Describe about the Report for Business Employment Commissions.
Income is classified as ordinary when it realized after a short period of time i.e. not exceeding twelve months. These incomes include wages & salaries from employment, commissions, incentives, tips, dividends, interests, rents, royalties and winnings from gambling. Also gains from sale of an asset held less than one year “also referred as short term capital gains” are treated as ordinary income. Income realized after a long period of time e.g. the sale of assets like a piece land and a house is treated as capital gains(Morgan et al, n.d.). Another case where income is not treated as ordinary income is qualified dividends, where the company includes the tax in their own taxable income. In summary ordinary income is any other income that is not a long-term income/capital gains.
Peta acquired the property that comprised of a house and two old tennis courts two years ago. Two years later she invested on renovation of the tennis courts in order to sell them to the tennis club. The oldtennis courts plus the house are considered as one property since they are on the same piece of land that was bought two years ago, according to the taxation law, ordinary income is that which is realized after a period less than a one year. Peta’s property of $600,000 receipt will not be categorized as ordinary income. Reason being the part of the property was disposed two years later. The income however it qualifies as capital gains since the renovation of the courts can only be termed as value addition on property. For the case where Peta planned to construct three units and sell them at a profit, the revenue gained from such activity would also be treated as capital gains since the two years had already passed by (Freebairn, 2016). However, if Peta had acquired the property and in the same year sold the two tennis courts to the tennis club, the receipt would have been treated as ordinary income.
This is a form of tax that is liable to a company due to benefits that it extends to its employees. For example rights, privileges, services and facilities that can be expressed in monetary terms (Bebbington, 2009). The most common types of fringe benefits that companies extend to their employees include, car fringe benefits, car parking fringe benefits,,expense payment fringe benefits, loan fringe benefits, debt waiver fringe benefits, housing fringe benefits, board fringe benefits and living away from home allowance fringe benefits(Ato.gov.au, 2016).
In our case we will also be dealing with entertainment fringe benefit. Usually it is quite hard to determine the fringe benefit on entertainment, since not all the time a company is able to tell the exact number of occasions to be held throughout the year or even the number of attendees. Therefore, various methods that have been put in place to help estimate the fringe benefit tax, but we shall focus on only three of them that are most common.They include;
The 50/50 method
This method assumes that when providing entertainment, half of the food and drinks will be taken by employees while the other half goes to the partners, clients or spouse. The method is mostly used when a company does not have all the attendant data or it is unable to estimate the number of attendees.
The actual method
It is applied when the organization in question is at a position to determine the number of attendants in a particular event to be held during that particular year of fringe benefit tax. It calculates the actual taxable value based on actual expenditure. This is the most suitable method as it saves cost and helps in smoothening the planning of the occasion.
The 12-week register method
The 12-week register involvesfollowing the taxable amount of each employeefringe benefit. It focuses on the percentage of meals and entertainment provided to employees against non- employees as itemized with in a register or log for 12-week representative period.
The following considerations are to be considered to determine whether the fringe benefit tax is to be applied or not;
When the company organizes an entertainment of food and drinks that are to be consumed on business travel away from home, it will not attract fringe benefit tax.
In occasions where the company conducts a seminar, the food and drinks expense is deemed as fringe benefit but not taxed.
Where the company provides food and drink to employees during working days in recognizable dining place.
Employees may sometimes be overwhelmed by work and the company is forced to provided overtimemeals, such meals do not attract fringe benefit tax.
If the entertainment takes place in a work day (in-house, meetings) to employees, the event will not attract fringe benefit tax
When the entertainment is for clients,whether the event takes place in-house or outside, fringe benefit tax does not apply
In case the company provides food and drinks to suppliers and partners whether the event is in house or outside premises, the event is subject to fringe benefit tax.
Fringe benefit tax will apply when the entertainment involves employees, clients, suppliers, family members and avenue outside work place.
However exemptions are made to minor benefits. Entertainment involving food and drinks with a value less than $300 per employee is not taxable. Though this should not be frequent or regular otherwise it will be taxed.
Alsoentertainment provided by charitable organizations do not attract fringe benefit tax
In order to estimate the fringe benefit tax on entertainment that ABC Company is liable, we will employ the 50/50 method.
Goods and services tax is levied at every stage of purchase or selling of goods or exchange of services, and is commonly regarded as value added tax (VAT) in some countries (Morgan et al, n.d.).This kind of tax allows registered businesses organizations to claim tax refund on goods and services tax of goods they purchased and are yet to be sold for instance when a business entity purchases products that are goods and services tax inclusive and latter sell a particular portion of the same goods in a particular year, the business has a right to claim a tax refund for the goods not sold(Austlii.edu.au, 2016). The goods and services tax is hard to distinguish at every stage on the supply chain and therefore it has a single rate all through till the goods or services get to the end consumer(Ato.gov.au, 2016). The main objective of goods and service tax is to avoid double taxation and improve efficiency in tax collection.
The following calculations will be undertaken to determine the goods and service tax to be included in the fringe benefit tax
I order to calculate the goods and services tax payable on fringe benefit tax we follow the below steps
Take the total value of fringe benefits that each employee enjoys
Subtract any benefits which are exempted or zero rated for goods and services tax, such as low-interest loans, international travels and contribution to employee’s insurance policy.
Multiply the results from step 2 by 3 and divide by23, the result is the amount ongoods and services taxadjustment to include in your fringe benefit taxreturn.
Step 1: Add all fringe benefits
Payment ofAlan mobile phone bill for a year$220*12= $2,640 in a year
Alan’s children school fees $ 20,000
ABC companyPurchase of latest mobile handset for Alan $ 2,000
Cost of dinner$ 6,600*50 % (entertainmentfringe benefit tax)= $3,300
Total fringe benefits$27940
Step 2: Less any fringe benefits that are goods and services tax free.
Less children’s school fees $ 20,000
Fringe benefit tax amount $7,940
Step 3 Determination of goods and services tax to be included on fringe benefit tax.
To obtain this, we firstmultiply $7,940 by 3 = $23,820
The result is then Divide $23,820 by 23 = $1035.65
According to the above calculations the goods and services tax adjustment to be included in the fringe benefit tax return by the ABC Company as of 31st March 2016 is $1035.65
(b)If the ABC Company had hosted the dinner for only5 employees the expensewould still be taxed since their partners would also attend.If the 5 employees only were to go for the dinner in the same restaurant, taxation would apply since it is an outside venue. On the other hand if the dinner was only for five employees and the expenditure per employee would be below $300, goods and services tax inclusive,the fringe benefit tax would not be put in place since the law has already exempted it.
(c)In the case where clients had to attend the dinner together with the employees and partners, the fringe benefit tax would remain the same as in part “a” above since entertainment for clients is exempted from taxation though it would be hard to determine the exact amount that the client would consume. If the company had to arrange the dinner at the same restaurant for its clients only, then the entertainment would not attract the fringe benefit tax. Also if the same entertainment was to be held within the company’s premises the fringe benefit tax would not apply.
References
Austlii.edu.au. (2016).A NEW TAX SYSTEM (GOODS AND SERVICES TAX) ACT 1999.: https://www.austlii.edu.au/au/legis/cth/consol_act/antsasta1999402/
Ato.gov.au. (2016).Fringe benefits tax (FBT) | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-%28FBT%29/
Ato.gov.au. (2016).GST | Australian Taxation Office: https://www.ato.gov.au/Business/GST/
Ato.gov.au. (2016).Entertainment and fringe benefits | Australian Taxation Office: https://www.ato.gov.au/General/Fringe-benefits-tax-%28FBT%29/Types-of-fringe-benefits/Entertainment-and-fringe-benefits/ .
Bebbington, P. (2009). Fringe benefit.New Scientist, 203(2724), p.27.
Freebairn, J. (2016). Taxation of Housing.Australian Economic Review, 49(3), pp.307-316.
Morgan, A., Mortimer, C. and Pinto, D. (n.d.).A practical introduction to Australian taxation law.
Stenkula, M. (n.d.).Taxation of Goods and Services from 1862 to 2010.SSRN Electronic Journal.
Woellner, R. (2013). Australian taxation law 2012. North Ryde [N.S.W.]: CCH Australia.
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