringe benefit is not the same as the calculation of tax for income tax purpose as the former deals with non cash benefit compared to cash benefit in the later. The applicable rate of FBT is 49% with regard to the assessment year of 2015 -16 but it will be reduced to 47% in the next assessment year 2016-2017 based on the TRBL. The remuneration component like salary and wages, superannuation and other benefits are excluded from the FBT liability (Kraal, Yapa, and Harvey, 2008). Further as stated in the FBTAA the benefits like expenses related with relocation, loan benefit, expenses related with work, remote area housing benefit, expenses of car payment with exemption, minor benefits with taxable income under s300 and expenses in work related tools and certain equipments are exempted from FBT.
The 13 kinds of benefits with FBT liability as cited by FBTAA and it include
By applying the fringe benefits liability and exemption rules to the remuneration package of Alan in the case analysis above it can be stated that the mobile bill expenses would not be part of FBT taxation as it pertains to the office work. It will be exempted as mentioned under FBTAA exemption list related with FBT liability (Kraal, Yapa, and Harvey, 2008). Likewise mobile handset provided by the company is exempted from the FBT as it relates with expenses in tools and certain equipments under the FBTAA exemption list. Thus both $220 and $2000 pertaining to mobile bill expenses and mobile handset cost respectively will not have any FBT liability.
The school fees are the personal expenses supposed to be paid by the employee. As in the case analysis above it is borne by the company it will have FBT liability as mentioned under the 13 benefits of FBT cited by FBTAA under the category of expense payment fringe benefit (Pattenden, and Twite, 2008). Therefore the amount of $20,000 related with school fess and GST free is FBT liable under type of FBTAA.
The dinner party provided to the 20 employees and partners in a Thai restaurant at the end of the year by the company, it is liable for FBT as mentioned in the 13 kinds of benefits cited by FBTAA under meal entertainment category (Pattenden, and Twite, 2008). This is based on the assumption that the meal was not provided in the office hours. As such the expense of $6000 will have FBT liability for the company.
Calculation of FBT for ABC Pty Ltd (ABC)
Expense payment fringe benefit for ABC Pty Ltd (ABC)
School fees borne by company as GST free = $ 20,000
FBT tax applicable calculation = $ 20,000 X 1.8868 = $ 37736
FBT liability calculation = $ 37736 X 47% = $ 17736
Meal entertainment benefits for ABC Pty Ltd (ABC)
Dinner expense borne by the company = $ 6000
FBT tax applicable calculation = $ 6000 X 1.1 X 2.0802 X 50% = $ 7551
FBT liability calculation = $ 7551 X 47% = $ 3549
Total FBT liability = $ 17736 + $ 3549 = $ 21285
The answer to A would differ if there are 5 employees instead of 20 employees as in A. It would be lower payment pertaining to the dinner for ABC Pty Ltd (ABC). Therefore the FBT liability would also reduce in that proportion (Reinhardt, and Steel, 2006). The cost of dinner for 20 people was $ 6000 the cost of dinner for 5 people would be calculated as $ 6000/20 X5 and it works out to $ 1650. Thus the DBT would differ as shown below
Cost of dinner = $ 1650
FBT tax applicable calculation = $ 1650 X 1.1 X 2.0802 X 50% = $ 1888
FBT liability calculation = $ 1888 X 47% = $ 887
As stated by FBTAA 13 kinds of fringe benefits, the Meal entertainment benefits are restricted to employees and their associates. If the dinner party of the company included the clients then based on FBTAA rule it will be applicable for the employees and clients dinner will not be part of this calculation. Thus FBT liability in this case would remain the same as the clients dinner will not be part of the FBT Calculation (Woellner et al., 2016). Though there will additional expenses for the company it will not constitute the FBT liability related with 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.
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