Taxation Law - Question 1

Issue

  • What is the Fringe Benefits Tax (FBT)?
  • Discuss relevant statutory provision
  • Discuss the categories and why was it introduced?

Rule

  • Fringe Benefits Tax Assessment Act 1986

Application

  • FBT stands for Fringe Benefits Tax. It is a remuneration that employees or his associate like his spouse or children of an organization get not in the form of salary or wages. According to the legislation, it is the benefit provided to the employees for their employment, paid by the employer (Australian Taxation Office, 2020). Examples like entertainment for the staff in the form of food and drinks; a car provided to the employees by the company; a flat or any place of residence provided to the company; health insurance; reimbursement on non-taxable deductible expenses etc. (The University of Adelaide, 2019). Not everything is applicable for fringe benefit. Things like salary and wages, employee share schemes, superannuation, employment termination payments, payments of capital nature, dividends etc Australian taxation Office, 2020). As for the year 2018, the FBT for the year ending 31 March 2018, it is 47.0% (Federation University, 2020). It is essential for assessing the assessable income of an individual for that year. It is treated separately from the income tax and is calculated on the taxable value of benefits provided (The University of Adelaide, 2019).

The act says to keep a record of it for at least 5 years so that tax officers can understand the tax liability for that respective year.

  • The primary legislation of FBT is
  • Fringe Benefits Tax Assessment Act 1986- it talks about the rules of assessing and collecting the tax. It is not the income tax act but gives a detail list of the fringe benefits and the kinds of it.
  • Fringe Benefits Tax Act 1986- this act levies tax on the taxable value of the fringe benefits. If any rate is to be changed, then this act has to be amended.
  • Fringe Benefits Tax (Application to the Commonwealth) Act 1986- this act major role is to see that the FBT legislation is applied to the Australian Government and its authorities.

Majorly, the Fringe Benefits Tax Assessment Act (FBTAA) 1986 is used to understand the concept and impose the benefits under this act.

  • Part III of the FBTAA, 1986 talks gives a detail list on the types of fringe benefits. Starting from division 2 to division 15 entails the type of fringe benefits. The car fringe benefit, Debt waiver fringe benefits, Loan fringe benefits, Expense payment fringe benefits, Housing fringe benefits, Living‑away‑from‑home allowance fringe benefits, Board fringe benefits,Tax-exempt body entertainment fringe benefits, Car parking fringe benefits, Property fringe benefits, Residual fringe benefits, Miscellaneous exempt benefits, Amortisation of the taxable value of fringe benefits relating to remote area home ownership schemes, to name a few.

FBT dates back to 1986, where it was propounded to overcome the income tax deficiencies (Australian Taxation Office, 2020). It involved benefits other than salary and to wages. It is calculated annually beginning on 1st April and ending on 31st March the succeeding year (Australian Taxation Office, 2020).

Taxation Law - Question 2

Brief facts-

During the current tax year Erin received the following amounts:

  1. Salary and wages income of $98,000.
  2. $4,200 interest earned from a bank term deposit of $50,000.
  3. $500 per week for 50 weeks of the year from a rental property she owns.
  4. Winnings of $10,000 on the poker machines.
  5. $500 from selling eggs that her chickens laid to friends.
  6. A holiday bonus of $1,000 from her employer.
  7. A watch worth $200 from a happy client.

Issue-

Calculate the assessable income.

Solution-

Details

Sections

Authority

Assessable income (in $)

Deductions (in $)

Salary and Wages

Sec 6-5

 

98000

 

Interest on bank deposit

Sec 6-5

Repayment of capital - Interest (4200) deductible - Use Test

4200

 

Rent

Sec 6-5

Rent is assessable income (500*7*50)

175000

 

Winnings on poker machines

Sec 8-1

Gambling and betting wins are not taxable income unless one is operating it

 

10000

Selling eggs

Sec 8-1

Considering it a hobby

 

500

Holiday bonus

Sec 6-5

Income from the employer

1000

 

Watch from a client

Sec 8-1

A personal gift from a client

 

200

Total

   

278200

10700

Erin’s taxable income

     

267500

Explanations-

  1. Salary and wages are ordinary income as they are considered remuneration.
  2. Interest on bank deposit is an income for Erin.
  3. Rent received from subletting it is an income.
  4. Gambling and betting wins are not taxable incomes until and unless one is dealing in it as a business.
  5. As per Ferguson v FCT [(1979) 9 ATR 873], things to be taxed depends upon whether it's a bobby or a business. If Erin was dealing in eggs as a business, then it would be an ordinary income. The question is silent about whether it's a hobby or a business, we considered it as a hobby and therefore it is not an ordinary income.
  6. As per Laidler v Perry [(1966) AC 16], a holiday bonus is an ordinary income since it is a reward given by an employer.
  7. As per Hayes v FCT [(1956) 96 CLR 47], any personal gift is not considered as an ordinary income. The client gave the watch as an appreciation and shall be regarded as a personal gift, therefore not an ordinary income.

Taxation Law - Question 3

Issue-

  • Difference between the capital receipts and revenue receipts

Rule-

  • Income Tax Assessment Act 1936
  • Income Tax Assessment Act1997
  • Precedents

Application-

Revenue expenditure means an expense that one has consumed or will consume within an accounting period of 12 months (Caldwell, 2014). These are like electricity bills, rates, wages and salaries, motor vehicle expenses etc. They could be paid in advance but that does not change their nature (Caldwell, 2014). The only effect is seen in companies balance sheets for that accounting period (Caldwell, 2014). Capital expenditure is usually seen as expenditure on assets, something that shall benefit the company in the long run like more than one accounting period of 12 months (Caldwell, 2014). These could be furniture, plants, types of machinery etc (Caldwell, 2014). Not always assets going to be in physical forms. It also includes non-tangible ones like intellectual property rights (Caldwell, 2014). The only crucial feature of this expenditure is that should last beyond a period of 12 months.

To distinguish between capital expenditure not entitled for a tax deduction as per 8-1 of ITAA, 1997 and revenue expenditure which is deductible some precedents demarcate the two. In Sun Newspaper Limited v Federal Commissioner of Taxation [(19380 HCA73; 61 CLR 337], the guidelines were given for the difference between the two. Three elements are to be seen is ascertaining which one is capital and which one is revenue expenditure. First, the nature of advantage sought; second, the way it is going to be used; and third the means adopted to have it. A similar kind of judgement was given in AusNet Transmission Group Pty Ltd v Federal Commissioner of Taxation[(2015) HCA 25]. In absence of circumstances where one cannot judge it, then by default, it is being taken as capital expenditure adjudged in British Insulated & Helbsy Cables v Atherton [(1924-26) 10 TC 155]. The nature of the advantage distinguishes the two of them. Therefore, the payment of rent for business premises is fully deductible, even when half of the payment was credited at the purchase price, adjudged in Federal Commissioner of Taxation v South Australian Battery Makers [(1978) HCA 32] and recently in Commissioner of Taxation v Sharpcan Pty Ltd [(2019) HCA 36].

There is no specific mention about the two in the Income-tax assessment act 1986. However, there are certain sections that define examples of it. Like under part 3rd, division 3 subdivision H clause (2) defines the period of deductibility of certain advance expenditures. In the sub-clause (b) says that where expenditure is made in respect to rent or lease rent which is made in advance shall be considered as an advance expenditure which shall be subject to tax deductions. Then there is section 8-1 which talks about that expenses of revenue nature are deductible but those of capital nature are not. However, since there is no list of it in the act, it is judged with the help of precedents which gives a clear picture.

Taxation Law - Question 4

Paula is employed as a Physical Education (PE) teacher at the local high school.

During the year, she spent the following amounts for which she has substantiation:

  • Purchase of gel comfort running shoes worn every day (2 pairs)………………….$460
  • Purchase of sunscreen, required as her classes are mostly conducted outside.........$70
  • Cost of a one-day seminar on new warm-up and stretching techniques………......$160
  • Taxi fares for travel from home to work when her car was at the mechanic………$50
  • Cost of first aid course (total before $200 reimbursement by the school)…………$400

Issue-

Which of the above expenses is deductible?

Rule-

Draft Taxation Ruling, 2019

Solution

As per the TR 95/14, the ruling applies to teachers, tutors, early childhood, primary, secondary, special education, technical and further education (TAFE) and relief employee teachers. It does not apply to expenses related to lectures at higher education and teachers engaged in exchange programmes. It entails the allowances and reimbursements under section 25and paras 26(e) and 26(eaa) of ITAA 1936.

The deduction is allowable only when the expense is-

  • Actually incurred
  • Meets the deductibility tests
  • Satisfies the substantiation rules

If the expense is incurred partly for work purposes and partly for private purposes, the work-related expense is reimbursed.

Therefore, as per The Australian Tax office, 2020-

  • For her gel comfort running shoes, that shall be deductible for only 1 pair of it. The remaining other pair shall be considered her private expense. At one time she can wear one pair of it so half of $460, i.e., $230 shall be reimbursed, hence deductible.
  • The purchase of sunscreen for $70 for her classes that are conducted outside shall be reimbursed by the school and hence deductible.
  • Cost of a one-day seminar on warm-up and stretching techniques is a part of the school curriculum, hence deductible.
  • Taxi fare from her home to work is an expense and hence deductible.
  • Cost of first aid course shall be deductible for $200 and $200 was reimbursed to her.

References for Taxation Law

AusNet Transmission Group Pty Ltd v Federal Commissioner of Taxation[(2015) HCA 25].

Australian Tax Office. (2020. Taxation ruling. Retrieved from https://www.ato.gov.au/law/view/document?DocID=TXR/TR9514/NAT/ATO/00001#P21

Australian Taxation Office. (2020). Fringe benefits tax – A guide for employers. Retrieved from https://www.ato.gov.au/law/view/pdf/sos/fbtgemp20200129.pdf

British Insulated & Helbsy Cables v Atherton [(1924-26) 10 TC 155].

Caldwell, R. 2014. Taxation for Australian businesses: Understanding Australian business taxation concessions. John Wiley and Sons, 2014.

Commissioner of Taxation v Sharpcan Pty Ltd [(2019) HCA 36].

Federal Commissioner of Taxation v South Australian Battery Makers [(1978) HCA 32]

Federation University. (2020). Fringe Benefits Tax (FBT). Retrieved from https://federation.edu.au/__data/assets/pdf_file/0018/38061/FBT_What_is_it.pdf

Ferguson v FCT [(1979) 9 ATR 873]

Hayes v FCT [(1956) 96 CLR 47],

Laidler v Perry [(1966) AC 16],

Sun Newspaper Limited v Federal Commissioner of Taxation [(19380 HCA73; 61 CLR 337],

The University of Adelaide. (2019). Legal Compliance Education and Awareness. Retrieved from https://www.adelaide.edu.au/legalandrisk/system/files/media/documents/2019-01/FBT_101.pdf

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Taxation Law Assignment Help

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