Discuss about the Taxation and Law Cases for Absolute Ordinary Income.
Peta after making sales of refurbished old two numbers of tennis courts received $ 600,000. This receipt is very much an ordinary income in absolute nature as per section 6-5. The property or the house was purchased before two years by Peta with an intention of residing with family and to make alterations in the old adjoining tennis courts to sale them with profit to recover the cost of purchasing the house and cost involved for refurbishing the old tennis courts. The transaction although appears to be capital in nature but in reality it is an ordinary income only (Government, 2015).
The income received from an ordinary source is called an ordinary income and will be assessed under section 6-5 of Income Tax Assessment Act, 1997. Section 10-5, if explained properly, we will understand this more. Any income coming to any Australian citizen from any ordinary source should be treated as ordinary income for Income Tax Assessment.
The property was purchased by Peta before two years which is 12 months old. It is usually to be treated as Capital gains as being a capital asset under Income Tax Assessment Act, 1997.
Peta will thus be entitled to get a discount of 50% on gain for selling capital assets after selling the refurbished tennis courts. A reference to this can be made by mentioning the case of Harris (1904) vs. California Copper Syndicate (Reduced and Limited) 5 TC 159 (Legislation, 2016).
The basic target of Peta, the taxpayer was to sale the tennis courts after repair and refurbishment with an intention to make profit. Due to this the income will be treated as business income.
The nature of income can be better understood with the help of certain case studies. Any receipt cannot be an income but where there is a stage of periodicity, regularity and recurrence then it can be called an income. To determine an income as business income there is specific method to do it.
The owner of a land treated a land in different manner or like object for sale although it is of different nature as per the case under High Court.
Under section 6-5 of ITAA, 1997 the company’s income was charged by High Court and Income Tax Assessor as ordinary income as the land was treated as object and was intended to be sold to make profit and just not business (Austlii, 2016).
The importance finding ordinary income needed because–
Any money receipt generated from a business is not considered as business income.
Profit is the product of the business, and the business income can be considered by the receipt of profit.
The receipt and the product of the business must have a relation.
If any isolated or ‘one-off’ transaction generated profit it is to be considered as ordinary income if the profit or the gain from extraordinary transaction in course of the business.
The judgment of FCT v Montgomery says “If a profit or gain from such a transaction is treated as ordinary income, it would obviously involve only a net amount being income”.
The following cases will give an idea about ordinary income when a plan is made to subdivide land to make buildings on it.
The party Moana Sand Pty Ltd purchased huge land areas for selling sand out of it and when the sand was exhausted then the land was subdivided and sold, the Commissioner said that the company is making huge profits out of this land sales. The ruling was not right but the company accepted this ruling. The case here is Moana Sand Pty Ltd v FC of T 88 ATC 4897.
The party Casimaty as per the case of Casimaty v FC of T97 ATC 5135 was in the business of dairy production and some cropping activities.
Due to old age he became very weak and was unable to continue business anymore as it went to huge loss.He planned to sell the land into eight subdivisions to make the loss right. He was charged by The Commissioner for selling land to make profit and purpose of land development was to make profits only. The owner on Appeal got relief from this judgement as the land sale was made with no intention to land development but to meet emergency only (Austlii, 2016).
The company Statham & Anor as per the case of Statham & Anor v FC purchased and developed land for 105 lots in four different phases with an intention to make profit (Ato, 2016).
The ATO pointed out the following from the case—
The land or property’s purpose of purchase changes.
Any business to have a printed letterhead, office premises and its manager.
Addition to the existing land with new purchases.
Planning for existing land subdivision.
Business accounts including such lands.
Expense treatment or not of any interest on borrowed money to purchase such land.
The existing land is subdivided for making a building on it (Austlii, 2016).
A:
The Fringe Benefit Tax or FBT is a very unique type of taxation element which is to be paid by the employer only having a special purpose and intention of benefiting all the employees with a purpose of encouragement to the employees for taking the business as their own and act accordingly. It is exclusively done or paid by the employer to say his employees that he cares for them so much that he can pay for their benefits also. The employees get a great moral boosting after they get these FBT rewards from their employer. They try to give their more than expected contribution to make the business grow, prosper and develop into a new horizon (Ato, 2016).
There are innumerable types of FBT’s which are used in a business and they may vary from business to business. These are of different types and are related to employees who are needed to be given these benefits for making them more responsible and useful. The payment of the FBT is generally made by the employer related to the specific employee and is of different as they vary due to usage and leverage from employees needed (Ato, 2016).
There are thirteen types Fringe Benefit available for employees. These are follows–
Fringe benefit of Property.
Fringe benefit of Car Parking.
Fringe benefit of Housing.
Fringe benefit of Board.
Fringe benefit of Tax-exempt body entertainment.
Fringe benefit of Entertainment.
Fringe benefit of Airline transport.
Fringe benefit for Cars.
Fringe benefit for Waiver of debt.
Fringe benefit of Loan.
Fringe benefit of Expense payment.
Fringe benefit of Living away from home allowance.
Fringe benefit of Residual.
But we must also mention here that there are a few exemptions for employer from fringe benefit for public benevolent organisations, religious institutions, etc.
ABC’s FBT will be same for both the case where it has given entertainment for 20 employees or for 5 employees. ABC’s FBT can be reduced substantially by making the reimbursement to its employees instead of making the payment by them directly. Payment through reimbursement will be indirect hence would get relief from FBT because FBT is related to only direct payment for employee entertainment or benefit (Ato, 2016).
The mobile phone worth $ 2,000 give to Alan should have done by indirect manner than directly to avoid FBT. Alan could have been given an advance and he on prior sanction and advice of the management would buy the item and submit the bill to get the advance adjusted thus making the FBT like an expense.
In the same manner the amount of $ 20,000 for children’s tuition fees could have been paid to Alan. This could have been directly included in the salary of Alan and he would pay it directly thus saving ABC from making FBT payment unnecessarily.
ABC can ask the employees to make contributions towards a fund for replacing FBT by ABC and for the purpose of using such fund for employee’s entertainment related FBT and thus by doing this the FBT can be avoided in straight manner by company.
ABC purchased mobile phone inclusive of GST and food for employees for entertainment also inclusive of GST. For both the cases ABC will get GST relief as they are already paid and will be treated as INPUT GST (Ato, 2016).
The following is the FBT calculation—
Alan is employed for two years duration by ABC and ABC have provided Alan with benefits as detailed below—
Tuition fees for Employee’s Children—Taxable.
Food as a part of Employee’s Entertainment—Taxable.
Employer provided Mobile phone—if work related the exempted.
Employer provided Mobile Bill for its usage– if work related the exempted.
The calculation of fringe benefit tax:
Total Fringe benefit:
Entertainment by food— $ 6,600 (No Credit of GST)
Children’s tuition fees–$ 20,000 (No credit of GST)
Total $ 26,600
|
Type 1: GST cannot be claimed for lower gross-up rate. |
Year Ending 31 March 2016 and 31 March 2017. |
|
FBT outcome–49% |
1.9608 |
|
Type 2: GST can claim as it has entitlement for higher gross-up rate. |
Year Ending 31 March 2016 and 31 March 2017. |
|
FBT outcome–49% |
2.1463 |
Tuition fees for Alan’s Children’s–$20,000 x 1.9608 = $39216 x 49% = $19215.84 (FBT)
Food used for Entertainment– $330 x 2.1463 = $708.279 x 49% = $ 347.05671.
B:
If the entertainment is done with only 5 employees, then every block of 5 employees, will be used to find out the entire dinner cost after division.
The following FBT has to be paid;
|
Type 1: GST cannot be claimed for lower gross-up rate. |
Year Ending 31 March 2016 and 31 March 2017. |
|
FBT outcome–49% |
1.9608 |
|
Type 2: GST can claim as it has entitlement for higher gross-up rate. |
Year Ending 31 March 2016 and 31 March 2017. |
|
FBT outcome–49% |
2.1463 |
Food used for Entertainment–$1320 x 2.1463 = $2833.116 x 49% = $ 1388.22684 (FBT)
C:
Business promotions have different ways for each business. One of it is taking the client to have entertainment by way of food and drinks. Hence in such case FBT would never be applied.
References:
Ato. (2016). ATO Interpretative Decision. Retrieved 09 16, 2016, from law.ato.gov.au: https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2002483/00001
Ato. (2016). FBT exemptions and concessions. Retrieved 09 10, 2016, from www.ato.gov.au: https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/fbt-exemptions-and-concessions/
Ato. (2016). Fringe benefits tax – rates and thresholds. Retrieved 09 13, 2016, from www.ato.gov.au: https://www.ato.gov.au/Rates/FBT/
Ato. (2016). How to calculate your FBT. Retrieved 09 15, 2016, from www.ato.gov.au: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT/
Ato. (2016). Reduction in taxable value where interest would have been deductible to employee. Retrieved 09 13, 2016, from www.ato.gov.au: https://www.ato.gov.au/General/Fringe-benefits-tax-(fbt)/In-detail/Employers-guide/Loan-and-debt-waiver-fringe-benefits/?page=8#8_8_Reduction_in_taxable_value_where_interest_would_have_been_deductible_to_employee
Ato. (2016). Taxation Ruling; whether profits on isolated transactions are income. Retrieved 08 30, 2016, from law.ato.gov.au: https://law.ato.gov.au/atolaw/view.htm?DocID=TXR/TR923/NAT/ATO/00001
Ato. (2016). Work-related items exempt from FBT. Retrieved 09 15, 2016, from www.ato.gov.au: https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/do-you-need-to-pay-fbt-/work-related-items-exempt-from-fbt/
Austlii. (2016). INCOME TAX ASSESSMENT ACT 1936 – SECT 148. Retrieved 09 13, 2016, from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s148.html
Austlii. (2016). INCOME TAX ASSESSMENT ACT 1936 – SECT 78A. Retrieved 09 21, 2015, from www.austlii.edu.au: https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s78a.html
Austlii. (2016). INCOME TAX ASSESSMENT ACT 1997 – SECT 6.5. Retrieved 09 16, 2016, from www.austlii.edu.au: https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html
Government, A. (2015). Income Tax Assessment Act 1997 . Retrieved 09 18, 2015, from https://www.comlaw.gov.au/Details/C2013C00082
Legislation. (2016, 09 16). Income Tax Assessment Act 1997. Retrieved 09 16, 2016, from www.legislation.gov.au: https://www.legislation.gov.au/Details/C2013C00082
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