Consequences of Fringe Benefit Tax for ABC Pty Ltd

Discuss about the Internal Revenue Code and Automobiles.

Rulings on taxation 92/3 of Income Tax Assessment Act specify the provisions on tax liability on the profits incurred from the transactions apart from the transactions in the ordinary course of business. Isolated transaction is the transaction that takes place other than the business and profession or if it has been conducted by the non- business assesses. Considering the taxability of the income from isolated transaction, it would be added to the assessable income of the assessee if the taxpayer’s purpose is to incur profit or gain from the transaction. Further, the income earned by the Australian resident either directly or indirectly shall be computable as an ordinary income as per section 6-5 of Income Tax Assessment Act (ITAA) 1997 (Heckemeyer and Overesch 2013).

Considering the present case, Peta acquired a house, two years ago at Kew, Australia, which had two tennis court attached. She bought the house property for the purpose of residence and for constructing the housing units on the tennis courts, which is meant to be sold at profit in the future years. However, in the current taxation year Peta received an offer for the sale of tennis courts provided it remain in good condition. Peta used $100,000 for renovating the old tennis court into good condition and sold the same for $600,000.

As per section, 6-5 of ITAA97 profit or gain from the sale of property considers as an ordinary income if the same has been transacted in the ordinary course of business. On the contrary, if the profit earned from the sale of the property does not constitute the business of the assessee then the same will be regarded as the capital income. In the present situation, sale of tennis courts in the current tax year was not a part of Peta’s ordinary business course therefore, it has been considered as income from isolated transaction as per taxation ruling 92/3. Considering the decided case of The Myer Emporium Ltd (1987) v. Federal Commissioner of Taxation 163 CLR 199, tax liability of the profit or gain earned from isolated transaction is based on the intention or purpose of the assessee. It has been stated that if the purpose of the assessee is to earn profit from the sale of the property then the same will be included in the assessable income (Benshalom 2013). However, if the assessee’s objective is not to earn income from the property sale, which is not in the ordinary course of the business then the income, will be considered as a capital income of the taxpayer.

Based on the case of Westfield Ltd v Federal Commissioner of Taxation, the assessee contended the argument on inclusive of income in the assessable income from the sale of parcel of land. The company contended that the intention of the taxpayer was not to earn profit from the sale of land and therefore the same should not be considered as an ordinary income of the taxpayer. According to the provisions and taxation rules 92/3, the court decided the profit would not be included in the assessable income since the intention of the taxpayer company was not incur profit or gain (Haufler and Stähler 2013). Therefore, the income by way of sale of property would be considered as a capital income and not as a revenue income.

Moreover, in the present situation Peta acquired the house property including the tennis court with the intention to reside in one part and to earn profit from the sale of units on tennis courts. On the contrary, the nature of the transaction for sale of tennis court was not in the ordinary course of Peta’s business. The residential purpose in one of the parts of the house property was considered to be the investment made by Peta. As per the taxation rulings 92/3 the transaction entered on sale of tennis court would be regarded as income from an isolated transaction as Peta was not engaged in the ordinary business of sale of property (Schäfer et al. 2012). Therefore, the tax liability of the income earned by Peta from the isolated transaction would be analyzed as per the purpose or intention to conduct the sale of tennis court. It had been observed that the intention of Peta for buying the house property was for residential purpose and the intention to buy the tennis court was to sale the same at profit. Hence, the profit incurred from the sale of tennis court would be included in the assessable income of Peta at $500,000 ($600,000- $100,000) as per ITAA 97 in the current taxation year. 

The provisions of Fringe Benefit Tax Assessment Act (FBTAA) 1986 regulate fringe benefits provided by the employers to the workers and staffs. Additionally, taxability of the allowances in terms of fringe benefit is regulated by the taxation ruling 97/17 of ITAA 97. Fringe benefit according to the section 136 FBTAA 1986 is defined as the advantages or benefits provided by the employer in lieu of services rendered by the employers or workers (Hodgson and Pearce 2015). On the benefits provided to the employee, the employers are obligated to pay tax on the benefits according to the percentage as mentioned in the taxation rulings. In the given situation, ABC Pty Ltd offered allowances to its employee Alan in the current taxation year 2016, which is required to be taxed on the basis of FBTAA 1986 and ITAA 97. As per the section 136 in FBTAA 1986 taxability of benefits provided by employer is measured by considering higher gross- up rate as well as lower gross- up rate (Pearce and Hodgson 2015).

According to the taxation ruling 97/17, Higher gross- up rate is applicable to the assesses for determining the taxable value of fringe benefits who pays Goods and Services Tax (GST) on the amount of the benefit. It is also known as type 1. Moreover, the benefit providers including the GST are entitled to claim credit on GST, which is known as “Gross Credible Benefits”. On the contrary, Lower gross- up rate is applicable to the taxpayers not entitled to claim credit on GST because the employers do not pay GST on the value of benefits provided to the employees (Kelliher 2014).

According to the section 58 X, FBTAA 1986, several allowances provided by the employers are considered as exempted benefits. Any benefits provided by the employer or any reimbursements made by the employers in lieu of the expenditures related to the employer’s work falls under the exempted benefits as contained in the TR97/17. In case the amount of benefit or any property is provided by the employer related to the business or work then the same would be included in the exempted benefits as per section 58X of FBTAA 1986. Such exempted items includes electronic gadgets of mobile, computer peripherals, software, office bag or briefcase, protective clothes or any tools or appliances related to work (Webster, Guo and O’Connell 2014). Considering the stated provisions and taxation rulings, tax consequences of the benefits provided by ABC Pty Ltd to Alan explained as under:

Salary payment under a remuneration package: Section 58X FBTAA 1986 provides the consequences of fringe benefits for the payment of salary to the employees that are associated to the employer’s work. It states that the amount of salary provided by the employer would not be liable for taxability in the hands of the employer in the current taxation year (King and Case 2015). Therefore, payment of salary $300,000 provided by ABC Ltd to Alan constitute as exempted fringe benefit because the payment was related to the company’s work as at 31 March 2016.

Mobile phone bill payment: The payment of bill for the mobile phone amounted to $220 per month included the payment of GST. ABC Ltd reimbursed it for the phone given to Alan for the purpose of work therefore, the taxable value of the payment would be considered by using the high- gross up value. According to the TR 97/17 ITAA 97 and section 58X FBTAA 1986, payments or allowances paid for the mobile phone is exempted but the allowances for bill amount is taxable under the provision of fringe benefits. Hence, the company is liable to pay tax on the assessable value of mobile bill at the rate of 49% for the current year ended on 31 March 2016.

Table 1: FBT on mobile bill payment

(Sources: Created by author)

Allowances on children’s education fees: The Company offered the allowances on payment of education fees for Alan’s children on the yearly basis amounted to $20,000, which was exclusive of GST. Considering the provision and taxation ruling 97/17, ABC Ltd is liable to pay tax on assessable value of education fees by using the lower gross- up rate.

Table 2: FBT on education fees payment

(Sources: Created by author)

Benefit of mobile phone: ABC Limited provided the mobile device to Alan the amount of which was inclusive of GST charges. According to the section 58X FBTAA 1986, amount paid for mobile device is an exempted benefit if the same is provided for the purpose of work. Since the purpose of providing benefit on mobile device is not mentioned following three situations would be considered as follows:

Firstly, in case the phone is assumed to be provided by the company is for work purpose, then the amount of mobile device $2,000 falls under the exempted fringe benefit as per section 58X FBTAA1986.

Secondly, in case the device is used by Alan for the personal purpose then the company is liable to pay tax on the assessable value. Further, the assessable value should be computed by using higher gross- up rate because the amount is inclusive of GST.

Table 3: FBT on mobile phone handset

(Sources: Created by author)

Thirdly, in case the mobile device is partly used by used by Alan for personal purpose as well as partly for the work purpose then the amount allocated for work is considered to be exempted as per TR97/17. On the other hand, the amount allocated for the personal use of the phone by Alan should be taxable according to TR97/17. However, it is difficult to segregate the division of amount of mobile phone therefore; it has been assumed that the phone has been utilized for personal purpose. Hence, the same will be taxable as determined in the second option.

Expenses incurred on dinner party: TR 97/17 of ITAA 97 requires the taxability of allowances provided by employer on the “entertainment by way of food and drink”. Since the dinner party organized by ABC Ltd falls under the category of entertainment by way of food and drink, the company is entitled to pay tax on the assessable value of the expenses spent for the party. 

Computation of fringe benefit tax for the year ended 31 March 2016

Table 4: FBT on entertainment allowance

(Sources: Created by author)

Tax liability on the amount of benefits offered by the company cannot be determined based on the number of employees. The taxability on the expenses or allowances depends on the nature and reason for the utilization of the amount of benefits. Therefore, the tax consequences on the expenses spent on dinner party would remain same even if the number of employees were 5 instead of 20 employees.

In case, the clients of ABC Pty Ltd attend the annual party then the cost of the dinner would not be constituted as fringe benefit since it is related to the employees only. If the clients of the company attend the dinner party, then such expenses would be considered as business expenses. The company would be eligible to claim deduction on such expenses according to ITAA97. 

Reference List

Benshalom, I., 2013. Rethinking the Source of the Arm’s-Length Transfer Pricing Problem. Virginia Tax Review, 32(3), pp.425-459.

Haufler, A. and Stähler, F., 2013. Tax competition in a simple model with heterogeneous firms: How larger markets reduce profit taxes. International Economic Review, 54(2), pp.665-692.

Heckemeyer, J. and Overesch, M., 2013. Multinationals’ profit response to tax differentials: Effect size and shifting channels. ZEW-Centre for European Economic Research Discussion Paper, (13-045).

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.

Kelliher, C.F., 2014. A Tax Planning Case Using a Taxpayer Life-Cycle Approach. Advances in Accounting Behavioral Research (Advances in Accounting Behavioral Research, Volume 17) Emerald Group Publishing Limited, 17, pp.119-160.

King, D. and Case, C., 2015. AAn international individual income tax comparsion: the united states, australia, and united kingdom. Editorial review board, p.77.

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

Schäfer, D., Schulmeister, S., Vella, J., Masciandaro, D., Passarelli, F. and Buckley, R.P., 2012. The financial transaction tax—Boon or bane?.Intereconomics, 47(2), pp.76-103.

Webster, M., Guo, Y.M. and O’Connell, A., 2014. Expatriate employees and consultants working in China. Austl. Tax F., 29, p.587.