Taxation Accounting - Essay Example

Running header: Tax accounting Student’s name: Instructor’s name: Subject code: Date of submission: Taxation Accounting Lynn’s responsibility in reference to her as an entity carrying on an enterprise in regard to GST: Facts of the case: Lynn has purchased the café in Australia with a turnover of around $400,000 per annum. There is an apartment attached to the café and she has rented it out. As such, there are two potential sources of income for Lynn which include the income she will be getting from the café and the rental income. Responsibility for Lynn with regard to GST; In determining Lynn’s responsibility with regard to GST, one has to be sure that she is carrying on an enterprise and that she is not merely carrying on a hobby. S 9-20 of the GST act defines an enterprise as an activity or set of activities that include carrying on a business. On the other hand, s195-1 of the GST act terms business as any professional, trade, employment or vacation excluding employee that is carried on with a profit motif and is repetitive and organized (Australian Government Australia Taxation Office, 2013). Based on this, we can deduce that Lynn intends to carry on an enterprise since a café is usually operated for a profit motif and has all the above qualities. Since we are satisfied that Lynn is carrying on an enterprise, we examine her responsibility with regard to GST. Her first responsibility is to register based on s 23-1 GSTA since her entity (café) will be carrying on an enterprise. It is mandatory for her to register for GST since her entity has reached the registration threshold of $75,000 turnover per annum in accordance to s23-5 as well as s23-15 of GSTA. Having registered for GST, her next responsibility is that of collecting the GST included in the price of the goods she supplies or services she offers (the taxable supply she makes –s 9-5 of GSTA) on behalf of the tax office and submitting it to the Australian tax office (Commonwealth consolidated acts, 2014). S31-5 of GSTA also requires that she files quarterly GST returns for the GST she will have charged her customers to the Australian tax office. b) The entitlements that Lynn has and how; It is worth noting that Lynn operates her enterprise as a cash business. This implies that she has already overpaid GST due to the fact that she paid much more money in GST - $10,500 as opposed to $9,000 that she has charged on the supplies she made. The overpayment is equivalent to $1500. One of the benefits of registering for GST for her is that she can claim back the GST she has been charged on her business purchases. In case she had not registered, she would have lost this right. The first step in claiming refund for the repayment is filing the GST returns in accordance to s31-8 of GSTA. This will give the commissioner the opportunity to assess the returns and establish that the returns are actually correct and that she has indeed overpaid GST. This is because the commissioner has to satisfy himself that the overpayment in question relates to taxable supplies based on division 40. Lynn may need to apply for the refund according to s35-5 of GSTA. The section states that where the assessed amount for a tax period is less than zero, the commissioner must pay the amount back to the tax payer on behalf of common wealth. Assuming the assessed amount is found to be an overpayment of $1500, then Lynn will be entitled to a refund by the commissioner on behalf of commonwealth. Lynn may also be entitled to interest on the amount where the commissioner delays in making the refund. C) Having supplied the customer with the goods, Lynn must have factored in the GST charged to the customer in making her returns. As such, this amount must have been paid to the tax office although she did not receive it from the customer. Since she is registered for GST, she is entitled to make a bad debt adjustment in order to ensure she pays GST that is less the GST amount that the customer would have paid. GSTR 2000/2 details out the provisions for dealing with a bad debt as regards GST (Australian Government Australian Tax Office Legal database, 2014). According to the ruling, Lynn may make an adjustment to claim back the GST paid if: -she paid GST to Australian Tax Office for a sale she made. This condition has been fulfilled as we are informed that she made supplies to a local business amounting to $935 including VAT. - If she did not end up receiving the above amount from the customer which we are told that she did not - The entire amount of $935 has been written off in her books as bad debts or it has been overdue for 12 months or more. In this case, Lynn must provide a written record on her decision to write off the debt. It should however be noted that be allowing Lynn to do the adjustment allowing her to claim the GST paid but not received, the commissioner has to satisfy himself that the amount in question is actually bad debt and relates to taxable supplies with regard to GST and that attempts to collect it have not been successful. In addition, it should be noted that Lynn can only make the adjustment in the period that she writes off the debt or where the amount in question has been overdue for 12 months (Hubert, 2007). In case the amount is finally recovered, a corresponding adjustment to reinstate the GST should be made. 2. Christmas parties Fridge benefits tax and GST implications Case 1 facts: Christmas function held on site, only employees are invited, associates such as partners are invited, major clients are invited, there is a gift hamper which is valued at $110.00 including GST, and the organisation has not elected to use Div 9A. Discussion: Division 9 and 11 of the Fridge benefits act classifies Christmas parties provided by the employer to their employees as fridge benefits and hence they are subject to FBT except in cases where they are considered specifically exempt. S58p of the FBT act provides such exemption for minor benefits. For a benefit to qualify as a minor benefit and hence exempt from FBT, it has to be of a less value than $300 including GST. In addition, such benefit should be such that it is provided to the employee or their related associates on an irregular and infrequent basis. If the above Christmas party is provided to the organization’s employees on its business premises on a working day, then it will be exempted from FBT. As such, the entire cost of the party irrespective of its cost is exempt of FBT. However, it should be noted that although the benefits fail to attract FBT, s32-5 of ITAA97 and GST s69-5(3) of GST act include them under the meaning of entertainment and hence in this case, the organisation will be prohibited from claiming a GST tax deduction (Commonwealth consolidated acts, 2014). This implies that expenses such as drinks and food incurred for the party will be exempted from FBT without any cost limit and no GST will be claimed on them. Similarly, the expenses incurred on the clients who will attend the party will not attract fridge benefit tax but at the same time no GST will be claimed on such expenses. On the same note, expenses incurred on the associates will also not be subject to FBT while at the same time no GST will be claimed on such expenses. In a case where the party is held on the organization’s business premises on a working day with the employees and the clients and only light meal is served with no alcohol being provided, the entire cost of the party will be tax deductible and no FBT is chargeable while no GST can be claimed on the expenses (Barkoczy, S2013). It should also be noted that where employees have invited their associates to the party and the expenses incurred by the associate is $300 or more GST included, then this will attract FBT on the associate’s cost and the employer can claim GST deduction on the associate’s costs. Where the party is held off the business premises Where the Christmas party is held externally or off-site for instance in a function center, in public areas such as parks or in a restaurant, such parties will be exempt from FBT incase the cost for each employee and their associates amounts to less than $300 including GST. However, the employer is prohibited from claiming GST deduction on such cost (Australian tax office 2014). On the other hand, the costs incurred for the clients invited to the party will not be subject to fridge benefit tax. At the same time, the employer can not claim any tax deduction or GST on the cost related to the clients. The same case will apply to the business associates invited. Based on tax ruling TR2007/D6 (John 2014), the value of the Christmas party and related benefits are not combined in determining the threshold of the value that attracts FBT. As such, if for instance the Christmas party will be held at a site costing $200 per person and the employees given Christmas hamper worth $110, both the benefits will be FBT exempt under the minor benefits exemption although they amount to more than $300 since the two benefits will be considered separately (Parsons, 2012). It should also be noted that for the party expenses, the employer is not entitled to claim a GST credit. However, for the part of the Christmas gift hamper that will not be considered entertainment, the employer will be allowed to claim GST credit. The Christmas gift hamper Taxation of the gift hamper valued at 110 dollars including GST will depend on what kind of a gift it is i.e, whether it is an entertainment gift or a non entertainment gift. S32-5 of ITAA provides that non entertainment gifts that employers give to employees are fridge benefits tax exempt when their total value is less than 300 dollars including GST. This also implies that the employer can claim a GST credit on them. Such non entertainment gifts could include things such as beauty products and skin care products, perfumes, wines, gift hampers and gift vouchers. It should also be noted that gift hampers that are given to clients will not fall within the fridge benefits tax rules since they are not being given to employees. This means that t the employer can claim GST credits for such gifts as far as they are not excessively valuable. There is a different tax implication for entertainment gifts according to s69-5 of the GST act. Such gifts could include movies, tickets among others. In this case, where the expenses on the employee for the entertainment gifts together with the associates is less than $300 including GST, there will be no GST applicable while at the same time no GST credit will be claimed by the employer (John 2014). In a case where the cost for the employees as well as the associate is 300 dollars or more including GST, the employer can claim a GST credit while FBT will be payable on the cost. It is worth noting that the cost of providing entertainment gift to the clients will not be subject to fridge benefit tax and hence no GST credit can be claimed on the cost by the employer (Janet, 2010). In the above case therefore, although the gift is not an entertainment gift, it is below the threshold value since it is valued at $110 which is less than $300 threshold value. Hence no FBT will be charged on it. Similarly, the owner can not claim GST credit on it. References: Australian Government Australia Taxation Office, 2013, How GST works, Retrieved 25th January 2014, from; http://www.ato.gov.au/business/gst/ Commonwealth consolidated acts, 2014, Anew tax system (Goods and services tax) Act 1999, Retrieved on 25th January 2014, from; http://www.austlii.edu.au/au/legis/cth/consol_act/antsasta1999402/ Australian Government Australian Tax Office Legal database, 2014, Goods and services tax ruling –GSTR2000/2: Goods and services tax- Adjustments for bad debts, Retrieved on 25th January 2014, from; http://law.ato.gov.au/atolaw/view.htm?docid=GST/GSTR20002/NAT/ATO/00001 Hubert, D2007, Goods and services tax explained, London, Rutledge. Commonwealth consolidated acts, 2014, Income Tax Assessment Act 1997, Retrieved on 25th January 2014, from; http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/ Barkoczy, S2013, Foundations of taxation law, CCH Australia Limited, Sydney. Australian tax office 2014, Fridge benefits tax assessment act 1986, retrieved on 25th January 2014, from; http://www.austlii.edu.au/au/legis/cth/consol_act/fbtaa1986312/ Parsons, R2012, Income taxation in Australia, Thomson legal & Regulatory limited, Australia. John M2014, TR2007/D6-FBT: Minor benefits, Retrieved on 25th January 2014, from; http://www.fjmtax.com/tax-newsletter/3553-tr-2007d6-fbt-minor-benefits-commissioner-tightens-the-interpretation-in-practice-as-the-threshold-jumps-from-100-to-300.html Janet, F2010, FBT and GST implications on Christmas parties, Australian Economic Journal, vol. 25, no.2, pp. 19-25. 1. Read More