Describe about the Concept of Ordinary Income for Under ITAA 1997.
The core objective of the given situation is to discuss the relevant statute dealing with the concept of ordinary income and therefore opine on the appropriate tax treatment and income classification of the proceeds received by Peta from the tennis courts sale with special reference to the concept of ordinary income.
Rule
In relation to the concept of assessable income under ITAA 1997, the following two sections are pivotal.
Section 6(5) – This includes income that is derived or earned as per ordinary income concept but the statute does not provide details as to which all income sources tend to fulfil this condition and hence could be included in the ambit of this section (Barkoczy, 2015).
Clarity in this regard has emerged by referring to the various to the case laws that have opined on this section along with the relevant tax rulings which have pondered on the constituents of the income to be included here. Based on these, common income sources included here are as follows (Gilders et. al., 2015).
Personal exertion income – As per this, income from indulging in commercially useful activity would result in assessable income usually in the form of salary.
Investments income- This is primarily earned in the form of dividends on shares, rent on property or interest on securities or bank accounts.
Business income: This is primarily earned from indulging in a business activity by the taxpayer. It is imperative that the activity should not be of isolated nature and also must not be activity classified as hobby under the aegis of TR 97/11 (Woellner, 2014).
Section 15(15) – This primarily includes proceeds that are obtained from transactions of isolated nature which the taxpayer tends to enact with the specific purpose of deriving gains in mind. The presence of profit motive as the primary reason for enactment of the underlying activity has been established and highlighted in tax ruling TR 92/3 along with the Westfield Limited v. FCT (1991) case (Sadiq et. al., 2015).
Application
As per the information provided, Peta took ownership of the Kew based house with the following intention in mind.
The house would serve as residence for Peta where she would reside with her family.
She also intends to derive gains by undertaking construction activity on the tennis courts on which new units would be constructed which would bring in significant gains on liquidation.
However, the plan of construction of units had to be aborted as before Peta could implement that, she got an offer from a tennis club which wanted to take ownership of the tennis courts in the backyard and were willing to pay as much as $ 600,000 for the same. However, for buying the courts, they wanted Peta to restore their condition so that they could be used for playing tennis. Peta agreed for the offer as she knew that after spending on the related restoration work , she would gain handsome profits. Thus, with the objective of making profit, she undertook requisite work related to restoration at a cost of $ 100,000. After incurring the same, she was successful in obtaining $ 600,000 proceed from the club.
For the above proceeds to be classified as ordinary income, it has to fall within the ambit fo personal exertion, investment or business, Clearly, Peta did not herself undergo any employment or personal exertion and nor were proceeds realised as investment income. Further, no information given in the case remotely hints at Peta conducting any business that deals with restoration of old tennis courts or related activity. This fact is also confirmed by her initial plans to construct units on the tennis court. Hence, the proceeds evidently do not fall within the definition of Section 6(5).
Also, it is apparent that the restoration plan was implemented by Peta only driven by the offer from the tennis club and more importantly the gains that she could derive from the sale transaction. In the event, that such an offer was not extended to her, it is highly likely that she would have continued with her earlier plans of construction of units on the tennis court. Hence, there is no doubt that the proceeds of this transaction which is of isolated nature (as Peta is not involved in such a business) and also has underlying profit motive which qualifies it as assessable income but under the aegis of Section 15(15).
Conclusion
The arguments and related discussion hint to the fact that the proceeds derived by Peta would fall within the ambit of Section 15(15) but would not be termed as ordinary income as defined in Section 6(5).
The central objective in the given case is to analyse the various fringe benefits that Alan receives from his employer ABC Ltd and thereby comment on the result FBT liability from the same.
Rule
Mobile Device
With regards to mobile handset being given by the employer, Section 58X is useful which states that if such a device is used by employee only in professional work, then no FBT liability would arise for the employer. Additionally, in wake of the same, any payment of mobile bill by the employer would lead to FBT liability only when the mobile is deployed for personal use by the employee (Wilmot, 2012).
School fees
School fees for children is an expense which is of personal nature and borne by the employee only. If such fees are instead paid by the employer, then expense fringe benefit would be extended to the employee (Deutsch et al., 2015).
Expense fringe benefit – Fees (Grossed up value) = School fees expense borne by the employer * Gross up factor
The gross up factor used above changes from time to time and also depends upon whether GST is levied on the underlying payment or not (Gilders et. al., 2015).
Expense fringe benefit (FBT liability) = 0.49* Expense fringe benefit – Fees (Grossed up value)
Dinner
For any spending on meals extended to employees or clients, which is not arranged within the business premises, the employer would have to bear FBT liability as meal fringe benefits would be extended. There are two separate methods that employer can deploy in this regard as explained below.
The use of this method is preferred by the employer when the clients do not figure in the invitee list. In accordance with the name, the actual expense of meal is taken into account for computation of tax liability. However, the employer has an incentive in the form of the meal expense that is incurred being of deductible nature which helps the employer in reducing the overall tax liability. However, any such expense done on clients is not deductible for tax and thus when clients are part of invitees, the alternative approach tends to be preferred (Hodgson, Mortimer & Butler, 2016).
Meal Fringe Benefit –Actual Method (FBT Payable) = 0.49* Actual food bill * Gross up factor
The use of this method is preferred by the employer when the clients figure in the invitee list. In accordance with the name, only half of the actual expense of meal is taken into account for computation of tax liability. Since, expense done on clients meal is not deductible for tax, hence the employers aim to lower the FBT liability to the extent possible and thereby use this method (Nethercott, Richardson & Devos, 2016).
Meal Fringe Benefit –50:50 Split Method (FBT Payable) = 0.49* 0.5*Actual food bill * Gross up factor
Mobile Device
The mobile handset provided by employer ABC to Alan is used by him only for professional work and thus Section 58X advocates that no FBT payable for employer in relation to the handset. Further, for the phone bill also, since Alan makes no personal calls, hence it would not be classified as a fringe benefit and hence no FBT on the same.
School fees
School fees paid by ABC= $ 20,000
It is known that school fess is exempt from GST, hence relevant gross up factor for FY2016 is 1.9608
Expense fringe benefit – Fees (FBT payable by ABC) = 0.49 * 20000 * 1.9608= $19,216
Dinner
The organisation of the dinner at a restaurant is indicative of the fact that meal fringe benefits have been extended and resultant FBT liability needs to be computed.
Total headcount for dinner at Thai restaurant (including associates) = 40
Total food expense = $ 6,600
Expense attributable to the employees only = (1/2)*6600 = $ 3,300
Hence, meal expense paid by employer on behalf of each employee = 3300/20 = $ 165
As the fringe benefit is nominal and lower than the threshold mark of $ 300, hence the employer can escape FBT liability citing the minor exemption benefit clause as per which, benefits below $ 300 are not levied FBT (Sadiq et. al., 2015).
Due to a decrease in the number of employee to five, the quantum of the meal fringe benefit would increase to a value greater than $ 300 assuming that no change in the bill amount. Hence, FBT liability could not be escaped now, hence using actual method the FBT would be computed.
Meal Fringe Benefit –Actual Method (FBT payable by ABC) = 0.49 * 6600 *2.1463 = $ 6,941
GST input credits to the tune of $ 600 paid on the food bill could be used by the employer to lower the tax liability (Barkoczy, 2015).
In line with the provided information, even clients are part of the invitees only and therefore the suitable method of deriving FBT liability would be the 50:50 split method as exhibited follows.
Meal Fringe Benefit –50: 50 split Method (FBT payable by ABC) = 0.49* 0.5*6600 *2.1463 = $ 3,471
Conclusion
Based on the above discussion, it is fair to conclude that FBT liability arise only on payment of school fees and the dinner at the Thai Restaurant. The FBT payable on dinner by ABC keeps on altering based on the headcount of invitees and the inherent composition of the same particularly in regards to clients’ presence or absence.
References
Barkoczy, S 2015. Foundation of Taxation Law 2015, 7th edn, CCH Publications, North Ryde
Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2015. Australian tax handbook, 8th edn, Thomson Reuters, Pymont
Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2015. Understanding taxation law 2015, 8th edn, LexisNexis/Butterworths.
Hodgson, H, Mortimer, C & Butler, J 2016, Tax Questions and Answers 2016, 5th ed., Thomson Reuters, Sydney,
Nethercott, L, Richardson, G & Devos, K 2016, Australian Taxation Study Manual 2016, 4th ed., Oxford University Press, Sydney
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2015, Principles of Taxation Law 2015, 8th edn, Thomson Reuters, Pymont
Wilmot, C 2012, FBT Compliance guide, 6th edn, CCH Australia Limited, North Ryde
Woellner, R 2014, Australian taxation law 2014, 8th eds., CCH Australia, North Ryde
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