Discuss about the Core Tax Legislation and Study.
It has always been a confusion that whether the amount a person is receiving lies under the category of ordinary income or not! In many of the cases, this has not been resolved, although, there are some laws and legal obligations which completely explain the process of understanding the concept of ordinary income. In the present case, a girl named Peta has purchased a land in Kew where she thought of living with her family once she builds the three unit house. The other way around, she might want to sell the house on a profit.
She has got two tennis courts in her land which she wanted to use for the construction of her house. But, the tennis club at the next door asked Peta to sell the land at a price of 600, 000$ but they put a condition for that, which states that Peta has to renovate the tennis courts before selling it. Peta agreed and spent 100, 000$ on it to sell it at a handsome price. 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 $600,000.
Now the question is whether the amount of 600,000$ is an ordinary amount or not in the tax year! According to the law of Australia, the tax is imposed on the ordinary income of the individual which means that if a person is earning or receiving money through a direct or indirect source, that amount is known as the ordinary amount. (Crifo & Diaye 2011) So, as far as the case is concerned where Peta has renovated both of the tennis courts in order to sell the house, the amount she is receiving against that house is a direct amount as she is the owner of the property.
The Income Tax Assessment Act states that if Peta is an Australian resident, then, the ordinary amount is assessable. (Gaal 2013) It means if Peta was residing in Australia, then the amount she is getting against the tennis courts is the ordinary amount. So, under the statement of the law, it is quite clear that the receipt of 600,000$ is of ordinary amount. (Feldstein 2011) Peta has invested 100,000$ on the renovation because the next door tennis club asked Peta to renovate it and then sell it to them. She got 500,000$ as a profit from selling the tennis courts where she was thinking to build his own three unit house to live with her family.
There have been so many misconceptions in the past about the concept of the ordinary income but the court has legally defined it in a very straight forward way. All the amounts which are normally considered as income are known to be the ordinary amounts. (Gravelle 2010) But even then, people get confused about the concept of ordinary income. The law has simply called the income ordinary if the income has been defined under such conditions:
So, the government has made the things easier for the people to understand but still problems come up like in the present case. However, the amount of 600, 000$ comes from the property Peta owned so, therefore, it comes under the second clause of the above mentioned criteria for understanding the concept of ordinary income. (Rand & Tarp 2011) In simple words, the receipt of 600, 000$ is the ordinary amount. The ordinary income is considered to be the assessable income because this is the income which is liable to pay tax against itself. Although, there are some limitations upon which it is decided that whether the income is ordinary or not! The origin of the income matters in order to see whether it falls under the ordinary incomes or not! (Slemrod 2010) The law is slightly different for those who are not the residents of the Australia but as in the present case where Peta is living with her family in the house, the amount she received from the tennis club is the ordinary income. This is how it can be categorized and sorted out because there are too many ambiguities when it comes to the assessment of the ordinary income. (Reinhardt & Steel 2006) It does not matter whether you are receiving the amount directly or indirectly, the amount which is linked to an Australian source would fall under the ordinary amount. (Royalty 2000) Peta received the amount directly from the tennis court which was owned by her so in this case, the receipt of 600, 000$ is pure ordinary income for Peta in the income year.
Fringe Benefits Tax is one of the kinds of tax which is imposed on the companies due to some of their acts. This type of tax is imposed on the company when the company is offering some non-cash benefits to its employees. The benefits which are provided to the employees vary because you will see in this scenario how people have been given different benefits.
Alan is an employee at ABC Pty Ltd (ABC). He has negotiated with the company upon the following benefits to be provided:
The case revolves around few parameters that if some changes have been made in the current scenario, then how FBT gets affected and what are the possibilities they can improve their FBT amount at the end of the financial year. Fringe benefits tax would be taken care of under different conditions and it has different variables for each country as per their laws and regulations.
Fringe Benefits Tax is one of those taxes which have to be reported at the end of the financial year. There are some limitations on which these taxes are based. In the present case, Alan is getting a salary of 300, 000$ monthly with some of the other non-payment benefits like his phone bill is being paid by the ABC Pty Ltd which is about 220$ per month. Moreover, the company also bought a phone for Alan which costed 2000$. Lastly, the company is also taking care of his children school fee which 20,000$ annually. Plus, the company also arranged an annual dinner for all the 20 employees and it costed 6600$. Now, the consequences which the company might face according to the conditions of FBT include some of the following facts:
Alan’s per month phone charges: 220$
Annual phone charges: 220×12 = 2,640$
Cost of Mobile phone: 2000$
Cost of dinner for Alan: 330$
Cost of dinner for 20 employees: 6600$
Annual fringe benefits cost: 2640 + 2000 + 6600
Total = 11, 240$
The value clearly shows it is quite higher than the threshold value set by the law for FBT to be imposed. However, one thing should be clear about the FBT and that is, the amount which only include GST on it is liable to fall under FBT, otherwise it would not be considered as the amount to be used for FBT. (Matthews 2011)
Now in the present case, ABC needs to submit the report of the fringe benefits amount which is known as reportable fringe benefits amount. The sum of the fringe benefits amounts for an employee after a year is known as reportable fringe benefits total. As you can see that the amount for the school fee is not included in the FBT amount because it does not have GST on it. Therefore, company has to pay the FBT amount in the month of the June. (Carroll et al. 2010)
If ABC had only 5 employees, then the scenario might have been a bit different because the cost for the 20 employees at the dinner is quite more than the amount for the 5 employees. The amount gets reduced to only 1650$ at the dinner and then if we calculate the amount under the conditions of FBT, that is, the amount which include GST becomes 6, 280$ which is quite less than the amount calculated earlier. The consequences are less critical for the ABC Pty Ltd now because the FBT amount has been decreased. But, still the company has to pay the FBT for his employee. The law, however, varies from country to country and the value set by the government for FBT also differs. (Woellner et al. 2016)
If clients of ABC also come in the dinner, then the scenario would have been changed completely because the amount would have been increased a lot and so is the GST. The more the amount of GST, the higher will be the FBT amount which company has to pay. (Saez 2013) So, fringe benefits tax is a totally different type of tax which is imposed on the company on the basis of the benefits offered to its employees. (Barkoczy 2016) It also includes the medical facility being provided to the employees. So, the amount has already crossed the threshold value which is only 2000$ and if the clients of ABC were also present in the dinner, then it would have cost a lot to ABC and the consequences might get worse.
References
Barkoczy, S., 2016. Core tax legislation and study guide. OUP Catalogue.
Carroll, R., Joulfaian, D. and Mackie, J., 2010. Income versus consumption tax baselines for tax expenditures. National Tax Journal, Forthcoming.
Crifo, P. and Diaye, M.A., 2011. The composition of compensation policy: from cash to fringe benefits. Annals of Economics and Statistics/Annales d’Économie et de Statistique, pp.307-326.
Feldstein, M., Feenberg, D. and MacGuineas, M., 2011. Capping individual tax expenditure benefits (No. w16921). National Bureau of Economic Research.
Gaal, J., 2013. Fringe benefits tax issues. Division 7A Handbook: The Practitioner’s Guide to the Div 7A Rules, p.219.
Gravelle, J.G., 2010. Practical Tax Reform for a More Efficient Income Tax.Va. Tax Rev., 30, p.389.
Matthews, S., 2011. Trends in top incomes and their tax policy implications.
Odunlade, R.O., 2012. Managing employee compensation and benefits for job satisfaction in libraries and information centres in Nigeria.
Rand, J. and Tarp, F., 2011. Does gender influence the provision of fringe benefits? Evidence from Vietnamese SMEs. Feminist economics, 17(1), pp.59-87.
Reinhardt, S. and Steel, L., 2006. A brief history of Australia’s tax system.Economic Round-up, (Winter 2006), p.1.
Royalty, A.B., 2000. Tax preferences for fringe benefits and workers’ eligibility for employer health insurance. Journal of Public Economics, 75(2), pp.209-227.
Saez, E., 2013. Income inequality: evidence and policy implications. Arrow Lecture, Stanford University.
Slemrod, J., 2010. Complexity in the Australian tax and transfer system. InMelbourne Institute–Australia’s Future Tax and Transfer Policy Conference (p. 257).
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016.Australian Taxation Law 2016. Oxford University Press.
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