Taxation Law For Work Related Expenses

Assessable Income

Describe about the Taxation Law for Work Related Expenses.

1:-  For the Australian residents the incomes, earned from all direct and indirect sources within or outside Australia, are considered as the assessable income. Any income generated from the sale of property by any Australian resident, therefore, should be treated as an assessable income of the individual resident (Woellner et al. 2012).

However, under ITAA 1997, the assessable incomes are classified into two sections – ordinary income and statutory income. Ordinary incomes can be described as the incomes, generated from ordinary or general course of action. Under section 6-5, the main ordinary incomes are stated below:

Income from personal exertion, such as, salary, wages, leave encashment, monthly pension etc.

Income from property, such as, rent from properties, interest on deposits, dividend from investments etc.

Income from business, such as, net profit from business, sale of trading stocks, net income from farming etc (www.dlsweb.rmit.edu.au, 2016)

On the other hand, statutory incomes can be defined as the income, which has not been generated from ordinary courses. These incomes, as described in the section 10-5, are described below:

Capital gains from sale of capital assets

Lump Sum payment, received on termination of employment

Bonus on Insurance

Bad Debts recovered

Profit from Barter transaction

Royalties

Imputation credit (www.dlsweb.rmit.edu.au, 2016)

The statutory incomes are calculated separately to determine the taxable amount from such incomes.

Peta, had purchased the house with tennis court for living in the house permanently and to earn profits by selling the tennis courts in units. However, she sold the whole tennis court later to a tennis club.

The income from the sale of the tennis court is surely an assessable income. Peta had purchased the property with an intention to sale the tennis courts for earning profits. Therefore, the net income, after deducting the expenses, incurred for resurfacing and fencing, can be considered as business income. In that case, it can be included as an ordinary income of Peta under section 6-5 (Austlii.edu.au, 2016).

However, it should be noted that though Peta had an intention to sale the property, she did not involve in any kind of real estate business. Apart from that, she had intended to sell the property in small units, but had to sell it in a whole. Hence, the income from the sale of the property should be considered as statutory income under section 10-5, instead of, ordinary income.

Ordinary Income and Statutory Income

Moreover, if Peta would show the income as ordinary income, then she has to pay tax on the net income, by deducting the cost price and other expenses, incurred for the assets. However, if it is shown as capital gain, she can claim for 50% exemption on the net income (Ato.gov.au, 2016).

Therefore, from both the point of views, the receipt of $600000 should not be considered as an ordinary income under section 6-5.

2:-  It is necessary to made the following assumptions for ascertaining the Fringe Benefit Tax liability of ABC Pty. Ltd. on the expenses, made for Alan:-

Salaries and wages, paid to the employees, are not considered for FBT and therefore, the salary of Alan will not be included for FBT liability computation (Bender et al. 2013).

Mobile phone bill, paid by the employer, on behalf of employee, is treated as expense fringe tax benefit. ABC Pty. Ltd. has not reimbursed the mobile phone expenses to Alan, but paid to the third party directly. Though, the monthly mobile expenses is lower than $300, but annually the expense ins amounted to $2640. Therefore, ABC Pty. Ltd. can consider the mobile expense for fringe tax benefit (Ato.gov.au.2016).

The school fees of the Alan’ children, paid by ABC Pty. Ltd, are also an expense fringe benefit, where the employer is paying the employee’s private expenses directly on behalf of the employee. Hence, it should be included for fringe benefit taxation purpose (Delany 2012).

The mobile phone is provided to Alan for work purpose. From employer’s end, it should be treated as work related expenses. Hence, the cost of mobile phone should be included for calculating the total amount for GST Inclusive items and later the gross-up amount of the hand set should be excluded from the FBT taxable amount (James et al. 2013).

Any expenses, paid for the entertainment of the employees by the employer, are referred as entertainment fringe benefits. It should be noted that the employer can claim for deduction on such expenses under “otherwise deductible” rule (Rimmer et al. 2014). However, the claim can be made only for the amount, spent for the employees only. Any expenses, spend for the entertainment of the family members or associates of the employees, cannot be included in the entertainment fringe benefits. As the exact per head amount, spent for the entertainment purpose of the employees only, is not possible for ABC Pty. Ltd., the total amount is included in the fringe benefit tax calculation (Jones 2015).

It is necessary to compute the total amount of GST inclusive benefits and GST free benefits separately. Then the total values are summarized by multiplying the individual Gross up rates, applicable to the different types of benefits (Ramli et al. 2015).

Calculation of FBT Liability

The net taxable value, after deducting the exempted amount from the total gross up value, is then charged with FBT rate, i.e., 49% to calculate the total Fringe Benefit Tax Liability of the employer (Soled and Thomas 2015).

On the basis of the assumptions and rules, the fringe benefit tax liability of ABC Pty. Ltd. is calculated in the following table:-

In the Books of ABC Ltd.
Calculation of Fringe Benefit Tax Liability
as on 31.03.2015
	GST Inclusive	GST Free
Particulars	Amount	Amount
	$	$
Payment of Phone Bill	2640
Payment of School fees of Employee’s Children		20000
Dinner at Restaurant	330
Providing Mobile Phone	2000
Total of GST Inclusive/Free Benefits	4970	20000
	A	B
Gross-up Rate	2.1463	1.9608
	C	D
Gross-up Value	10667.11	39216
	E = A x C	F=B X D
Total Taxable Fringe Benefit	49883.11
	G = E + F
Less : Exemption for Mobile Phone at gross-up value	4292.60
($2000 x 2.1463)	H
Net Taxable Fringe Benefit	45590.51
	I = G – H
Fringe Benefit Tax Rate	49%
	J
Fringe Benefit Tax Liability	22339.35
	K = I x J

If ABC Pty. Ltd. includes only 5 employees for dinner and the total cost of dinner remains same, in that case, the per head dinner cost will become higher. It would result in higher FBT liability (Kaplan and Price 2014). The calculations are given below:

In the Books of ABC Ltd.
Calculation of Alternative Fringe Benefit Tax Liability
as on 31.03.2015
	GST Inclusive	GST Free
Particulars	Amount	Amount
	$	$
Payment of Phone Bill	2640
Payment of School fees of Employee’s Children		20000
Dinner at Restaurant	1320
Providing Mobile Phone	2000
Total of GST Inclusive/Free Benefits	5960	20000
	A	B
Gross-up Rate	2.1463	1.9608
	C	D
Gross-up Value	12791.95	39216
	E = A x C	F=B X D
Total Taxable Fringe Benefit	52007.95
	G = E + F
Less : Exemption for Mobile Phone at gross-up value	4292.60
($2000 x 2.1463)	H
Net Taxable Fringe Benefit	47715.35
	I = G – H
Fringe Benefit Tax Rate	49%
	J
Alternative Fringe Benefit Tax Liability	23380.52
	K = I x J

However, if the per head cost of dinner remains same and the total cost of dinner would reduce accordingly, then the total FBT liability will remain unchanged as per the calculations, shown in answer 2.a (Shields and North-Samardzic 2015).

2.c:- The entertainment fringe tax benefit is only applicable for the benefits, provided for the employees. If ABC Pty. Ltd. includes its clients, then also the fringe tax benefit would include only the cost, incurred for employees. The company cannot get any deduction for the entertainment of the clients (Martocchio 2013).

References:-

Ato.gov.au. (2016). Fringe benefits tax (FBT) | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/ [Accessed 27 May 2016].

Delany, T.P., 2012. Fringe benefits tax

James, S., Wallschutzky, I. and Alley, C., 2013. The Henry Report and the taxation of work related expenses: Principles versus practice

Jones, S., 2015. ‘Cost-to-company’explained: tax planning. Tax Breaks Newsletter, (349), pp.6-7

Kaplan, R.L. and Price, D.J., 2014. Change and Continuity in Fringe Benefit Taxation: Seeking Sense and Sensibility. NYL Sch. L. Rev., 59, p.281

Martocchio, J., 2013. Employee benefits. McGraw-Hill Higher Education

Ramli, R., Palil, M.R., Hassan, N.S.A. and Mustapha, A.F., 2015. Compliance costs of goods and services tax (GST) among small and medium enterprises. Jurnal Pengurusan, 45, pp.1-15

Rimmer, X., Smith, J. and Wende, S., 2014. The incidence of company tax in Australia

Soled, J.A. and Thomas, K.D., 2015. Revisiting the Taxation of Fringe Benefits. Washington Law Review, Forthcoming

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2012.Australian taxation law. CCH Australia

www.dlsweb.rmit.edu.au. (2016). www.dlsweb.rmit.edu.au/toolbox/finance/fnbacc02a/preparetax/keyprinciple/ordinaryi.htm. [online] Available at: https://www.dlsweb.rmit.edu.au/toolbox/finance/fnbacc02a/preparetax/keyprinciple/ordinaryi.htm [Accessed 13 Sep. 2016].

www.dlsweb.rmit.edu.au. (2016). www.dlsweb.rmit.edu.au/toolbox/finance/fnbacc02a/preparetax/keyprinciple/statutoryi2.htm. [online] Available at: https://www.dlsweb.rmit.edu.au/toolbox/finance/fnbacc02a/preparetax/keyprinciple/statutoryi2.htm [Accessed 13 Sep. 2016].

Ato.gov.au. (2016). What to include in your assessable income | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/Business/Income-and-deductions-for-business/Working-out-your-assessable-income/What-to-include-in-your-assessable-income/ [Accessed 13 Sep. 2016].

Bender, M., Contacos-Sawyer, J. and Thomas, B., 2013, July. Benefits Strategies for Attracting and Retaining Employees. In Competition Forum(Vol. 11, No. 2, p. 165). American Society for Competitiveness

Shields, J. and North-Samardzic, A., 2015. 10 Employee benefits. Managing Employee Performance & Reward: Concepts, Practices, Strategies, p.218

Austlii.edu.au. (2016). INCOME TAX ASSESSMENT ACT 1997 – SECT 6.5Income according to ordinary concepts (ordinary income). [online] Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html [Accessed 13 Sep. 2016].