Taxation Law For Mobilization And Trade Integration

Income from Sale of Property

Discuss about the Taxation Law for Mobilization and Trade Integration.

Section 6-5 of Income Tax Assessment Act (ITAA) 1997 contains income as per ordinary concepts. An individual, who is an Australian resident, is required to assess the taxable income by including ordinary incomes acquired directly or indirectly from different sources of income. Ordinary income for the purpose of tax is derived from three sources, firstly, income from personal efforts that includes salary or remuneration income and wages income. Secondly, income from assets and properties including rental income from property, dividends and interest income from shares and securities are included in ordinary income. Thirdly, ordinary income also includes income from conducting a business operation in the form of retail sales, wholesale, farming etc (Fleischer, 2015).

In the present case, Peta owned a house in Kew, Australia for the purpose of residence in one unit and the other unit i.e. tennis court for the purpose of sale at profit. During the current tax year, Peta received an offer to sell the courts at good condition. She spent $100,000 for the renovation of tennis court and sold it at $600,000 in the current tax year.

As per the explanations on assessable income in ITAA97, sale of property is considered to be an ordinary income if it constitutes a business of the taxpayer. Further, if the intention of the taxpayer at the time of acquiring the property is not to earn profit from the sale of the asset then the profit on proceeds cannot be considered as ordinary income (Grubert & Altshuler, 2016). Considering the decided case of The Myer Emporium Ltd v. FC of T (1987) 163 CLR 199 classification of profit on sale of property had been decided according to the nature and purpose of the transaction. In case the property is sold out with the profit making intention then the receipt sale proceeds cannot be regarded as revenue income. Accordingly, the profit earned from the sale proceeds would be considered as capital income and not ordinary income under section 6-5 of ITAA97 (Auerbach & Hassett, 2015). Further, in the decided case of Whitfords Beach Pty. Ltd. v. FC of Taxation (1982) 150 CLR 355 it has been argued that a mere earning of profit from investment cannot be called as income. If the taxpayer realizes the sale proceeds of the asset or investment in a way to obtain best price then also the income would not be considered as ordinary income. Therefore, such income would be considered as statutory or capital income that is not assessable under section 6-5 of ITAA97 (Ho & Wang, 2015).

Consequences of Fringe Benefit Tax

In the present situation, income from sale of property unit, tennis court gives rise to two situation, firstly, intention and purpose of Peta to sell the property and secondly, nature of the property transaction. It is mentioned that the purpose of acquisition of the house was to build and sell the units in tennis court at a profit. On the contrary, the asset acquired by Peta also constitutes investment as the other part of the house she used for residential purpose. Considering the decided case of McCorkell v. FC of Taxation 98 ATC 2199 on profit from sale of subdivided land, it was decided by the court that since the applicant was not involved in the business of subdivision and sale of land, the realization of profit was not an ordinary income (Mehrotra & Ott, 2016).

Similarly, in case of Peta, it has been observed that she is not involved in carrying on a business of construction and sale of housing units. On the other hand, her intention of acquisition of the house two years back was to earn profit from sale of units of house. Hence, if the nature of acquisition of house property by Peta is considered then, the sale of tennis unit would not be regarded as an ordinary income under section 6-5 ITAA 97. The receipt of $600,000 would be constituted as capital receipt and not to be included in the assessable income. However, if the intention and purpose of acquisition of property by Peta is given the priority, then the receipt of $600,000 shall be included in the assessable income as an ordinary receipt under section 6-5 ITAA 97. The amount of $600,000 would be assessed for taxability by considering the deduction on expenses $100,000 incurred by Peta to renovate the tennis court in good condition. Hence, the balance amount $500,000 would be taxable in the hands of Peta as per ITAA97 section 6-5.

The present solution reflects the consequences of Fringe Benefit Tax as per the Taxation Ruling 97/17 of Income Tax Assessment Act (ITAA) 1997. The consequences are also in pursuance with Fringe Benefit Tax Assessment Act 1986 for the year ending 31^st March 2016 in the books of ABC Pty Ltd. which provided several benefits his employee Alan. Fringe benefit means certain advantages and benefits provided by employer to the employees of the organization (Nijland & Dijst, 2015). Employer is liable to pay tax on such benefits at the rate specified by the Australian Taxation Office that is computed on the gross- taxable value provided to the employees. In order to determine the taxable value, two types of gross up rates are considered i.e. higher gross- up rates knows as type 1 while the other is lower gross up rate  known as type 2 (Hodgson & Pearce, 2015).

Higher gross up rate or type 1 is applicable to the assessees paying Goods and Services Tax (GST) for the benefits provided by them to the employees. Such taxpayers are entitled to claim credit on GST, which is known as Gross Credible Benefits. On the contrary, lower gross up rate or type 2 is applicable to the taxpayers not entitled to claim credits on GST against the benefits provided to the employees (Ahmad & Scott, 2015).

Moreover, several benefits that are provided by the organizations or employers to the employees are exempted benefits whereas certain benefits are taxable if the value of benefits exceeds the specified limits in the ITAA 97. For instance payment of remuneration and wages, benefits provided on house rent allowance in remote area tools and electronic gadgets including mobile phones that are related to work, and laptops are not taxable (Tang & Wan, 2015). Therefore, the fringe benefit tax consequences for the advantages provided by ABC Pty Ltd. are as follows:

Salary $300,000 under remuneration package: It is taxable in the hands of the employee Mr. Alan, during the current tax year 31^st March 2016. Since the payment of remuneration by employer falls under the exempted fringe benefit scheme, ABC is not liable to pay fringe benefit tax on salary $300,000 as per TR97/17 ITAA 97.

Payment of mobile phone bill: The payment of bill amounted to $220 per month made by ABC Limited that included GST while the phone was used by Alan for the purpose of work only. Exemption on mobile phone expense is available whereas the regular payment of bill amount is not exempted from fringe benefit tax (Chadarava & Raval, 2015). Therefore, ABC Limited is liable to pay fringe benefit tax @49% on the assessable value for the year ended 31^st March 2016. Further, higher gross up rate would be applicable to determine the assessable value because the company is entitled to claim input credits.

Phone bill allowance (including GST) (i) $ 2,640.00

($220.00* 12 months)

Higher Gross up rate (ii) 2.1463

Taxable amount of allowance (i* ii) $ 5,666.232

Tax on Fringe Benefit @ 49% on $ 5,666.232 as on 31 March, 2016 $ 2,776.453

(Subject to the input tax credits or GST credits)

Payment of Alan’s children education fees: The Company made annual payment amounted to $20,000 for the education fees, which does not include GST. Considering the TR97/17 ITAA 97, the payment would be taxable as fringe benefit tax to be assessed by applying lower gross up rate.

Education fees (GST free) (i): $ 20,000.00

Lower gross- up rate (ii): 1.9608

Taxable value (i* ii) $ 39,216.00

Tax on Fringe Benefit @ 49% on $ 39,216.00 as on 31 March 2016 $ 19,215.84

Mobile phone handset: ABC Limited provided a mobile handset to Alan values $2,000 that includes GST. According to the provisions in FBTAA 1986 and TR97/17 ITAA97, benefits provided by employer with respect to tools or electronic gadgets for work purpose, then value of such benefits or advantage will be exempted from the taxability of fringe benefits (Jibrin, Ejura & Augustine, 2015). In the present situation, it is not clearly mentioned that the mobile handset provided by ABC Ltd. to Alan has been provided for work purpose or personal use or for both purpose. Hence, the tax consequence has been provided considering all the three situations:

Option 1: If the phone has been provided by the organization for only work purpose then ABC Ltd. is not liable to pay tax on the value of phone because it falls under the exempted fringe benefit scheme.

Option 2: If the phone has been provided for personal use then the assessable value would be determined by using higher gross up rate because the cost of handset in inclusive of GST.

Cost of the handset (including GST) (i) $ 2,000.00

Higher Gross up rate (ii) 2.1463

Taxable value (i* ii) $ 4,292.60

Tax on Fringe Benefit @ 49% on $ 4,292.60 as on 31 March 2016 $ 2,103.37

(Subject to the input tax credits or GST credits)

Option 3: If the phone is provided for partial use for work and partial for personal use then the amount used for work would be exempted from fringe benefit tax while amount for personal use would be taxable. However, the bifurcation of the amount is provided hence, it has been assumed that the phone is used for personal purpose. Therefore, the assessable value and taxable amount would be same as determined in the option 2.

Dinner party at the year-end: The Company arranged a dinner party for the employees and their partners at the end of the financial year at a local restaurant. According to Australian Taxation System, this expenditure made by ABC Ltd falls under the head “entertainment by way of food and drink allowance”     (Gupta & Sawyer, 2015). Therefore, ABC Limited is liable to pay fringe benefit tax on the dinner expense and the number of employees’ attendance at the party is not relevant.  

Computation of fringe benefit tax for the year ended 31^st March 2016

Total cost of dinner including GST (i) $ 6,600.00

Higher Gross up rate (ii) 2.1463

Taxable value (i* ii) $14,165.58

Tax on Fringe Benefit @ 49% on $ 14,165.58 $ 6,941.13

(Subject to the input tax credits or GST credits)

Measurement of fringe benefit tax does not depend on the benefit provided to number of employees but depends on the nature and purpose of use of such benefit provided to the employees. Therefore, the taxability of benefits for entertainment by way of food and drink provided by the organization would not depend on the attendance of number of employees. As per TR97/17 ITAA 97, the taxability for the expenses on dinner hosted by ABC would be same as computed in answer (a) even if the company had only 5 employees instead of 20 employees.

In case the organization’s clients also attend the dinner party then the tax consequences for the cost of dinner would be different from that of determined in the answer (a). Since the fringe benefit scheme is applicable only for the employees, expenses incurred for the clients would not qualify for fringe benefit. Expensed incurred for the clients would be considered as business expense. Further, it is difficult to segregate the dinner expense incurred for the employees and clients (Chadarava & Raval, 2015). Therefore, the entire cost of dinner incurred by ABC would be considered as general deduction to measure the assessable income. While the tax on fringe benefit as derived in solution (a) $ 6,941.13 would be tax saving for ABC Ltd.

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