Salary Packaging and Taxation - Essay Example

26th September SALARY PACKAGING Question 2 Part A Salary packaging, also called salary sacrifice is an arrangement whereby an employee’s total monetary remuneration for performing employment duties is taken in the form of cash and benefits instead of being paid wholly in the form of salaries or wages (Colin, 2012). With FBT, the payments are subject to tax in the hands of the employer rather than employee. Chris Smith is an employee of the western Gate Pty Ltd. He has entered a remuneration agreement with the employer whereby he has both monetary and non-monetary fringe benefits. Fringe benefits tax will apply to both Chris and his employer for this agreement during the FBT year that begins in 1st April 2011 up to 31st March 2012. Superannuation is money put in for a person's retirement. Strict government policy prevent untimely access to conserved benefits except in extremely limited and constrained circumstances, as well as severe financial adversity or on a compassionate basis, such as for medical cure not obtainable through Medicare. Usually, superannuation benefits are in three categories: conserved benefits; restricted non-conserved benefits; and unhindered non-preserved benefits. Mainly superannuation is concessionary taxed at a level charge of 15% at two key points: on contributions, and on salary. Capital Gain Tax inside the fund though is taxed at a charge of 10% if the properties held for longer than twelve months. Contributions whether in the type of employer superannuation, or associate salary sacrifice are levied at this rate. In the majority of the industry funds, the salary tax is paid prior to profits are disbursed to associates so it appears as a lesser level of interest on the worker’s statement. From the time when it was introduced, employers have been obligated to make compulsory contributions to superannuation in place of the majority of their workers. This contribution was initially put at 3% of the workers’ income and has been steadily augmented by the Australian government. Ever since 1st July 2002, the least contribution has been placed at 9% of a staff’s ordinary time pay. The 9% is therefore, not payable on eventually rates but is due on payment items such as shift loading, commissions, casual loadings and bonuses. Superannuation contributions made by Chris are not treated as fringe benefits but as employer contributions. The initial contribution that Chris was making was $17,000. He however, decided to increase it by $15,000. This contribution has to meet three conditions, which are; it must be an arrangement before service there should be an agreement between West Gate Pty Ltd and Chris and Chris should not have an access to the sacrificed salary (Marsden, 2010). According to the Australian tax office ruling, the superannuation contributions are taxed in the superannuation funds such as 15% (Australian National Audit Office, 1999). West Gate Pty Ltd will therefore, pay the following amount in tax for contribution: 15/100 x $32,000 = $ 4,800 Chris has salary packaged other items apart from the superannuation contributions. The first item is a laptop that one of his children requires for school. It is worth $3,300. This is a fringe benefit for Chris. According to the Australian tax office ruling S23, the tax is levied at 46.5% for the FBT year ending 31st March. West Gate Pty limited will pay the following amount for the benefit; 46.5% x $3,300 = $1,534.50 Under this, the income test will take into account the fringe benefit received. This fringe benefit is not included in the employee’s assessable income. The employer will be giving a benefit directly to a relative of the employee. Anything is accomplished by the employer in any agreement, arrangement or transaction so as to award any benefit upon any individual other than the member of staff, whether directly or obliquely. The benefit would have been taxed if it had been contracted to the employee. The next item that Chris has packaged is a new car. A taxable benefit is be considered to have been approved where an employee is given the right to utilize any motor vehicle for personal or family purposes, whether free of fee or for an amount which is less than the worth of such use. The personal use of the motor vehicle includes travelling amid the employee's place of work and place of residence. A car is defined in s36 (1) as a motor vehicle being a motor car, panel van, utility track, station wagon or other road vehicles designed to carry a load of less than one tonne or less than 9 passengers. Provision of motor vehicles, which is not actually a car will not give rise to a residual benefit except may lead to a residual benefit when it is utilized by the employee. In the case of the car, it will be held by the employer since he is the one who will lease the car. The provision of a car by the employer to Chris under lease novation will give rise to a car fringe benefit. The lease payment obligation will under these novated lease will be transferred to the employer although the arrangement is with the employee. In this case while the employer is paying the lease payments there are no taxation implications for the employee. The lease expenses will be deducted from the employer when the car is being used in his business or provided to the employee as part of the salary packaging arrangement. The car benefit is based on a statutory formula. Chris has decided to package the car instead of leasing it as originally planned. West Gate pty Ltd owns this car and therefore, this makes it a fringe benefit. He is also using the car for private purposes, and it is available to him every day. Using the statutory fringe method, FBT is calculated as;  A represents the base worth of the car. In this case, the value is $33,390. B is the statutory fraction, which is 1/5. C is the number of days that the car fringe benefit was provided during the year. The employer provided the cars under 36 months lease it was therefore, available every day of the year. D is the number of days during the year. Lastly, E is the amount of recipient’s payments. This amount is $ 8,145.  = $6,678 The cost of running the car was $2,616. It will be deductible from FBT for the employer. West Gate pty is paying $5200 as interest payments for Chris’ private residence. This is an expense payment fringe benefit to Chris. It is defined in the Australian taxation office ruling in S20. A taxable advantage shall be judged to have been contracted if the employer has compensated a sum owing by the member of staff to a third party, either directly or indirectly, without needing the employee to reimburse him any for the sum paid or the employer has freed the employee from the responsibility to pay a sum owing by the worker to the employer. This eliminates medical contributions paid by the employer or medical expenses paid by the employer. Since the employer pays a third party on behalf of Chris, the whole amount is taxable to Chris. Any amount contributed by Chris for this payment is deductible. The company also pays $2,000 annual electricity bill for Chris. This is also categorised as an expense payment fringe benefit. A taxable benefit will be considered to have been arranged if any service has been offered at the disbursement of the employer been provided to the employee, (either by the employer or a third party) and the service has been utilized by the worker for his or her personal or family purposes and no thought, or an insufficient thought has been given by the member of staff. It will be tax effective in a similar manner as the interest payment. PART B Item 1 Taxable value = $600 - $400 = $200 Grossed-up taxable value = $200 * 1.8692 = $373.84 $400 was excluded because it was expended on employment of related issues, and it is only private telephone billing that is taxable for Jones. In order to substantiate this Jones has to file her telephone account bill indicating the amount that was expended on business related uses. This is a communication fringe benefit because ADB has reimbursed Jones for the amount estimated to be used for business. It is also an external expense payment fringe since the expense payment fringe benefit is not an in house benefit. The employer has made payment to the third part on the employee’s behalf; the taxable worth of the benefit is the sum of the disbursement reduced by any contribution by the employee. Since in this case, the employee is reimbursed, the taxable worth of the benefit is the sum of the reimbursement (Pricewaterhousecoopers 2003). Item 2 Total taxable value = $2,000 + ($0.55 * 4,000) = $4,200 Reimbursement will be treated as the benefit given to Jones of which is subject to fringe benefit taxation. The travel allowance will be taxable as wages or salaries. The value of travel allowance of $2,000 will not be grossed-up since it is not treated as a fringe benefit. Grossed-up taxable value = ($2,200 * 2.0647) + $2,000 = $6542.34 This is an expense payment fringe as the employer reimburses the employee for an expense that he has incurred which is a private expense. Documentation details should be provided where the expenditure is incurred by the employee, and it has to be provided to the employer prior to the lodgment of the FBT return. Jones should document details on mileage that was travelled for business purposes. Item 3 Taxable value = $750 Grossed-up taxable value =$750 * 1.8692 = $1,401.90 The money spent on travel, accommodation and conference registration by Jones are expense payment fringe benefits. This benefit has arisen as ADB has made a reimbursement payment. Jones has to show documentary evidence of air transport, accommodation charges and conference registration fees (Escoffier & Fortin 2008). Item 4 Taxable value Total allowance = $1,000 * 8 = $8,000 Rental costs = $500 * 8 = $4,000 Total food costs = $500 * 8 = $4,000 The gross-up factor for rental costs is 1.8692 because the employer is not entitled to goods and services tax credits on the acquisition cost on this benefit. On the other hand, the gross-up factor for total food costs is 2.0647 because the employer is entitled to goods and services tax credits on the acquisition cost on this benefit. Grossed-up taxable value = ($4,000 * 1.8692) + ($4,000 * 2.0647) = $15,735.60 This benefit is living away from home allowance. While allowances are taxable as wages or salaries, living away from home allowance is an exception. This allowance benefit arises, when a manager pays an employee, and it would be conclude that the entire or a fraction of the disbursement is in the type of recompense to the worker for, extra expenses sustained by the employee during the period and additional costs incurred by the worker and other extra difficulties to which the worker is subject throughout the period. A person’s ordinary place of the dwelling is not in the meaning of FBTAA, but various Taxation verdict MT 2030, according to the administrator, an individual is considered as residing away from the normal place of the dwelling if, but for having to transform the dwelling in order to work provisionally for his boss at another area, the worker would have persisted to reside at the previous place. It would be pertinent in attaining that sight, that there is a purpose, or anticipation of the worker going back to live at the previous place, or dwelling on cessation of employment at the provisional job area. In order for a benefit to be considered a living away from home fringe benefit, the payment to the employee must: result from the employee being needed to reside far from his or her normal residence; be for expenses during a particular period; and represent compensation for additional expenses (Pricewaterhousecoopers 2003). In order to justify this allowance Jones must evidence of the incurred expenditure by a receipt or an invoice. Item 5 Taxable value The discount is equivalent of a benefit provided by the employer. Under the staff’s plan = 30% * $1,500 = $450 Under the executive plan = 50% * $2,500 = $1,250 Total taxable value = $450 + $1,250 = $1,700 Grossed-up taxable value = $1,700 * 2.0647 = $3,509.99 This falls under the benefits that are provided to employees that are not covered with the provisions contained in FBTAA. It is therefore, a residual fringe benefit. The main criterion is that there is a benefit provide to the employee as a result of an employment relationship. Jones is expected to document evidence showing the purchase of the new books under different plans. The receipt should indicate the category of books and the amount of discount in each. Item 6 The market value of the car of $25,000 is not considered since it is a cost that was not incurred. Since the car was transferred to Jones home and registered in his name, it is assumed that the car will be totally used for no business purposes. Taxable value is computed on the value of acquiring the car which is $15,000. Grossed-up taxable value = $15,000 * 2.0647 = $30,970.50 Where properties are offered to the employee as a reward for long service, the worth determined is condensed by the smaller of the price to the employer of all such property so given to the appropriate employee in the tax year and R5 000. For instance, if the price of the asset is $6 600, only $600 will be taxable and replicated on the IRP5/IT3 (a) certificate. The provision of property by an employer to an employee is regarded as a fringe benefit regardless of whether or not the employee pays for property. These include both tangible and intangible goods. Examples of these properties include animals, real property, goods, shares and other securities or rights. Property is provided when ownership passes. If title never passes, then it is a residual benefit rather than property benefit (Escoffier & Fortin 2008). This is a car benefit, and ADB is required to show the receipts for transfer and the log book effected in the name of Jones (Pricewaterhousecoopers 2003). Item 7 Taxable value Running costs including depreciation = $21,250 * (10,000/18,000) = $11,805.56 Insurance = $1200 * (10,000/18,000) = $666.67 The purchasing cost of the car for $60,000 is not included because it is not treated as operating cost for the car. The actual operating costs of the car incurred during the period will include both the running costs including depreciation and registration, insurance etc on the car. However, since the car was used for both private and business use the taxable value will involve only the portion of operating costs that was used for private errands. Total taxable value = $11,805.56 + $666.67 = $12,472.23 Grossed-up taxable value = $12,472.23 * 2.0647 = $25,751.41 This is a car fringe benefit because 10,000 kilometers were for private use by Jones, and it is provided by the employer. A car is defined in s.136(1) as a motor vehicle being a car, station wagon, utility track, panel van or any other street vehicle intended to carry a consignment of less than one tone or less than nine passengers. The above case fulfils the definition of a car. The provision of a motor car by the employer to an employee under a lease novation arrangement gives rise to a car fringe. The lease payments obligations under a novated lease are transferred to the employer even though the lease arrangement is with the employee. In order to justify that the car has been used for business purposes, Jones must maintain a log book with entries containing the reason for the travelling, the date of commencing and ending the journey, the start and end readings of the odometer, and the distance travelled. Item 8 Total cost of the trip. $ Air fares 4,000 Accommodation 5,000 Meals 2,500 Entertainment 500 Total 12,000 Taxable value = $12,000 Grossed-up taxable value = $12,000 * 2.0647 = $24,776.40 The types of benefits provided in this case are air fares, accommodation, meals and entertainment. An airline fringe benefit will arise under s.32 where: an airline or a travel agent provides free or discounted air travel to employees or their associates. The air transport is provided as a result of the employment relationship, and the air travel is subject to stand by restrictions, that is, the rights of the employee come behind members of the public. The benefit comes when the travel begins to be provided, not when it is booked or paid. The documentation should reveal the booking fees for the air transport; meal vouchers and entertainment levy (Escoffier & Fortin 2008). REFERENCES Colin, W. (2012). FBT compliance guide: Employee fringe benefits income tax. CCH Australia Limited. EscoffierS D, Fortin K A, (2008) Taxation for Decision Makers, Cengage learning Pisa, Italy. Marsden, S. (2010). Australian master bookkeepers guide [2009/10. North Ryde, N.S.W: CCH Australia. Pricewaterhousecoopers LLP (2003) Corporate and Individual Taxes 2002-2003: WorldWide Summaries WILEY Hoboken, NJ Read More