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HA3042 TAXATION LAW
TRIMESTER 2, 2016
INDIVIDUAL ASSIGNMENT 2
Assessment Value: 20%
Instructions:
• This assignment is to be submitted in accordance with assessment policy stated in the Subject Outline and Student Handbook.
• It is the responsibility of the student who is submitting the work, to ensure that the work is in fact her/his own work. Incorporating another’s work or ideas into one’s own work without appropriate acknowledgement is an academic offence. Students should submit all assignments for plagiarism checking on Blackboard before final submission in the subject. For further details, please refer to the Subject Outline and Student Handbook.
• Answer all questions.
• Maximum marks available: 20 marks.
• Due date of submission: Week 10.
Question 1 (10 Marks)
Two years ago Peta purchased a house in Kew. This house had two old tennis courts down the back which were in poor condition. She purchased the property for two reasons:
• so that she and her family could live in the house; and
• so that she could build three units on the tennis courts and sell them at a profit.
In the current tax year the tennis club next door offered to buy the old tennis courts, but only if Peta first restored them to good condition. Peta decided to accept the club’s offer instead of going ahead with her plan to build and sell units.
Peta spent $100,000 on preparing the tennis courts for sale. This involved a great deal of work. Peta had to resurface the tennis courts and build new fences around them. She then sold the tennis courts in the current tax year to the tennis club for $600,000.
Ignoring capital gains tax, discuss whether the receipt of $600,000 is ordinary income under s 6-5.
Question 2 (10 marks)
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 2016. 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?
____________________-
Answer 1:
The receipt of $600,000 from the sale of the tennis courts is likely to be ordinary income under s 6-5 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). Section 6-5 provides that assessable income includes ordinary income derived directly or indirectly from all sources, unless the income is specifically exempted or excluded from assessable income under the ITAA 1997.
In this case, Peta purchased the property with the intention of selling the tennis courts at a profit, and she spent a significant amount of money restoring the tennis courts to a saleable condition. The sale of the tennis courts was therefore likely to be part of her business or commercial operations and would be considered ordinary income. Additionally, the fact that Peta had to undertake significant work to restore the tennis courts to good condition suggests that the $600,000 received from the sale was a result of her own personal exertion, which is also a key factor in determining whether income is ordinary income.
While capital gains tax is ignored in this question, it is worth noting that if Peta had held the property for more than 12 months and the sale of the tennis courts was considered a capital gain, she may have been eligible for the 50% capital gains tax discount.
Answer 2:
(a) ABC Pty Ltd would be liable for fringe benefits tax (FBT) on the following benefits provided to Alan:
• Payment of Alan’s mobile phone bill: This benefit is an expense payment fringe benefit and is subject to FBT. The taxable value of this benefit is $220 per month x 12 months = $2,640.
• Payment of Alan’s children’s school fees: This benefit is an exempt benefit as it is for the education of Alan’s children and is GST-free.
• Provision of the latest mobile phone handset: This benefit is a property fringe benefit and is subject to FBT. The taxable value of this benefit is $2,000.
• End-of-year dinner: This benefit is an entertainment fringe benefit and is subject to FBT. The taxable value of this benefit is $6,600 x 2.0802 = $13,717.32 (using the type 2 gross-up rate for the 2016 FBT year).
ABC can claim an income tax deduction and input tax credits for the GST-inclusive cost of providing these benefits. The FBT liability for the year ending 31 March 2016 is therefore calculated as follows:
FBT liability = (2,640 + 2,000) x 47% + 13,717.32 x 49%
FBT liability = $2,978.69 + $6,722.19
FBT liability = $9,700.88
(b) If ABC only had 5 employees, it may be eligible for the FBT exemption for small business employers. Under this exemption, the taxable value of each benefit provided to each employee is reduced to nil, subject to a $30,000 cap per employee per FBT year. The exemption is only available to employers with an aggregate turnover of less than $10 million.
Assuming ABC meets the eligibility criteria for the exemption, the FBT liability for the year ending 31 March 2016 would be nil.
(c) If clients of ABC also attended the end-of-year dinner, the meal entertainment provisions of the FBT legislation would apply. Under these provisions, the taxable value of meal entertainment provided to employees and their associates (including spouses and children) is subject to FBT, but the taxable value of meal entertainment provided to clients is not subject to FBT. However, the expenses associated with providing meal entertainment to clients are not income tax deductible.
