Business Insurance Law And Practice

Classification of Income

Discuss about the Business Insurance Law and Practice.

The income that is earned directly or indirectly by the residents of the Australia and whether it is earned outside or within the country is regarded as the assessable income. Therefore, the income that is generated from the sale of the property by the resident of Australia is treated as the assessable income of the individual residents of Australia (Barkoczy 2016).

The assessable income has been classified into two sections under the income tax assessment act. 1997. The two sections are as follows:

• Statutory income
• Ordinary income

The income which is not generated from the ordinary courses of business is considered as the statutory income (Miller and Oats 2016). Section 10-5 describes the statutory income and the following income is described under the statutory income and the incomes are listed below:

• Bonus received on insurance
• Capital gain generated from the sale of capital assets
• On the termination of employment, the lump sum amount received
• Recovery of bad debt
• Imputation credit
• Barter transaction generating profit
• Royalties received

In order to determine the taxable amount of such income, the statutory income are calculated separately.

On the other hand, the income that is generated from the general or ordinary course of action is described as the ordinary income. The ordinary incomes under the section 6-5 are listed down below:

• Income generated from various properties such as interest received from deposits, rent earned form the properties and the dividend receive form the investments.
• Income such as leave encashment, salary, wages, pensions that is received monthly. These incomes are generated from the personal exertion (Woellner et al. 2016).
• Income that is generated from the business such as sale of trading stocks, the income generated from the farming, and the profit generated from the business

Peta has purchased the house for two reasons and the house is attached with the two tennis courts. She has purchased the house to live in with the family permanently and to build the units at the court so that she would sell them to earn more profits. However, the whole tennis court was sold by Peta to the tennis club.

Peta was not involved in any sort of the real estate business as Peta has purchased the property deliberately to sell it and earn profit. Peta was interested to sell the property into small units so that she is able to generate the profit from such sales; however, she had to sell it in a whole to the tennis court. Therefore, under section 10-5 such income that is generated from the sale of the property would be regarded as the statutory income, instead of regarding as the ordinary income (Moore 2015).

The income generated from the sale of the tennis courts would surely be regarded as the assessable income. The property was purchased by Peta with an intention to sell the tennis unit constructed to earn the profits. The net income earned by Peta would be regarded as business income of Peta after deducting all the expenses such as expenses incurred for the fencing and resurfacing. Under section 6-5, given the case such income would be considered as the Peta’s ordinary income (Rimmer et al. 2014).

Example: Income from Sale of Property

Peta would have to pay the taxes on the net income generated by deducting all the expenses incurred and the cost prices for the assets sold. However, if Peta show the income generated from the sales as the capital gain, she would be able to claim exemption of taxes for fifty percent on the net income generated.

Therefore, under section 6-5, the income of $ 600000 would not be regarded as the ordinary income from both points of view.

In order to ascertain the fringe benefit liability of tax for ABC Pty Ltd on the expenses this is made for Alan, it is necessary to make the following assumptions:

The expense of bill of mobile phone which is paid by the employer on employee behalf would be treated as the fringe tax benefit. ABC Pty Ltd has paid the expenses of mobile phone bills directly to the third parties rather than reimbursing it to Alan. The annual expenses of mobile phone amounts to $ 2640 but the monthly expense of the mobile phone bill is less than $300. Therefore, the expenses of the mobile phone bills of ABC Pty ltd could be consider for fringe tax benefit.

In order to compute the liability of fringe tax benefit, the wages and salaries which is paid to the employees of ABC Pty Ltd would not be considered. Therefore, the salary paid to Alan would not be considered to compute the fringe benefit tax liability

Form the employer end, the mobile phone that is provided for the work purpose to Alan would be treated as the expenses related to the work. Therefore, in calculating the total amount of GST items that are inclusive, the cost of mobile phones should be included. The item which needs to excluded from the fringe benefit tax taxable amount are the handsets gross up amount.

Other item which is treated as the expenses fringe benefits are the school fees of children of Alan which is paid by ABC Pty Ltd. Here, the employer is directly paying the private expenses of the employees and therefore, it should be included for the purpose of fringe benefit taxation (Ring 2014).

The total amount of GST free benefits and the GST inclusive benefits is necessary to be computed separately. The total value attained should be multiplied by the gross up rates individually which is applicable to the different types of benefits

The entertainment fringe benefits would include any expenses which are paid by the employer for the entertainment of the employees. The deduction on such expenses would be claimed by the employer under the rule of ‘otherwise deductible’. However, the claim is restricted only to the amount that is spent by the employees. Therefore, the expenses which are made on the expenses of the associates or the family members of employees cannot be considered in the fringe benefits of entertainment. It is therefore, not possible for Pty Ltd for the exact amount that is spent per head for the entertainment of the employees only (Martocchio 2013). The calculation of the fringe benefit tax would include the total amount.

The total gross up value is deducted from all the exemptions and is charged with the rate of fringe benefit tax to attain the net taxable value. In order to calculate the liability of the employer regarding the fringe tax benefit, the rate is taken to be 49%.

The fringe tax benefit liability of ABC Pty Ltd under the rules and assumptions are calculated below:

In the Books of ABC Pty Ltd.
Calculation of Fringe Benefit Tax Liability
as on 31.03.2015
	GST Inclusive	GST Free
Particulars	Amount	Amount
	$	$
Payment of Phone Bill	2640
Payment of School fees of Employee’s Children		20000
Dinner at Restaurant	330
Providing Mobile Phone Bills	2000
Total of GST Inclusive/Free Benefits	4970	20000
	A	B
Gross-up Rate	2.1463	1.9608
	C	D
Gross-up Value	10667.11	39216
	E = A x C	F=B X D
Total amount taxable Fringe Benefit	49883.11
	G = E + F
Less : Exemption for Mobile Phone at gross-up value	4292.60
($2000 x 2.1463)	H
Net Taxable Fringe Benefit	45590.51
	I = G – H
Fringe Benefit Tax Rate	49%
	J
Fringe Benefit Tax Liability	22339.35
	K = I x J

If the total cost of dinner would remain the same and if there would be only five employees of ABC Pty Ltd for the dinner, the cost of dining per head would be higher and this would results in higher liability of fringe benefits tax to the employer.

In the Books of ABC Ltd.
Calculation of Alternative Fringe Benefit Tax Liability
as on 31.03.2015
	GST Inclusive	GST Free
Particulars	Amount	Amount
	$	$
Payment of Phone Bill	2640
Payment of School fees of Employee’s Children		20000
Dinner at Restaurant	1320
Providing Mobile Phone	2000
Total of GST Inclusive/Free Benefits	5960	20000
	A	B
Gross-up Rate	2.1463	1.9608
	C	D
Gross-up Value	12791.95	39216
	E = A x C	F=B X D
Total Taxable Fringe Benefit	52007.95
	G = E + F
Less : Exemption for Mobile Phone at gross-up value	4292.60
($2000 x 2.1463)	H
Net Taxable Fringe Benefit	47715.35
	I = G – H
Fringe Benefit Tax Rate	49%
	J
Fringe Benefit Tax Liability	23380.52
	K = I x J

The total liability of fringe benefits of taxation would remain unchanged if the dining costs is reduced and the dining cost per head would remain same.

The fringe tax benefit would include only the costs which would be incurred for the employees, even though the ABC Pty Ltd includes the clients. For the entertainment purpose of the clients, the company cannot claim any deductions and the fringe tax benefits for the entertainment purpose would be applicable to the employees receiving benefits (Kaplan and Price 2014).

Reference:

Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.

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

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

Lepow, C.G., 2015. Taxation and Insurance. Business Insurance Law and Practice Guide, 3.

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

Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.

Moore, M., 2015. Taxation and development. In The Oxford Handbook of Politics of Development.

Oats, L. ed., 2012. Taxation: a fieldwork research handbook. Routledge.

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

Ring, D.M., 2014. Moderator, International Taxation.

Schwidetzky, W.D. and Brown, F.B., 2015. Understanding Taxation of Business Entities. LexisNexis.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016.Australia.