Describe about the Taxation Law for Isolated Business Transaction.
1. The main objective of the current case is to comment whether the proceeds from the sale of the tennis courts by Peta is considered as ordinary income under the section 6(5).
According to the Income Tax Assessment Act 1997, assessable income is derived either from ordinary income concepts or from isolated transaction (with profit motive). In this regards, there are two main sections are highlighted in the ITAA, 1997, which describe the origin of the assessable income (Gilders et. al., 2015).
Section 15(15) – when the prime intention on the part of the taxpayer is to generate the profit then in such cases the income received from the isolated transaction would be assessable for the taxation under the section 15(15) of ITAA, 1997 (Barkoczy, 2015).. The decision of the Westfield Limited v. FCT (1991) case is the witness of the above statement, which illustrates that the intention of taxpayer of deriving profit by isolated transaction causes assessable income for taxation purpose (Sadiq et. al., 2016). The same conclusion is also supported by tax ruling TR 92/3 (Woellner, 2014).
Section 6(5) – When the taxpayer derives income from the ordinary scheme then the received proceeds would be named as assessable income. There is no direct law or statute available for defining ordinary concepts. Therefore, the decision of the respective case laws is the main source to examine the nature of the income that either it is from ordinary concepts or from any other scheme (Deutsch et. al., 2015). Mainly three sources of ordinary income are observed as per the ruling, which are income from personal exertion or by conducting profit driven business or from investment (Nethercott, Richardson & Devos, 2016).
Income received from the personal exertion, which involves income from employment, professional work and would cause ordinary income.
If income is received from the business scheme, which contains the profit deriving intention on the part of the taxpayer for routine activities, then in such aspects the income received from commercial action would be termed as ordinary income from business scheme under the TR 97/11.
Income derived through investment on behalf of the taxpayer, which basically includes rents from property, interest from bank, surplus amount on the purchased securities and dividends on shares and so on would result ordinary income through investment.
All the above mentioned proceeds are from ordinary concepts. It is imperative to distinguish the source of income derived from ordinary concepts for the ease of calculation of the taxable amount that whether the proceeds from the business, investment or via personal exertion (Barkoczy, 2015).
Peta acquired a house located in Kew two years ago. The house contained two old tennis courts down the back of the house, which were in poor state. She owned the house so that she and her family could reside in the house and the shabby tennis courts could be used for construction of new units which could be used to earn profit in the future. However, the local tennis club made an offer to Peta with the term that if Peta restored the tennis court and turns it into good condition then only they will purchase the tennis courts. Peta accepted the offer of the tennis club and decided to renovate the courts. In the process of renovation of the tennis court, she spent $100,000. She also did resurfacing of the courts and fencing around them. Finally, the tennis court were sold to the tennis club and proceeds of $600,000 were realized by Peta.
It can be stated that on the basis of the case facts that Peta did not possess any business of property development and sale. Therefore, the action on the part of Peta to sell the tennis courts would not considered under the business scheme of ordinary concepts and thus, the income of $600,000 would not be entitled as ordinary income under section 6(5) of ITAA, 1997.The income can only be categorized as ordinary if Peta had a business of restoring tennis courts and subsequently sell them at high profits, which is not the scenario in the present case. Although, the income is entitled to be treated as assessable income since the transaction for the tennis court is isolated in nature and with the intention of earning profit. She knew from the offer of the tennis club that the value of the tennis court would be enhanced if she restored it and made fence around the court. Therefore, the expense of $100,000 was incurred with the focus of deriving high profit and thus, the isolated transaction amount of $600,000 would be classified as assessable income under the section 15(15) of ITAA, 1997.
Conclusion
Therefore, on the basis of the relevant case law and facts, it can be concluded that the income received through the sale of the tennis court is not entitled as ordinary income as per section 6(5) of ITAA, 1997. Besides, it would be considered as assemble income under section 15(15) due to the presence of profit intention of Peta and the nature of transaction being isolated.
2. The objective in this case study is to comment on the FBT liability on employer for the extended fringe benefits to Alan.
Electronic devices: It is stated in the accordance of the section 58X of Fringe Benefits Tax Assessment Act 1986, that if the electronic devices are extended to employee by the employer for professional work only, than in such cases there would be no FBT liability is payable on the part of the employer and the benefits is not considered under the fringe benefits (Wilmot, 2014). Additionally, the provision of minor benefits exemption clause states that the worth of the benefit is inferior than $300 then also there would be no FBT is payable for employer (Gilders et. al., 2015).
School fees: if the employer gave the school fees of the children’s of their employees, which is considered under the category of personal expense and thus, the payment of school fees is considered as expense fringe benefits to the employee and FBT liability would arise for the employer (Section 20, Division 5A) (Sadiq et. al., 2016).
Taxable amount on the account of school fees (expense fringe benefits) = Fees amount (Employer paid) × Gross up value
FBT payable on the part of employer = 0.49 × Taxable amount on the account of school fees (expense fringe benefits)
Dinner: if the employer planned dinner for their employee (with their associates) in location rather than office, then, it would lead the fringe benefits tax liability on employer for the expense incurred in meal fringe benefits (Section 37AC, Division 9A) (Nethercott, Richardson & Devos, 2016).
There would be no tax deduction on the part of the employer, if clients are the invitees for the dinner. Since, no tax deduction is applicable in this case and thus, the employer selects such method, which provides lowest FBT payable amount resulting through the meal fringe benefits (Barkoczy, 2015).
Actual method and 50-50 split method are the two methods to evaluate the FBT payable amount on the part of employer for the meal fringe benefits.
Actual method is generally applied by the employer, when the employees and their respective associates are invited for dinner. In actual method total meal expense is considered for the evaluation of the FBT payable amount. However, the employer does not have an issue as tax deduction can be claimed by the employer on the meal expenses for employees and their associates (Woellner, 2014).
FBT payable on the part of employer (by actual method) = 0.49 × dinner expense × Gross up factor
50-50 split method is used by the employer, when the invitees are clients as no tax rebate can be claimed by the employer for the meal expense on clients. This method considers only 50% of the total meal expense for the evaluation of the FBT payable amount for employer (Section 37BA, Division 9B) (Barkoczy, 2015).
FBT payable on the part of employer (by 50-50 split method) = 0.49 × 0.50 × dinner meal expense × Gross up factor
Various fringe benefits and FBT liability
Electronic devices – The employer ABC Ltd issued a mobile handset to Alan, but there would not be fringe benefits because the utilization of the mobile phone is restricted for the professional use only (Section 8X). Also, the payment of the bill of the mobile set would be caused from professional work and eventually, no FBT liability on employer for paying mobile bill of Alan.
School fees: School fees of employer’s children is paid by the employer and thus causes expense fringe benefits along with FBT payable on employer.
|
School fees borne by the employer (ABC) |
$20,000 |
|
Gross up factor (school fees is type 2 goods and exempted from GST) |
1.9608 |
|
Taxable amount on the account of school fees (expense fringe benefits) = Fees amount paid by employer × Gross up value =20000 × 1.9608 |
$39,216 |
|
FBT payable on the part of employer (expense fringe benefits) = 0.49 × Taxable amount on the account of school fees = 0.49 × 39216 |
$19,215.84 |
Dinner: Employer of ABC Company has planned dinner at Thai restaurant and thus, significant FBT payable on the part of the employer.
Case 1 – invitees are employees and their associates
|
Number of employees (along with the associates ) |
20 |
|
Total dinner expense |
$6,600 |
As per the information provided in this case, employees were invited along with their associates and thus, the cost incurred in dinner meal expense would be half of the actual expense for employees only.
|
Expense incurred only for employees = = |
$3,300 |
|
Expense incurred per employees = = |
$ 165 |
From the above calculations, it has been observed that per employee expense is $165 only, which is less than the amount of $300 and thus, there would be no FBT payable on behalf of the employer due to minor benefit exempt clause.
|
Number of employees |
5 |
|
Total dinner meal expense |
$6,600 |
|
Expense incurred only for employees = = |
$3,300 |
|
Expense incurred per person = = |
$660 |
From the above calculations, it is observed that per employees expense is $660, which is more than the amount of $300 and thus, there would be FBT payable on behalf of the employer. Dinner is considered as type 1 service due to application of GST on the same.
|
Gross up factor |
2.1463 |
|
Applied method – Actual method FBT payable on the part of employer (meal fringe benefits) = 0.49 × dinner meal expense × Gross up factor = 0.49 × 6600 × 2.1463 |
$6,941.13 |
Case 3 – invitees are clients
As discussed above, the employer would use the 50-50 Split method in order to calculate the FBT payable amount when clients are also part of the invitees.
|
Total dinner meal expense |
$6,600 |
|
Gross up factor |
2.1463 |
|
Applied method – 50-50 split method FBT payable on the part of employer = 0.49 × 0.50 × dinner meal expense × Gross up factor =0.49 × 0.50 × 6600 × 2.1463 |
$3,470.6 |
The employer can claim the GST credit refund in order to limit the FBT liabilities ((Nethercott, Richardson & Devos, 2016).
Conclusion
Therefore, on the ground of the above discussion, it can be stated that
|
Benefits
|
Fringe benefits |
FBT payable for employer |
|
Mobile handset |
No |
No FBT liability |
|
Mobile bill $200 |
No |
No FBT liability |
|
School fees |
Yes |
$19,215.84 |
|
Dinner Case 1 20 employees along with associates |
Yes (Minor fringe benefits) |
No FBT liability |
|
Dinner Case 2 5 employees |
Yes |
$ 6,941.13 |
|
Dinner Case 3 Clients |
Yes |
$ 3,470.6 |
References
Barkoczy, S 2015. Foundation of Taxation Law 2015, 7th edn, CCH Publications, North Ryde
Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2015, Australian tax handbook, 8th edn, Thomson Reuters, Pymont
Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2015. Understanding taxation law 2015, 8th edn, LexisNexis/Butterworths.
Hodgson, H, Mortimer, C & Butler, J 2016, Tax Questions and Answers 2016, 5th ed., Thomson Reuters, Sydney,
Nethercott, L, Richardson, G & Devos, K 2016, Australian Taxation Study Manual 2016, 4th ed., Oxford University Press, Sydney
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2016, Principles of Taxation Law 2016, 8th edn, Thomson Reuters, Pymont
Wilmot, C 2014, FBT Compliance guide, 8th edn, CCH Australia Limited, North Ryde
Woellner, R 2014, Australian taxation law 2014, 8th eds., CCH Australia, North Ryde
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