Fringe Benefit Tax And Capital Gains Tax: Calculations And Exemptions

Categories of Fringe Benefit Tax

Question 1:

Alan is an employee at ABC Pty Ltd (ABC). He has negotiated the following remuneration package with ABC:

• salary of $300,000;

• Payment of Alan’s mobile phone bill ($220 per month, including GST). Alan is under a two-year contract whereby he is required to pay a fixed sum each month for unlimited usage of his phone. Alan uses the phone for work-related purposes only;

• Payment of Alan’s children’s school fees ($20,000 per year). The school fees are GST free. 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.

(a) Advise ABC of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2014. Assume that ABC would be entitled to input tax credits in relation to any GST-inclusive acquisitions.

(b) How would your answer to (a) differ if ABC only had 5 employees?

(c) How would your answer to (a) differ if clients of ABC also attended the end-of-year dinner?

Dave Solomon is 59 years of age and is planning for his retirement. Following a visit to his financial adviser in March of the current tax year, Dave wants to contribute funds to his personal superannuation fund before 30 June of the current tax year. He has decided to sell the majority of his assets to raise the $1,000,000. He then intends to rent a city apartment and withdraw tax-free amounts from his personal superannuation account once he turns 60 in August of the next year. Dave has provided you with the following details of the assets he has sold:

(i) A two-storey residence at St Lucia in which he has lived for the last 30 years. He paid $70,000 to purchase the property and received $850,000 on 27 June of the current tax year, after the real agent deducted commissions of $15,000. The residence was originally sold at auction and the buyer placed an $85,000 deposit on the property. Unfortunately, two weeks later the buyer indicated that he did not have sufficient funds to proceed with the purchase, thereby forfeiting his deposit to Dave on 1 May of the current tax year. The real estate agents then negotiated the sale of the residence to another interested party.

(ii) A painting by Pro Hart that he purchased on 20 September 1985 for $15,000. The painting was sold at auction on 31 May of the current tax year for $125,000.

(iii) A luxury motor cruiser that he has moored at the Manly Yacht club. He purchased the boat in late 2004 for $110,000. He sold it on 1 June of the current tax year to a local boat broker for $60,000.

(iv) On 5 June of the current tax year he sold for $80,000 a parcel of shares in a newly listed mining company. He purchased these shares on 10 January of the current tax year for $75,000. He borrowed $70,000 to fund the purchase of these shares and incurred $5,000 in interest on the loan. He also paid $750 in brokerage on the sale of the shares and $250 in stamp duty on the purchase of these shares. Dave has contacted the ATO and they have advised him that the interest on the loan will not be an allowable deduction because the shares are not generating any assessable income.

Valuation Rules for Benefits

Dave has also indicated that his taxation return for the year ended 30 June of the previous year shows a net capital loss of $10,000 from the sale of shares. These shares were the only assets he sold in that year.

(a) Based on the information above, determine Dave Solomon’s net capital gain or net capital loss for the year ended 30 June of the current tax year.

(b) If Dave has a net capital gain, what does he do with this amount?

(c) If Dave has a net capital loss, what does he do with this amount?

FBT is known as Fringe Benefit Tax is tax imposed on benefits paid to the employees by the company. There are many perquisites paid to the employees apart from the salary. So these are included in the ordinary income of the employee. The whole part of the benefit is not taxable, only some portion of it is included in the taxable ordinary income. FBT is assessed under Fringe Benefit Tax Assessment Act 1986. The tax rate applicable is 46.5%. There are 13 different types of fringe benefits provided to the employees by the employer. All are valued differently. For the employer who provides such benefit to the employee, the cost of such perquisite is deductible in the hands of the employer 8-1 Income Tax Assessment Act 1997.

This type of tax comes into picture when a benefit is provided to the employee during a year. Such benefit is provided by an employer or b an associate of the employer or by some third party, but the associate or the third party must have an agreement with the employer. There are certain exclusions from the fringe benefit tax. These are

1. Salary & Wages : As these are directly taxable as ordinary income
2. Superannuation Contributions
3. The schemes like Employee share schemes. There are certain benefits that are exempt specifically.

The various categories of fringe benefit tax are as follows

1. Car
2. Wavier of any kind of debt
3. Loan provided
4. Expense Payment
5. Housing
6. Allowance provided to the employee for living away
7. Transportation from airline
8. Meal expense or entertainment expense
9. Car parking
10. Property, etc (Australian Taxation Office, 2014)

All the benefits have their own valuation rules. To in house benefits certain concessional treatment applies. There is a rule known as otherwise deductible rule. This rule applies to the following

1. Fringe Benefit for Loan
2. Payment for expense Fringe Benefit
3. Transportation through Airline Fringe Benefit

How to calculate Fringe Benefit Tax (Steps)

1. First of all the taxable portion of all fringe benefit is calculated
2. The benefits are segregated into two parts
3. Goods and Service Tax creditable benefits known to be type 1
4. Other benefits known to be type 2
5. The value of benefit under type 1 is multiplied by 2.0647 and the benefit under type 2 is multiplied by 1.8692.
6. To the amount calculated under step 3, we need to add the amount that is not exempt

Now we need to know the taxable value of fringe benefit in order to include the amount of fringe benefit to the ordinary income of the taxpayer. This is calculated as follows

Fringe Benefit Taxable Amount = (Type 1 * 2.0647) + (Type 2 * 1.8692) + Total Non-Exempt Amount

Fringe Benefit Taxable Amount * 46.5%

Let us analyze the case of Alan who is an employee of ABC Pty Ltd

1. Salary $300000: Will be directly included in the ordinary income and will be taxable at the normal slab rates

2. Payment of mobile phone bill = $220*12= $2640. This is inclusive of Goods and Service Tax. So it shall be included under the heading type 1. We can see from the question that the amount will fall under the heading type 1. In question one thing is mentioned that the mobile phone is utilized fully for work related purpose. In such case the amount is not taxable and is exempt.

How to Calculate Fringe Benefit Tax

3. The school fees paid by the employer on behalf of the employee is Goods and Service Tax free and is included under Type 2

4. Alan is provided latest mobile handset which cost $20,000 per annum. This is inclusive of Goods and Service Tax. So it shall be included under the heading type 1. We can see from the question that the amount will fall under the heading type 1.

5. Dinner is provided to all the 20 employees and their partners. The total cost of the meal was $6600. This is inclusive of Goods and Service Tax. So it shall be included under the heading type 1. We can see from the question that the amount will fall under the heading type 1. But the tax law says that in case if a perquisite is below $300 then it is a minor benefit and is exempt. Employees are 20 in number and we assume that there are more than 2 partners. In such case the food value per person falls below $300 and hence is exempt. The calculation for Fringe Benefit Tax is done as follows

(a) Type 1:$2000

         Type 2:$20000

Therefore, Fringe Benefit Taxable Amount = (Type 1 * 2.0647) + (Type 2 * 1.8692) + Total Non-Exempt Amount

Fringe Benefit Taxable Amount = ($2000*2.0647)+($20000*1.8692)=$4129.4+$37384 = $41513.4

Amount to be included in the ordinary income = $41513.4*46.5%=$19303.731

(b) In case if the employer had only 5 employees then we can remove the assumption that we took above that the food cost per person will be more less than $300. We are not having the exact number of partners in order to know the food cost per person. So we cannot exactly calculate the benefit amount. This is inclusive of Goods and Service Tax. So it shall be included under the heading type 1. We can see from the question that the amount will fall under the heading type 1. So the amount will be multiplied by 2.0647.

(c) In case if the total members including partners and clients is more than 22 then the answer will be similar to (a) and incase if the total members including partners and clients is not more than 22 then the answer will be similar to (b).

(a)

Computation Of Capital Gain For Dave Solomon For The Year Ended On 30 June
	Particulars	Amount (in$)	Total Amount (in $)
Exempt:	Proceeds & Cost Base Of Home Property	–
	(claiming the main residence i.e. family home exemption as it is exempted under the definition of CGT)
Add:	#Proceeds of Painting in the current year	125,000.00
Less:	Cost Base of Painting acquired in 1985 after indexation (15000*123.4/71.3)=25960.73
(25,960.73)	150,960.73
Add:	Proceeds of Luxury Motor Cruiser in the current year	60,000.00
Less:	Cost Base of Luxury Motor Cruiser acquired in 2004	(110,000.00)	(50,000.00)
Add:	Proceeds of Shares	80,000.00
Less:	Cost Base	(75,000.00)
Less:	Interest cost deduction (5000/5=1000)	(1,000.00)
Less:	Brokerage On Shares deduction	(750.00)
Less:	Stamp duty on Shares deduction	(250.00)	3,000.00
Less:	Previous Year Capital Loss Deduction	(10,000.00)	(10,000.00)
Net Capital Gain For The Current Year	93,960.73

#Painting acquired is not considered in the category of collectables as Dave Solomon acquired it for the value less than $500 before 16 December 1995.

Exceptions and exemptions:

Commonly speaking, a capital profit or capital loss on items below mentioned is not applicable:

1. Assets acquired before 20 September 1985

2. Cars, motorcycles and alike vehicles

3. Reimbursement received for particular injury

4. Disposal of main residence (family home)

5. A collectable, for example, painting, which acquired for $500 or less

6. A private used asset kept mainly for private use or pleasure. If assesse acquired it for more than $10,000, is disregarded for only capital losses.

7. If it is acquired for $10,000 or less, it is disregarded for both capital gains and capital losses.

(b)

Functioning out net capital gain or loss –

After finding out Capital Gains Tax of each asset, Assesse needs to calculate Net Capital Gain from the below mentioned formula –

Net capital gain = Total capital profit for the current year

Less: Total capital losses (including any net capital losses from previous years)

Normally, CGT is not an isolated tax.  The net capital profits forms part of assesse assessable income in the year the CGT event occurred and is to be paid as a part of assesses income tax assessment for the respective income year.

As assets are often long term assesse needs to keep records safely and securely relating to purchase, conservation and enhancements. This will help not only in finally working out the amount that is subject to Capital Gains Tax but also helps in recollecting the true base costs that has been spent.

Some records which are specifically needed to keep include:

1. Interest paid/to be paid on related loans
2. Grosses of purchases
3. Histories of expenses like audit fees, stamp duty etc.
4. Incomes covering taxes, bills, rates etc.
5. Grosses for repairs, maintenance and improvements
6. Any arcade evaluations
7. Grosses for stocks brokerage

(c)

Functioning out net capital gain or loss –

Once assesse finds capital loss for each capital asset he/she needs to find out his/her net capital loss for the year.

Net capital loss = Total capital losses (including any net capital losses from preceding years)

Less: Your total capital gains for the year

Assesse cannot deduct his/her net capital loss straight from his/her other incomes, but he/she can carry it forward and subtract it from capital gains in future income years.

There is no such time limit restriction on how long one can carry onward a net capital loss.

One must put on his/her capital losses counter to his/her capital gains in the order in which he/she made them. They cannot choose not to counter capital losses against capital gains if they have them, however, they can choose which capital gains to deduct their losses from.

Net losses arising from collectables can only be deducted from capital gains made from respective category of collectables only, and not from other capital gains.

There are some limitations and prohibitions on whether or how companies and trusts handle capital losses and there are some capital losses that assesse must disregard.

References:

ANON, N.D., “Capital Gains Tax on Shares and Units”, viewed on 11 January 2014.

ANON, N.D., “Capital Gains Tax on Home”, viewed on 11 January 2014.

ANON, N.D., “Capital Gains Tax Exemptions”, viewed on 11 January 2014.

ANON, N.D., “Calculating a Capital Loss”, viewed on 11 January 2014.

ANON, N.D., “Calculating and Paying Capital Gains Tax”, viewed on 11 January 2014.

ANON, N.D., “Step By Step Guide to Capital Gains Tax”, viewed on 11 January 2014.