Taxation For Ordinary Basic Salary: Fringe Benefits And Income Tax Consequences

Fringe Benefit Tax assessment act and Taxable and Non-Taxable Benefits

Discuss about the Taxation for Ordinary Basic Salary.

1: Advice whether any of the Remuneration Packages in Items a to d are Fringe Benefits

Fringe benefits are those benefits given by an employer to an employee, which are out of the ordinary basic salary (Woellner, Barkoczy, Murphy, Evans, and Pinto, n.d., pp.10-20). According to Publication 15-B of the income tax act, a fringe benefit is a form of pay for the performance of services. For example, the company may allow the employee to use the business vehicle to or from work. Some are tax exempt while others are taxable. Below are the fringe benefit consequences of Lani:

Lani received $ 1,000 for communication costs. She used this amount to pay for mobile phone airtime and internet services. Since this amount is out of the ordinary business operations and basic salary, it is considered a fringe benefit as per the fringe benefits tax assessment act 1986 Part III Sec 20 (Woellner, 2013, pp.55). It is also considered a fringe benefit since it is given by GHTY partnership to Lani. This fringe benefit is not taxable.

GHTY partnership also paid Lani $ 3,000, which went to the Happy Kidz Childcare Provider. The childcare provider is located in the same building and Lani brings her daughter there every day when she reports to work. The $ 3,000 is meant for the childcare services that are provided for Aisha, Lani’s daughter. Since this benefit is out of the ordinary business operations, it is then considered a fringe benefit and it is therefore tax exempt (Ricardo, 2001, pp.200-211). Childcare expenses are non-deductible under s 8-1 as they are incurred by putting the taxpayer in a position to gain assessable income as seen in the Lodge V FCT case.

the GHYT partnership also bought a pair of steel-capped boots worth $ 250, a lead lined apron worth $ 150, and a pair of prescription safety goggles worth $ 350 that had been purchased from Safety and Uniforms R Us. In the information above, all these items are fringe benefits as per the fringe benefits tax assessment act 1986 Part III Sec 20. The steel-capped boots and the lead lined apron are tax exempt. The prescription safety goggles on the other hand are taxable since they had been bought from a different company that is Safety and Uniforms R Us (SalanieÃŒÂ, 2011, pp.119). This implies that they had been deducted from the gross salary of Lani and they should therefore be added back since they are disallowable items.

Calculation of Fringe Benefit Tax (FBT) Liability

Lani borrowed $ 19,000 at a 3.5% interest rate from GHTY partnership. Lani used this amount to purchase a car, which she was planning to drive herself to and from work and on weekends for private purposes. According to the fringe benefits tax assessment act 1986 Part III Sec 7, a car provided by the employer is a fringe benefit and it is therefore taxable under the income tax act. Generally, expenses incurred in travelling from home to the normal place of work are not deductible under s8-1 as seen in Lunney v FCT, Hayley v FCT and Ruling IT 112.

2:  Calculation of Fringe Benefit Tax (FBT) Liability

The fringe benefit tax is the amount of tax that Lani will be liable to pay annually for the fringe benefits realized. It is calculated by taking the total sum of all fringe benefits realized multiplied by the fringe benefit tax rate (Khoury, 2000, pp.115). In this case, for the period ending 31 March 2016 and 31 March 2017 the fringe benefits tax rate is 49% per annum. Lani’s fringe benefits include the amount paid for communication costs, the amount paid for Aisha’s childcare services, amount paid for the steel-capped boots, amount paid for the lead lined apron, the amount paid for the prescription safety goggles, and vehicle allowance (Kaplow, 2006). Below is the calculation of the fringe benefits to be paid by Lani.

3: Calculation of Lani’s Total Tax Payable

Step a: Calculation of Total Taxable Income

Details	Amount ($)
Basic salary	65,000
Add: Allowable
Car Allowance	19,000
Communication allowance	1,000
Child care services	3,000
Steel capped boots	250
Lead lined apron	150
Prescription safety goggles	350
Less: Fringe Benefit Tax	(11,637.50)
Total Taxable income	77,112.5

Details	Amount ($)
Total taxable income	77,112.5
For the first $ 80,000	17,547
Total tax payable	17,547

1: Whether Michel has been Carrying on Business as a Winemaker and the Income Tax Consequences

Based on the information above, it is evident that Michel was carrying on a business as a winemaker. This is because he was planting grapes and producing wine from the grapes. He also employed Helen’s oldest son, Giorgi, and his eldest niece, Chari, to work in the wine business. Since Michel was making sales, he is therefore prone to income tax consequences. The Australian Revenue Authority (ARA) would therefore tax Michel a 30 percent tax rate on the net income he makes (Jacob, n.d.). The net income is calculated by taking the gross sales of the winery business less the expenses incurred by the wine making business in that financial period. Here, the incomes of Michel will include the sales of 2011, 2012, 2013, 2014, and 2015. The expenses of Michel on the other hand would include the cost of the new equipment, the basic salary paid to Giorgi, and the hourly rate paid to Chari.

Calculation of Total Tax Payable

Michel is therefore liable to income tax. Below are his income tax consequences:

Sales of 2011 less any salaries paid- In 2011, he realized sales worth $ 23,000. Here, he did not pay any salaries; therefore, he is liable to pay a 30% corporate tax on the $ 23,000. His tax for this year would be.

Sales of 2012- In this year, he realized an income of $ 56,000. He will therefore be liable to pay a 30% tax on the $ 56,000. His tax for this year would be

Sales for 2013- He realized an income of $ 122,750 in 2013. He will therefore be liable to pay a 30% tax on the $ 122,750. His tax will therefore be

Income of 2014- Here, he realized sales worth $ 234,200. On this same year, he employed Giorgi paying him a salary of $ 52,000 who opted to change the equipment and incurred a cost of $ 325,000. He also employed his niece for $ 15/hr. It is evident hat Michel incurred a net loss and therefore he is not liable to pay tax. Under s 8-1(2) (b), losses of a private nature will not be deductible under s 8-1.

Sale of the property- On 2015, he sold the property for $ 4.2 million. Since he realized a capital gain, he is therefore liable to pay income tax on the proceeds.

2: Whether the $ 4.2 Million from the Australian Wine Maker is Ordinary Income for Michel

A large Australian wine maker approached Michel and proposed to purchase his winery business for $ 4.2 million. This would not be ordinary income for Michel since it has not been generated from the ordinary production and sale of wine. This kind of income is known as a capital gain (Jacob, 2013, pp.30-56). The wife of Michel urged him to accept the offer and sell the wine business for $ 4.2 million to the large Australian wine maker so that they can be able to buy a house in France for their retirement. This would be a bad idea for Michel since the wine making business could be worth more than that in future.

In this scenario, I would advice Michel not to sell the wine making business as he could rip more than that from it for retirement (Conway, and Smith, 2007, pp.230). Another reason why Michel should not sell the wine making business is that the business could be able to rip more annual returns that could help him, his wife and his family live a better and comfortable life even after retirement (Jacob, 2013, pp.30-56). However, if he decides to sell the winemaking business he would receive a lump sum of $ 4.2 million, which would deplete as time goes by.

Income Tax Consequences of Winemaking Business

3: Capital Gains for Michel of He Accepts the $ 4.2 Million

Capital gains occurs when one sells property or a capital asset for an amount that is more than that you had purchased. According to the eighth schedule of the income tax act 58 of 1962, a capital gain arises when you dispose off an asset or investment for proceeds that exceed its base cost on or after 1 October 2001. Michel purchased the rural property for $ 3,000,000 and an Australian wine maker approaches him and offers to buy it from him for $ 4.2 million (Berube, and Pinto, 2010, pp.45-50). In this case, the winery business will realize a long-term capital gain since Michel held the company for more than 36 months, which is three years. Calculation of long-term capital gains is a complex procedure since it incorporates inflation (Jacob, 2013, pp.30-56). In this scenario, Michel sold the business in 2015 when the inflation rate or index was -0.1. Below is the indexed cost of purchase:

The capital gain of Michel can therefore be calculated as shown below:

The tax on the long-term capital gain would therefore be calculated as shown below:

In this calculation, it is evident that the higher the long-term capital gains, the higher the tax Michel would pay on the long-term capital gains.

References

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. (n.d.). Australian taxation law select. Pp. 10-20. Retrieved on 10 September 2016.

Woellner, R. (2013). Australian taxation law 2012. North Ryde [N.S.W.]: CCH Australia. Pp. 55. Retrieved on 10 September 2016.

Ricardo, D. (2001). On the principles of political economy and taxation. London: Electric Book Co. Pp.200-211. Retrieved on 10 September 2016.

SalanieÃŒÂ, B. (2011). The economics of taxation. Cambridge, Mass.: MIT Press. Pp.119. Retrieved on 10 September 2016.

Khoury, D. (2000). Tax. Chatswood: Butterworths. Pp.115. Retrieved on 10 September 2016.

Kaplow, L. (2006). Taxation. Cambridge, Mass.: National Bureau of Economic Research. Retrieved on 10 September 2016.

McFadden, D. (1989). Employee Fringe Benefits Expense. Compensation & Benefits Review, 21(6), pp.66-69. Retrieved on 10 September 2016.

MACNAUGHTON, A. (1992). Fringe benefits and employee expenses: Tax planning and neutral tax policy. Contemporary Accounting Research, 9(1), pp.113-137. Retrieved on 10 September 2016.

Jacob, M. (n.d.). Taxes and Life Cycle Capital Gains Realizations. SSRN Electronic Journal. Retrieved on 10 September 2016.

Jacob, M. (2013). Capital Gains Taxes and the Realization of Capital Gains and Losses — Evidence from German Income Tax Data. FinanzArchiv: Public Finance Analysis, 69(1), pp.30-56. Retrieved on 10^th September 2016.

Conway, G. and Smith, J. (2007). The law concerning capital gains. [Ottawa]: [Queen’s Printer]. Pp. 230. Retrieved on 10 September 2016.

Berube, W. and Pinto, C. (2010). Taxation, tax policies and income taxes. New York: Nova Science Publishers. Pp. 45-50. Retrieved on 10 September 2016.