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Australian Taxation Law for Section 6-5 of Income

Question:

Describe about the Australian Taxation Law for Section 6-5 of Income.

Answer:

1. Issue:

After understanding the given case one would understand the provisions of Ordinary income as per the Australian Income Tax Law. Peta had received an income from the club for selling his table tennis court. The amount received was $600,000. The amount spent by Peta was $100,000 to renovate the tennis court. His ultimate aim was to build three units on it and then to sell in the market. But since the offer made by the club was very good, Peta changed her mind and decided to sell the tennis court to them. Issue is that we need to decide that whether the amount received from the club be considered as ordinary income as per Section 6-5 of the Income Tax Assessment Act 1997.

Rule: Section 6-5 of the Income Tax Assessment Act 1997, highlights the provisions relating to the income which are considered to be ordinary. All incomes of an Australian resident whether earned in Australia or outside Australia will be taxable in Australia. If a foreign resident earns any income in Australia then he needs to pay tax on the income earned. For calculating the assessable of a person then all the amounts which is received by the said person from his business needs to be included in his ordinary income. But there are certain incomes which need to be excluded from ordinary income. Such incomes are discussed below: (austlii.edu.au, 2016)

If a person had borrowed any amount from any other person or bank then it should be excluded.

If a person had received any amount from the income protection insurance policy.

Goods and service tax collected by a person should not be included in ordinary income since it is a tax which is paid the government.

If any person is involved in betting or gambling, then any income earned from there needs to be excluded. But if a person has a business of betting or gambling then it needs to be included.(dlsweb.rmit.edu.au, 2016)

If a person had received any prize which is not relating to the business then it needs to be excluded as well.

If a person receives a gift from any other person then it cannot be included in ordinary income.

Every person has some hobby and if any income is earned from such hobby then it has to be excluded from ordinary income.

All the above mentioned income has to be excluded from ordinary income. (ato.gov.au, 2016)

Application:

Peta had purchased a house few years ago so that she could live there with her family. But apart from this she also wanted to sell the tennis court which was there in the house. Two tennis courts were there near the house, on which she was planning to build three units and then sell them in the marker at a profit. But after sometime one of the popular clubs in Kew had offered Pets to sell her tennis court to them Peta had also changed her plan for building three units, now she had decided to sell the tennis court to the club. Before selling the court they wanted some renovation to be done so that the tennis court should be in a good condition. Peta had almost spent $100,000 on the tennis court and then sold it to the club for $600,000. This was an income received by Peta from the club. The given case was very similar to the case of FCT v Cooling where the income was regarded as a capital receipt. Tennis court was a part of the house and house is a capital asset. (Robert Davis, 2016) This income received by Peta should be considered as a capital receipt rather than a revenue receipt. House is a capital asset and so anything related to the house or which is a part of it, should also be considered as a capital asset. Now since this is a capital asset, capital gain would arise in this case. Though capital gain needs to be avoided in this situation but it cannot be considered as revenue receipt at all. Now since this is not considered as a revenue income for Peta, it cannot be considered as ordinary income at all. It is kind of special income received from the club.

Conclusion:

We had seen that the tennis court is considered as a capital asset since it was attached with the house. In this case the amount which was received from Peta for selling the tennis court cannot be considered as an ordinary income. It has to be regarded as a capital income received from the club. Now since this is a capital income, capital gain should be computed and capital gain tax needs to be charged on it. This house is an asset for Peta and so it cannot be regarded as an ordinary income at all. Ordinary income is the income which is earned from the business of a person, not by selling a property. (taxreview.treasury.gov.au, 2016)

2. Part a)

Issue: This is a case which would highlight the provisions of Fringe benefit tax in Australia. This main issue which is to be discussed here is the fringe benefit tax which is to be paid by the company named as ABC Pty Ltd.

Rule: if an employer is giving any benefit to his employee then on such benefit fringe benefit tax is to be charged, And then later company needs to pay fringe benefit tax on it. But not all benefits would attract fringe benefit, there are certain benefits which are exempted from fringe benefit tax. The exemptions are listed below: (ato.gov.au, 2016)

Electronic devices such as mobile phones, laptops, portable printers, tablets and GPS navigation receivers.

Protective clothing

Computer software

Briefcases

Tools of trade. (ato.gov.au, 2016)

Except the benefits mentioned above, on all the other benefits fringe benefit tax needs to be charged. For the year ended 31st march 2016, fringe benefit rate in Australian was 49%. (ato.gov.au, 2016)

There are some specific benefits on which separate sections are mentioned in the Fringe Benefit Tax Assessment Act 1986. Section 54 highlights the benefit relating to food. If an employer has taken all his employees for lunch within the premises of the office then it needs to be exempted from fringe benefit. But if the same is outside the premises of the office then it would attract fringe benefit tax. (austlii.edu.au, 2016)

Application: There were several benefits provided by the company. The benefits and its fringe benefit implications are discussed in detail below:

Company had provided Alan, its employee monthly telephone plan. All the bills of the mobile are paid by the company. Monthly mobile bill was $220 including GST. GST needs to be excluded since input credit is available. Yearly mobile bill would be $200*12 - $2,400. Hence yearly benefit provided by the company to its employee was $2,400.

Company was also paying the school fees of Alan’s children. The mount which was yearly paid by the company was GST free. Hence this benefit would also attract fringe benefit, Fringe benefit value would be $20,000.

Company has provided Alan a mobile handset worth $2,000. We have seen in Fringe Benefit tax Assessment Act that some of the benefits given by the company are exempted from fringe benefit. If a company provides any electronic device to its employee then wit would not attract fringe benefit. Hence in this case mobile phone is exempted from fringe benefit.

At the end of the year company took all its employees with their partners to a dinner. The dinner was not in the company premises; instead it was at a restaurant. If the dinner was in company’s premises then it would have been exempted. The total bill for the dinner was $6,600 including GST. Amount which should be taxable under fringe benefit tax would be excluding GST = $6,000

Conclusion: The total benefit which is to be taxable under the fringe benefit tax would be $2,400 + $20,000 +$6,000 = $28,400

The FBT Rate for the year ending 31st March 2016 was 49%

Hence Fringe Benefit Tax to be paid by the company would be $28,400 *49% = $13,916

Part b)

This case is exactly same with the above case except the no of employees in the company. In this case the total no of employees in the company was only 5. Even though it is a small company, the benefit of taking employees outside for dinner would be taxable under fringe benefit tax. (ato.gov.au, 2016)

Fringe benefit tax paid by the company would be $13,916

Part c)

In this case even the clients went for the dinner with the employees. This means that the dinner was now for business purpose. Hence this will not be considered as a benefit and would not be taxable under fringe benefit tax.

Fringe Benefit value = $2,400 +$20,000 = $22,400

Fringe Benefit Tax would be = $22,400 *49% = $10,976.

Works Cited

Anon., 2016. FRINGE BENEFITS TAX ASSESSMENT ACT 1986 - SECT 54. [Online]
Available at: http://www.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/s54.html
[Accessed 10th September 2016].

ato.gov.au, 2016. Fringe benefits tax – rates and thresholds. [Online]
Available at: https://www.ato.gov.au/Rates/FBT/
[Accessed 10th September 2016].

ato.gov.au, 2016. Fringe benefits tax (FBT). [Online]
Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/
[Accessed 10th September 2016].

ato.gov.au, 2016. Fringe benefits tax for small business. [Online]
Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/In-detail/Getting-started/FBT-for-small-business/
[Accessed 10th September 2016].

ato.gov.au, 2016. What to include in your assessable income. [Online]
Available at: https://www.ato.gov.au/Business/Income-and-deductions-for-business/Working-out-your-assessable-income/What-to-include-in-your-assessable-income/
[Accessed 10th September 2016].

ato.gov.au, 2016. Work-related items exempt from FBT. [Online]
Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Do-you-need-to-pay-FBT-/Work-related-items-exempt-from-FBT/
[Accessed 10th September 2016].

ato.gov.au, 2016. Work-related items exempt from FBT. [Online]
Available at: https://www.ato.gov.au/General/fringe-benefits-tax-(fbt)/do-you-need-to-pay-fbt-/work-related-items-exempt-from-fbt/
[Accessed 10th September 2016].

austlii.edu.au, 2016. FRINGE BENEFITS TAX ASSESSMENT ACT 1986 - SECT 54. [Online]
Available at: http://www.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/s54.html
[Accessed 10th September 2016].

austlii.edu.au, 2016. INCOME TAX ASSESSMENT ACT 1997 - SECT 6.5. [Online]
Available at: http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html
[Accessed 10th September 2016].

dlsweb.rmit.edu.au, 2016. Ordinary Income. [Online]
Available at: https://www.dlsweb.rmit.edu.au/toolbox/finance/fnbacc02a/preparetax/keyprinciple/ordinaryi.htm
[Accessed 10th September 2016].

Robert Davis, 2016. The Effect of the Decision of the Full Court of the Federal Court in Cooling. Revenue Law Journal, 1(2), p. 8.

taxreview.treasury.gov.au, 2016. Architecture of Australia's tax and transfer system. [Online]
Available at: http://www.taxreview.treasury.gov.au/content/paper.aspx?doc=html/publications/papers/report/section_2-04.htm
[Accessed 10th September 2016].

 

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