LAW 505 - 2 - Assignments. PDF

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TAXATION I LAW 505

ST JAYAWEERA 11621166 ASSIGNMENT 2

ISSUE What kind of fringe benefits provided by Shiny Homes Pty Ltd (Shiny Homes) to employee Charlie under FBTAA 86?

How Shiny Homes Pty Ltd. (Shiny Homes) and Charlie recognized these fringe benefit when assessing their assessable income?

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LAW “Fringe Benefit Tax (FBT) is a separate Commonwealth tax that is payable by employers on fringe benefit provided to their employees.” Non-financial benefits such as use of car, free housing and discounted goods or services which provided in regards of the employment of an employee can be classified as a fringe benefit. (Barkoczy, 2017 p.520) Since, the income tax system in Australia, hasn’t covered all type of fringe benefits it consequence to occur revenue leakages within the system. As a result of it, Fringe Benefit Tax Assessment Act 1986 (FBTAA) legislation has been introduced in 1986. A new FBT legislation has imposed by the Australian government for certain reasons such as,  Failure of employee to keep record under s 26(e) ITAA36.  Insufficient provisions for valuations and other technical matters.  To meet efficiency of administration. (i.e. – few taxpayers to dealt with instead of dealing thousands of employees) (Barkoczy, 2017 p.520) The employers have to paid the FBT on their fringe benefit taxable amount for the assessment year. FBT year of tax is differs from the income year of assessment. FBT year runs from 1 st April to 31st of March in every year (s 136 (1) FBTAA). In order to calculate Fringe benefit taxable amount, employer needs to identify the grossed-up taxable value of fringe benefit which are provided to their employees during the FBT year. FBT rate is designed as reflects to top marginal income rates plus levies (ML, TBRL). During the FBT years of 2015/16 to 2016/17 FBT rate has been top up to 49%. However, the tempory budget repair levy (TBRL) is removed from the FBT year of 2017/18 it has been reverted back to 47%. Under the FBTAA, employers are required to self-assessed their fringe benefit liability. “Employers that are liable to pay FBT for year of tax must lodge FBT returns by 21 st May in the following year of tax, or such later date as the Commissioner allows s (68) FBTAA.” (Barkoczy, 2017 p.521) For an instance, FBT returns were due on 21 st May 2017 for the FBT year of 2016/17 which runs from 1st April 2016 to 31st March 2017. ST JAYAWEERA

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“Employers are generally liable to pay FBT by quarterly instalments and report their activity statements (s 102 FBTAA). The instalments which are liable to paid by the employers are credited against their actual FBT liability (s 105 FBTAA), which become due on 21 st may in the following year of tax, (s 90 FBTAA)” (Barkoczy, 2017 p. 522) However, if the employer’s previous year FBT liability was less than $3000, then employers are not required to pay their liability as quarterly instalments. Employer can have deductible advantage of paying cost of FBT, when they assess their income tax liability under s8-1 ITAA97. In order to qualified as deductible under employer’s assessable income, there should be sufficient link between the payment of tax and the employer’s income-producing or business activities. “The time at which FBT and FBT instalments are incurred is relevant in determining the income year in which the payments are deductible. According to TR 95/24, FBT is incurred by an employer at the end of relevant FBT year and FBT instalments are incurred by an employer when the liability to pay them arises.” (Barkoczy, 2017 p.522)

What is a fringe benefit? The s 136(1) FBTAA defines the ‘fringe benefit’. It includes both positive and negative limbs.  Positive Limbs “Under the paragraph (a) to (ea) of the s 136(1) defines the fringe benefits arise where, 

A benefit is provided during, or in respect of the year of tax



By an employer, an associate of the employer, or a third party under an agreement with the employer or associate of the employer



To an employee or an associate of the employee



In respect of the employment of employee” (Barkoczy, 2017 p.523)

The case of J & G Knowles & associates Pty Ltd v FC of T 2000 ATC 4151, indicates that it is difficult to classified as all benefits received by employees from employers as a fringe benefit. In order to become fringe benefit, the benefit must be provided in respect of

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employment. That mean, it’s mandatory to have a sufficient link between benefit provided and the employment. The case of Essenbourne v FC of T 2002 ATC 5201, depicts that in order to become a fringe benefit must provided in respect of particular employee. FC of T v Indooroopilly Children Services (Qld) Pty Ltd 2007 ATC 4236, explains that “fringe benefit cannot arise where the identity of particular employee that is to obtain the benefit is not known at the time the benefit is provided.” (Barkoczy, 2017 p. 524)  Negative Limbs Negative limbs discussed the paragraph (f) to (s) of the 136(1) definitions of FBTAA. Under negative limbs of definition, it, excludes following benefits from being fringe benefit. 

salary or wages,



exempt benefit



other benefits

Fringe Benefits Taxable Amount Calculation of fringe benefit is far more complex process. It involves certain steps. Step 1: Calculate the taxable value of each fringe benefit Step 2: Divide benefits into: 

GST-creditable benefits' (type 1)



Other benefits' (type 2)

Step 3: Multiply:  type 1 benefits by 2.0802 (for 2014/15) or 2.1463 (for 2015/16 and 2016/17), and  type 2 benefits by 1.8868 (for 2014/15) or 1.9608 (for 2015/16 and 2016/17) Step 4: Add the employer’s 'aggregate non-exempt amount'

“Section 5B(1A) FBTAA states that an employer’s fringe benefits taxable amounts are the sum of the ‘s 5B(1B) amount’ and ‘s 5B(1C) amount’.” (Barkoczy, 2017 p.529) 

Type 1 aggregate fringe benefit amount –The total of taxable value of fringe benefits that are

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GST creditable provided during the year of tax by employer to employee. (5C (3) FBTAA) S5B (1B) amount = Type 1 aggregate fringe benefit amount x 2.1463 

Type 2 aggregate fringe benefit amount –The total of taxable value of remaining individual fringe benefits provided during the year of tax by employer to employee. (5C (4) FBTAA) S5B (1B) amount = Type 2 aggregate fringe benefit amount x 1.9608

Both type 1 & 2 are calculate based on gross-up rates as per the below table.



FBT Year

FBT rate

Type 1 gross-up rate

Type 2 gross-up rate

2017/18

47%

2.0802

1.8868

2015/16 and 2016/17

49%

2.1463

1.9608

2014/15

47%

2.0802

1.8868

2013/14

46.5%

2.0647

1.8692

Aggregate Non-Exempt Amount “Section 5B(1D) states that if any benefits provided in respect of the employment of an employee are exempt benefit under s57A FBTAA.” (Barkoczy, 2017 p. 531) Benefits provided to public hospitals, hospital carried on rebatable employers, public amburance service providers etc. can be classified as non exempt benefit. And it also have a positive impact when calculating FBT liability. Finally, we can deried totalfringe benefit table value as for the following formula. Fringe Benefit Taxable Amount = [Type 1 aggregrate fring Benefit Amount x 2.1463] + [Type 2 aggregrate fring Benefit Amount x 1.9608] + Aggregate non-exempt amount

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Categories of benefit In order to benefit to recognized as a fringe, benefit it’s mandatory to benefits provided by an employer (or associate, etc.) to an employee (or associate) in respect of the employment of the employee and it should not fall within the exclusion category of benefits. Simply it must meet the definition of s 136 (1) FBTAA. Benefits that are provide outside the employment, are then not classified as fringe benefits. FBTAA 86, recognized the 13 fringe benefits in different categories. Car Benefit (s 7 FBTAA) Car Parking Benefit (s 39A FBTAA) Meal Entertainment Benefit (s 136 (1) FBTAA) Debt waiver Benefits Loan Benefits Expense Payment Benefits Housing Benefits Living-Away-from-Home Allowances Benefit Airline Transport Benefit Board Benefit Tax-Exempt Body Entertainment Benefit Property Benefits Residual Fringe Benefits As per the assignment purpose we’ll discuss only car, car parking and meal entertainment fringe benefit.

Car Fringe Benefit

It’s a fringe benefit that is a ‘car benefit’ (s 136 (1) FBTAA). A car benefit arises where a car held by a provider is applied or available for ‘private use’ of an employee or associate. ST JAYAWEERA

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The provider must be the employer, an associate of the employer, or a third party who has a relevant arrangement with the employer or associate. (s 7 (1) FBTAA)

“Private use means anus any use that is not exclusively in the course of gaining or producing assessable income. Where a car is garaged at or near an employee’s or associate’s place of residence, it is deemed to be available for private use 7(2) FBTAA).” [ CITATION Bar17 \l 3081 ] The taxable value of car fringe benefit can be calculated according to the following methods.  Statutory Formula Method (s 9 FBTAA)  Cost Basis Method (s 10 FBTAA)

Statutory Formula Method

Taxable Value

=

æ N um ber of days ç d u rin g th a t y e a r o f ta x ç o n w h ic h th e c a r frin g e b e n e fits ç ç 0 .2 ´ B a s e v a lu e ´ w e re p ro v id e d b y th e p ro v id e r o f th e c a r ç N um ber of days ç in th a t y e a r o f ta x ç çç è

ö ÷ ÷ A m ount ÷ (if a n y ) ÷ o f th e ÷ re c ip ie n t’ s ÷ paym ent ÷ ÷÷ ø

Cost Basis Method (Operating Cost Method)

Taxable Value = (C x (100% – BP)) – R 

C: Operating cost of the car, including deemed depreciation and interest (s 10 (3) FBTAA)



BP: Business percentage (s 10 (3) FBTAA)



R: Recipient’s payment (s 10 (3) FBTAA)

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Car Parking Fringe Benefit

“It’s a fringe benefit that is a ‘car parking benefit’ (s 136 (1) FBTAA). A car parking benefit arises where car parking is provided to an employee at, or in the vicinity of, his or her primary place of employment and used in connection with travel by the employee between such place and his or her residence (s 39 A FBTAA)” [ CITATION Bar17 \l 3081 ] This has been applied in the case of Virgin Blue Airlines Pty Ltd v FC of T 2010 ATC , where he federal court held that car parking fringe benefit didn’t result, since the car parking facilities provided around 2km from an employee’s primary place of employment fail to meet the vicinity of that place. “The car parking must be available to the employees on provider’s ‘business premises’ or associated premises’ between 7 am and 7 pm. A commercial parking station must be located within 1 km of premises and lowest fee charged by the operator in the ordinary course of business to the public for all day parking on the first business day of the FBT year must be more than index ‘car parking threshold’ for the year set out in the following table.” (Barkoczy, 2017 p. 547)

Car Parking Threshold FBT Year 2012/13 Threshold $7.83

2013/14 $8.03

2014/15 $8.26

2015/16 $8.37

2016/17 $8.48

Taxable value of car parking fringe benefit can be calculated by using one of following methods.

The Commercial Parking Station Method (s 39C) The Market Value Method (s 39D) The Average Cost Method (s 39DA)

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A. The Commercial Parking Station Method

The lowest all-day parking fee charged in ordinary course of business by any commercial parking station within 1km radius of relevant business premises or associated premises which the car is parked is recognised as the taxable value of car parking fringe benefit on a particular day. Any contribution made by the recipient reduced the taxable value.

B. Market Value Method The amount that the recipient could reasonably be expected to have been required to pay for the benefit if the provider and the recipient were dealing with each other at arm length is identify as the taxable value of car parking fringe benefit under this method. Under this method also any contribution made by the recipient reduced the taxable value. And also, market value required to determine by suitably qualified arm’s length valuer.

C. Average Cost Method

Determinant of car parking fringe benefit under this method is calculated by reference to an average of the lowest all-day parking fee charged by any operator of a commercial parking station within 1km radius of the employer’s premises on the first and last days on which the benefit is provided in the FBT year. In here also the taxable value is reduced by any contribution made by the recipient.

D. The Statutory Formula Method

The taxable value of each space for which there is at least one car parking benefit for an employee can be calculated using following formula.

Daily Rate Amount x Number of days in availability period x 228 365

Daily Rate Amount – Value of car space provided ST JAYAWEERA

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Daily rate amount can be calculated either, commercial parking station method, the market value method or the average cost method assuming no recipient contribution, Under this method, taxable value is reduced by any contribution made by the recipient. The taxable value of car space is reduced on proportionate basis as per the formula contained in s 39FB FBTAA86, where the average number spaces provided is greater than to the average number of employees covered by the election.

E. The 12-Week Record- Keeping Method

If the taxable value of car parking fringe benefit is calculated under this method it is essential for employer to keep proof of details which benefits provided during the year. Therefore, employer must maintain register for record those details. So, the formula to calculate taxable value of benefit as follows. Total taxable value of Benefit = Taxable value of car parking x 52 x benefits (register)

Number of days in car

12 parking availability periods 366

Taxable value of car parking benefit can be calculated either, commercial parking station method, the market value method or the average cost method.

Meal Entertainment Fringe Benefit A ‘meal entertainment fringe benefit’ recognized as a fringe benefit under (s 136 (1) FBTAA). These kinds of benefit arise when the employer provides meal entertainment to a recipient under s37AC.Certain provisions are containing under the meal entertainment fringe benefit. They are, a) Entertainment by way of food or drink b) Accommodation or travel in connection with, or for the purpose of facilitating each entertainment, or c) The payment or reimbursement of expenses incurred in providing (a) or (b) (s 37AD FBTAA) ST JAYAWEERA

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(Barkoczy, 2017 p. 546) The meal entertainment fringe benefit is taxed accordance with the special rules in Div. 9A FBTAA. Employers who are using this special rule can calculate the meal entertainment fringe benefit provided to their employee either following methods.  The 50/50 split method (s37BA) The taxable value of fringe benefit can be calculated by taking the 50% of expenses incurred by employer during the FBT year, when providing meal entertainment benefits to all persons.  The 12-week register method (s37BC) In order, to calculate taxable value of meal entertainment fringe benefit it’s mandatory to keep maintain 12-week register, to determine the employer’s percentage of provided benefit. Therefore, total taxable value of fringe benefit can be calculated by as follows. Taxable Value = Total meal entertainment expenditure x Registered percentage incurred by the on all persons in the year

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APPLICATION

SHINE HOMES PTY LTD. As per the question scenario, a Shine Homes Pty Ltd. is one of real estate company within the area and Charlie act as one of real estate agent in a Shine Homes Pty. Ltd. The relationship between two parties is sufficiently meet the positive limbs as mentioned under s 136 (1) FBTAA. Under the s 136(1) positive limb definition of FBTAA, Shine Homes has provided a benefit such as car, car parking fringe benefit & meal entertainment fringe benefit to its employee Charlie for the FBT year of 2016/17. All the benefits provided by Shine Homes has arisen as respect of Charlie being a real estate agent(employee) of Shine Homes.

Since, Shine Homes is liable to pay FBT, as first step we must taxable value of each fringe benefit provided FBT year 2016/17.

Car Fringe Benefit

 Statutory Method Taxable Value

= [ 0.2 x 70000 x 196] – 0 365

= $7.518

 Cost Basis Method Taxable Value = (C x (100% – BP)) – R

Taxable Value = [[39200(a) + 10208(b) + 2307(c)] x (100% - 62.5%)] – 0 = $19,393

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BP = (50,000/80,000) * 100 = 62.5%

R =0

C = $51,715 ($39200 + $10,208 + $2,307)

a)

$39,200 is the fuel, maintenance, registration and insurance costs relating to the car for the 2016/17 FBT year. This can be calculated as follows.  Petrol and oil - $2,000 x 7 = $14,000  Repairs and maintenance - $3,500 x7 = $24,500  Registration for period - $240x7/12 = $140  Insurance for period - $960x7/12 =$560

b) $10,208 is the ‘deemed depreciation’ relating to the car for the 2016/17.FBT year which is calculated under the formula in s 11(1) FBTAA. Element B of the formula is deemed ‘depreciation rate’ [25% for cars acquired on or after 10th May 2006] ABC = $70000 x 0.25 x7 D

12 = $10,208

c) $2,307 is the ‘deemed interest’ relating to the car for the 2016/17.FBT year which is calculated under the formula in s 11(2) FBTAA. Element B of the formula is deemed ‘statutory interest rate’ for the FBT year [5.65% for 2016/17]

ABC = $70000 x 0.0565 x7 D

12

= $2,307

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* As you can see taxable value of car fringe benefit is lower when using statutory method. Shine Homes has an opportunity to adopt lowest cost method when calculating taxable value of fringe benefit. In this case we have to with statutory formula method. Car Parking Fringe Benefit During working hours Charlie parked his car at Secure Parking (an unrelated entity) and Shine Homes paid $200 per week. The shine Homes has provided a car parking benefit as a fringe benefit and taxable value of provided car parking fringe benefit can be calculated by using statutory formula method as follows. The daily rate of car parking fringe benefit

=

provided to Shine Homes per day

$200 7

= $28.57

Total taxable value of Benefit = Daily Rate Amount x Number of days...