Foundation of Taxation Law for Peta Taxpayer

Describe about the Foundation of Taxation Law for Peta Taxpayer.

1. Issue

It is known based on the given situation that Peta the taxpayer has obtained an amount of $ 600,000 from the tennis court sale to the local tennis club. The key concern is to evaluate the various case facts and thereby opine on whether the above proceeds can be termed as ordinary income or not.

Rule

Not all income that is obtained by the taxpayer is considered assessable for the purpose of tax. The assessable income as advocated by ITAA 1997 has been captured primarily in the two sections stated below.

Section 6(5) – As per this section, the income refers to that which is derived through the usage of concepts that are ordinary in nature The section does not dwell on precise definition of these ordinary concepts and hence the scope of this has been left undefined by this statute which amounts to ambiguity as to what exactly quantifies as assessable income as per this section (Barkoczy, 2015).

However, based on the tax rulings and case laws which have revolved around definition and classification of income in accordance with Section 6(5), three pivotal sources are to be included with regards to composition of ordinary income as enumerated below (Gilders et. al., 2015).

Income earned during engagement in personal exertion. A prime example of this would be the income generated through employment or engagement in activity where the concerned taxpayer has capability of producing commercial value.

Income earned from investments made in property. Some common example of the same are rent income from owned property, interest received on various investment as well as bank balances along also the dividend received from share investments

Income earned by conducting a business activity. It is imperative that the arguments forwarded in TR 97/11 should be applied in order to ensure that the underlying activity carried out by the taxpayer would constitute as a business and not as a hobby (Woellner, 2014).

Section 15(15) – Any isolated transaction that the taxpayer executes with the intention of earning profits would lead to the potential gains being identified as assessable income. The above understanding has been highlighted in the decision of the Antlers Pty Ltd Federal Commissioner of Taxation 97 ATC 4192 case.  In case of isolated transactions, since the taxpayer is not engaged in the business, hence profit intention has to be mandatorily present from the onset of the activity and should be the prime motivator for executing the same (Sadiq et. al., 2015).

Application

The given case indicates that Peta buys a house having the two tennis courts. The intentions with which she bought the property are outlined below.

The property could become permanent residence for Peta where she could reside with her family.

The tennis courts could provide an ideal ground for building up there new units which later can be liquidated thus earning profits.

But, before Peta could begin building units on the tennis court, she got an offer by the local tennis club who were interested in buying the tennis courts present on her property. However,, they had one condition which was that Peta would have to get these restored. Driven by the huge profit that Peta could derive from renovation and sale of the tennis courts, she decided to abandon the plan of setting up units. A sum of $ 100,000 is spent on the tennis courts renovation which required a host of activities to be done. After the restoration if complete, the local tennis club buys these courts and provides Peta with a payment of $ 600,000.

The above proceeds amounting to $ 600,000 do not fall within the ambit of income derived under Section 6(5). This is because the case contains no such information with regards to Peta carrying out a business of real estate development or restoration of old tennis courts. The money received from the sale would have been business income if Peta was involved in a related business where such old courts are bought and then renovated and sold at a hefty profit. Clearly, this is not the case here as initial plan of Peta was to build additional units for gains and also the property has been bought for residence also.

The given proceeds from the sale of the tennis courts will contribute to assessable income as per Section 15(15).  The key argument here is that restoration of the old courts at a hefty cost of $ 100,000 was carried out by Peta only with the prospect of earning profits by liquidating the restored courts to the local tennis club.  Hence, the given land development was part of an isolated plan which Peta had executed for earning profits.

Conclusion

The above arguments clearly suggest that the proceeds from the sale of the tennis courts are not considered as ordinary income as per Section 6(5) even though it would fall within the ambit of assessable income under Section 15(15).

2. Issue

Based on the various benefits provided to Alan by his employer, the core concern in the question is to access the underlying FBT liability.

Rule

The calculation of potential FBT liability on various fringe benefits is governed by relevant provisions of FBTAA 1986. In this regard, Section 58X clearly exempts the electronics devices of mobile nature from the imposition of FBT if these have been given for work related use only. Additionally, reimbursement of expenses that are professional in nature does not amount of any fringe benefit being given to the employee. Further, token fringe benefits not exceeding $ 300 do not attract FBT liability as per the minor benefit exemption clause (Wilmot, 2012).

School fees

School fees are a personal expense for the employee, hence expense by the employer in this regard would lead to extension of fringe benefit on behalf of the employer (Deutsch et al., 2015).

Value subject to FBT on account of school fees = Total fees paid by employer * Gross up factor

The value of gross up factor is periodically adjusted and is also driven by the classification of goods as Type 1 or Type 2 based on whether GST applies or not (Gilders et. al., 2015).

FBT payable on school fees = 0.49* (Value subject to FBT on account of school fees)

Dinner

In the event that the employer incurs food expense outside the business premises, then fringe benefit related to meals would be extended. With regards to computation of FBT liability on meal benefit, the employer has a choice to make as two alternative approaches are available. The employer typically makes a choice considering the guest composition for the meal and also the expected guest count. Since the employer cannot claim deduction on food expenses incurred on clients, hence when clients are also present, the employer aims to reduce the total expense taking into consideration for computation of the underlying FBT liability (Hodgson, Mortimer & Butler, 2016).  The two available methods for FBT calculation on meal related fringe benefits are discussed below.

Actual Method

This method is considered when the clients are not included and only employees and/or their associates comprise the guest list. This method involves computation of FBT liability on the actual expense on meal as the employer can claim tax deduction on this expense (Nethercott, Richardson & Devos, 2016).

FBT liability = 0.49* Actual meal cost incurred *Gross up factor

50-50 Split Method

This method is considered when the clients are also included in the guest list besides employees and their associates.  In this method, FBT liability is computed only on half of the actual food expenses incurred by the employer. The employer uses this method for minimising FBT liability as meal expense on client is not tax deductible. It is imperative to note that meal expenses on employees and their associates still remain deductible to the extent of 50% of the actual cost (Sadiq et. al., 2015).

FBT liability = 0.49* 0.5* Actual meal cost incurred *Gross up factor

Application

Even though the mobile bill of Alan is paid by his employer, but it does not amount to any expense fringe benefit as the bill only had work related calls. Also, no FBT liability would arise on account of the mobile phone given by the employer to Alan as indicated in Section 58X, FBTAA 1986.

School fees

Fees amount paid by ABC = $ 20,000

It is known from the given information that it is not subject to GST, which implies that the gross up factor would be 1.9608

Hence, FBT payable by ABC on account of school fees = 0.49 * 20000 * 1.9608= $19,215.84

Dinner

The employer organises the dinner at a Thai Restaurant and therefore meal fringe benefit has been extended to the invitees.

Total employees invited for the dinner = 20

These were accompanied by their associated and the actual food bill came out to be $ 6,600.

The amount of money spent on the food bill of the employees alone would be 50% of the total expense or $ 3,300. The above figure results in a per employee food bill of $ 165.

Considering that the meal fringe benefit is nominal and does not exceed the threshold value of $ 300, therefore no FBT liability would arise in this case.

As per the information provided, the number of invitees now comprises of only five employees with the food bill remaining the same and hence it is apparent that now the meal fringe benefit per employee would not be nominal and hence FBT would be applicable on the employer. The appropriate method which the employer would choose is the Actual Method.

Meal Related FBT payable by ABC (Actual Method) = 0.49 * 6600 *2.1463 = $ 6,941.13

As GST has been paid on the food bill, hence input credits could allow the company to marginally reduce the tax burden (Barkoczy, 2015).

The guest composition now has altered with the inclusion of clients at the dinner and this would cause a shift in the method from actual to 50:50 split method for the reason explained above. The corresponding FBT liability imposed on ABC is shown below.

Meal Related FBT payable by ABC (50:%0 Split Method) = 0.49* 0.5*6600 *2.1463 = $ 3,470.6

Conclusion

Based on the discussion above, the employer ABC needs to pay FBT for the expense fringe benefit arising due to fees and also the meal fringe benefit. The exact FBT liability in case of meal fringe benefit varies with the guest composition and the guest count that have been invited to the Thai Restaurant for dinner.

References

Barkoczy, S 2015. Foundation of Taxation Law 2015, 7^th edn, CCH Publications, North Ryde

Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2015. Australian tax handbook, 8^th edn, Thomson Reuters, Pymont

Gilders, F, Taylor, J, Walpole, M, Burton, M. & Ciro, T 2015. Understanding taxation law 2015, 8^th edn, LexisNexis/Butterworths.

Hodgson, H, Mortimer, C & Butler, J 2016, Tax Questions and Answers 2016, 5^th ed., Thomson Reuters, Sydney,

Nethercott, L, Richardson, G & Devos, K 2016, Australian Taxation Study Manual 2016, 4^th ed., Oxford University Press, Sydney

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2015, Principles of Taxation Law 2015, 8^th edn, Thomson Reuters, Pymont

Wilmot, C 2012,  FBT Compliance guide, 6^th edn, CCH Australia Limited, North Ryde

Woellner, R 2014, Australian taxation law 2014, 8^th eds., CCH Australia, North Ryde

 

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