Australian Taxation Law - Assignment Example

? [Manager] 28 May AUSTRALIAN TAXATION LAW The fringe benefits tax liability of Chatswood Pty Ltd for the year ended 31 March 2011, shall be based on the ‘Higher gross-up formula (type 1), which means that the higher gross-up formula was introduced to avoid allowing employers the benefit of GST credits for goods and services purchased for the private use of employees. The higher gross-up rate effectively recovers the GST credit you can obtain in providing a fringe benefit. The following formula is used to calculate the higher gross-up rate:’1. Type 1 FBT rate + GST rate aggregate fringe x ______________________________ benefits amount (1 – FBT rate) ? (1+GST rate) ? FBT rate Hence, the following benefits of Paul shall be as follows: Car fringe Benefit $22,500 Entertainment Fringe Benefit $ 2,000 Loan Fringe Benefit $ 8,000 ---------------- Employer’s type 1 aggregate fringe benefits $32,500 amount 46.5% + 10% ------------------------------------------- $32,500 x (1 – 46.5%) ? (1+ 10%) ? 46.5% rate $32,500 ? 2.0647 = $67,102.75 Total Fringe Liability This is the total value of the fringe benefits tax liability of Chatswood Pty Ltd. for the year ended 31 March 2011. For purposes of computation, ‘the FBT year is the 12 months beginning 1 April and ending 31 March. Currently, the FBT rate is 46.5%. A GST of 10% is applied on most goods and services that are supplied in Australia and on goods imported into Australia’2. ‘If an employee receives certain fringe benefits with a total taxable value of more than $1,000 in an FBT year (1 April to 31 March), employer must report the grossed-up taxable value of the benefits on their payment summary for the corresponding income year (1 July to 30 June). This is called the reportable fringe benefits amount’3. Therefore, the Fringe Benefits Tax (FBT) that should be paid by the employer Chatswood Pty Ltd., at the end of the year is $67,102.75. The car fringe benefit, the loan fringe benefit and the entertainment fringe benefit which were granted to Paul by his employer are all entitled to Goods and Services Tax (GST) credit that is available to Chatswood Pty Ltd. However, the $1,000 salary of Paul is not considered as a fringe benefit since there is an imposed tax on the salary which is being paid by the employee. As defined under the Finance Act of 2005: “Fringe Benefits” means any consideration for employment provided by way of: (a)   “any privilege, service, facility or amenity, directly or indirectly, provided by an employer, whether by way of reimbursement or otherwise, to his employees (including former employee or employees) (b)   any free or concessional ticket provided by the employer for private journeys of his employees or their family members;  and (c)    any contribution by the employer to an approved superannuation fund for employees”.4 The total value of all fringe benefits given to a particular employee by his or her employer in an FBT year is known as their individual fringe benefits amount. 2. Peter’s is liable to pay a capital gains tax (CGT) for the sale of the gift shop for the year 2010/2011 based on the following computation: Gross Sale Proceeds from the gift shop: $840,000 Less: Incidental Cost of Disposal : $(60,000) Net Sale Proceeds: $780,000 Less Cost of Asset: $(450,000) Capital Gain: $330,000 Therefore, Peter shall be liable to pay a CGT on his gain amounting to $330,000. ‘Capital gains tax is a tax on the profits which may be made from the sale of capital assets. Only individuals are liable to pay CGT, corporations are not liable to CGT. A liability to pay CGT arises only when a chargeable person makes a chargeable disposal of a chargeable assets’5. Some of chargeable assets include lands and buildings, paintings, jewelry, plant and machinery. However, no CGT shall be imposed on the sale of his main residence as he is entitled to ‘Private Residence Relief’. To qualify for the exemption based on the ‘Private Residence Relief’, there are requisites to be met: 1. ‘The dwelling house has been the only or main residence of the taxpayer throughout the period of ownership; 2. He or she has not been absent, other than for an allowed period of absence or has been living in job-related accommodation during the period of ownership; 3. The garden or grounds including the buildings on them are not greater than the permitted area, and; 4. No part of the home has been used exclusively for business purposes during the period of ownership’6. If all these conditions are met, no Capital Gains Tax will be imposed on the income upon the disposal of the family residence. Here, all requisites were complied by Paul, which entitles him to claim an exemption under the ‘Private Residence Relief’. Several jurisprudence has applied the principle of ‘Private Residence Relief’ such as in the case of Batey v Wakefield 7, where the Supreme Court ruled that it was established that a dwelling house can consist of more than one building and can include an ancillary building which is itself a dwelling house. However, the consequent cases involving Williams v Merrylees 8 and Markey v Sanders 9, involving analogous circumstances provided different interpretations of the law as the decisions differed in the judgement concerning the importance founded on the proximity of the ancillary dwelling house to the main house. The decision laid down in the case of Lewis v Rook 10 has finally put to rest the conflicting issues, as LJ Balcombe sided with Vinelott J’s view in William v Merrylees: ‘What one is looking for is an entity which can be sensibly described as being a dwelling house though split up into different buildings performing different functions.’11 Read More