Taxation Theory, Practice and Law

Table of Contents

Question 1: Case of John and his invalid brother Paul

Question 2: Case of Oliver and loan fringe benefit

Question 3: Case of David and Emma.

Question 4: Case of Anna and Eastern Medical Centre.

Question 5: Case of DK Pty Ltd and Dennis Denuto.

Reference.

Question 1: Case of John and His Invalid Brother Paul

As per ATO, one cannot claim its tax offset for maintaining any other invalid (other than spouse) or carer of an invalid if:

  • Its ATI exceeds the levels of $100,000 for 2019–20, or
  • It maintains the invalid (or carer of an invalid) for a whole year and their ATI (including any invalid or carer payment they will receive) exceeds $ 11,346 for 2019–20.

Scenario 1: There ATI in 2018‐2019 financial year were as follows:-

 

John

Paul

ATI

 $ 120,000

 $ 4,000

Since ATI of John is $ 120000 and exceeds $100000, therefore, tax offset cannot be claimed.

Scenario 2: There ATI in 2018‐2019 financial year were as follows:-

 

John

Paul

ATI

 $ 63,000

 $ 900

Since ATI of John is $ 63000 and that of Paul is $ 900, both the income figures are under the thresholds limits of $100000 and $11346 respectively, therefore, tax offset can be claimed.

Scenario 3: There ATI in 2018‐2019 financial year were as follows:-

 

John

Paul

ATI

 $ 41,000

 $ 0

Since ATI of John is $ 41000 and that of Paul is $ 0, both the income figures are under the thresholds limits of $100000 and $11346 respectively, therefore, tax offset can be claimed.

Question 2: Case of Oliver and Loan Fringe Benefit

In the case, Oliver took a loan from NAB and in order to repay the (with interest) bank loan, he approached his employer who provided him a interest free loan of $12,000 on 14 October 2019. During 15 Feb 2020, his employer informed that only half of the loan is required to be paid to the company back (ATO 2020).

This is a case of loan fringe benefit and a debt waiver fringe benefit. These are discussed below:

Loan fringe benefit arises when an employer provides interest free (or low rate of interest) loan to an employee during the FBT year. Low rate of interest means lower than the benchmark rate of interest (aka the statutory interest rate).

Debt Waiver fringe benefit arises when an employer waive an employee’s obligation to repay a loan amount to the company (employer) on the basis employment relationship.

In the case of Oliver, he received the following two benefits from his employer:

  1. An interest free loan of $ 12000 so that he can pay his bank loan taken from NAB.

The statutory interest rate (considering the statutory rate of 5.37% as of April 2019 as per ATO) on an amount of $12000 will be held taxable for Oliver for the period from the receipt of loan fringe benefit from employer that means from 14 Oct 2019 to 15 Feb 2020, i.e. for 136 days.

FBT = Taxable Value * 1.8868 (Gross up factor) * 47% (Rate of FBT)

  • Taxable value = 12000 * (5.37% - 0%)
  • Taxable value = 644.40

FBT = 644.40 * 1.8868 * 47%

  • 570 (rounded off)
  1. A debt waiver of $ 6000, half of the total amount owed to employer

Also, Oliver will be charged by ATO with an amount of $ 6000 (half of the total loan fringe benefit) as debt waiver fringe benefit because he received a waiver of this much amount from his employer during the FBT year (ATO 2020).

FBT = Taxable Value (amount of the debt that is waived) * 1.8868 (Gross up factor) * 47% (Rate of FBT)

  • 6000 * 1.8868 * 47%
  • 5320 (rounded off)

Question 3: Case of David and Emma

As per the given scenario, David and Emma is a married couple and jointly own some investment properties. They under a partnership agreement Emma and David shares the rental net profits in the ratio of 94%: 5% respectively. As per agreement David will bear all the losses related to properties.

As per the Joint Ownership provisions of ATO, Emma and David are holding the rental property as joint tenants, and the net rental profit (or loss) is required to be shared by them as per their legal interests in the specified properties. Also, ATO specified that each joint tenant hold an equal legal interest in the property. That means, the couple has to include half of the total expenses and income individually in their tax returns (ATO 2020).

Any agreement (the partnership agreement in this case) that the couple agreed upon to divide the expenses and income in the above specified proportions (which is different from equal shares) does not impact the income tax purposes. Therefore, even if Emma has higher share over rental income and David has to bear all the losses and expenses with the rental property as per agreement, then also Emma can show a lower income with half of the amount after bearing half of the expenses. Similarly David would not be able to claim more deductions on the rental property than Emma.

Question 4: Case of Anna and Eastern Medical Centre

The case of Anna and Eastern Medical Centre is related to

The term “Salary Sacrifice” refers to an arrangement of an employee (Anna in this case) with the employer (Eastern Medical Centre) to forego a portion of the wages or salary for investing in Superannuation, in return the employer is also obliged to provide benefits with a similar amount. That means employer will also invest a similar value in the super fund investment in the name of the employee (ATO 2020).

 Eastern Medical Centre contributed $13,000 under Superannuation Guarantee Charge @ 9.5 % of salary (without salary sacrifice). That means annual salary of Anna becomes $136842. The salary sacrificed @ 10% will become 13684.

current scenario

 

Base Salary

Salary Sacrifice

SG (9.5%)

Total Super Contribution

Taxable Income

Tax on Income @ 37%

Medicare levy

Total Tax Payable

Anna

$136,842

-

$13,000

13000

$136,842

$38,129

$2,737

$40,865

 

after salary sacrifice

 

Base Salary

Salary Sacrifice

SG (9.5%)

Total Super Contribution

Taxable Income

Tax on Income @ 37%

Medicare levy

Total Tax Payable

Anna

$136,842

$13,684

$13,000

$26,684

$123,158

$33,065

$2,463

$35,529

There are benefits for both Anna and her employer

  1. For Anna

Salary sacrificing increases super while reduces tax implications.

  1. For Employer
  • The contributions are tax deductible
  • Salary sacrificed are not subject to FBT

Note: Changes applicable from 1 January 2020 has been considered, where salary sacrificed super contributions can't be used to reduce employer’s super guarantee obligations, regardless of the amount the employee elects to salary sacrifice (ATO 2020).

Question 5: Case of DK Pty Ltd and Dennis Denuto

As per the GST Rules of the Australian Taxation Office, a seller who is registered for GST must charge GST on all taxable sales made by them and is required to pay GST on the taxable sales made by them when they file their business activity statement with the ATO. According to the definition of taxable sale that is provided by the ATO, a taxable sale is a sale that

  • In exchange for a payment or consideration
  • Is made in the usual course of operating the business
  • And has a connection with Australia. (ATO n.d. b)

It must be noted that as per the clarification provided in taxation ruling 2001/6, a payment or consideration as mentioned above does not only includes monetary payments but also includes a payment made “in kind” or a non monetary form which includes goods provided in exchange, obtaining a right or service of any kind and entering into an obligation (ATO n.d. a). Hence, a sale made by a business in return for a particular service would be regarded as a taxable case.

In the given case of D.K. Pty Ltd is a property investment company and has offered to provide Mr. Dennis Denuto, a rent free office in Sydney in exchange for service to be provided by Dennis in relation to negotiation of rental contracts. The given arrangement for provision of rent free office to Mr. Dennis shall be regarded as a taxable sale in terms of the clarification provided by TR 2001/6 and as of D.K. Pty Ltd is registered for GST, it would have to charge GST on this transaction. D.K. Pty Ltd will be required to charge GST@10% of the market value of services that will be provided to it by Mr. Dennis. Also, the company would be entitled to claim input tax credits on the market value sale made by Mr. Dennis to the company (38000*1/11) (ATO n.d. b).

On the other hand, as the practice income of Mr. Dennis is $300000 per year; he is required to be registered for GST an is required to charge GST on sales and claim input tax credit on purchases.. As Mr. Dennis is providing his service to D.K. Pty in relation to negotiation of rental contracts, this would be regarded as a taxable sale made by him and he would be required to charge GST @ 10% on the market value of consideration received by him in exchange for sale. As Dennis would be receiving a rent free office whose market rental value (GST inclusive) is $38000 per year, he would be required to show this as his taxable sale and pay GST accordingly on this GST inclusive amount. Also, Mr. Dennis would be entitled to claim input tax credits on the GST that would be charged by D.K. Pty Ltd on the market value of negotiation services provided by him (ATO n.d. b).

Reference for Taxation Theory, Practice and Law

ATO. 2020. Fringe benefits tax - a guide for employers. https://www.ato.gov.au/law/view/document?DocID=SAV/FBTGEMP/00009&PiT=99991231235958/

ATO. 2020. Co-ownership of rental property. https://www.ato.gov.au/Forms/Rental-properties-2019/?page=3

ATO. 2020. Joint ownership. https://www.ato.gov.au/General/Capital-gains-tax/Acquiring-assets-and-keeping-records/Joint-ownership/#Partnerships

ATO. n.d.a. GSTR 2001/6. https://www.ato.gov.au/law/view/document?Docid=GST/GSTR20016/NAT/ATO/00001

ATO.n.d. b. Taxable sales. https://www.ato.gov.au/Business/GST/When-to-charge-GST-(and-when-not-to)/Taxable-sales/#SalesForPayment

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