Foundations Of Taxation Law And Commercial Law

Taxation Law and ITAA 1997

Discuss about the Foundations of Taxation Law and Commercial Law.

In the given case, Pete has purchased a house in Knew. The house had two tennis courts in poor conditions. One of the reasons for purchasing the house is to use the old tennis courts for building three units and selling them at profit. The tennis club offered to purchase the tennis court from Peta at $600000.00 if she would renovate the tennis court. Pete incurred $100000.00 for necessary innovations and sold the tennis court to the tennis club. The issue here is to determine whether the receipt of $600000.00 is an ordinary income under section 6-5 of the Income Tax Assessment Act.

In Australia, two tax laws of ITAA 1997 and ITAA 1936 governs the tax treatment for individual, companies and entities that are required to pay tax. It is provided in section 4-1 of the ITAA 1997 that tax are required to be paid by every individual, company and some entities. The taxes are required to be paid on taxable income (Woellner et al. 2016). The section 4-15 of the ITAA 1997 states that taxable income is calculated by deducting the allowable deductions as provided in section 8-1 of the ITAA 1997 from the assessable income. The section 8-1 of the ITAA 1997 states that the taxpayer is allowed deduction from assessable income for expenses that are incurred for producing the assessable income or for general purpose of the business. The Assessable income of the taxpayer is classified into ordinary income and statutory income (Taylor and McNamarFerraro 2013). The section 6-5 of the ITAA 1997 states that income according to the ordinary concept is called ordinary income. The section 6-10 of the act states that incomes that are not ordinary income are known as statutory income. The income should be determined in accordance with “ordinary concept and usage of mankind” this decision was held in the case of Scott V Commissioner of Tax (1995). It was further held in the cases of FCT V Cooke (1980) and Tenant V Smith (1892) that the income cannot be considered as ordinary income if the gain or receipt is not made in cash or readily converted to cash. Therefore, it can be seen from this cases that there are certain prerequisites for considering an income as an ordinary income. These prerequisites are that income should be of ordinary concept and should be received in cash or easily converted to cash (Barkoczy 2016). Another condition is that if there is no real gain to the taxpayer then it should not be considered as ordinary income as was held in the case of Hochstrasser V Mayes (1960).

Definition of Ordinary Income

The ordinary income of a taxpayer includes income received from personal exertion, property income, business income and income from profit making schemes. The income that is received by providing services that is incidental to the employment is the income from personal exertion. The income from personal exertion does not includes gifts. The ordinary proceeds and trading transactions are included in the income from business. The income from business does not include any capital gains that is made from the sale of capital assets. The property income includes regular cash flow that is made by the taxpayer by using the property but it does not include any capital gains (Sharkey and Murray 2015). The profit that is made from a single transactions are included in the ordinary income if the taxpayer enters into the transactions with the intention of making profit. The Taxation ruling 92/3 elaborately explains the situation when an isolated transaction is to be included as income for the tax purpose. The definition and meaning of the isolated transactions are provided in the Para 1 of the Taxation Ruling 92/3. The isolated transactions are those transactions that are not entered into by the business in the ordinary course of activity.  It also includes transactions that are entered into by non-business tax payers. The Para 6 of the Taxation Ruling92/3 provides that an income from isolated transaction is included in the ordinary income if the taxpayer has entered into the transaction with the purpose of making profit or gain and the transaction made is a commercial transaction (Tucker 2013). The Para 14 of the Taxation ruling 92/3 states that if an individual enters into a transaction for making profit in a particular way and ends up making profit in a different way then also the income from isolated transaction shall be considered as ordinary income.

In this case Pete sold the tennis court to the tennis club and received $600000.00 the selling of tennis court is an isolated transactions and should be evaluated based on the taxation Ruling 92/3. Pete purchased the house with the intention of making profit by selling three units and this has satisfied the condition that is laid down in Para 6 of the Taxation ruling 92/3 which states that transaction should be entered into with the intention of making profit. Though the original intention was not restore and sell the tennis court but still the income should be considered as ordinary income as provided in the Para 14 of the taxation ruling 92/3. Therefore based on the above analysis it can be concluded that the receipt of $600000.00 from sale of tennis court should be considered as ordinary income under section 6-5 of the ITAA 1997. The taxpayer is however allowed to claim deduction of $100000.00 for expenses it made for restoring the tennis court.

Fringe Benefit Taxation and Calculation

The employee apart from receiving salary also receives various other benefits that are provided by the employer. This benefits are called fringe benefits. The law states that the employer is required to pay tax on the benefits it provides to its employees. The tax that is paid by the employer on the benefits that is provided to its employees is called Fringe Benefit tax. This Fringe benefit tax is also applicable for benefits that are paid to the family members and associates of the employees. In Miscellaneous Taxation ruling 2016 it is provided that there are two essential requirements that are to be satisfied for a benefit to be subject to fringe benefit tax. The first condition is that the benefit must be provided to the employee. The second condition is that the benefit should be provided in connection with the employment. If both the condition are satisfied then the benefits are subject to Fringe benefit Tax. Few of the common examples of fringe benefits are expenses reimbursement benefit, entertainment benefit, gym membership benefit, interest rate benefit, employee car benefit etc. In Taxation ruling 2001/2 it is stated that the fringe benefit can be calculated by using two methods of higher grossed up rate and lower grossed up rate (Saad 2014). If the employer is able to take input tax credit for GST paid on the benefits provided to the employee then in such case higher grossed uprate is used. If the employer is unable to take input tax credit on the benefit provided to the employees in that case lower grossed up rate is used.

In this case Alan is an employee of the ABC Ltd and receives salary of $300000.00. In addition to this salary Alan is also provided various other benefits by the employer. The employer reimburses the mobile phone bill of Alan which is $220 per month. The mobile phone is used by the Alan only for the work relate purpose. The Fringe benefit tax assessment act 1986 states that expenses for work related items are exempted from tax (Kenny et al. 2015). Therefore for the reimbursement of the mobile phone bill the employer is not liable to pay FBT. The employer also pays the Alan’s children school fees of $20000.00. It is provided in the section 20 of the fringe benefit Tax assessment act 1986 that if an employer discharges the obligation of employee in part or in full it is considered as expense payment benefit under this act. The FBT is required to be paid by the employer on the expenses payment benefit. The employer has also provides a mobile phone to the employee for $20000.00 including GST. This should be treated as expense fringe benefit and the employer is subject to FBT. The food or drink provided to the employee and associates is considered as meal entertainment benefit as per the Taxation Ruling 97/17. This meal entertainment benefit is also subject to FBT. The dinner provided in a Thai Restaurant by the employer is a taxable fringe benefit as per the ruling of 97/17. The calculation showing FBT payable is given below:

Calculation showing FBT Liability for year ended 31 March 2016
Particular	Taxable value of the benefit	Gross up rate	Grossed up taxable value
Children’s school Fees	$                  20,000.00	1.9608	$           39,216.00
Expense Payment benefit	$                    2,000.00	2.1463	$             4,292.60
Meal Entertainment benefit	$                        660.00	2.1463	$             1,416.56
Total Fringe Benefit taxable amount	$           44,925.16
FBT rate	49%
Fringe Benefit Tax payable	$           22,013.33

Calculation showing FBT Liability for year ended 31 March 2016
Particular	Taxable value of the benefit	Gross up rate	Grossed up taxable value
Children’s school Fees	$                  20,000.00	1.9608	$           39,216.00
Expense Payment benefit	$                    2,000.00	2.1463	$             4,292.60
Meal Entertainment benefit	$                    1,320.00	2.1463	$             2,833.12
Total Fringe Benefit taxable amount	$           46,341.72
FBT rate	49%
Fringe Benefit Tax payable	$           22,707.44

If the number of employee of ABC becomes 5 then the meal entertainment benefit increases as a result the FBT payable also increases. The calculation of FBT is given above.

The Fringe Benefit Tax is payable on the benefit that are provided to the employee. The benefits that are provided to the client are not subject to FBT. If the clients also attends the so the dinner is not arranged for the employees but the clients then in such cases FBTT will not be applicable as provided in the Taxation Ruling 97/17 (Smith 2016).

Reference

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

Kenny, P., Blissenden, M. and Villios, S., 2015. Residency and Australians working overseas: can be an expensive lesson in tax Law. Australian Tax Law Bulletin, 2(9-10), p.188.

Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.

Sharkey, N. and Murray, I., 2015. Reinventing administrative leadership in Australian taxation: beware the fine balance of social psychological and rule of law principles. Available at SSRN 2770222.

Smith, N., 2016. Case study: The interaction of Australian and UK tax laws.Ethos: Official Publication of the Law Society of the Australian Capital Territory, (240), p.50.

Taylor, D. and McNamarFerraro, R., 2013. Tax education: Planning your tax studies for 2014 and beyond. Taxation in Australia, 48(6), p.310.

Tucker, K., 2013. Library Guides: Commercial law: Home.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016.Australian Taxation Law 2016. Oxford University Press.