FBT Tax Implication: Legislation, Analysis, And Conclusion

Legislation

Explain The FBT tax implication.

Alan the employee of the company ABC pty received some benefits from his company. Some benefits needs to taken into consideration and is to be seen that will it have any Fringe benefit tax on it under the given conditions

1. The given condition
2. When the number of employees are 5 instead of 20
3. When the attendees of the party had clients of the company.

Legislation

FBT Act, 1986

ITAA 1997

Under the Fringe Benefit tax assessment act, 1986 a Fringe benefit tax liability incurs on the part of the employers when some benefits are provided to the employees. It does not include the salary or the pension or other payment which is treated as income by the employee. Instead it should be additional perks which makes the employee’s life easier.

The FBT tax implication on the given amounts or benefits will be as follows:

1. Salary amount of $300,000 – It is given in the section 6 – 5 of the Income Tax assessment act, 1997 that ordinary incomes include income from employment. Employment income includes salary, wages, etc. Therefore, such amount is paid for the work done by the employee and hence, it is not a benefit which will be taxable under the FBT act.
2. Payment of the mobile expense of $200 which includes the goods and service tax also, is paid for doing the company related work. No personal use from it is being derived. In the case, where it used for personal work there only it will get taxable. Hence, such amount of $200 is exempted from FBT act.
3. A mobile phone of $2000 is given to Alan. Where the mobile phone is one in number given for work related purpose, there it will be exempted from the Fringe benefit tax act. But, when it used for personal use and also, there is more number of mobile phones provided to the employee, there it will create a Fringe benefit tax liability. Here mobile phone provided is just one used for work will not be considered for tax purpose.
4. Payment of any expense which is to be paid by the employee or is the liability of the employee will be taxable in the hands of the employer. A payment of school fess of $20,000 is paid for Alan/s kids. It will be taxable on ABC Pty Company’s part.
5. When the company provides for any additional benefit in the form of entertainment or meals, or party’s there will incur a tax liability on company $6,600 is incurred on such expenses. It will create a tax liability and such amount will considered under Fringe benefit tax purpose.

It should be noted that it does not matter that how many number of employees were given party, What matters is that the act of party comes under entertainment which creates Fringe benefit tax liability. Hence, even when there are 5 employees the Fringe benefit tax liability will be same. The taxable amount will be the amount incurred on the benefit which is same as before as $6,600.

It is given that the party was hosted for the employees and the partners which are taxable already. If there is an addition of the client’s of the company it will be taxable as earlier in the same manner. Therefore, the answer to this remains the same.

Conclusion

The company is providing the benefits to the employee Alan and some other benefits to other employees. AN additional perk other than employment salary or wages creates a tax liability on the company which is to be paid by them.

The benefit which is taxable and provided to Alan is the school fees of $20,000 and dinner party expense of $6,600.

The non taxable benefits are mobile bill payment of $200 and handset of $2,000 as they are used for just work only And also the handset provided is just one.

The fringe benefit tax liability for company will remain same even when the number of employee’s changes from 20 to 5 as the event is already a taxable one.

There will a Fringe benefit liability when the dinner party attendees include the clients of the company. This does not change the purpose of the expense which is to provide entertainment to the employees, the partners and the clients.

Given: The manufacturer of tennis balls purchased machinery of $1.1 million used for making cans to pack the balls. Later, in the year 2014 on 1^st January, the old machine was sold for $3.3 million and new purchased for $2.2 million. What will be the tax implications on such act?

Analysis

Legislation

ITAA 1997

Section 40 of Income Tax Assessment Act 1997

Analysis

Section 40 – 340 of the ITAA 1997 Act, deals in the rollover assets and accordingly relief is given to such assets. Its implications are such that the calculated capital gain or the loss is disregarded unless the new asset later on makes a taxable capital gain in the following conditions:

1. Capital gain tax event happens.
2. On the disposal of the asset, balancing adjustment happens
3. In the given below conditions:
4. On loss of asset, or the destruction.
5. Purchase of shares on sale of shares or scrips for scrips when takeover or merger takes place.

iii. On the event of demerger where the earlier company is either dissolved or constructed into new one, or the earlier company is departed from the major one.

1. Breaking of the relationship or marriage. In such case, the asset is actually not sold but transferred. It is not disposed actually. Moreover such event should take place after 20 September 1985, to be a taxable capital gain or allowed as deduction under capital loss.
2. Lease mining – Land disposed after the lease agreement to the lessee.
3. Rollover of assets under other conditions such as:

– Asset acquired after capital gain event took place

– The assets of the partner or the individual are disposed to a company.

– Financial service provider’s statutory license is renewed

– Disposal of a depreciating asset.

– Replacement of assets

vii. Rollover of the same category asset where the old asset is exchanged for a new one but the asset is the same.

viii. Under the condition where the asset is received in inheritance but after 20 September 1985. If the date of acquisition if the asset is before the mentioned date, then the capital gain made or capital loss taking place is disregarded.

The case law 2015/40 states about the details of the rollover assets and whether such capital gain will be taxable or not. The shareholders of the old company become the shareholder of the new company. The shares were transferred actually. There is the act of sale as the earlier shares are disposed, but the shares are substitutes with the new ones in the new company of the earlier organisation. Hence, any capital gain made or capital loss taking place is disregarded.

This clarifies that when the rollover of the assets take place, because of the mentioned acts above, there will be a rollover relief to the taxpayer and no capital gain tax will be paid on it. The calculation will be under the two categories.

1. Purchase of asset is before 20 September 1985 and sale is after such date, then the capital gain or loss is disregarded as it is mentioned in the act.
2. Purchase of asset is after 20 September 1985, and sale too, will create a tax liability on the taxpayer unless it is exempted.

For the rollover relief there will be the calculation of reduced cost base for the new asset which will be its cost base when it will be sold. It is calculated by deducting the sale price of the old machinery from the purchase price of it. Here, the sale price is $330,000 and it was acquired for $1.1 million. Therefore, the reduced cost base will be $770,000. This will be the cost base of the new machinery and will be taking into consideration for the sale of it in later years.

The earlier machine enjoyed whatsoever method of depreciation and useful life will be taken into consideration for the new one.

Conclusion

Section 40 – 340 of the Income Tax Assessment Act, 1997 specifies that the assets which are exchanged for a new one for netter quality or service is exempted from capital gain event and the difference between the cost base of the old asset and the sale price of it when exchanged will be treated as the new cost base of the new machinery with the same useful life and depreciating method.

The other benefit includes the reduced cost base of it on the basis of old asset, carry forward of loss in the coming years.

Hence the old machinery sale will not create taxable capital gain and the useful life taken for it will be 10 years with the reduced cost base of $770,000 which will be considered in the later years when it will be sold. The depreciation method will be same as before which ever was considered.

References

ANON, 2015, Entertainment and FBT, Accessed on 25th May 2016 <

ANON, 2015, Rollover, Accessed on 25th May 2016, Available at: