Income from labour and Fringe Benefit TaxPresentation Transcript
Assessable income, Taxable income, Salaries, Gifts, Non-Cash benefits, Frequent flyer schemes, Fringe benefits tax, and calculation of fringe benefits www.helpwithassignment.com
Ordinary income – ordinary concepts, services, work, from labour - sale of goods or services from business, rents and dividends from property.
Statutory income – the statute determines that it is income – section 21A, s 15-2
Ordinary income from labour and running a business or from property - Gifts, lottery winnings, gambling and inheritance not income.
Both the ITAA 97 and ITAA 36 are silent as to what is income. Definition of “income from personal exertion” and “income from property” – used when a ‘ schedular ’ system operated:
Section 6(1) ITAA 36: income from personal exertion or income derived from personal exertion means income consisting of earnings, salaries, wages, commissions, fees, bonuses, pensions, superannuation allowances, retiring allowances and retiring gratuities, allowances and gratuities received in the capacity of employee – income from labour,
or in relation to any services rendered, the proceeds of any business carried on by the taxpayer either alone or as a partner with any other person,………, the income from any property where that income forms part of the emoluments of any office or employment of profit held by the taxpayer,
and any profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale or from the carrying on or carrying out of any profit-making undertaking or scheme, but does not include:
(a) interest, unless the taxpayer's principal business consists of the lending of money, or unless the interest is received in respect of a debt due to the taxpayer for goods supplied or services rendered by him in the course of his business; or
(b) rents, dividends or non-share dividends.
Income is assessable but a gift has no taxation implications – allowance from a parent to a child, not assessable income
Income has characteristics of being a periodical, regular or recurring payment usually for services rendered or goods supplied
Gift of an asset may attract CGT
Taxpayer received an additional periodic payments from his employer while serving in the Army during WW 2. Military salary well below civilian salary.
Income or gift. High Court: income as the additional payment was a substitute for wages, s 25(1) [now s 6-5]. Section 26(e) was not applicable as not paid as a result of the employment relationship, no services provided
Scott a solicitor performed legal work for Mrs. Freestone as a result of the death of her husband. Mrs. Freestone gave Mr. Scott a gift of $10,000.
Scott was her professional advisor and whose services merited proper reward and also her friend whose personal qualities merited appreciation
She had always paid him his proper fees. She claimed payment was due to "personal friendship, not because of anything he had done for me."
Held - the payment was not income but a non-taxable gift.
There was ample evidence of the taxpayer's desire to express appreciation of the taxpayer's personal qualities.
Principle of Scott's case
‘ An unsolicited gift does not become income merely because it can be traced to gratitude engendered by some service rendered. In distinguishing between a taxable and a non-taxable gift, the relevant question is whether the gift was in a relevant sense, a product of the recipient's personal services or on the other hand, an exceptional payment due to the recipient's personal qualities’, Windeyer J.
Section 15-2(1) Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you (including any service as a member of the Defence Force).
15-2(2) This is so whether the things were provided in money or in any other form.
15-2(3) However, the value of the following are not included in your assessable income under this section:
(a) a superannuation lump sum or an employment termination payment;
(b) an unused annual leave payment or an unused long service leave payment;
(c) a dividend or non-share dividend;
(d) an amount that is assessable as ordinary income under section 6-5.
Note: Section 23L of the Income Tax Assessment Act 1936 provides that fringe benefits are non-assessable non-exempt income - NANE
Taxpayers in the business of distributing soft drinks. The manufacturer provided free holidays to distributors. The holidays could not be assigned. The taxpayer was not obliged to take the holiday. Nothing came in or was received. No money was paid.
Held: not income under s 26(e) [s 15-2], because there was not an employment or service relationship. The distributors did not provide a service to the manufacturers. Section 21A was enacted to take effect from 1988 to catch non-cash benefits paid to businesses
S 21A(1) - Benefit treated as convertible to cash - For the purposes of this Act, in determining the income derived by a taxpayer, a non-cash business benefit that is not convertible to cash shall be treated as if it were convertible to cash.
"non-cash business benefit" means property or services provided after 31 August 1988:
(a) wholly or partly in respect of a business relationship; or
(b) wholly or partly for or in relation directly or indirectly to a business relationship;
What happens when you fly as part of your employment and accrue frequent flyer points? When you use those points for a private purpose is this a benefit
Payne v FCT – an auditor with big accounting practice, accrued points from work travel but paid for and joined Qantas frequent flyer program herself. Obtained tickets for her parents in UK to fly to Australia. Value of tickets income?
Federal Court held: no employment relationship as points provided by an unconnected third party, s 15-2 – Qantas. The employer played no part in providing the reward.
They could not be converted to cash as they were non-transferable, therefore not income, s 6-5.
Compensation for loss of employment – generally income because a substitute for what was lost.
Restrictive covenants – Dickenson v FCT - Taxpayer owned a service station and agreed for two payments of $2,000 to only sell “Shell products”.
Capital or income: High Court by a majority of 3-2 that capital as it constituted a substantial change to the structure of the business, i.e. only selling Shell products
FCT v Woite - Payment made by North Melbourne FC not to play with any other football club in Melbourne.
Taxpayer did not come to Melbourne but played football in South Australia. If he had played football in Melbourne then income.
Capital or income – he continued to play football and earn assessable income – therefore capital. Case of Dickenson v FCT confirmed.
Note: CGT event D1, s 104-35, ITAA 97 – no 50% discount
Professional footballers and other sporting professionals have been regarded as carrying on a business for reward.
Kelly v FCT - $20,000 prize for being the best footballer paid to taxpayer. He argued not ordinary income as the football services had already been provided to his club and not incidental to his employment.
Federal Court held that s 26(e) [s 15-2] applied as the gift was sufficiently connected to his employment as to make it assessable.
The law is found in the Fringe Benefits Tax Assessment Act 1986
The FBTAA is a separate tax act operating outside the ITAA - unlike the Capital Gains Tax.
The aim of the FBTAA is to tax the non-income-earning private benefit provided to the employee.
The benefit that is provided to the employee that is used by the employee for income-earning purposes is subject to the otherwise-deductible rule
Objective formulae apply to determine the taxable value of the fringe benefit.
For example, under the FBTAA, the value of a car benefit is determined by objective factors, such as the number of days an employee has the vehicle in his/her control, the cost of the vehicle, the cost of maintaining the vehicle, the number of kilometres the vehicle is used by the employee, etc.
Compare this to section 26(e),[s 15-2] where the value of the car benefit is determined by "the value to the taxpayer of the benefit".
FBT is imposed on the employer - this reduces administrative problems for the ATO and assists in ensuring compliance.
The employer is entitled to deduct the cost of providing the benefit in order to obtain the employee's services under s 8-1
This is so irrespective of whether that benefit is used by the employee for the purpose of earning assessable income, such as paying for the employee's work-related travel expenses or is used by the employee to pay for his/her own personal income-earning activities or private purposes, such as paying for the employee's private travel expenses. In either case, the cost of providing the benefit to the employee is a cost incurred by the employer in obtaining the employee's services for the purpose of earning assessable income under s 8-1
Since 1 April 1994 under the ITAA, the employer is entitled to deduct not only the cost of obtaining the employee's services but also the FBT paid by the employer under the FBTAA in respect of the employee.
The fringe benefit tax year runs from 1 April to 31 March. FBT paid with the BAS.
The rate of tax is the top personal marginal rate of tax - 45% plus Medicare levy of 1.5% = 46.5%.
FBT is self assessed by the employer.
The employer signs the FBT return specifying:
• the benefit provided to the employee
• the taxable value of the benefit
• the tax due in respect of the benefit
Penalties are imposed on the employer for short payment.
If an employer and employee relationship exists then FBTAA is applicable - the employer is subject to tax.
If there is no employer or employee relationship but a business relationship exists then s 21A, ITAA36 applies - the recipient of the benefit is subject to income tax on the value of the benefit, s 6-10, statutory income.
1. Identify if a fringe benefit is provided to the employee
2. Calculate the value of the fringe benefit
3. Calculate the amount of fringe benefits tax that is payable by the employer
The fringe benefit is also liable to FBT if provided by an associate of the employer – work for ANZ Bank and receive a discount when obtaining motor car lease from Esanda
Work for ANZ bank and receive a discount from all Shell service stations as a result of an arrangement
FBT is incurred even if the fringe benefit is provided to a family member
If motor car provided to spouse then FBT liability.
Is there a 'benefit' provided? A benefit is defined as including any right, privilege, service or facility.
If so, is it excluded? Section 136, FBTAA excludes as fringe benefits, inter alia, superannuation, ETP, salary, allowance, which are all taxable under the ITAA. It also excludes capital payments for enforceable contracts in restraint of trade and for personal injuries.
Car fringe benefit
Debt waiver fringe benefit
Loan fringe benefit
Expense payment fringe benefit
Housing fringe benefit
Living away from home fringe benefit
Airline transport fringe benefit
Board fringe benefit
Tax exempt body entertainment fringe benefit
Car parking fringe benefit
Meal entertainment fringe benefit
Property fringe benefit
Residual fringe benefit
Certain work-related items – mobile phone, protective clothing, laptops, calculator, briefcases, computer software, tools of trade, s 58X, FBTAA
Newspapers and periodicals, s 58H, FBTAA
Workers compensation insurance, s 58J, FBTAA
Membership fees and subscriptions, s 58Y, FBTAA
Compassionate travel, s 58LA
Minor benefits – less than $300, provided infrequently or difficult to value, s 58P, FBTAA
Single trip taxi travel, s 58Z
In-house fringe benefit, expense, property or residual, reduced by $1,000 – s 62. If value less than $1,000 no FBT
Recipients contribution – if the employee contributes towards the cost of the benefit then the value is reduced by that amount.
Otherwise deductible rule – if the fringe benefit would have been deductible to the employee if paid by the employee then no FBT. Example loan to buy shares, interest expense deductible
The system of levying FBT is based on a gross-up of the amount of the taxable benefit. The assumption is that the taxable benefit represents an after-tax benefit to the employee (who paid no tax). As the true value to the employee of the benefit also includes the tax saving, i.e. the FBT paid on the benefit, this is added back to determine the value of the benefit. The formula for doing this is:
1 - FBT rate
which comes to:
1 = 100 = 1.8692
1 -46.5% 53.5%
Type 2 benefits do not include GST and no input tax credit has been claimed for the GST
Therefore, where an employee receives a fringe benefit, such as the payment by the employer of the employee's private expenses of $1,000, it is assumed that the amount represents 53.5% of the before-tax value of the benefit. The other 46.5% of the before-tax value must be added back to provide a before-tax value of the benefit of $1,869 that is then taxed at 46.5% to give a FBT of $906.46.
In order to compensate for the increased FBT, the employer is now able to deduct for income tax purposes, the cost of the whole benefit provided, including the cost of the FBT. This amounts to $1,000 + 906.46 = 1,906.46
those that are wholly GST free – unprepared food, education, health services, international travel, exports outside Australia;
those that represented goods or services not acquired by the employer (such as goods manufactured by the employer);
those provided by an employer that is a small business employer who has opted not to register for GST; excluded fringe benefits; and those benefits provided by an employer whose activities are input taxed – no liability for GST on supplies made and the supplier cannot claim credits for the GST on its business inputs – financial supplies such as loans, issuing securities, insurance; the supply of residential rental premises;
If an employer is entitled to input tax credits in respect of the value of fringe benefits at the time the benefits were provided then the total value of fringe benefits so provided is grossed up to a tax-inclusive value using the following gross-up formula:
FBT rate + GST rate
(1 - FBT rate) x (1+ GST rate) x FBT rate
which comes to: 2.0647
This formula is aimed at recouping any input tax credit arising from the provision of fringe benefits by an employer or associate, or under an arrangement between the employer and a third party. The FBT and GST rates applicable are 46.5% and 10% respectively.
The Type 1 fringe benefits would include such things as: Motor vehicle fringe benefits, expense reimbursement such as telephone, electricity account, domestic travel, DVD player,
Car travels 25,500 k per annum = 0.11
Car cost $50,000 and used for whole of year, 365 days, Employee contributed $3,000 towards the cost.
50,000 x 365/365 x 0.11 = 5,500 – 3,000 = 2,500 x 2.0647 = grossed up value $5,161.75 x 46.5% = FBT $2,400 paid by employer. Private use?
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