Discuss about the Taxation of Intellectual Capital.
Following assignment presents the tax consequences under the Taxation Government of Australia regarding fringe benefit tax liability for ABC Limited in compliance to Fringe Benefit Tax Assessment Act (FBTAA), 1986 and Taxation Ruling 97/17 of Income Tax Assessment Act (ITAA), 1997. Additionally, the assignment represents allowable deduction on capital expenditures on depreciable asset as per division 40 ITAA 1997.
Treatment of Fringe Benefits Tax according to the provisions of TR 97/17 ITAA 1997 and FBTAA 1986 in the hands of ABC Pty Ltd for the year ending 31st March 2015.
FBT is calculated on the gross- taxable value of the benefits as measured under the two types- higher gross up rate (type 1) and lower gross up rate (type 2). Higher gross up rate, for the taxpayers who pay Goods and Services tax (GST) on the cost of benefits entitled to claim GST credit. Whereas lower gross up rate is for taxpayers not entitled to claim GST credit on the benefits since the cost is GST free. Whereas certain benefits are exempted and some are taxable if their value exceeds the threshold limits specified under the Act (Hodgson and Pearce, 2015). Accordingly, tax consequences are as follows:
Salary $300,000: Remuneration is taxable in the hands of the employee, Mr. Alan for the assessment of income tax. ABC Limited is not liable to pay any FBT for the salary payment as it falls under the exempted Fringe Benefit category (Soled and Thomas, 2015).
Payment of mobile phone bill: The allowance paid by ABC Limited $220 per month, inclusive of GST for the phone bill which Alan uses for work purpose only. ABC Limited is liable to pay FBT on such allowance @ 47 % on the taxable value. Also, provided that the entity is entitled to claim input tax credits on the payments inclusive of GST hence, Higher Gross- up rate will be used for taxable value (Pearce and Hodgson 2015).
Phone bill (i) $ 2,640.00
($220.00* 12 months)
Higher Gross up rate (ii) 2.1463
Taxable value (i* ii) $ 5,666.232
Tax on Fringe Benefit @ 47% on $ 5,666.232 $ 2,663.129
(Subject to the input tax or GST credits)
Assumed that the payment per month is at the beginning of the year, therefore converted the same to annual payment.
Payment of Alan’s children’s education fees: ABC Limited has paid $20,000 annually, as education fees (GST free). Therefore, lower gross up rate will be applicable for the computation of taxable value (Shields and North-Samardzic, 2015).
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 @ 47% on $ 39,216.00 $ 18,431.52
Mobile phone handset: The entity provided a mobile phone handset to Alan worth $ 2,000 including GST. As contained in the provisions of ITAA 1997 and FBTAA 1986, if any benefit used by the employer work purpose only, then such allowance shall fall into the category of exempted Fringe Benefits (Soled and Thomas, 2015).
In this case it is not clear whether the handset provided is for work purpose or for personal use. Therefore, the taxability consequence provided as per the circumstances:
Option i) benefit for work purpose only: in this case, tax liability for ABC Ltd is nil as the benefit falls into the exempted fringe benefit category (Pearce and Hodgson 2015).
Option ii) benefit for personal use: in this option, ABC Ltd is liable to pay FBT on the value derived by considering higher gross up rate as the cost is inclusive of GST (Pearce and Hodgson 2015).
Cost of the handset (i) $ 2,000.00
Higher Gross up rate (ii) 2.1463
Taxable value (i* ii) $ 4,292.60
Tax on Fringe Benefit @ 47% on $ 5,666.232 $ 2,017.52
(Subject to the input tax credits or GST credits)
Dinner at year-end:
ABC Ltd had organized a dinner for its employees and their partners at the end of the financial year. As per ITAA 1997, this expenditure falls into the entertainment by way of food and drink allowance. Hence, ABC is liable to pay fringe benefit tax on the total cost (Shields and North-Samardzic, 2015).
Computation of FBT for the year ended 31st March 2015
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 @ 47% on $ 14,165.58 $ 6,657.82
(Subject to the input tax credits or GST credits)
In case ABC Ltd had only 5 employees then the answer to (a) would remain same. It is because the liability of tax on allowances provided to employees does not depend on the number of employees but it depends on the nature of the benefit and purpose of the use of benefit as specified under the ITAA 1997 and FBTAA 1986 (Shields and North-Samardzic, 2015). Hence, the tax liability consequences for the ABC Company would be same as derived in the solution (a).
If the clients of ABC Limited also attend the year-end dinner along with the employees then there would be different treatment of tax liability. In this case, the expenditure on dinner would not fall into the category of fringe benefit, as it is difficult to segregate the cost allocation of dinner between employees and clients (Shields and North-Samardzic, 2015). Hence, the cost of dinner would fall into general deduction category while computation of taxable income of the company and the tax on fringe benefit as derived in solution (a) $ 6,657.82 would be a saving for ABC Ltd.
Division 40 on Capital allowances of ITAA 1997 serves the objects and principles for deduction on capital expenditure. According to division 40, deduction on capital expenditure is allowed on depreciating asset, which has limited life expectancy. Further, the division under section 40- 365 also provides the provisions on replacement of assets for determination of costs and allowable deductions which specifies that any amount for the sale of old depreciating asset would be allowed as tax deduction only if that old asset was in use or kept ready for use (Thomson, 2015).
The tax consequences for Rubber Co. as per Division 40 ITAA 1997 are as under:
Cost of machine on 1.1.10 (inclusive of GST) $ 1,100,000.00
Estimated effective life 10 years
Accumulated depreciation for 4 years till 1.1.14 $ 440,000.00
(1,100,000/10* 4 years)
Net book value on 1.1.14 $ 660,000.00
Hence, deductible allowance will be accumulated depreciation $ 440,000 in the year 2014 for the capital expenditure $ 1,100,000.00 made in the year 2010.
On the replacement of the machinery on 1.01.14, the tax consequence is as under:
Net book value of the old machinery on 1.01.14 $ 660,000.00
Disposal value (including GST) on 1.01.14 $ 330,000.00
Loss on disposal of original machine $ 330,000.00
($ 660,000.00- $ 330,000.00)
Cost of new machine (including GST) on 1.01.14 $2,200,000.00
Deduction allowed on the capital expenditure $ 330,000.00
Net reportable capital cost of new machine $ 1,870,000.00
Rubber Co. is allowed to claim tax deduction in respect of the new machine is equal to the amount of loss incurred from the sale of old machine $ 330,000.00 as it was already in use. Hence, net capital expenditure in the financial year 2014 would be $ 1,870,000.00.
Conclusion:
The assignment has been dealt with taxation inference on two different aspects of ITAA1997 i.e. tax liability on fringe benefit and deductible allowance on capital expenditure. In the first solution, ABC Limited is liable to pay tax on certain allowances provided to Alan while for some allowance company was eligible to claim exemption. In the second requirement, Rubber Co. is eligible to claim tax deduction for the capital expenditure incurred on machinery in the year 2010 in terms of depreciation and subsequently, on replacement in the year 2014 at an amount equal to the loss on disposal of old machine.
Reference List:
Burke, K.C., 2015. Comments on’Taxation of Intellectual Capital:’Better than Consumption-Tax Treatment?.
Hodgson, H. and Pearce, P., 2015. TravelSmart or travel tax breaks: is the fringe benefits tax a barrier to active commuting in Australia? 1. eJournal of Tax Research, 13(3), p.819.
Pearce, P. and Hodgson, H., 2015. Promoting smart travel through tax policy. Tax Specialist, 19(1), p.2.
Prebble, J. and McIntosh, H., 2015. Is Expenditure to Assess the Feasibility of Constructing or Acquiring Capital Assets Deductible?.Available at SSRN 2583341.
Rahi, M. and Islam, S., 2015. Exploring capital expenditure planning process & tracking in Robi Axiata Limited.
Shields, J. and North-Samardzic, A., 2015. 10 Employee benefits.Managing Employee Performance & Reward: Concepts, Practices, Strategies, p.218.
Soled, J.A. and Thomas, K.D., 2015. Revisiting the Taxation of Fringe Benefits. Washington Law Review, Forthcoming.
Thomson, R., 2015. The Effectiveness of R&D Tax Credits. Review of Economics and Statistics, (0).
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