Foundation of Taxation Law ITAA 1997

Question: Discuss about the Foundation of Taxation Law for ITAA 1997. Answer: 1. Issue As per the given case, Peta has received receipts to the tune of $ 600,000 from the sale of tennis courts and the aim in this light is to offer opinion on whether the same would be ordinary income (Section 6-5). Rule The assessable income as derived by the taxpayer in ITAA 1997 is dealt by the following two sections. Section 6(5) As per this section, proceeds or income that is earned in accordance with the ordinary concepts would be included as assessable income but no details or examples are included in the exact legislation with regards to application of the same (Barkoczy, 2015). Hence, in accordance with the case laws on this statute, an understanding has emerged whereby income under this section primarily consists of the following three categories (Gilders et. al., 2015). Personal exertion related proceeds An obvious example of the same is income obtained through employment (known as salary) since the employee offers activities or work that is commercially having worth for the employer. Investments related proceeds The various instances of proceeds under this section would be dividend obtained from securities, interest obtained from accounts and rent obtained from property. Business related proceeds: In the event that taxpayer conducts business activities, then proceeds from the same would be assessable income. However, in line with the factors identified in TR 97/11 business activities need to be segregated from hobby as proceeds from latter are non-assessable (Woellner, 2014). Section 15(15) Any income/proceeds that the taxpayer derives through engagement in a one-off transaction (also called isolated transaction) would be termed as assessable income provided the main purpose of the taxpayer enacting the activity or proposal is to obtain monetary gains. This understanding has also been propagated in TR 92/3 ruling and was also hailed in the landmark case Westfield Limited v. FCT (1991) (Sadiq et. al., 2015). Application The intention with which Peta (taxpayer) bought the house is outlined below. Residential use of the property to act as a dwelling for taxpayer and her family. Construction of new units on the land occupied by the tennis courts and subsequent liquidation of the same resulting in monetary gains. But, before the taxpayer could implement her plans of building units, she got an alternative proposal whereby the local tennis club showed interest in taking ownership of the tennis courts provided restoration of the same to acceptable condition may be performed. Peta realised that this proposition would bring huge gains for her and driven by these gains she carried out the necessary restoration while incurring a capital cost of $ 100,000 in the same. These tennis court were then sold for $ 600,000 to the tennis club. It would be fair to opine based on the given facts that the $ 600,000 would not be ordinary income as defined in Section 6-5. This may be explained in view of Peta not being engaged in the business of restoration of tennis courts. Clearly while no information is provided about the same but the same could be inferred from the fact that the initial plan to construct units for sale. Also, the other information presented especially using the house for residential purpose suggests that the above activities do not constitute business for Peta. Further, the $ 600,000 proceeds obtained from sale of tennis courts will be assessable income for the taxpayer but the same would be as per Section 15(15). Clearly, Peta here did not have any plan to restore the tennis courts as her plan was to build units. Thus, the restoration activities were specifically implemented with the intention of realising the gains from selling of these. Also, these activities were carried out once Peta received the offer from the tennis club which assured her of the returns from the isolated transaction as this is not her profession or business. Conclusion On the basis of the arguments presents, the logical conclusion that can be drawn is that the sales proceed would not be ordinary income (Section 6-5) even though these would be assessable but under Section 15-15. 2. Issue On the basis of the given information, the concern is to compute the tax liability that would arise for ABC Ltd. on account of the host of fringe benefits extended to Alan. Rule Expense Fringe benefits are incurred only when the spending by the employer is on expenses of personal nature for the employee. Also, in accordance with Section 58X, Fringe Benefit Tax Assessment Act, 1986 (FBTAA, 86), providing any electronic device which is mobile is excluded from the ambit of FBT (Fringe Benefit Tax) provided it is strictly deployed for professional use only (Wilmot, 2012). School fees As school fees of the employees children needs to be borne by the employee only, thus payment of the same by employer would lead to expense fringe benefit (Deutsch et al., 2015). Taxable value (Expense fringe benefit Fees) = Employers payment towards school fees * Gross up factor The value of the gross up factor would be derived from the fact as to whether the school fees attract GST or not (Gilders et. al., 2015). FBT liability (Expense fringe benefit Fees) = 0.49* Taxable value (Expense fringe benefit Fees) Dinner Whenever the employer holds meals outside the normal business premises, it would lead to the extension of meal fringe benefits. In order to compute the relevant tax liability regarding this, there are namely two methods on offer as highlighted below. Actual Method This method is of use when the employer has not invited client for the meal. This is because, in this method, the tax on account of fringe benefit is applied on the whole meal expense. For employees and their respective associates, the employer has entitlement for deduction of the expenditure on meal for the tax calculation. But the same is not available for clients. Hence, in case of presence of clients, the alternative approach (50:50 split method) is better (Hodgson, Mortimer Butler, 2016). FBT liability (Meal Fringe Benefit Actual Method) = 0.49* Expenditure of meal incurred by employer *Gross up factor 50-50 Split Method As per this approach, only half of the actual meal bill is used for computation of liability related to FBT. As highlighted above, this is preferable when clients are present in sizable number since this would help in reducing the overall liability associated with FBT. It is imperative to note that even under the application of this method, deductions with regards to meal expenditure on employees is still valid but same would be applicable only to the extent of 50% (Nethercott, Richardson Devos, 2016). FBT liability (Meal Fringe Benefit 50:50 Split Method) = 0.49* 0.5*Expenditure of meal incurred by employer *Gross up factor Application It is evident from the case facts that the employer (ABC) pays employees (Alan) mobile bill but since the phone is not used to make any personal calls, thus no fringe benefit is deemed to have been extended and resultant no FBT. Also, the act of providing a mobile by ABC to Alan in line with Section 58X would be exempt from FBT. School fees ABC payment towards school fees = $ 20,000 The gross up factor to be used here is 1.9608, as the school fees is GST exempt. FBT liability (Expense fringe benefit Fees) = 0.49 * 20000 * 1.9608= $19,215.84 Dinner The given information reflects that ABC is giving the dinner outside the office and thus meal fringe benefits would occur, the calculation of which is highlighted below. Number of invitees (including associated of employees) for dinner = 40 Actual food bill at the Thai Restaurant = $ 6,600 Since associates and employees are equal in number, hence, the actual spending in relation to food on employees would be half of the actual bill or $ 3,300 The meal fringe benefit extended on an individual basis by the employer = 3300/20 = $ 165 In accordance with minor fringe benefit exemption, no FBT liability would result here as the fringe benefits extended are of nominal value i.e. not higher than $ 300. As per the given information, the employee head count changes to five and thus assuming the same expense as earlier, the nominal exemption would not apply now. Also, it is known that the clients are excluded from this dinner, hence the relevant approach is the actual method as is apparent below. FBT liability (Meal Fringe Benefit Actual Method) = 0.49 * 6600 *2.1463 = $ 6,941.13 It is possible for ABC to lower the tax liability by claiming GST input credits with regards to the GST paid on food bill at the Thai Restuarant (Barkoczy, 2015). There has now been an inclusion of clients, and hence as per the previous section discussion, the method would shift to 50:50 split and resultant FBT liability is computed below. FBT liability (Meal Fringe Benefit 50: 50 split Method) = 0.49* 0.5*6600 *2.1463 = $ 3,470.6 Conclusion On the basis of the above argument, it is clear that two benefits namely school fees and dinner would lead to FBT liability of ABC. With regards to dinner, the underlying FBT implication would be determined by number of people invited and whether clients have been included in the list or not. References Barkoczy,S 2015.Foundation of Taxation Law 2015,7th edn, CCH Publications, 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. Hodgson, H, Mortimer, C Butler, J 2016, Tax Questions and Answers 2016, 5th ed., Thomson Reuters, Sydney, Nethercott, L, Richardson, G Devos, K 2016, Australian Taxation Study Manual 2016, 4th ed., Oxford University Press, Sydney Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A 2015,Principles of Taxation Law 2015,8th edn, Thomson Reuters, Pymont Wilmot, C 2012, FBT Compliance guide, 6th edn, CCH Australia Limited, North Ryde Woellner, R 2014, Australian taxation law 2014, 8th eds., CCH Australia, North Ryde