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Fringe Benefit Tax Assessment
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To ascertain the liability on account of FBT for the employer ABC Ltd. which has extended host of fringe benefits to Alan, their employee.
The tax treatment of fringe benefits is governed by the Fringe Benefit Tax Assessment Act, 1986 or FBTAA, 1986. Section 58X of FBTAA, 1986.states that the employer may provide particular electronics hardware such as laptop or mobile to the employee for use in relation to work, then the same would not be included within the ambit of FBT. Further, for other employee expenses that are borne by the employer, fringe benefit would arise only if the expense is personal in nature for employee and despite that is paid or reimbursed by employer. Hence, fringe benefit is likely to result if the employer pays for the utility bills including mobile provided these are used for personal calls. If the utility bill is derived purely on the basis on expenses related to work, then fringe benefit would not arise. Further, the fringe benefits whose value is lower than $ 300 and thus are of token value would not be included for FBT as they can be exempted as per the minor benefit exemption clause (Wilmot, 2012).
School fees - FBT Treatment
The fee payment for children of employee leads to extension of fringe benefit and hence would result in FBT being levied on the part of the employer (Gilders et al., 2015).
Fringe benefit’s taxable value = Fees paid * Gross up factor
Since no GST is applicable, the gross up factor that would be used is 1.8868
FBT liability for employer = 0.47* Fringe benefit’s taxable value
The employer may provide mean for employees along with clients outside the business premises which would lead to the extension of fringe benefit and may result in levying of FBT. The FBT computation on meal is dependent on two factors namely the count of invitees along with the invitees composition. The invites count becomes significant as with sufficient count, it may be possible that the employer may be able to escape any FBT through the usage of minor fringe benefit exemption clause. The invitees composition assumes significance due to differential tax deduction treatment extended by the tax department since any expenses on clients in this regard are not deductible for tax whereas employee along with their associated related expenses are deductible for tax purpose (Barkoczy, 2015).
There is choice that employer has with regards to the method used for computation of meal related FBT. The two available choices are briefly explained as follows.
- Actual Method
In this, FBT is computed on 100% of the meal expense incurred. This is preferable when only employees are invited and thus deduction to the extent of 100% on food expenses is allowable. Besides, the liability associated with FBT can becomes less by claiming the GST input credits that can be available due to the GST paid on dinner (Deutsch et.al, 2015).
- 50-50 Split Method
In accordance with this method, FBT needs to be paid on only half of the actual meal related expenses incurred. This method leads to the reduction of FBT liability but the major issue with this method is that even the deduction on tax would be halved. As a result, this method is preferred when meal expenses are extended to clients also since these are anyways tax non-deductible. Thus, the endeavour of the employer is to minimise the FBT liability (Sadiq et. al., 2015).
In accordance with Section 38X, the FBT implications for mobile handset do not exist since Alan uses the mobile only for purposes related to work. Additionally, the bill paid by ABC cannot be assumed to be a fringe benefit as Alan is not using the mobile phone for personal purposes.
School fees paid by ABC = $ 20,000
Hence, in line with the discussion in the rule section, we get that
FBT levied on school fees = 0.47 * 20000 * 1.8868 = $17,736
Thai Restaurant Dinner
As per the information provided, a total of 20 employees along with their respective partner form the invitees. Since no clients are invited, hence the preferable method is actual method.
Dinner expense by ABC = $6,600
Assuming all employees come in pairs, hence the expenditure on employees is 50% of total or (1/2)*6600 = $ 3,300
Thus, per employee expense on dinner = 3300/20 = $ 165
The employer can claim exemption from any FBT on account of minor benefit exemption clause since the taxable value of the above dinner spend if computed would not cross the set limit of $ 300.
Now there has been a reduction in the employee strength to five and hence the minor benefit exemption would no longer be applicable as the taxable value of meal fringe benefit would be greater than $ 300.
FBT on account of meal = 0.47 * 6600 *2.0802 = $ 6,453
It is noteworthy that additional tax credits would be available to the employer because of the GST paid.
Now there has been an alteration in the composition and even the clients have been invited. As a result, the 50:50 split method would be used.
Hence, FBT on account of meal = 0.47 * 0.5* 6600 *2.0802 = $ 3,227
Besides, tax credits can be availed to the extent of 50% of the GST payable on dinner.
2. As per Division 40, ITAA 1997, there are namely two approached for calculation of the decline in value of a given depreciation asset which are highlighted below (ATO, 2015).
- Prime Cost Method
- Diminishing Value Method
The given division does not provide guidance with regards to the method deployed. However, for the case given, diminishing value method is used as the machine is sold before full utilisation of the asset over the effective life. For any asset which had been owned by an entity afterwards May 10, 2006, the value decline using diminishing value method can be computed as shown below (Gilders et. al., 2015)
The company has the option of availing input tax credits on account of GST paid but for the computation in this case, the underlying effect of these has been ignored (ATO, nd).
Year 1 ( January 2010 - January 2011)
Machine’s base value = $1,100,000
Life of the machine = 10 years
Since the machine is deployed only for business, hence the days would be considered as 365.
Therefore, machine’s decline in value = 1100000*(365/365)*(200%/10) = $ 220,000
Residual value of asset (machine) = $1,100,000 - $ 220,000 = $ 880,000
A deduction equal to the decline in value i.e. $ 220,000 would be available in the given tax year.
Year 2 (January 2011 - January 2012)
Residual value of asset (machine) at the beginning of year 2= $880,000
Life of the machine = 10 years
Therefore, machine’s decline in value = 880000*(365/365)*(200%/10) = $ 176,000
Residual value of asset (machine) at the end of year 2= $880,000 - $ 176,000 = $ 604,000
A deduction equal to the decline in value i.e. $ 176,000 would be available in the given tax year.
Year 3 ( January 2012 - January 2013)
Residual value of asset (machine) at the beginning of year 3 = $604,000
Life of the machine = 10 years
Therefore, machine’s decline in value = 604,000*(365/365)*(200%/10) = $ 120,800
Residual value of asset (machine) at the end of year 3= $604,000 - $ 120,800 = $ 483,200
A deduction equal to the decline in value i.e. $ 120,800 would be available in the given tax year.
It is evident on the base of computations carried out above that the opening value of machine as on January 1, 2014 is $ 483,200. But the asset owner liquidates the machine for a net consideration of $330,000.
The company would be able to claim a capital loss on the machine since its selling price is considerably lower than the acquisition price (Barkoczy, 2015).
Capital loss (machine) = Acquisition cost – Sales Proceeds = 1100000 – 330000 = $770,000
It is known that the above machine was exclusively meant for business and not utilised for personal or private gains. As a result, all the capital loss computed above will have to be adjusted against the capital gains during the current year if possible or will have be carried forward to the future years till the time these are nullified against the derived capital gains (Sadiq et. al., 2015).
Besides, Rubber company can also file a deduction in tax which is equivalent to the difference in value of the selling price and the carrying value of the machine in the books of account (ATO, 2015). Thus, tax deduction available in 2014-2015 = $ 483,200 - $ 330,000 = $153,200.
Barkoczy, S 2015. Foundation of Taxation Law 2015, 7th edn, CCH Australia Limited, North Ryde
Deutsch, R, Freizer, M, Fullerton, I, Hanley, P, & Snape, T 2015. Australian tax handbook, 8th edn, Thomson Reuters, Pymont
Gilders, F, Taylor, J, Walpole, M, Burton, M & Ciro, T 2015. Understanding taxation law 2015, 8th edn, LexisNexis/Butterworths.
Sadiq, K, Coleman, C, Hanegbi, R, Jogaranjan, S, Krever, R, Obst, W & Ting, A 2015. Principles of taxation law 2014. 8th edn, Thomson Reuters, Pyrmont
Wilmot, C. 2012 FBT Compliance guide. 6th edn, CCH Australia Limited, Sydney
ATO 2015. Guide to Depreciating Assets 2014-2015, Australian Taxation Office, Available online from https://www.ato.gov.au/uploadedFiles/Content/MEI/downloads/Guide-to-depreciating-assets-2015 (Accessed on May 22, 2016)
ATO n.d. Prime Cost and diminishing value methods, Australian Taxation Office, Available online from https://www.ato.gov.au/Business/Income-and-deductions-for-business/Depreciating-assets/General-depreciation-rules/Prime-cost-and-diminishing-value-methods/ (Accessed on May 22, 2016)
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