What is Fringe Benefit Tax (FBT)?

Question 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 2014. 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?

Fringe Benefit tax  are been paid by the employer on the certain benefits provided by him to their employees. The tax on fringe benefit is mostly applied on the non cash benefits which are provided by the company to their staff. The fringe benefit tax is different from the income tax and it would be calculated on the benefits provided. The FBT is taxable on the specified items at the rate of 47% including Medicare levy. FBT is annual tax and taxable on any benefit during the period of 1^st April to 31^st March.

There are certain exclusion on which no FBT is liable to pay the exclusions is: salary & wages, superannuation contribution, benefits under employee share schemes.

The FBT tax is exempt on certain benefits which are notified by the Australian government the benefits are:

• Exempt loans
• Work related expenses
• Exempt car payment benefits expense
• Minor benefits having taxable value under $300
• Tools and certain equipment expenses related to work
• Employee relocation expenses
• Remote area housing.

The FBT are been liable on the following item:

• Car
• Debt waiver
• Loan
• Expense payment
• Housing
• Living away from home allowance
• Airline transport
• Board
• Meal entertainment
• Tax-exempt body entertainment
• Car parking
• Property
• Residual

As per the Alan case the we assume that mobile bills covered under salary packaging would be not be chargeable to FBT as such phone is used for the business purpose so it falls under the exclusion category of work related expenses and the cost of mobile phone given of $2000 would not be liable for FBT as it was related to employee employment benefit.

The expense initially the employee is liable to pay such amount and if it was paid by the employer than it will fall under the category of expense payment fringe benefits and employer ABC Pty is liable for FBT. So the children school fees of Alan were borne by the employer than such fees if liable for tax. The school fees paid by the employer were GST free so it would be liable for tax as per type 2 of FBT.

Calculating FBT

In the above case the meal was provided by the ABC Pty limited at the end of the year to their employees and partners, we are assuming that such meal was not provided during working hours or for the business or seminar purpose so such entertainment expense would be liable to FBT.

Answer to above case:

a) The ABC PTY Limited company has provided mobile phones and reimbursed the mobile bill of Alan than such expense payment would not be liable to FBT as the such expense is incurred for the use of business purpose and as per the provision any expense incurred and such benefit given are used for the business purpose than such expense are not liable for FBT.

Calculation of FBT:

Expense related payment: school fees where GST is free the FBT liability for 31^st march is $20000*1.8868 = $37736

FBT liability = $ 37736*47%=17736 (round off)

Entertainment benefit provided: dinner provided of $6600 including GST calculation is provided below.

FBT taxable value= $6600*1.1 *2.0802*50%=$7551

FBT liability= 7551$*47%=$3549

Total FBT liability was $17736+$3549=$21285.

b) The answer given in case A would differ if there are less employees i.e. 5. If the employees would be less than the payment for dinner would automatically reduces which affect on the FBT amount the cost of dinner per employee would be 6600/20=$ 330 per employee so number of employee was 5 so total expense for dinner would be $1650. So FBT amount would be 1650*1.1*2.0802*50%=1888*47%= $887.

c) As per the answer given in case A above the FBT is leviable on the meals provided to their employee at the year end and if such dinner if accompanied by the clients than as per the legislation the FBT would be leviable on the part of the benefits provided to the employee and the associates or partners they are not liable to pay FBT n the remaining part of benefit provided to clients.

Dave Solomon is 59 years of age and is planning for his retirement. Following a visit to his financial adviser in March of the current tax year, Dave wants to contribute funds to his personal superannuation fund before 30 June of the current tax year. He has decided to sell the majority of his assets to raise the $1,000,000. He then intends to rent a city apartment and withdraw tax-free amounts from his personal superannuation account once he turns 60 in August of the next year. Dave has provided you with the following details of the assets he has sold:

(a) A two-storey residence at St Lucia in which he has lived for the last 30 years. He paid $70,000 to purchase the property and received $850,000 on 27 June of the current tax year, after the real estate agent deducted commissions of $15,000. The residence was originally sold at auction and the buyer placed an $85,000 deposit on the property. Unfortunately, two weeks later the buyer indicated that he did not have sufficient funds to proceed with the purchase, thereby forfeiting his deposit to Dave on 1 May of the current tax year. The real estate agents then negotiated the sale of the residence to another interested party.

Exclusions from FBT

(b) A painting by Pro Hart that he purchased on 20 September 1985 for $15,000. The painting was sold at auction on 31 May of the current tax year for $125,000.

(c) A luxury motor cruiser that he has moored at the Manly Yacht club. He purchased the boat in late 2004 for $110,000. He sold it on 1 June of the current tax year to a local boat broker for $60,000.

(d) On 5 June of the current tax year he sold for $80,000 a parcel of shares in a newly listed mining company. He purchased these shares on 10 January of the current tax year for $75,000. He borrowed $70,000 to fund the purchase of these shares and incurred $5,000 in interest on the loan. He also paid $750 in brokerage on the sale of the shares and $250 in stamp duty on the purchase of these shares.

Dave has contacted the ATO and they have advised him that the interest on the loan will not be an allowable deduction because the shares are not generating any assessable income. Dave has also indicated that his taxation return for the year ended 30 June of the previous year shows a net capital loss of $10,000 from the sale of shares. These shares were the only assets he sold in that year.

(a) Based on the information above, determine Dave Solomon’s net capital gain or net capital loss for the year ended 30 June of the current tax year.

(b) If Dave has a net capital gain, what does he do with this amount?

(c) If Dave has a net capital loss, what does he do with this amount?

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Part a.)

@Painting acquired is not considered in the category of collectables as Dave Solomon acquired it for the value less than $500 and also before 16 December 1995.

Exceptions and exemptions:

Commonly speaking, a capital gain or capital loss on below mentioned is dis-regarded:

1. a) Properties acquired before 20 September 1985
2. b) Motor vehicles
3. c) Reimbursement received for particular injury
4. d) Selling of main residence (family home)
5. e) A collectable, for example, jewelry, which is acquired for $500 or less
6. f) A private used asset kept mainly for private use or pleasure for own purposes or for associates. If assesse acquired it for more than $10,000, is disregarded for only capital losses. If it is acquired for $10,000 or less, it is disregarded for both capital gains and capital losses.

Part b.)

Calculating out net capital gain or loss –

Once assesse finds out his/her capital gain for each CGT asset, he/she need to find out his/her net capital gain for the year.

Net capital gain = Total capital gains for the current year (including those distributed by a managed fund or trust)

(Minus) Total capital losses (including any net capital losses from previous years)

Generally, CGT is not aseparated tax. The net capital gains forms part of your assessable income in the year the CGT event occurred and is payable as part of assesses income tax assessment for the relevant income year.

Because assets are often long term assesse need to take good care of records relating to purchase, conservation and enhancements. This will help not only in finally working out the amount that is subject to Capital Gains Tax but also helps in recollecting the true base costs that has been spent.

The amount Mr. Dave has got after selling of the assets can be utilized to contribute funds to his personal superannuation fund.

Some records which are specifically needed to keepwhenever a major transaction happens include:

1. a) Interest paid on related loans
2. b) Receipts of purchase
3. c) Records of expenses like legal fees, stamp duty etc.
4. d) Receipts covering land taxes, insurance bills, rates etc.
5. e) Receipts for repairs, maintenance and improvements
6. f) Any market valuations
7. g) Receipts for shares brokerage

Part c.)

Calculating out net capital gain or loss –

Once assesse has find out his/her capital loss for each CGT asset, he/she need to find out his/her net capital loss for the year.

Net capital loss = Total capital losses (including any net capital losses from previous years)

(Minus) Total capital gains for the year (including those distributed by a managed fund or trust).

Assesse cannot deduct his/her net capital loss directly from his/her other incomes, but he/she can carry it forward and deduct it from capital gains in later income years.

There is no time limit on how long one can carry forward a net capital loss.

One must apply his/her capital losses against his/her capital gains in the order in which he/she made them. They can’t choose not to apply capital losses against capital gains if they have them, however, they can choose which capital gains to deduct their losses from.

Net losses arising from collectables can only be deducted from capital gains made from respective category of collectables only, and not from other capital gains.

References

ANON, N.D., “Capital Gains Tax on Shares and Units”, viewed on 11 January 2014.

ANON, N.D., “Capital Gains Tax on Home”, viewed on 11 January 2014.

ANON, N.D., “Capital Gains Tax Exemptions”, viewed on 11 January 2014.

ANON, N.D., “Calculating a Capital Loss”, viewed on 11 January 2014.

ANON, N.D., “Calculating and Paying Capital Gains Tax”, viewed on 11 January 2014.

ANON, N.D., “Step By Step Guide to Capital Gains Tax”, viewed on 11 January 2014.