HI6028 Taxation Law Assignment : Essay Fountain

Question:

Charlie is an employee of Shiny Homes Pty Ltd (Shiny Homes). He is a real estate agent. Shiny Homes also operates a separate business on landscaping to ‘do up’ houses before it is put up for sale.

During working hours Charlie parked his car at Secure Parking (an unrelated entity) and Shine Homes paid $200 per week.

 
Allan and Betty were living and working in Melbourne. They decided on a ‘tree change’, sold their Melbourne home and purchased a large country house on a 10 hectare block in central Victoria. Betty works part-time as an accountant and Allan as a locum doctor. Allan is popular with the elderly patients in the town and regularly is given home-made cakes and scones, along with his fee. On one occasion he treated a local wine maker’s dog for snake bite when the vet was unavailable and was given a dozen bottles of Lonarch Brae shiraz in appreciation. The wine had a retail value of $360.
 
 

Answer:

Introduction:

It can be mentioned that any benefit paid to employees in addition to the wages and salary payable to them are referred to as Fringe benefits as stated in the Fringe Benefits tax Assessment Act 1986.  To establish the provisions of tax legislation dealing with fringe benefits and tax liabilities of employees a beneficiary relationship between the employer and employee has to be proved

It is to be mentioned that section 7 of the Fringe Benefit Tax Assessment Act 1986 deals with the provision of the fringe benefit related to car. According to this section of the aforementioned act it can be mentioned that if an employee is allowed to use the car, owned or taken on lease by the employer, he will be held liable to pay fringe benefit tax. Even if the car is used by the associates of the employee for private purpose and not used by the employee himself, the employee will be liable to pay fringe benefit tax (Bravermanet al. 2015).

It is to be mentioned that statutory formula method or the operating cost method is to be used for calculating the taxable value of the fringe car benefits. The same is stated in section 9 of the Fringe Benefit Tax Assessment Act 1986. The real cost of the car is to be considered for calculating the taxable value of the fringe benefits by the statutory formula method. However, the operating cost of the car is calculated while assessing the value of taxable fringe benefits by the operating cost method. Of the two aforementioned methods , the one which yields the lowest value will be considered to ascertain the FBT. All necessary documentation is necessary for using the operating cost method.

In this case study, Charlie is an employee of Shin Holmes Pty. Ltd. He has been provided with a car which is defined as a four wheel drive sedan car. According to the provided facts of the case it can be stated that the car was being used for private purposes as well as for work purposes. Therefore it can be stated that car provided to Charlie by Shiny Pty ltd. will be assessed for fringe benefit tax (Woellneret al. 2016).  

As mentioned before there are two methods for to calculate taxable fringe benefit value to ascertain FBT. It can be said that under the statutory formula the taxable value of fringe car benefits is set at twenty percent. Therefore 20% of the value of the car is multiplied with the value of the car which is the base value. To what extent the car has been used for private purposes is not considered to be relevant while calculating the taxable value according to the statutory formula method (Barkoczy 2017). However, under the method of operating cost, the total operational cost of the car is separated and segregated proportionately into the categories of private and work purposes in order to ascertain the taxable fringe benefit value of such car(Gale and Samwick 2014).

It can be mentioned that the depreciation of the car is calculated at a rate of 25% by using the formula as provided in sub-section 11(1).

However the interest is calculated according to the formula as provided in subsection 11(2).  The interest rate has been fixed to 5.65% for the years 2016/2017

 

The taxable value of fringe benefit for the car is lower if it is calculated using the statutory formula method and therefore the same method is to be considered for ascertaining its value. It can be said that in addition to this Shine limited had hired the car for wedding purpose therefore the charge of which must be added to the taxable value of fringe benefits. Honeymoon accommodation provided Shine ltd. is also a fringe benefit and therefore should be included in the taxable value.  However according to section 39 of the aforementioned act it can be said that parking fringe benefits arise in case the car is parked in the premises which is not applicable in this scenario.

It is to be stated that Betty and Allen have decided on change of the tree, therefore the sale of their house in Melbourne and acquisition of property in Central Victoria will not impose any tax burden on them. Betty and Allan are part time accountant and locum doctors respectively. Therefore their incomes will be subjected to income tax separately according to the provisions as stated in Income Tax Assessment Act 1997. In this chosen case study it can be stated that Allan is popular among the elderly clients and due to the same he receives homemade cake and food as token of appreciation along with the fee charged by him. However, homemade foods and cakes will not impose any tax burden as all these commodities are considered to products which are non-commercial and without any market value. However, the wine received by Allan is priced at 36$ dollars in the market and therefore will impose tax consequences as the market price of the wine would be added to the income of Allan and taxed afterwards. The same would be assessed to ascertain the income tax liability of Allan under the Income Tax Act, 1997 (Nijland and Dijst 2015).

The taxation Ruling TR 97/11 has some indicators to determine whether an individual has been engaged in some business. The differences between the businesses and hobbies according to the ruling of Taxation Ruling TR 97/11:

  • The activity and its purpose is significant in determining whether the activity s business or hobby. If activity of an individual has significant commercial purpose, it would be considered to be a business activity
  • If the purpose of activity of an individual is to earn profit it would be considered to be a business activity.
  • In business activity there is an employer and employee relationship which is nonexistent in case of hobbies
  • Business activity involves investment of a large amount
  • Business activity needs to be carried on in a premises which is not the case for hobbies.

In the remarkable case Cooper Books Pty Ltd vs. Commissioner of Taxation of Commonwealth of Australia the court clearly specified the criteria for distinguishing hobbies from business activities (Kimet al. 2015).

It is t be mentioned that if a client transforms his hobby into business activity and earns significant profit then such client would be liable to pay income tax for the profit earned. In this chosen case Betty and Allan converted their hobby of gardening into a business activity as they generally received 500 to 600 dollars by selling marmalade (Woellneret al. 2016). This system of barter is to be assessed by the provisions of Income Tax Act 1997.

Barter transactions in Australia are charged under the provisions of GST and ITAA in the country. It is to be mentioned that business transactions which involve barter are to treated as just any other cash or credit transactions. Such barter transactions would be subjected to tax computations under the provisions of GST and IITA. Therefore, it can be assumed in this case that the barter system which was set up by Betty and Allan will be treated as any other cash or credit transaction and will be subjected to income tax and GST (Akinset al. 2014).

 

References:

Akins, B.W., Chapman, J.L. and Gordon, J.M., 2014. A whole new world: Income tax considerations of the Bitcoin economy. Pitt. Tax Rev., 12, p.25.

Barkoczy, S., 2017. Core Tax Legislation and Study Guide. OUP Catalogue.

Braverman, D., Marsden, S. and Sadiq, K., 2015. Assessing Taxpayer Response to Legislative Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl. Tax’n, 17, p.1.

Gale, W.G. and Samwick, A.A., 2014. Effects of income tax changes on economic growth.

Kim, P.H., Longest, K.C. and Lippmann, S., 2015. The tortoise versus the hare: Progress and business viability differences between conventional and leisure-based founders. Journal of Business Venturing, 30(2), pp.185-204.

Nijland, L. and Dijst, M., 2015. Commuting-related fringe benefits in the Netherlands: Interrelationships and company, employee and location characteristics. Transportation Research Part A: Policy and Practice, 77, pp.358-371.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.

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