Costs Of Goods And Services Tax

Components of Ordinary Income

Discuss about the Costs of Goods and Services Tax.

Assessable income is the income earned from ordinary sources. In other words, these incomes are called ordinary income. According to Australian Law, assessable income includes all the income, which a person earned either directly or indirectly during the assessment year. Under section 6-5 and 6-10 of ITAA 1997 an Australian resident will be assessable to the income, which he earns from all the sources, i.e. income earned from house property, income earned from other sources, and so on(Woellner et al. 2012). However, a non-resident will be assessable only on the income, which he earned in Australia only. Under section 6-5(1) of ITAA 1997 deals with the income based on ordinary concepts.

There is no specific definition of ordinary concept in the act but it takes into account all the income, which the assessee derived during the year and provides proper treatment for that income as per the act. Various arguments have been held in between the inclusion of ordinary income and the derived income. There are three basic components of ordinary income:

• Income earned from property like rent received from house property.
• Income earned from business like profit derived from selling some farming stocks.
• Income earned from personal effort like amount received in the form of salary(www.dlsweb.rmit.edu.au, 2016)

On the other hand, statutory incomes are those incomes, which are generated from other sources such as bad debt recovery, capital gains, bonus income, and so on. These incomes are calculated separately to ascertain the total income.

In the given case, Peta bought a house two years ago. The main reason of this purchase is that she wants to accommodate her family in that house and she wants to construct three units on the tennis court so that she can earn some profit by selling those units. The nearby tennis club offered to buy the tennis court if Peta restore the court in good condition. Peta accepted the offer and sold the court to the club for $600,000. Peta spent $100,000 for this purpose. The receipt of $600,000 will be treated as ordinary income under section 6-5(Austlii.edu.au, 2016). The reason behind this can be explained in more simple manner by discussing some case laws and exemptions grant by the government which are as below:

Social clubs, which provide recreation facilities to its members, are exempt from taxation purpose. In this case, the authorities cannot bind the club to perform the activities, which are beyond the scope of IRC 501(c) (7). The club can use its fund for educational and charitable purpose. The club will not be liable for exemption if the activities performed by them are not for charitable purpose. In other words if the club earns some profit by providing some service to their members than this income will be chargeable for taxation purpose. Similar cases of Automobile Club v. Comm.  181 F. 2d 402 (3d Cir. 1950); Allied Trades Club v. Comm., 228 F. 2d 906 (3d Cir. 1956); Chattanooga Automobile Club v. Comm., 182 F. 2d 551 (6th Cir. 1950); Automobile Club of St. Paul v. Comm., 12 T.C. 1152 (1949); Rev. Rul. 69–635, 1969–2 C.B. 126.

Statutory Incomes

According to Australian Law, payment received by a sportsperson can be chargeable to income tax if an amount derived by a person is from the operation of the provisions of tax. The following income can be assessed as an ordinary income:

• Amount derived from employment.
• Amount received from the services provided by a person.
• Amount derived from participating in sport. However, if income received from participating in any activity as a hobby will not be considered as assessable income. According to the act, no deduction will be allowed on this amount. Expenses related to sports are not allowed for deductions based on voluntary payments because these expenses are not related to voluntary payment receipt.

The income generated by the sale of property shall be included under the head statutory income because Peta sold the property in small units instead of selling the whole lot. Hence, she is eligible for the exemption of 50% on her total income (Ato.gov.au, 2016).

Alan works for a company ABC Pty. Ltd on contractual basis of two years. He received a salary package of $300,000 from the company. The company gives certain benefit to him by paying his mobile expenses @ 220 p.m. The company also pays the school fees of his children @20,000 p.a. The company gifted him a mobile phone of $2,000. The company organized a dinner party for its employees and partners, which cost $ 6,600. According to Australian Law, the term FBT means when an employer provides certain incentives to its employees, which includes benefits to its family also. It is calculated separately under the head fringe benefits. It is calculated from 1^st April to 31^st March. There is a huge difference in between benefit and fringe benefit under the act. Fringe benefits includes all the benefits which an employer provides to its employees in the form of incentives used for business purpose such as expenditure related to vehicles used for office purpose, expenditure related to providing any entertainment benefits to him such as movie tickets, concert tickets and so on. (Bender et al. 2013).

All these expenses are fringe benefits. In the given case expenses related to payment of school fees and mobile expenses will be termed as fringe benefit under the act. On the other hand, GST is chargeable @ 10% in Australia. A person can claim its benefit if the amount of GST is included in the price of the product. In other words, GST credit=price of input tax- a price included in the business input. If a person sales, a product valued more than $82.50, and which includes GST than in this case the customer’s needs to issue a tax invoice to claim input credit for the purchase. The seller will issue this invoice within a period of 28 days from the sale. The invoice must include some additional information:

• Identity of seller and its ABN.
• Date and invoice number of the transaction.
• Details of the product sold and the amount of GST payable. For example if a company makes a sale of more than $ 1,000 than 10% GST is applicable to it. Therefore, the total amount of tax input in this case will be $1,100.

Case Study

Payment made by an employer towards the mobile bill of Alan will be treated as fringe benefit tax because it is the benefit, which a company provides to its employees. In this case, the whole amount of $2,640 will be charged under the head fringe benefit tax.

Payment of $2,000 made by the company on mobile phone will be excluded from fringe benefit tax because the mobile phone was used for official purpose not for the employee self-owned purpose. Hence, chargeable under the head total income (James et al.2013).

Payment of $6,600 made by the company for dinner party will be treated as fringe benefit tax because the company is providing refreshment facility to its employees (Rimmer et al.2014).

Payment of $20,000 made by the company towards the school fees for the children of an employee will be chargeable under the head fringe benefit tax because it is the benefit provided by the employer to its employee. The whole amount is liable for fringe benefit (Delany 2012).

It is important to calculate the GST value after ascertaining the value the person is allowed to claim the FBT @ 49% from its total amount.

Calculation of FBT based on above mentioned facts are:

Payment of mobile bill  =$  2,640

Payment of school fees  = $20,000

Payment made on mobile phone  =$   2,000

Payment made on dinner=$ 6,600/20 =$     330

[Since, the company has 20 employees so the amount of dinner will be divided among 20 members]

Total value = 20000+2640+2000+330=24970-10% of GST=$22,473

Less: mobile phone for official purpose  =$  2,000

Total value=$20,473

FBT @ 49% on total value=$10,441.23 [20473-49% of 20473]

Answer to question number 2 (b):

In case if, the company has only 5 employees than the calculation of tax liability will be as follows:

Payment made on mobile bills =$2640

Payment made for school fees= $20000

Payment made for mobile phone=$2000

Payment made for dinner=$1320[6600/5]

Total value=20000+2640+2000+1320=25960

Less: mobile phone=2000

Net value=23960

Taxable value of FBT=23960-49%of 23960=12,219.60

[Since, the amount of dinner will be change in this case because instead of 20 employees the company is providing refreshment to 5 employees]

The tax liability will be higher in this case.

The answer will not differ if the company ABC Pty Ltd included its client for dinner alongwith its employees because the FBT is applicable on the benefits provided by the employer to its employees. The company is providing benefit to the employees in the form of dinner, no matter whether the clients of the company joined the dinner or not. The company can claim FBT benefit. It is to be noted that the company cannot claim any exemption on the money spent towards its client (Martocchio 2013).

Conclusion:

After analyzing all the facts it can be concluded that it is important to ascertain the total income properly so that the person can claim some benefits from the taxation purpose. It helps the assessee to reduce the burden of its tax liability. If a person makes some mistake and pays extra amount of tax than it will affect its total income and the income for the assessment year will not be ascertained. Therefore it is important to ascertain the value properly.

References:

Ato.gov.au. (2016). Fringe benefits tax (FBT) | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/ [Accessed 27 May 2016].

Delany, T.P., 2012. Fringe benefits tax

James, S., Wallschutzky, I. and Alley, C., 2013. The Henry Report and the taxation of work related expenses: Principles versus practice

Jones, S., 2015. ‘Cost-to-company’explained: tax planning. Tax Breaks Newsletter, (349), pp.6-7

Kaplan, R.L. and Price, D.J., 2014. Change and Continuity in Fringe Benefit Taxation: Seeking Sense and Sensibility. NYL Sch. L. Rev., 59, p.281

Martocchio, J., 2013. Employee benefits. McGraw-Hill Higher Education

Ramli, R., Palil, M.R., Hassan, N.S.A. and Mustapha, A.F., 2015. Compliance costs of goods and services tax (GST) among small and medium enterprises. Jurnal Pengurusan, 45, pp.1-15

Rimmer, X., Smith, J. and Wende, S., 2014. The incidence of company tax in Australia

Soled, J.A. and Thomas, K.D., 2015. Revisiting the Taxation of Fringe Benefits. Washington Law Review, Forthcoming

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2012.Australian taxation law. CCH Australia

www.dlsweb.rmit.edu.au. (2016). www.dlsweb.rmit.edu.au/toolbox/finance/fnbacc02a/preparetax/keyprinciple/ordinaryi.htm. [online] Available at: https://www.dlsweb.rmit.edu.au/toolbox/finance/fnbacc02a/preparetax/keyprinciple/ordinaryi.htm [Accessed 13 Sep. 2016].

www.dlsweb.rmit.edu.au. (2016). www.dlsweb.rmit.edu.au/toolbox/finance/fnbacc02a/preparetax/keyprinciple/statutoryi2.htm. [online] Available at: https://www.dlsweb.rmit.edu.au/toolbox/finance/fnbacc02a/preparetax/keyprinciple/statutoryi2.htm [Accessed 13 Sep. 2016].

Ato.gov.au. (2016). What to include in your assessable income | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/Business/Income-and-deductions-for-business/Working-out-your-assessable-income/What-to-include-in-your-assessable-income/ [Accessed 13 Sep. 2016].

Bender, M., Contacos-Sawyer, J. and Thomas, B., 2013, July. Benefits Strategies for Attracting and Retaining Employees. In Competition Forum(Vol. 11, No. 2, p. 165). American Society for Competitiveness

Shields, J. and North-Samardzic, A., 2015. 10 Employee benefits. Managing Employee Performance & Reward: Concepts, Practices, Strategies, p.218

Austlii.edu.au. (2016). INCOME TAX ASSESSMENT ACT 1997 – SECT 6.5Income according to ordinary concepts (ordinary income). [online] Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html [Accessed 13 Sep. 2016].