Describe about the Capital Gains Tax for Concept of Ordinary Income.
1. First of all, we need to understand what the actual scenario is about this case. A girl named Peta owns a land in Kew which includes two tennis courts at the back, and she thought of making a house for her family there for a better living. Meanwhile, she got an offer from one of the tennis clubs next door which demanded the land for an amount of 600,000$ with a condition that it should get renovated first. In the present tax year, the social club adjacent offered to purchase the old tennis courts, however if Peta initially renovates them before selling. Peta chose to acknowledge the club’s offer rather than proceeding with her arrangement to build her own house.
Peta spent $100,000 on setting up the tennis courts available to be purchased. A lot of work has to be done in order to improve the condition of the tennis courts. Peta needed to restore the tennis courts and manufacture new fences around them. She then sold the tennis courts in the present expense year to the social club for $600,000.
In Australia, there is a concept of ordinary income. People are often confused that whether the amount they are earning comes/lies under ordinary income or not. (Akhtar 2015) What is meant by ordinary income? Any amount from direct or indirect source is ordinary income. It can consist of income from wages, salaries, tips, commissions, bonuses, and other types of compensation from employment, interest, dividends, or income earned from a sole proprietorship, partnership or LLC. (Argente & Garcia 2015) There are numerous cases in which the people claim that their income is ordinary or not so the court decided that the amount earned in following circumstances would lie under ordinary income and tax would be imposed on that amount.
There are three components of ordinary income.
Income from doing any labor work (e.g. salary and wages)
Income from any land or property (e.g. rent, dividends, interest)
Income from running a business on your own or a partnership (e.g. Retail sales, farming) (Barkoczy 2016)
Peta bought the land in Kew where she thought of living with her family once she builds the three unit house or she would sell it on profit. She bought two tennis courts to construct her house on but the tennis court next to her door offered her to sell that land at a price of 600,000$ but only on one condition that she has to renovate it and for that, Peta had to face the expenditure of 100,000$. 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 $600,000. So, excluding the amount she spends for renovation (100,000$), she would earn 500,000$ as a profit. According to income tax assessment act 1997 sec 6.5, the source of the salary matters with a specific end goal to see whether it falls under the customary income or not! (Gyourko & Sinai 2003) The law is somewhat distinctive for the individuals who are not the inhabitants of the Australia but rather as in the present situation where Peta is living with her family in the house, the sum she got from the social club is the customary wage. (Hegemann et al. 2015) In this way, it can be ordered and dealt in regards to the fact that there are excessively numerous ambiguities with regards to the appraisal of the customary wage. It doesn’t make a difference whether you are getting the sum straightforwardly or in a roundabout way, the amount which is linked to an Australian source would fall under the ordinary income. (Knoll 2008) Peta got the sum straightforwardly from the tennis court which was claimed by her so for this situation, the receipt of 600, 000$ is unadulterated standard pay for Peta in the wage year. The law itself clearly explains the concept of ordinary income under some particular conditions and limitations. For example, if someone is being paid even through a salary, then it also lies under the category of ordinary income. Moreover, the purpose of this law is to impose the tax on those amounts which are coming from any direct and indirect source while you are the resident of Australia.
As she is the owner of that land and residing in Australia and going to sell it then it quite clear she is liable for paying the tax and the amount she is earning is ordinary income. The amount which is being provided by the tennis club to Peta is the direct source of money for her. Therefore, the receipt of 600, 000$ is the ordinary income for Peta. Loss or profit as nothing to do with the ordinary income because what matters is the source of the income. (Zhou 2013)
2: ABC Pty Ltd. is a company where Alan and other 20 people are working. ABC gives the following remuneration package with ABC:
ABC also provided Alan with the latest mobile phone handset, which cost $2,000 (including GST).
At the end of the year, ABC hosted a dinner at a local Thai restaurant for all 20 employees and their partners. The total cost of the dinner was $6,600 including GST.
Any firm or organization in Australia has to pay FBT (fringe benefits tax) if it provides non cash benefits to its employees for example
In short, the fringe benefits tax (FBT) is a tax applied to the Australian tax system by the Australian Taxation Office. This tax is imposed only on non-cash benefits that an employer provides to employees “in respect of employment.” The benefits provided to employees vary as mentioned in the scenario. The case is about how FBT gets affected and what are the possibilities a company can improve FBT amount at the end of the financial year? Fringe benefits tax would be taken care of under different conditions, and it has different variables for each country as per their laws and regulations. Fringe Benefits Tax is one of those taxes which have to report at the end of the financial year. In this case, Alan is getting a salary of 300, 000$ 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. Plus, the company also gave a phone to Alan at a price of 2000$. Lastly, the company is also paying his children’s school fee which is 20,000$ per year. Plus, the company also arranged an annual dinner for all the 20 employees at an expenditure of 6600$. Now, the problem which the company might face according to the conditions of FBT includes some of the following:
If a company gives benefits to the employee which increases the amount of 2000$ from April 1 to 31 March, then the company has to pay FBT on those benefits.
In this scenario, the company is already giving benefits to Alan which is more than the amount of 2000$ annually. We can calculate it:
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$
It shows that higher than the threshold value set by FBT and the company is liable to pay the tax on the benefits (Schneider 2013) so,
The amount for the school fee of Alan’s children is not included in the calculation for the FBT because it does not hold GST in it. Therefore, company has to pay the FBT amount in the month of the June because anything exclusive of GST does not include in FBT after showing the annual report of each employee to FBT department or in where it should be checked. (Shields & North-Samardzic 2015)
The expenditure of the company has been affected by a large number of employees because if only five employees were invited to the dinner then, the total cost for dinner would have been quite less than this! If ABC only has five employees, then the expenses of the dinner would have been quite less than in the present case. For five employees, the cost for the dinner would be 1650$ which is quite less than 6600$ so, similarly, GST would also get reduced by a certain amount.
If the company invites annually to its clients as well, then the FBT amount will increase because of the increase in the total amount which includes GST in it. (Vobbmerbäumer 2013) The more the amount of GST, the higher will be the FBT amount which company has to pay. (Soled & Thomas 2016) So, fringe benefits tax is a totally different type of tax which is imposed on the company by the benefits offered to its employees. It would affect the company a lot and ABC’s consequences would be worst.
References
Akhtar, S.J., 2015. Capital Gains Tax in Theory and Practice. VISION: Journal of Indian Taxation, 1(1).
Argente, D. and García, J.L., 2015. The price of fringe benefits when formal and informal labor markets coexist. IZA Journal of Labor Economics, 4(1), p.1.
Barkoczy, S., 2016. Core tax legislation and study guide. OUP Catalogue.
Gyourko, J. and Sinai, T., 2003. The spatial distribution of housingâ€Ârelated ordinary income tax benefits. Real Estate Economics, 31(4), pp.527-575.
Hegemann, A., Kunoth, A., Rupp, K. and Sureth, C., 2015. Impact of capital gains taxation on the holding period of investments under different tax systems (No. 183). arqus-Arbeitskreis Quantitative Steuerlehre.
Knoll, M.S., 2008. The taxation of private equity carried interests: estimating the revenue effects of taxing profit interests as ordinary income.
Morse, S.C. and Deutsch, R., 2016. Tax Anti-Avoidance Law in Australia and the United States.
Schneider, K.N., 2013. Soften the blow by providing tax-free fringe benefits to terminated employees. Journal of Legal Issues and Cases in Business, 2, p.0_1.
Shields, J. and North-Samardzic, A., 2015. 10 Employee benefits. Managing Employee Performance & Reward: Concepts, Practices, Strategies, p.218.
Soled, J.A. and Thomas, K.D., 2016. [91WashLRev0761] Revisiting the Taxation of Fringe Benefits.
Vobbmerbäumer, J., 2013. Incentive effects and the income tax treatment of employer-provided workplace benefits. Review of Managerial Science, 7(1), pp.61-84.
Zhou, M., 2013. The Tax Disadvantage Of Ordinary Income: An Event Study On The Legislative Process Of JGTRRA. Journal of Applied Business Research (JABR), 29(4), pp.1003-1010
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