Calculation of Fringe Benefit Tax based on a case study

Questions:

1. Alan is an employee at ABC Pty Ltd (ABC). He has negotiated the following remuneration package with ABC:

• salary of $300,000;

• payment of Alan’s mobile phone bill ($220 per month, including GST). Alan is under a two-year contract whereby he is required to pay a fixed sum each month for unlimited usage of his phone. Alan uses the phone for work-related purposes only;

• Payment of Alan’s children’s school fees ($20,000 per year). The school fees are GST free.

ABC also provided Alan with the latest mobile phone handset, which cost $2,000 (including GST).

At the end of the year ABC hosted a dinner at a local Thai restaurant for all 20 employees and their partners. The total cost of the dinner was $6,600 including GST.

(a) Advise ABC of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2015. Assume that ABC would be entitled to input tax credits in relation to any GST-inclusive acquisitions.

(b) How would your answer to (a) differ if ABC only had 5 employees?

(c) How would your answer to (a) differ if clients of ABC also attended the end-of-year dinner?

2. Rubber Co manufactures tennis balls. On 1 January 2010, Rubber Co purchased a new machine for $1.1m (inclusive of GST) which it used to produce the tin cans in which its tennis balls were placed for sale to retailers. At the time of acquiring the machine , Rubber Co estimated that the machine would have an effective life of 10 years before it needed to be replaced. Subsequently, on 1 January 2014, as a result of new technology, a better quality machine became available and Rubber Co decided to sell the original machine for $330,000 (inclusive of GST) and purchase a new machine for $2.2m (inclusive of GST).

Requirement:

What are the tax consequences of these arrangements under Div 40ITAA97?
 

In the given case, Alan is employed by ABC Pvt, Ltd. He is offered a salary package of $3000, 000. Further benefits that would be provided to Alan by ABC Ltd. include payment of mobile phone bill, children’s school fees and a mobile handset. There is also an offer of year end dinner at a restaurant by the employer for all employees.  In the given scenario the consequences of the Fringe Benefits provided by the employer is discussed. Along with the calculation of tax liability at the end of 31^st March, 2015 is also provided.

Fringe Benefit tax was founded in 1986. It is a tax paid by the employer on certain benefits provided to the employee or employee’s family (Martin 2015). As per the act the definition of benefits includes services, rights, privilege or facility provided by the employer (Woellner et al. 2012). The definition of fringe benefit does not include salary, allowances, superannuation’s etc.  The fringe benefits that are taxable under the act includes car fringe benefit, loan fringe benefit, housing fringe benefit, Airline transport fringe benefit, entertainment fringe benefits, meal entertainment fringe benefit, residual fringe benefit, Debt waiver fringe benefit, expense payment fringe benefit, living away from home fringe benefit, board fringe benefit, car parking fringe benefit and property fringe benefit (Shields and North-Samardzic 2015).

Exemptions under Fringe Benefit Tax

The rate of fringe benefit tax is 45% and 1.5% of Medicare levy which comes to 46.5%.  The year that is followed for calculating the taxable fringe benefit is 1^st April to 31^st March of next year (Edmonds 2015).  It is to be noted that items provided by the employer which are related to work for example mobile, laptop, computer, calculator etc are exempted from tax. The other exempted fringe benefit includes periodicals & newspaper, workers compensation insurance, subscription & membership fees etc (Pearce and Hodgson 2015). 

As per the above discussion expenses of employee paid by employer is a taxable fringe benefit. In the given case Alan’s Mobile phone bill of $220.00 per month payable by the employer is a taxable fringe benefit. The school fees of children $20000.00 per year is also a taxable fringe benefit. But the mobile handset given by the employer is exempted from fringe benefit tax (Stanley & McCue 2014). As the year end dinner is only provided to employees and their partners then it amounts to special benefit given by the employer to employees so is taxable under Fringe Benefit Tax  (Voßmerbäumer 2013).

For the purpose of calculation there are two type of fringe benefit- Type 1fringe benefit and Type 2 Fringe Benefit. If the employer is entitled to input tax credit of GST on the fringe benefits provided to its employees then it is a Type1benefit. The Type 2 benefit does not include claim for GST tax credit. For the purpose of calculating gross up value in case of Type 1 Fringe benefit it is multiplied with 2.0647 and in case of calculating Gross up value for Type2 benefits the fringe benefit is multiplied with 1.8692 (Tran-Nam 2015).

(a)

(b)

If there are only 5 employees instead of 20 then cost of dinner per head will increase and tax payable will also change to 21,184.21.

(C)

In the given question, if the yearend party is also attended by the clients then it is not a benefit given only to employees. In such case it will not be considered as fringe benefit. Then tax payable will be

From the above it can be concluded that Fringe Benefit tax is paid by the employer. The taxable amount depends on the nature of the benefit and whether the employer is eligible for GST credit. The ABC ltd. is advised that if Alan is employed with the present remuneration package then the company will be liable to pay $20234.05 as Fringe benefit taxes. If there is only 5 employees instead of 20 employees then Fringe Benefit Tax increases to $21184.21. But if the company arranges the year end party for all including clients then that expense will not be considered as Fringe benefit. So the Fringe Benefit tax will then be 19917.33. It is advised to reduce the Fringe Benefit Tax the third option is the best.

What are the tax consequences when a Rubber manufacturing Co purchase a new machinery (depreciable asset) having a life of 10 years but disposed it after using  4 years for business purpose i.e. manufacturing of rubber. The machinery was disposed because a new machine with better quality was available in the market as a result of new technology and new machinery was purchased in its place. 

As per Australian tax Office (ATO) depreciation is available on asset purchase and used for the purpose of business like plant and machinery used for the manufacturing or production process. Depreciation means decline in the value of asset over the period of time the asset is being used for business purpose. Depreciation is calculated over the estimated life of the asset.

As per Division 40 there are two methods for calculating depreciation as per ATO which are:

Prime Cost- Under this method depreciation is calculated over the life of the asset

at a fixed percentage (Rate of Depreciation) calculated as follows –

(Depreciation each year/ Cost of the Asset)*100

Where, Depreciation each year=Cost of the Asset/Estimated life of Asset

In this method depreciation each year is same. If the life of the asset can’t be estimated by the Company purchasing the asset then it can take the estimated life of given by ATO

The formula given by ATO for calculating Depreciation of a particular year is as follows-

Asset Cost*(No. of days asset was held during the Year/No. of  days in the year)* Rate of depreciation

Diminishing Value method-Under this method depreciation is calculated on the written down value or adjustable value of the asset at the beginning of each year.

Adjustable value is calculated by deducting decline in the value of the asset from the cost of the asset in the 1^st year and from the Opening adjustable value from the 2^nd year (Woellner et. al. 2012). Opening adjustable value means the closing adjustable value of the previous year. In this method Depreciation each reduces from the previous year (Palmer 2013)

The formula given by ATO for calculating Depreciation under Diminishing Value method is as follows-

Year 1: Cost of the asset* (No. of days asset was held during the Year/No. of  days in the year)*(200%/5)

From Year 2, Cost of the asset will be replaced by opening adjustable value of respective year.

This process will continue until the cost of the asset becomes Zero.

As per ATO, Goods and Sales Tax (GST) is to be excluded from the cost of the asset while calculating Depreciation. But other expenditure which are incidental to the acquisition of the asset are to be included in the cost of the asset like installation expenses, transportation expenses etc.

As per ATO, credit of GST  is available for the amount of GST paid on purchase of asset. GST credit is available for the proportionate part of asset used for the purpose of business (Sadiq et al. 2016). After the asset is partly being used for the purpose of the business and disposed of then decreasing adjustment has to be made for the Proportionate credit of GST not availed for the part used for private purpose. But if no part of the asset is used for private purpose then no decreasing adjustment is required to be made.

When a asset is disposed of the difference between termination value and adjustable value is to be accounted for in the book of accounts(Ramli et al. 2015). If the termination value is more than the adjustable value then the difference is to be added to the assessable income and if the termination value is less than the adjustable value then the difference is to be deducted from the assessable income. Termination value is the sales price of the asset while adjustable value is the cost of the asset minus depreciation allowed upto the date of sale or termination(Ey.com, 2016).

Applying  the above provision given above the tax implication in the hands of Rubber Co are as follows :-

So depreciation is available to the rubber co in the year of purchase(1^st January 2010) of asset from the date asset is put to use and in the year of sale up to the date of sale of asset(1^st January 2014).

Depreciation for the year 2012 is more than 100000(i.e. $100273) because it was a leap year (Barkoczy 2013).

GST are being excluded from the cost of asset as it is assumed that the rubber co has availed credit for the payment of GST on purchase of machinery (Athvankar 2015). Since 100% of the asset is being used for the purpose of the business so decreasing adjustment is not required at the time of disposal of asset.

It is being assumed that the rubber co has adopted the prime cost method of calculating depreciation.

The difference between the termination value and adjustable value which is $299454 is to be deductible from the assessable income as termination value is less than the adjustable value.

Rubber co has to pay GST of $30000 on the purchase of new asset and can avail credit of it 

Conclusion

So from the above discussion, the tax implication on the rubber co as per Div 40ITAA97 on purchase and disposal of asset is clearly understandable (Santucci 2014). The rubber co will be allowed deduction for each year the asset is being held by it. And on sale the difference between the termination value and adjustable value is deductible from the assessable income as termination value is less than the adjustable value. Rubber Co will also get the credit of GST paid on purchase of asset. No decreasing adjustment is required as no part of the asset is used for private purpose. 

Reference

Athvankar, S.P., 2015. Goods and Service Tax a path breaking reform in indirect taxes special reference to financial services supply.

Barkoczy, S., 2013. Foundations of taxation law. CCH Australia Ltd.

Martin, F., 2015. Overseas travel by employees: When does FBT apply?.

Palmer, T., 2013. UQ Library Guides: Taxation Law: Get started.

Pearce, P. and Hodgson, H., 2015. Promoting smart travel through tax policy. Tax Specialist, 19(1), p.2.

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.

Sadiq, K., Coleman, C., Hanegbi, R., Jogarajan, S., Krever, R., Obst, W., Teoh, J. and Ting, A., 2016. Principles of Taxation Law.

Santucci, G., 2014. Understanding taxation law and Australian tax law [Book Review]. Ethos: Official Publication of the Law Society of the Australian Capital Territory, (233), p.42.

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