Tax Planning Change And Continuity

Ordinary Income and Statutory Income

Discuss about the Tax Planning Change and Continuity.

It is assumed that Peta is a permanent Australian resident and liable to pay tax on her income as per the Australian Taxation Law. According to Australian taxation act, any Australian resident has to pay tax on the incomes, received from any Australian source or from any non-Australian source. Therefore, Peta, being an Australian resident, has to pay tax on her income, earned from selling her land property, which is situated within the Australia (Woellner et al. 2012).

For better control and logical taxation purpose, the Australian taxation department has divided the income of any individual or any organization into two groups. As per ITAA 1997, the incomes, received for general activities are described as ordinary income. Section 6-5 of ITAA 1997 provides the details of ordinary type of assessable income for taxation purpose. As per the mentioned section, if any taxable entity earns any income from normal course of action, it should considered as the entity’s ordinary income.

The salary & wages, allowances, encashment of leaves, periodic pension etc., received by any individual is considered as ordinary income from personal exertion.

If any taxable entity receives any income, generated from the assets, owned, are stated as ordinary income from property, Rent from real estate property, machine, motor vehicle etc.; interest received from bank deposits, bonds or loans; dividend from shares etc. are some example of income from property.

Incomes, earned by any individual or other taxable entities from any sort of business activities or primary production are referred as ordinary income from business  (www.dlsweb.rmit.edu.au, 2016).

Other type of incomes, which do not fall under the ordinary income head, are described as statutory income. The statutory income are explained under section 10-5. According to this section, the following incomes can be described as statutory income:

• Lump sum incomes, earned at the time of employment termination
• Recovery of bad debt, which was claimed for deduction in any previous taxation period
• Any capital gain, generated from the sale of assets
• Bonus, received on Insurance
• Income from Royalty
• Credit Imputation (www.dlsweb.rmit.edu.au, 2016)

The taxation rules for ordinary income and statutory income are different from many aspects.

Peta bought the home, especially for the old tennis court. She wanted to old tennis courts in three units for earning profit. However, selling the court in three separate units, Peta had to sell the full tennis court as a single unit to a club. She had been able to earn profit from the selling.

As the intention of Peta was to gain profit by reselling the property at higher price, such activity of Peta can be described as business activity. In that case, the net income, earned by Peta, is an ordinary income (Austlii.edu.au, 2016).

Case study involving Peta

However, Peta does not run any real estate business and is not involve in such business activity. She had sold the property to gain some one-time profit. Hence, such activity cannot be considered as normal course of action for Peta (Ato.gov.au, 2016).

Therefore, as per section 6-5, the net income, received by Peta cannot be considered as an ordinary income.

According to the ITAA 1997, fringe benefits can be described as the additional benefits, provided by the employer to its employee apart from the normal salary, wages or allowances. Like the salary, wages or other allowances, employer can claim deduction for fringe benefits. However, the calculation of fringe benefit tax liability is different from the normal payments, made to the employees. The employer is eligible to claim deduction only if it fulfills some conditions as per the taxation rules.

ABC Pty. Ltd. provides some extra benefits to its employee, Alan, along with the regular salary. Therefore, the company is entitled to claim deductions for fringe benefits, for the applicable benefits. However, though the salary of Alan is fully deductible, but as a work related expenses, not as a fringe benefit (Bender et al. 2013).

The other benefits, which can be incorporated for calculating the fringe benefit tax liability of ABC Pty. Ltd., are discussed below:

If the employer reimburses any personal expense of the employee or pays it to the third party on behalf of its employee, then such expense can be considered as expense fringe benefit. The payment of Alan’s mobile phone bill on behalf of Alan is a type of expense fringe benefit for ABC Pty. Ltd. However, any expense below $300 is not considered as fringe benefit. The monthly phone bill of Alan is below $300, but it should not be noted the fringe benefit is calculated annually and the total annual phone bill is $2640. Therefore, ABC Pty. Ltd. can claim it as fringe benefit (Ato.gov.au.2016).

ABC Pty. Ltd. pays the school fees of Alan’s children on his behalf. Hence, it can also be included as an expense fringe benefit (Delany 2012).

As the company has provided the mobile handset to Alan for business purpose, it should be treated as a work related expense. However, the company should include the cost mobile hand set for computing the total taxable cost of GST Inclusive items. It can be deducted later from the total amount of FBT (James et al. 2013).

Fringe Benefits

The expenses, paid for employees’ entertainment purpose, are deductible under entertainment fringe benefit. However, the entertainment fringe benefit includes the expenses, incurred for the employees only (Jones 2015). The cost of entertaining the family members or the associates of the employees is not deductible under this head. ABC Pty. Ltd. had provided dinner for the 20 employees and their partners. Hence, the total cost has been incurred for 40 heads and ABC Pty. Ltd. is eligible to claim deduction for 20 heads only (Rimmer et al. 2014).

The fringe benefit tax rate is different for GST inclusive and GST exclusive items, Hence, the values of the GST Inclusive and GST exclusive items are balanced by two different gross-up rates, applied for two different items (Ramli et al. 2015).

The fringe benefit tax rate for normal companies is 49% (Soled and Thomas 2015).

Based on the above discussions, the Fringe Benefit Tax Liability for ABC Pty. Ltd. is computed below:

In the Books of ABC Pty. Ltd.
Calculation of Fringe Benefit Tax Liability
as on 31.03.2016
	GST Inclusive	GST Free
Particulars	Amount	Amount
Payment of Phone Bill	2640
Payment of School fees of Employee’s Children		20000
Dinner at Restaurant	330
Providing Mobile Phone	2000
Total of GST Inclusive/Free Benefits	4970	20000
	A	B
Gross-up Rate	2.1463	1.9608
	C	D
Gross-up Value	10667.11	39216
	E = A x C	F=B X D
Total Taxable Fringe Benefit	49883.11
	G = E + F
Less : Exemption for Mobile Phone at gross-up value	4292.60
($2000 x 2.1463)	H
Net Taxable Fringe Benefit	45590.51
	I = G – H
Fringe Benefit Tax Rate	49%
	J
Fringe Benefit Tax Liability	22339.35
	K = I x J

The entertainment fringe benefit for per head would be different, if the dinner is provided to 5 employees only. ABC Pty.Ltd.  can claim deduction for the per head cost of $1320 (Kaplan and Price 2014). The alternative FBT liability in such scenario is calculated in the following table:

In the Books of ABC Pty. Ltd.
Calculation of Alternative Fringe Benefit Tax Liability
as on 31.03.2016
	GST Inclusive	GST Free
Particulars	Amount	Amount
Payment of Phone Bill	2640
Payment of School fees of Employee’s Children		20000
Dinner at Restaurant	1320
Providing Mobile Phone	2000
Total of GST Inclusive/Free Benefits	5960	20000
Gross-up Rate	2.1463	1.9608
Gross-up Value	12791.95	39216
	E = A x C	F=B X D
Total Taxable Fringe Benefit	52007.95
	G = E + F
Less : Exemption for Mobile Phone at gross-up value	4292.60
($2000 x 2.1463)	H
Net Taxable Fringe Benefit	47715.35
	I = G – H
Fringe Benefit Tax Rate	49%
	J
Alternative Fringe Benefit Tax Liability	23380.52
	K = I x J

It should be noted that, if the company would pay same per head cost, as per the answer 2.(a) and incur lower amount of total cost, then the FBT liability would be same as Ans 2.(a) (Shields and North-Samardzic 2015).

Entertainment expenses, incurred for clients, are deductible under fringe benefit tax. Therefore, if ABC Pty. Ltd. would include its clients in the annual dinner, then also, it can claim deduction for the per head cost, paid for the employees, as fringe benefit (Martocchio 2013).

References:

Ato.gov.au. (2016). What to include in your assessable income | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/Business/Income-and-deductions-for-business/Working-out-your-assessable-income/What-to-include-in-your-assessable-income/ [Accessed 21 Sep. 2016].

Ato.gov.au. (2016). Fringe benefits tax (FBT) | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/ [Accessed 21 2016].

Austlii.edu.au. (2016). INCOME TAX ASSESSMENT ACT 1997 – SECT 6.5Income according to ordinary concepts (ordinary income). [online] Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html [Accessed 21 Sep. 2016].

Bender, M., Contacos-Sawyer, J. and Thomas, B., 2013, July. Benefits Strategies for Attracting and Retaining Employees. In Competition Forum(Vol. 11, No. 2, p. 165). American Society for Competitiveness

Delany, T.P., 2012. Fringe benefits tax

James, S., Wallschutzky, I. and Alley, C., 2013. The Henry Report and the taxation of work related expenses: Principles versus practice

Jones, S., 2015. ‘Cost-to-company’explained: tax planning. Tax Breaks Newsletter, (349), pp.6-7

Kaplan, R.L. and Price, D.J., 2014. Change and Continuity in Fringe Benefit Taxation: Seeking Sense and Sensibility. NYL Sch. L. Rev., 59, p.281

Martocchio, J., 2013. Employee benefits. McGraw-Hill Higher Education

Ramli, R., Palil, M.R., Hassan, N.S.A. and Mustapha, A.F., 2015. Compliance costs of goods and services tax (GST) among small and medium enterprises. Jurnal Pengurusan, 45, pp.1-15

Rimmer, X., Smith, J. and Wende, S., 2014. The incidence of company tax in Australia

Shields, J. and North-Samardzic, A., 2015. 10 Employee benefits. Managing Employee Performance & Reward: Concepts, Practices, Strategies, p.218

Soled, J.A. and Thomas, K.D., 2015. Revisiting the Taxation of Fringe Benefits. Washington Law Review, Forthcoming

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2012.Australian taxation law. CCH Australia

www.dlsweb.rmit.edu.au. (2016). www.dlsweb.rmit.edu.au/toolbox/finance/fnbacc02a/preparetax/keyprinciple/ordinaryi.htm. [online] Available at: https://www.dlsweb.rmit.edu.au/toolbox/finance/fnbacc02a/preparetax/keyprinciple/ordinaryi.htm [Accessed 21 Sep. 2016].

www.dlsweb.rmit.edu.au. (2016). www.dlsweb.rmit.edu.au/toolbox/finance/fnbacc02a/preparetax/keyprinciple/statutoryi2.htm. [online] Available at: https://www.dlsweb.rmit.edu.au/toolbox/finance/fnbacc02a/preparetax/keyprinciple/statutoryi2.htm [Accessed 21 Sep. 2016].