Discuss about the Maintenance, and Capital Improvements for Businesses.
According to the Australian tax laws, section 6.5, the assessable income of an Australian resident is considered to include concepts that are ordinary and the income will, therefore, be known as ordinary income. Ordinary income will be treated differently depending on the type of residency of the citizen. The ordinary income of an Australian resident will be said to be assessable if it includes all the sources that accrue income to the resident if it is either indirectly of directly. The income will be assessed irrespective of whether it was gained in the country or outside Australia in the year of income (Wolters, 2016 p1).
If the person being assessed for tax purposes is a non-resident, the income that will be assessed for tax purposes will be the income that is derived indirectly or directly from their sources in Australia in the year of income. In this case, a non-resident person is a person who leaves in Australia but does not have an Australian citizenship. They include investors and people who may have relocated to the country after some time, and they have not yet gained the full citizenship of the country. The other income that will be treated as ordinary income will be the income that will be said to be derived from the citizen if the amounts accrued were transacted on behalf of the resident and the income is directly attributable to the resident person.
In the case of Peta, he purchased the house in Kew. It is not clear if Peta was a resident or non-resident in the country. The reason for the purchase of the property was for him to live with his family and to build a different unit on the tennis court. The selling of the additional units would be treated as ordinary income for tax purposes irrespective of whether Peta is a resident or nonresident. The only difference will be in the tax rates that will be applied in the calculation of the tax.
After Peta had been offered the opportunity to sell the tennis courts, he was able to change his mind on building additional units for sale. The condition for the tennis club purchasing the tennis court was if the current court was restored to a good condition. The cost incurred for restoring the court into a good condition will be considered as repairs and maintenance in preparing the income of Peta. That means that the costs will be reduced from the income that will be received after the sale. Repairs and maintenance are usually tax deductible because they are treated as capital expenses for purposes of tax. The fact that Peta accepted the offer to sell the tennis court after repairing it means that he has to record all the expenses that are incurred in the maintenance process (William, 2016, p1).
The amount that was spent by Peta was 100,000 dollars. However, the amount has to be broken down because there are some activities that are not considered as capital expenditures in the calculation of tax. One of the activities that will not be deductible will be the cost that was incurred for fencing. This is because the items that are deductible are those that are aimed at restoring the good condition of a place, and fencing will not be considered as one of them. When calculating the capital gains tax of Peta, the receipt of the 600,000 dollars should be treated as ordinary income. This is because the income was derived directly from an Australian source. That means that the classification of the income will not matter whether the income was from a resident or non-resident person (Efile.com, p1).
According to the Australian tax office, the fringe benefit is considered to be the payment that an employee is entitled but is different from their wages and salaries. The benefit is usually provided on the employment contract of the employee. For tax purposes, an employee will be defined as a person who has an entitlement to receiving salaries and benefits from a person or organization (Commonwealth consolidated acts, 2016, p1). The fringe benefit will be provided in a case where the employer allows the employee to use the car provided by the organization for private purposes. It also applies when employees are entitled to loans at a lower rate. It also includes memberships to clubs and reimbursement for expenses incurred by employees such as airtime and school fees.
Benefit Amount
School fees 20,000
Handset 2,000
Tax liability 22,000
(Australian taxation office, 2016, p1).
The tax liability for ABC Company will be equal to 22,000 dollars for the financial year ending 31st March 2016. The company will not be liable for FBT on the mobile phone bill because the airtime by Alan is used for work purposes only. That means that the expenses will be treated as a normal operations cost to the company. The fees for Alan’s children will be treated as a fringe benefit because it is an expense that is not incurred in the course of the business of the company but the employees are given a privileged for been works of the company. The full amount of 20,000 dollars should be subjected to the calculation of the FBT of the company. The cost for the mobile phone that is provided by the company should be treated as a fringe benefit. This is because it has not been indicated if the phone is used purely for work purposes or Alan also goes with it at home. The calculations have assumed that an employee does not leave behind the phone at work, but the airtime that is used for personal use is purchased by the employee (Australian taxation office, 2016, p1).
For the amount incurred by the company in the restaurant will be treated differently based on the frequency of the dinners. If the dinner is treated as a normal company operation, then the expense will be treated as a fringe benefit for the employees. This is because it will be treated as a normal expense for the company because it will be assumed that the employees are assured of the services from the company on a regular basis. If the expense was incurred as a one off thing, then it will be treated as an employee expense for the company. This will apply if it was a treat that never happens as a routine for the company on the normal operations of the company (Australian taxation office, 2016, p1). The application of the costs will be treated in the same way a bonus for employees is treated. If employees are assured of the bonus on an annual basis based on the performance of the company, then the tax is usually taxed. However, if the company just decides to award the employees with the bonus, it will be treated as company expenses and not chargeable on the employees.
If the company had only five employees, then it would be assumed that the company owed the employees an obligation of providing them with meals. This will form part of the employee expenses in the company and would be reduced from the income of the company (Australian taxation office, 2016, p1).
If clients were available in the dinner for the company, then the cost will be treated as a normal company costs. It will be treated as an expense for the company as an advertising cost. The cost will be categorized as an advertising cost because it will be assumed that the dinner is aimed at appreciating the clients of the company and ensuring that the customers of the company will retain in the next financial year of the company (Australian taxation office, 2016, p1).
Australian Government. Reducing your FBT liability. Retrieved on 16th September 2016. From https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Do-you-need-to-pay-FBT-/Reducing-your-FBT-liability/
Australian Government. What is fringe benefits tax? Retrieved on 16th September 2016. From https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/In-detail/Employers-guide/What-is-FBT-/
Australian Government. How to calculate your FBT. Retrieved on 16th September 2016. From https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT/
Australian Government. Types of fringe benefit. Retrieved on 16th September 2016. From https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/types-of-fringe-benefits/
Australian Taxation office. Tax ruling No. IT 2650. Retrieved On 16th September 2016. From https://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2650/NAT/ATO/00001
Australian taxation office. ATO interpretative decision. Retrieved on 26th September 2016. From https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID200723/00001
Commonwealth consolidated acts. Income tax assessment act 1997- sect 6.5. Retrieved on 16th September 2016. From https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html
Efile.com. How to claim, report tax deductible home expenses. Retrieved on 16th September 2016. From https://www.efile.com/tax-deduction/income-deduction/home-deductions/
William, C. 2016. Deductions for repairs, maintenance, and capital improvements for businesses. Retrieved on 16th September 2016. From https://thismatter.com/money/tax/business-deductions-repairs-maintenance-capital-improvements.htm
Wolters, K. Residency. Retrieved on 16th September 2016. From https://www.iknow.cch.com.au/topic/tlp703/document/atagUio694796sl24352044/legislation/residency/section-6-10-other-assessable-income-statutory-income.
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