Fringe Benefit Tax Assessment Act 1986 And Income Tax – Case Study

Fringe Benefit Tax and Car Fringe Benefit – Case Study 1

1). 

A benefit paid to an employee other than salary and wages by the employer is defined as Fringe Benefits in the Fringe Benefit tax Assessment Act 1986. Thus, there must be an employee and employer relationship between the beneficiary and the provider of benefits in order to use the provisions of the fringe benefits tax legislation to account for the tax liabilities of the employee and the employer in respect of such benefits.

The section 7 of the Fringe Benefit Tax Assessment Act 1986 deals with the car fringe benefit. It states that providing a car, owned or taken on lease by the employer, to an employee and if the car is allowed to be used by the employee for his private use then the car benefits will be liable for fringe benefits tax. If the car is either used by the employee or his associates for private purposes or is available to be used by the employee for his private use even if actually not used for the private purpose of the employee, will be considered for fringe benefits tax purposes (Braverman et al. 2015).

The taxable value of fringe car benefits can be calculated either using the statutory formula method or based on operating cost method. The method of calculating the taxable value of car fringe benefit using the statutory method is provided in section 9 of the Fringe Benefit Tax Assessment Act 1986. In statutory formula method, the taxable value of fringe benefits will be calculated taking into consideration the cost of the car. The section 10A and 10 B of the FBTAA 1986 mainly deals with determining the taxable value of car fringe benefit using the operating cost method.  In case of operating cost method the operating costs of the car is taken into consideration to ascertain the taxable value of fringe benefits. The method that yields lowest taxable value of fringe benefits should be used to ascertain the FBT. However, to use operating cost method all necessary documentation shall be maintained.

Facts of the case:

In this case, Charlie, an employee of Shiny Homes Pty Ltd, has been provided with a 4 wheel drive sedan which is being defined as a car in the fringe benefits tax legislation for fringe benefits in respect of a car. The facts made it clear that the car was allowed to be used for the private purposes of the employee and Charlie has used the car for private purposes in addition to the use for work purposes. Thus, the car provided by the employer, i.e. Shiny Homes Pty Ltd, to Charlie will be assessed for fringe benefits tax (Woellner et al. 2016).

Taxable Value of Fringe Benefits

There are two methods to calculate the taxable value of fringe benefits for ascertainment of FBT, these are statutory formula method and operating cost method. Under statutory formula method, the taxable value of car fringe benefits is calculated by using the statutory rate of 20 per cent. The statutory rate of 20% has been fixed for all types of cars subsequent to the budget of 2011. Thus, the statutory percentage of 20% is multiplied to the base value of the car to determine the taxable value of fringe benefits. The extent of private use of the car provided by the employer is not relevant to the determination of taxable value of fringe benefits under statutory formula method (Barkoczy 2017). Under operating cost method the total operating cost of the car is proportionately segregated under work and private purposes to ascertain the taxable value of fringe benefits (Gale and Samwick 2014).

Statutory method

Statutory method
Taxable value of fringe benefits
Particular	Amount ($)	Amount ($)
Base value of the car (A)	70000
Statutory rate (B)	20%
Car Available for Private use (Days) (C)	196
Number of days in the FBT year (D)	365
Taxable Value of the Car Fringe benefit (A*B*C)/D (Base value of the car*Statutory rate*Car Available for Private use)/Number of days in the FBT year		7517.81

Operating cost Method

Operating cost method:
Taxable value of fringe benefits
Particular	Amount ($)	Amount ($)
Petrol and oil cost	14000
Deemed Depreciation	17500
Deemed Interest	3955
Repairs and maintenance	24500
Registration	140
Insurance	560
Total operating cost (A) (Petrol and oil cost + Repairs and maintenance + Registration+ Insurance +Deemed Depreciation+ Deemed Interest )		39200
Proportion of use for private purpose:
Total kilometer run	80000
Work related	50000
Private purpose related (work related/Total Kilometer)X100	30000
Percentage of private use (B) ((private use/total kilometer)*100)	37.5%
Taxable value of fringe benefits (AXB) (Total operating cost*Percentage of private use)		14700

The deemed depreciation is calculated using the statutory rate of 25% by using the formula provided under section 11(1).

Calculation of Deemed Depreciation
Particulars	Amount
Base value of car	$70,000.00
Depreciation rate	25%
Deemed Depreciation (Base value of car* Depreciation rate*365)/365))	$17,500.00

The deemed interest is calculated is using the formula provided under section 11(2). The statutory interest rate is 5.65% for the year 2016/17.

Calculation of Deemed Interest
Particulars	Amount
Base value of car	$70,000.00
Statutory Interest rate	5.65%
Deemed Interest ((Base value of car*5.65%*365)/365)	$3,955.00

Since the taxable value of fringe benefits for car is lower under statutory formula method the taxable value of fringe benefits of car provided shall be taken as calculated under statutory formula method (Gale and Samwick 2014). In addition to this Shine limited has also hired the car for weeding the hire charge of the car should also be included in the taxable value of fringe benefit. The honeymoon accommodation paid by Shine limited is also a fringe benefit and should be included in the taxable value of fringe benefit. The section 39A of the Fringe Benefit Tax Assessment Act 1986 states that car parking fringe benefit arises only if the car is parked at a premises leased or owned by the employer. In this case, as the car is parked in separate entity so it does not give rise to car fringe benefit.

Calculation of FBT
Particular	Amount	Amount
Taxable value of fringe benefits of car	$7,517.81
Taxable value of fringe benefits for car hired exclusively for the honeymoon purpose of Charlie	$1,000.00
Taxable value of accommodation of hotel	$3,000.00
Taxable value of total fringe benefits (7517.81+1000+3000)		$11,517.81
FBT rate	49%
Fringe Benefit Taxable Amount (11517.81/ (1-49%))	$22,583.94
Fringe Benefit Tax (22583.94X49%)		$11,066.13

2).

Part (a):

Allan and Betty have decided on a tree change thus, the sale of their home in Melbourne and subsequent acquisition of large country house in Central Victoria will not attract any tax consequences. The income of Betty and Allan as part time accountant and locum doctor respectively will be subjected to income tax in accordance with the income tax provisions of the Income Tax Assessment Act 1997. In the case study, it is mentioned that Allan is pretty popular with his elderly clients as a result of which he receives lots of homemade cake and food from the patients as a token of appreciation, in addition to the fees that he charges as a locum doctor. However, such homemade cakes and foods will not attract any additional tax consequences to the recipient, i.e. Allan as these are not commercial products with certain market value. However, Allan has also received wine from one of his clients that has certain commercial value ,i.e. retail value of $36 to be precise. The wine received by Allan will have tax consequences as the amount will be added to the income of Allan to calculate his taxable income which in turn will be used ascertain his income tax liability under Income Tax Assessment Act, 1997 (Nijland and Dijst 2015).

Hobby vs Business

Part (b):

The Taxation Ruling TR 97/11 contains certain indicator for determining whether an individual is engaged in the business. Therefore, with the help of this ruling the difference between business and hobbies can be identified as follows:

1. The purpose of the activity is significant in determining whether it is business or hobby. If an activity has significant commercial purpose then it will be considered as a business activity.
2. The objective of a business activity is to earn profit whereas a hobby does not have such an objective.

• In business activities there is employee and employer relationship however, no such relationship exists in hobbies.

1. There is generally aninvestment of a large amount of capital in case of business whereas not a huge capital is generally required for hobbies.
2. It is mandatory to have premises for business; no such premise is necessary for conducting activities related to hobbies.  

In the case of Cooper Books Pty Ltd vs. Commissioner of Taxation of Commonwealth of Australia the court has specifically described the criterions to differentiate business activities from hobbies (Kimet al. 2015).

Part (C ):

In case of hobby of a client transforms into a business to accrue profit to such client, then there is definitely income tax consequences for the income arising from such business. In this case, the hobby of Allan and Betty of gardening has transformed into a business activity as they generally receive $500 to $600 in a good month from sale of marmalade (Woellner et al. 2016). The system of barter introduced by Allan and Betty is also liable to be assessed under the provisions of the Income Tax Assessment Act, 1997 (ITAA).

Part (d):

Barter transactions in the country are subjected to the provisions of ITAA and GST in the country if these are in the nature of business transactions. Thus, business transactions involving barter would be treated at par with other cash and credit transactions for the purpose of income tax computation under ITAA and GST provisions. Hence, in this case the barter system set up by Allan and Betty in the area will be treated at par with other cash and credit transactions for the purpose of income tax and GST in the country (Akins et al. 2014).  

References:

Akins, B.W., Chapman, J.L. and Gordon, J.M., 2014. A whole new world: Income tax considerations of the Bitcoin economy. Pitt. Tax Rev., 12, p.25.

Barkoczy, S., 2017. Core Tax Legislation and Study Guide. OUP Catalogue.

Braverman, D., Marsden, S. and Sadiq, K., 2015. Assessing Taxpayer Response to Legislative Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl. Tax’n, 17, p.1.

Gale, W.G. and Samwick, A.A., 2014. Effects of income tax changes on economic growth.

Kim, P.H., Longest, K.C. and Lippmann, S., 2015. The tortoise versus the hare: Progress and business viability differences between conventional and leisure-based founders. Journal of Business Venturing, 30(2), pp.185-204.

Nijland, L. and Dijst, M., 2015. Commuting-related fringe benefits in the Netherlands: Interrelationships and company, employee and location characteristics. Transportation Research Part A: Policy and Practice, 77, pp.358-371.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.