What is Fringe Benefits Tax Assessment Act 1986

Question:

Part One: Fringe Benefit Tax

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.

(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 2014. 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 ABC only had 5 employees?

(c) How would your answer to (a) differ if clients of ABC also attended the end-of-year dinner?
 
Part Two: Capital Gain Tax

Dave Solomon is 59 years of age and is planning for his retirement. Following a visit to his financial adviser in March of the current tax year, Dave wants to contribute funds to his personal superannuation fund before 30 June of the current tax year. He has decided to sell the majority of his assets to raise the $1,000,000. He then intends to rent a city apartment and withdraw tax-free amounts from his personal superannuation account once he turns 60 in August of the next year. Dave has provided you with the following details of the assets he has sold:

(a) A two-storey residence at St Lucia in which he has lived for the last 30 years. He paid $70,000 to purchase the property and received $850,000 on 27 June of the current tax year, after the real estate agent deducted commissions of $15,000. The residence was originally sold at auction and the buyer placed an $85,000 deposit on the property. Unfortunately, two weeks later the buyer indicated that he did not have sufficient funds to proceed with the purchase, thereby forfeiting his deposit to Dave on 1 May of the current tax year. The real estate agents then negotiated the sale of the residence to another interested party.

(b) A painting by Pro Hart that he purchased on 20 September 1985 for $15,000. The painting was sold at auction on 31 May of the current tax year for $125,000.

(c) A luxury motor cruiser that he has moored at the Manly Yacht club. He purchased the boat in late 2004 for $110,000. He sold it on 1 June of the current tax year to a local boat broker for $60,000.

(d) On 5 June of the current tax year he sold for $80,000 a parcel of shares in a newly listed mining company. He purchased these shares on 10 January of the current tax year for $75,000. He borrowed $70,000 to fund the purchase of these shares and incurred $5,000 in interest on the loan. He also paid $750 in brokerage on the sale of the shares and $250 in stamp duty on the purchase of these shares. Dave has contacted the ATO and they have advised him that the interest on the loan will not be an allowable deduction because the shares are not generating any assessable income.

Dave has also indicated that his taxation return for the year ended 30 June of the previous year shows a net capital loss of $10,000 from the sale of shares. These shares were the only assets he sold in that year.

(a) Based on the information above, determine Dave Solomon’s net capital gain or net capital loss for the year ended 30 June of the current tax year.

(b) If Dave has a net capital gain, what does he do with this amount?

(c)  If Dave has a net capital loss, what does he do with this amount?

Non-Cash Benefits and Taxation

According to Fringe Benefits Tax Assessment Act 1986, FBT is Fringe Benefits Tax which is provided on the non-cash benefits provided to the employee. Employees are provided with the allowances over and above the basic salary. These allowances are taxable and according to section 66 employers are required to pay certain tax upon the taxable values of the benefits provided to them. Section 5A of division 1 of part IIA of the act states hoe to compute the employer’s fringe benefits taxable amount.

As it is said before, fringe benefits are the benefits which are provided to the employee. In simple terms, these are the benefits provided over salary. Some of the examples are cited below:

• Car benefits given to employees
• Debt waived by the employer
• Loan fringe benefits provided to employee like giving loan to employees at a rate lower than market rate
• Reimbursement of personal expenditure of the employee
• Housing allowances paid to employees
• Allowances given to employees for living away from home
• Board fringe benefits provided to employees
• Meal entertainment benefits provided to employees
• Car parking benefits

As the above given benefits are taxable as per the act, some of the benefits are given exemption from the taxability. While giving the benefits to employees, if the employer incurs expenses in relation to those benefits which are taxable then the employer will be allowed to have deduction in income tax return.

The exempted benefits from Fringe Benefits Tax are:-

• Superannuation fund
• Minor benefits which are less $300 in value(58P of division 13 of part III)
• Remote area housing(58ZD of division 13 of part III)
• Living away from home allowances are partly exempt
• Employee relocation expenses
• Work related items given to employees for the purpose of doing work are exempted from tax like, protective clothing, briefcases, laptops, mobile phones.(58X of division 13 of part III)
• Taxi travel(58Z of division 13 of part III)

Minor benefits provided to employees which are less than $300 are not liable to FBT. If the benefit provided fulfils the below given two conditions then the benefits will be exempt from the applicability of FBT:-

• The notable value of the benefit is lower than $300.
• The benefit given is unreasonable to consider it as fringe benefit.

Notable taxable value means the taxable value if the benefit was taxable.

Benefits are liable to tax whether they are paid to the employee himself or to the associate of the employee. FBT year is from April to March.

• For the year ending 31^st March 2015-47%
• For the year ending 31^st March 2014-46.5%
• For the year ending 31^st March 2013-46.5%

Gross up rates of fringe benefits are of two types. Type 1 gross up rate are for those benefits which are allowed to have credit of GST. For example, if any service received by the employee is including GST and if employer is allowed to have the credit of GST then gross up rate 1 will be used to find out the taxable value of the fringe benefit.

Same as that, if the employee is provided certain services for which GST is not applicable then employer won’t be allowed to have the credit of GST as the service provided is GST free, therefore type 2 gross up rate will be applied and taxable value will be found out using type 2 rate. For example, payment of school fees of children of employee. School fees are always GST free, therefore to find out the taxable value of this service, type 2 gross up rate will be used.

• For the year ending 31^st March 2015-2.0802
• For the year ending 31^st March 2014-2.0647
• For the year ending 31^st March 2013-2.0647

• For the year ending 31^st March 2015-1.8868
• For the year ending 31^st March 2014-1.8692
• For the year ending 31^st March 2013-1.8692

• Payment of salary or wages.
• Shares purchased under approved employee share acquisition scheme.
• Employer contributions to complying super funds.
• Employment termination payments.
• Payment of amounts deemed to be dividends.
• Certain benefits provided by religious institutions to their religious practioners.

Step: 1- Find out the benefits provided to employees which are liable to FBT.

Step: 2- Work out total of those benefits which fall under type 1. Which means those benefits on which GST credit is available?

Step: 3- Work out the taxable amount of the benefits found out in step 2. The amount will be calculated using type 1 gross up rate. The value of the benefit will be multiplied by type 1 gross up rate.

Step: 4- Work out those benefits which are GST free. Here we have to total out those benefits on which GST credit is not available. Type 2 rate will be used to find out the taxable value of the benefit.

Exemptions from Fringe Benefits Tax

Step: 5- Find out the taxable value of the benefits found out in step 4 by multiplying the value of the benefits by type 2 rate provided.

Step: 6- Total out the taxable value of the benefits calculated in step 3 and 5.

Step: 7- Calculate the value of the Fringe benefits Tax by multiplying the rate of FBT with the taxable value found out in step 6.

Explanatory notes to the solution:-

I) Salary paid to Alan is not liable to tax. Salary is not liable to FBT as per the provisions of The Fringe Benefits Tax Assessment Act 1986. Therefore, salary will not be considered for calculating amount of fringe benefits tax.

II) Payment made to Alan for mobile phone expenses are $220 per month. That means $2640 per year. The mobile phone has been provided to Alan for work purposes only. The benefits provided exclusively for work purposes are not liable to FBT.

III) Payment made for Alan’s children’s school fees are liable to FBT. Children’s school fees are GST free. Therefore, it will fall under type 2 rate. The taxable value will be calculated by multiplying the value of school fees which is $2000 with type 2 rate. Therefore, the taxable value will be $37,384(20,000*1.8692).

IV) Alan has been provided by ABC with mobile phone handset which was worth $2,000 including GST. First of all, the benefit is liable to FBT as it is not included in the exemption list of work related items. Therefore, it will be very well liable to FBT. As the benefit provided is including GST, it will fall under type 1. To calculate the taxable value, the benefit will be multiplied with the type 1 rate. Therefore, the taxable value will be 4,129.4(2,000*1.8692).

V) At the end of the year, dinner facility was provided by the employer to 20 employees and the partners; the number of partners is not defined in the question. The total cost of the dinner is $6,600. Here, we assume that there was only one partner presented at dinner. Total 21 members were there. Therefore, the expenditure will be distributed between 21 employees. Per person expenditure will come to $314 after rounding off. The dinner expenditure was including GST. Therefore, type 1 rate will be used to calculate the taxable amount. Therefore, the taxable value will be $648.32.

The benefits provided by ABC to Alan are $28,600(22,000+2,000+6,600).

I) The benefits provided by ABC to Alan are $28,600(22,000+2,000+6,600).

II) The amounts of benefit provided to Alan which are liable to GST credit are $2,314(2,000+314).

III) The total taxable amount will be $4,777.72(4,129.4+648.32).

IV) The benefits provided which are not liable to GST credit are 20,000$(education fees).

V) The taxable value of those benefits which are not liable to GST will be multiplied with rate 2. Therefore, taxable value will be $37,384(20,000*1.8692).

VI) Total of the taxable value will be $42,161.72(4,777.72+37,384).

VII) Fringe Benefit Tax amount is $19,605.2(42,161.72*46.5%).

Particulars	Amount(in $s)	Taxable Amount(in $s)
Mobile Phone Expense(Note 2)	Exempt
Children’s school fees(Note 3)	20,000	37,384
Mobile phone handset(Note 4)	2,000	4,129.4
Dinner expenses(Note 5)	314	648.3
Total		42,161.7

Part A.b)

If there had only been 5 employees with ABC then there would be total 6 persons as per our assumption in part one. Therefore, total expenditure of $6,600 will be distributed between 6 persons. Therefore, per person the expenditure will be $1,100. $1,100 will fall under the category of type 1 as it is including GST. So, the taxable amount of this benefit will be found out by multiplying it with type 1 rate. Hence, the taxable value of the benefit will be as under:

The solution would change in the below given manner.

37,384+4,129.4+2,271.17=43,784.57

43,784.57*46.5%=20,359.83

The answer would change in the above given manner.

Part A.c)

If the clients would have attended the dinner then there will be more than 22 persons therefore the per person expenditure would come to less than $300. As per the provisions of the act, minor expenses are not liable to FBT. Therefore the answer of this question would change in a manner that the dinner expenditure will not be liable to FBT. So, the answer would change in the below given manner:-

Total taxable benefits will be:

$41,513.4(4,129.4+37,384) because dinner benefits will not be included in taxable amount.

FBT will be:

$19,303.73(41,513.4*46.5%).

Part B.a)

Particulars	Amount(in $s)	Amount(in $s)
Sale of two-storey residence at St. Lucia (Note I)	Exempt
Sale of paintings(Note II)	125,000$
Less: Purchase cost of painting (15,000*123.4/71.3)	(25,960.73)	150,960.73
Sale of Luxury motor Cruiser(Note III)	60,000$
Less: Purchase cost of Luxury Motor Cruiser	(110,000$)	(50,000$)
Sale proceeds of Shares(Note IV)	80,000$
Less: Purchase cost of Shares	(75,000$)
Less: Interest on loan	(1,000$)
Less: Brokerage on sale of shares	(750$)
Less: Stamp duty on sale of shares	(250$)	3,000$
Total Capital Gain		103960.73
Less: Capital loss of previous year	(10,000$)
Net Capital Gain		93,960.73

The most common type CGT event is disposal of an asset-selling it or giving it away.  

• Cancellation of share or surrender or redemption.
• A person ceased to be a citizen of Australia.
• Compensation payment.
• A person entering into a contract not to perform certain tasks.

I) Permanent residence is exempted from capital gain if sold. Therefore, two storey residence sold won’t be liable to capital gain. This event is disposal of an asset.

II) Sale of painting is liable to capital gain as per the provisions of the act. Therefore, cost of acquisition will be deducted from the sale proceeds and net sale consideration will be liable to capital gain. The painting was sold in an auction which is also a disposal of an asset.

III) Sale of motor cruiser is liable to capital gain as motor cruiser is capital asset as per the definition of capital asset. The motor cruiser is sold by Dave. Therefore, it’s disposal of an asset.

IV) Shares are always liable to FBT. Therefore, sale consideration received will be liable to capital gain and expenses incurred to complete the transaction will be allowed as deduction from sale consideration. This transaction is also a disposal of an asset.

V) Capital losses carried down from previous years are allowed as deduction from net capital gain of current as well as future years. Therefore it will be allowed as deduction.

Part B.b)

If Dave has net capital gain then the amount of net capital gain will be added to the income of the assessee and it will be taxed as per the normal rates applicable to the income of the assessee. This is the treatment to be given when there is net capital gain derived from the sale consideration (division 6E of part III).

Part B.c)

If Dave has net capital loss then capital loss will be carried forward for indefinite years and if there is any capital gain in current year or next year then the amount of capital loss will be set off against capital gain (division 6E of part III).

References:-

ANON, N.D., “Rates of FBT”, Accessed on 3^rd February 2015, <https://www.ato.gov.au/Rates/FBT/>

ANON, N.D., “Fringe Benefits Tax”, Accessed on 3^rd February 2015, <https://www.ato.gov.au/Business/Employers/Preparing-to-engage-workers/Fringe-benefits-tax-(FBT)/>

ANON, N.D., “Expenses you can claim”, Accessed on 3^rd February 2015, <https://www.ato.gov.au/Business/Employers/Preparing-to-engage-workers/Expenses-you-can-claim/>

ANON, N.D., “How to calculate Fringe Benefits Tax”, Accessed on 3^rd February 2015, < https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT/>

ANON, N.D., “The Fringe Benefits tax Assessment Act 1986”, Accessed on 3^rd February 2015, < https://www.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/>

ANON, N.D., “Calculating Fringe Benefits Tax”, Accessed on 3^rd February 2015, < https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/In-detail/Getting-started/FBT-for-small-business/?page=8#Calculating_fringe_benefits_tax>

ANON, N.D., “Capital Gains Tax”, Accessed on 3^rd February 2015, < https://www.ato.gov.au/General/Capital-gains-tax/>

ANON, N.D., “Selling an asset and other CGT events”, Accessed on 3^rd February 2015, < https://www.ato.gov.au/General/Capital-gains-tax/Selling-an-asset-and-other–CGT-events-/>

ANON, N.D., “Working Out Your Capital Gain or Loss”, Accessed on 3^rd February 2015, < https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/>

ANON, N.D., “Shares and units”, Accessed on 3^rd February 2015, < https://www.ato.gov.au/General/Capital-gains-tax/Shares-and-units/>