Tutorial 3 Chapter 7 answers PDF

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Principles of Taxation Law 2019 Answers to Questions CHAPTER 7 – FRINGE BENEFITS TAX Question 7.1 Determine whether the following benefits are fringe benefits or exempt fringe benefits and, where applicable, the relevant category of fringe benefit. Provide reasons for your answer: (a) Payment to employee for the estimated cost of the employee’s home phone bill as the employee sometimes has to use the home phone for work purposes. (b) Provision of accommodation at the family home to a child who is over 21 and works in the family business. (c) Payment of employee’s superannuation contribution by the employer to a complying superannuation fund. (d) Loan by Company X to one of its directors, Rupert, who is also a shareholder in the company. The company’s rules do not permit loans to directors. (e) Payment of taxi fare by employer for employee to travel home after working late. (f) Flowers sent to a sick employee. The flowers cost $75. (g) Provision of a car for an employee’s private use, including payment of all fuel costs by the employer. (h) Provision of sandwiches at a lunchtime seminar held at the employer’s premises. (i) Provision of an all-expenses-paid holiday to an employee who has had to work every weekend for the last six months. (j) Provision of two laptop computers to an employee who regularly attends clients’ premises. Answer (a) Not a fringe benefit. It is an allowance as the employee is paid a pre-determined amount for the expense: see [7.80]. (b) Issue is whether it is provided “in respect of employment” or because of the family relationship. Further investigation is needed, such as finding out whether the child is otherwise properly remunerated for their work in the family business: see [7.70]. (c) Not a fringe benefit. Excluded from the definition of “fringe benefit”: see [7.80]. (d) Not a fringe benefit. Loan provided due to the shareholder relationship not “in respect of employment”: see [7.70]. (e) Exempt fringe benefit: see [7.350]. (f) Exempt fringe benefit: see [7.320]. (g) Fringe benefit. It is a car fringe benefit. The payment of the fuel costs are not a separate fringe benefit and are part of the car fringe benefit: see [7.100]. (h) Exempt fringe benefit. Not a meal entertainment fringe benefit because it is not related to “entertainment”: see [7.230]. Not a property fringe benefit because it is exempt: see [7.260]. (i) Fringe benefit. It is a residual fringe benefit: see [7.280]. (j) One laptop is an exempt fringe benefit: see [7.330]. The second laptop is a property fringe benefit: see [7.250]. However, if the employer is a ‘small business entity’, both laptops can be treated as exempt benefits. See [7.330] and [3.210].

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Question 7.2 Jenny is an employee of the university. She is provided with 10 gift vouchers worth $50 each for use at the local supermarket as a Christmas gift. Advise Jenny and the university of the tax consequences of this transaction. Answer The provision of the vouchers is the provision of a fringe benefit. They would likely constitute a residual fringe benefit. Although each individual voucher is valued at less than $300 and may qualify for the minor benefit exemption, they must be looked at cumulatively as they are similar benefits and the total value is more than $300: see [7.320]. Therefore, the university is subject to FBT in relation to the provision of the vouchers: see [7.280]; [7.400]–[7.420]. The vouchers are non-assessable non-exempt income for Jenny: see [7.440].

Question 7.3 Robert borrowed $10,000 from his employer on 4 September 2018 as his home was damaged in a freak storm. The loan was provided at no interest. On 15 January 2019, his employer informed Robert that he was only required to repay half the loan as he is a valued employee. Advise Robert and his employer of the tax consequences of this transaction. Answer There are two fringe benefits arising here. At the end of the FBT year, 31 March 2019, Robert has received a loan fringe benefit and a debt waiver fringe benefit. The taxable value of the loan fringe benefit is: 4 Sep to 15 Jan: $10,000 x 5.20% x (134/365) = $191: and 16 Jan to 31 Mar: $5,000 x 5.20% x (75/365) = $53 See [7.170]–[7.190]. The taxable value of the debt waiver fringe benefit is the amount of the loan that is waived, ie $5,000: see [7.150]. Fringe benefits taxable amount = [($191 + $53) + $5,000] x 1.8868 = $9,894. The loan fringe benefit and the debt waiver fringe benefit are both Type 2 fringe benefits as they do not include GST and therefore not creditable acquisitions from the employer’s perspective. See [7.410]. FBT payable = $9,894 x 47% = $4,650: see [7.420]. For Robert, the loan and the debt waiver fringe benefits are non-assessable non-exempt income: see [7.440].

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Question 7.4 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. Assume that ABC has no other meal entertainment expenditure for the year and elects for Div 9A to apply to the provision of meal entertainment fringe benefits. You can also assume that ABC determines the taxable value of meal entertainment fringe benefits using the 50/50 split method. (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 2019. 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 clients of ABC also attended the end-of-year dinner? Answer (a) FBT consequences for ABC:  Salary $300,000 o Not a fringe benefit as specifically excluded from the definition of “fringe benefit” in s 136(1) of FBTAA; therefore no FBT consequences for ABC: see [7.80]. 

$220 per month for phone bill o The first issue to consider is whether this is an allowance or a reimbursement. Although the fixed nature of the amount would indicate an allowance, it is in fact a reimbursement as the $220 represents an actual expense incurred by Alan and is not an arbitrary amount: see RTA Case and TR 92/15. o Therefore, this is an expense payment fringe benefit: FBTAA, s 20. o Taxable value = $220 x 12 = $2,640 (s 23 FBTAA – external expense payment fringe benefit). o Alan uses the phone for work-related purposes only; therefore, if ABC provides a “noprivate-use declaration”, the expense payment fringe benefit will be an exempt benefit under FBTAA, s 20A. o Alternatively, the taxable value of the expense payment fringe benefit is reduced to 0 under FBTAA, s 24 (the “otherwise deductible” rule) as the phone expenses would be deductible to Alan if he had incurred them himself (see Chapter 12). See [7.85]; [7.200]–[7.220]; and [7.390].

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Payment of children’s school fees o This is an expense payment fringe benefit: FBTAA, s 20. o Taxable value = $20,000 (FBTAA, s 23 – external expense payment fringe benefit). o None of the reductions to taxable value are applicable. 3

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See [7.200]–[7.220] and [7.360]–[7.390]. Mobile phone handset o This is an exempt fringe benefit (s 58X of FBTAA) as Alan uses the phone for work purposes only: see [7.330]. End of year dinner - $6,600 o This is a meal entertainment fringe benefit and can be captured by a number of categories – property fringe benefit; meal entertainment fringe benefit; residual fringe benefit. o As stated in the facts, ABC chooses to apply Div 9A to its meal entertainment fringe benefits and uses the 50/50 split method:  Taxable value = 50% x $6,600 = $3,300 See [7.230] and [7.240].  As there are 20 employees and their partners, the taxable value of each fringe benefit is 3300/40 = $82.50. However, since we assume that the employer has elected to use the 50:50 split method to value meal entertainment, the use of the minor benefit exemption under s 58P will not be available.

Having determined the taxable value of each fringe benefit, it is then necessary to determine whether the fringe benefit is a Type 1 or Type 2 fringe benefit: see [7.400].     

School fees = Type 2 fringe benefit as it is GST-free (education). End of year dinner = Type 1 fringe benefit as the amount includes GST (and assuming that ABC is entitled to input tax credits) Fringe benefits taxable amount = ($20,000 x 1.8868) + ($3,300 x 2.0802) = $37,736 + $6,865 = $44,601: see [7.410]. Fringe benefits tax liability = $44,601 x 47% = $20,962: see [7.420]. Therefore, ABC must pay FBT of $20,962 in relation to Alan’s salary package.

(b) If any of ABC’s clients attended the end-of-year dinner, not all of the meal entertainment is provided as a fringe benefit and ABC should consider using the register percentage method if it would result in a lower FBT liability: see [7.240].

Question 7.5 Periwinkle Pty Ltd (Periwinkle) is a bathtub manufacturer which sells bathtubs directly to the public. On 1 May 2018, Periwinkle provided one of its employees, Emma, with a car as Emma does a lot of travelling for work purposes. However, Emma's usage of the car is not restricted to work only. Periwinkle purchased the car on that date for $33,000 (including GST). For the period 1 May 2018 to 31 March 2019, Emma travelled 10,000 km in the car and incurred expenses of $550 (including GST) on minor repairs that have been reimbursed by Periwinkle. The car was not used for 10 days when Emma was interstate and the car was parked at the airport and for another five days when the car was scheduled for annual repairs. On 1 September 2018, Periwinkle provided Emma with a loan of $500,000 at an interest rate of 4.20%. Emma used $450,000 of the loan to purchase a holiday home and lent the remaining $50,000 to her husband (interest free) to purchase shares in Telstra. Interest on a loan to purchase private assets is not deductible while interest on a loan to purchase income-producing assets is deductible. 4 © 2019 Thomson Reuters (Professional) Australia Limited

During the year, Emma purchased a bathtub manufactured by Periwinkle for $1,300. The bathtub only cost Periwinkle $700 to manufacture and is sold to the general public for $2,600. (a) Advise Periwinkle of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2019. You may assume that Periwinkle would be entitled to input tax credits in relation to any GST-inclusive acquisitions. (b) How would your answer to (a) differ if Emma used the $50,000 to purchase the shares herself, instead of lending it to her husband? Answer (a) FBT consequences for JB  Provision of car o Qualifies as a car fringe benefit as the car is available for Emma’s private use: FBTAA, s 7. o In the absence of an election to use the cost basis method (and further information), the statutory formula method is used: o Taxable value = (0.2 * $33,000 x 330/365) = $5,967  Base value = cost of the car  Number of days car provided as fringe benefit = 330 because days when car scheduled for annual repairs, car not available for private use. This assumes that the car was at the car repair workshop for five full days, otherwise if the car was dropped off on day one and picked up on day five, the reduction would only be for three days. Days when car parked at airport, still available for private use unless Emma gives the keys to her employer.  There is no recipient’s contribution as Emma was reimbursed for her expenses. See [7.100]–[7.130].  Reimbursement of Emma’s motor vehicle expenses o Generally, this would qualify as an “expense payment fringe benefit”. However, it is exempt under FBTAA, s 53. 

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Loan of $500,000 o Provision of the loan is a “loan fringe benefit”: FBTAA, Div 4 o Taxable value = $500,000 x (5.20% - 4.20%) x (212/365) = $2,904  NB: There is no reduction to the taxable value under the “otherwise deductible rule” as Emma has not used the loan amount to earn assessable income: see [7.390]. See [7.170] to [7.190].

Purchase of bathtub for $1,300  The bathtub would be an “in house property fringe benefit” as they are sold to customers in the ordinary course of Periwinkle’s business: FBTAA, Div 11.  The bathtubs are manufactured by Periwinkle and sold to the public in the ordinary course of Periwinkle’s business; therefore taxable value = 75 % x $2,600 (lowest price sold to public) = $1,950.  The taxable value is reduced by $1,300 for recipient’s contribution to $650.

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The taxable value may be further reduced to nil under s 62 FBTAA as it is an “in-house fringe benefit” (assuming there are no other in-house fringe benefits to Emma that year). See [7.250]–[7.270] and [7.370].

Having determined the taxable value of each fringe benefit, it is then necessary to determine whether the fringe benefit is a Type 1 or Type 2 fringe benefit: see [7.400].  Car = Type 1 fringe benefit (as the amount is said to be GST inclusive and assuming Periwinkle is entitled to input tax credits)  Loan = Type 2 fringe benefit (it is a financial supply; therefore no GST is applicable)  Assumed that taxable value of bathtub is reduced to 0. Fringe benefits taxable amount = ($5,967 x 2.0802) + ($2,904 x 1.8868) = $12,413 + $5,479 = $17,892: see [7.410]. Fringe benefits tax liability = $17,892 x 47% = $8,409: see [7.420]. Therefore, Periwinkle must pay FBT of $8,409 in relation to the above items. (b) If Emma used $50,000 of the loan amount to purchase shares for herself, that amount would be for an income producing purpose and any corresponding interest would be deductible. As such, the taxable value of the loan fringe benefit would be reduced by 10% ($50,000/$500,000) under the “otherwise deductible rule”: FBTAA, s 19. See [7.390].

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