Describe about the Taxation Law for Assessable Busines Income.
1. According to the Income Tax Assessment Act sec 6-5, the assessable income or the ordinary income of a resident of Australia is considered to include all concepts that are considered to be ordinary (Australian Government, 2016). Ordinary income will be treated differently depending on whether you are a resident or a non-resident. If you are an Australian resident, your assessable income includes any ordinary income that was derived directly or indirectly from your work or source of production at the income year. The ordinary income of the resident of Australia will be said to be assessable if it includes all the sources of income that accrue to the resident person whether indirectly or directly. The income will be assessed in the country of residence that is Australia irrespective of whether it was gained in the country or oversees that is outside Australia in the income year (Wolters, 2016 p1). In Myer Vs. FCT case, a person who enters in an isolated transaction with an aim of making profit shall be calculated for assessable income. The same notion can be seen in Westfield vs. FCT case.
If the individual being assessed for income tax purposes is a non-resident that is he or she lives in Australia at the year of income but he or she is not citizen, the income that will be assessed will be that income that will be derived either indirectly or directly from his or her sources of income in Australia in the income year. In this case, a non-resident individual is a person who lives in Australia but he or she does not have an Australian citizenship or identification card (Australian Government, 2016).They include foreign investors and people who may have relocated to the Australia after some time, and they have not yet gained the full citizenship of the country. Another income that could be treated as an ordinary income is the income that is said to be derived from the citizen of Australia if the amounts accrued from his or her source of income in Australia were transacted on behalf of him and the income is directly attributable to him.
In the case of Peta, she purchased the house in Kew. The case study, however, does not state whether Pete was a resident or a non-resident of the country (Australian Government, 2016). The case study further states that the main reason for buying the house is so that she could live there with her family as well as build three units of tennis courts for profit motives (Australian Government, 2016). The selling of the additional units would be treated as ordinary income for tax purposes irrespective of whether Peta is a resident or nonresident since it was realized from the ordinary activities from her source of income. The only difference between whether Peta is a non-resident and a resident is the rates of taxes that will apply.
After Peta was offered the opportunity to sell the tennis courts, she was able to change her mind about building additional units for sale. The condition was that the tennis club would purchase the tennis courts only if they were restored into good condition (Australian Taxation office, 2016). The cost incurred for restoring the courts into a good condition would be considered as the cost of repairs and maintenance when preparing the income and expenditure account of Peta. That means that the costs will be deduced from the income that Peta will receive from the sale. Repairs and maintenance expenses are usually deductible for tax purposes because they are treated as capital expenses for an individual or a business. Peta therefore has to record all the expenses incurred (William, 2016, p1).
Peta spent $ 100,000 to acquire the house in Kew. However, some amounts that Pet incurred while purchasing the house are disallowable and they should therefore be deducted for the purpose of calculation of taxes (Australian Taxation office, 2016, Pp.352). For instance, the cost of fencing is not an ordinary business activity for Peta and it should therefore be deducted for the purpose of calculation of taxes. This is because the items that are to be deducted are those that will be incurred for business activity that is the sale of the tennis courts and those that are aimed at restoring them in good condition of a place. Therefore, fencing of the tennis courts is not one of them. When calculating the capital gains tax of Peta, the receipt of the $ 600,000 from the sale of the tennis courts 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. To calculate the capital gains, the expenses incurred while restoring the tennis courts into good condition should be lessed from the income received (Efile.com, 2010, Pp.137).
Fringe benefits are those benefits given to an employee by an employer, 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 Allan:
Mobile phone- Here, ABC ltd. paid for the mobile bill of Allan worth $ 220 per month. The case study also states that Allan uses this amount for work related purposes only. Since this is an expense out of the ordinary business operations, it will be considered as a fringe benefit for tax purposes.
Mobile handset- Allan received a mobile handset from the company worth $ 2,000 inclusive of GST. Since this is a benefit to Allan from the company, it will be considered as a fringe benefit and it will be deducted for tax purposes. However, it states that it is inclusive of GST. This shows that we should first less the GST before calculating the fringe benefit tax.
Dinner- ABC Ltd. hosted a dinner party a local Thai restaurant for Allan and his other co-workers. The total cost of the dinner was $ 6,600 inclusive of GST. Since this is a benefit out of the ordinary income or salaries and wages of Allan, then it would be considered as a fringe benefit and it would be deducted for tax purposes. However, the case study states that the cost of the dinner was inclusive of GST. We, therefore, have to less the GST before including the dinner expenses for the computation of fringe benefits.
The company also pays for the school fees of Allan worth $ 20,000. The case study of ABC Ltd. states that this school fees is GST free. This implies that Allan will not have to pay for GST for this amount. Since this is a benefit to Allan from the company and it is out of the ordinary business income or salaries and wages for Allan, it would therefore be considered as a fringe benefit and should therefore be deducted for calculation of tax.
The case study states that all GST inclusive goods and services are entitled for input tax credits (Commonwealth consolidated acts, 2015, Pp.33).This implies that after paying the GST, the amount paid for GST would be credited back to the bank account of ABC ltd. and later the fringe benefit tax would be calculated. The fringe benefit tax rate that applies for the year 2016 is 49% (Woellner, 2013, Pp.55). Below is the calculation of the fringe benefit taxes of Allan.
If the corporation had only five employees, then it would be assumed that the company owed the employees a fiduciary duty or an obligation of providing them with meals (William, 2012, Pp.269). This will form part of the employee expenses in the company and would be reduced from the income of the company. It would also be considered an employee expense since this is a small amount incurred on the meals and therefore it would not qualify for fringe benefits (Australian taxation office, 2016, p1). Below would be the calculation of the fringe benefit tax.
Part C
If clients of ABC Ltd. attended the dinner for the company, then the cost will be treated as a normal selling and distribution costs (Wolters, 2013, Pp.20-25). This is because during the dinner, the firm can advertise about their services and be able to retain the existing customers and lure potential ones to buy from them (Berube, and Pinto, 2010, Pp.45-50). It will also be treated as an advertising cost because it will be assumed that the dinner is aimed at appreciating the clients of the corporation and ensuring that the customers of the company will retain in the next financial year of the company and attract more potential customers (Australian taxation office, 2016, p1). The fringe benefit tax will therefore be similar to part b above. The only difference will lie when computing the income tax since we expect that the cost for the five employees would be less than when the company invites the clients.
References
Australian Government. (2016). Reducing your FBT liability. Web. 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. (2016). What is fringe benefits tax? Web. 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. (2016). How to calculate your FBT. Web. Retrieved on 16th September 2016 from https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT/
Australian Government. (2016). Types of fringe benefit. Web. Retrieved on 16th September 2016. from https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/types-of-fringe-benefits/
Australian Taxation office. (2016). Tax ruling No. IT 2650. Pp. 352. Retrieved On 16th September 2016 from https://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2650/NAT/ATO/00001/
Australian taxation office. (2016). ATO interpretative decision. Web. Retrieved on 26th September 2016 from https://law.ato.gov.au/atolaw/view.htm?docid=AID/AID200723/00001/
Commonwealth consolidated acts. (2015). Income tax assessment act 1997- sect 6.5. Pp. 33. Web. Retrieved on 16th September 2016 from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html/
Efile.com. (2010). How to claim, report tax-deductible home expenses. Pp.137. Retrieved on 16 September 2016 from https://www.efile.com/tax-deduction/income-deduction/home-deductions/
William, C. (2012). Deductions for repairs, maintenance, and capital improvements for businesses. Pp. 269. Retrieved on 16th September 2016 from https://thismatter.com/money/tax/business-deductions-repairs-maintenance-capital-improvements.htm/
Wolters, K. (2013). Residency. Pp. 20-25. 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/
Berube, W. and Pinto, C. (2010). Taxation, tax policies and income taxes. New York: Nova Science Publishers. Pp. 45-50. Retrieved on 16 September 2016.
Woellner, R. (2013). Australian taxation law 2012. North Ryde [N.S.W.]: CCH Australia. Pp. 55. Retrieved on 16 September 2016.
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