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Taxation Law

200187

ANSWER GUIDE TUTORIAL PROBLEMS Week 4 FBT The following is an answer guide for one of the weekly allocated problems. Note that it is not a definitive answer and is only meant to provide students with sufficient direction to assist with their studies and to give students confidence they have some mastery of the material.

The question is in italics and the answer guide is in normal font.

Acknowledgement 1 © School of Law, Western Sydney University; © 2019 Thomson Reuters (Professional) Australia Limited The materials on this site, unless otherwise indicated, were prepared by Thomson Reuters & modified by John Azzi for the purpose of teaching in 200187 Taxation Law. They must not be reproduced or used for any other purpose without the express permission. Taxation Law 200187

Question 7.4 - PoTL 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 GUIDE (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. 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].

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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].

Acknowledgement © School of Law, Western Sydney University; © 2018 Thomson Reuters (Professional) Australia Limited The materials on this site, unless otherwise indicated, were prepared by Thomson Reuters & modified by John Azzi for the purpose of teaching in 200187 Taxation Law. They must not be reproduced or used for any other purpose without the express permission.

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