Fringe Benefits on Property to Robert - Case Study Example

Student Name Subject Tutor: Date Part A A). 50% reimbursement of University fees University education is rate as GST free so long as it is aimed at increasing employee’s skills in the performance of his duties. The course in question in this case is in the category of those allowable for GST free since it is available to the public and Robert is taking the course to improve his managerial skills in Arts1. An employee is not required to be reimbursed training fee if the training is not aimed at improving his productivity. The reporting fringe benefit paid to an employee will be 50% of the university fees paid. The company will not claim GST credits for the school fees reimbursed. Therefore, my advice on this issue to Sunnyville is that they will not be able to claim GST as it is GST free and Robert is not GST registered. Fringe benefits on property to Robert Robert was given supplies worthy $1,200 for personal use from the store. He utilized $500 worth supplies for personal effects and donated $700 to the company. The supplies of $500 are a fringe benefit accrued to Robert as a result of being class and workshop manager of Sunnyville Arts Ltd. This will be recognized as a benefit to employee and allowable expense. The company should record it as a reportable fringe benefit which will be subjected to GST credits2. Although this was not paid directly by the company, it was realized by Robert by virtue of being an employee of the company. It will be assumed that $500 is the cost incurred by the company to provide this expense. The company will be required to include it as GST exclusive value in their assessable income during the calculation of assessable income. The main reason why the company will treat it as GST exclusive is because it is a contribution made by an employee to the company. GST is assumed to have been paid by the store meaning that it will be double taxation if it is recognized again3. Therefore, I will advice Sunnyville to include lunch but exclude the figure of $ 125 for wines as it GST excusive. Personal use of the studio The personal use of the studio is an allowable expense on the company and a taxable income on Robert. This makes it a fringe benefit which should be quantifiable to determine the amount of tax that should be paid4. It is also subject to GST tax. The usage of Robert of 3 hours per month should be considered GST inclusive. This is a fringe benefit allowable expense and the company should treat it so that it is GST inclusive5. Reimbursement for lunch- Under fringe benefits tax assessment Act reimbursement made to employees in relations to lunch taken in the process of production is allowable expense to the extent that it is necessary6. Matching wines will not qualify for allowable expense for tax purposes. Since the wines are not reimbursable expenses to an employee then it can not be GST inclusive in the returns of the company. This means actual lunch which is aimed at production is allowable expense. In this case Sunnyville Arts Pty Ltd should include $250 as GST item. b). The acquisition of the offset printing press from the USA will be treated as imports where they are required to pay customs duty to Australian custom service7. The cost that will be considered under GST will include the value of the imported offset printing press, the cost of transport, insurance and installation8. The customs tax will be based on $ 13000 while the cost of installation, freight and insurance of $2000 will be subjected to tax but not under customs. This is because it is not easy to separate the cost of installation and the cost of freight and insurance. The Goods and services Tax that will be paid are based on $2000 for Freight, insurance and installation, custom duty and original costs of $ 13,000. The following will the quantification of the tax consequences of the offset printing press Description Amount ($) Comments The cost of the press 13,000 Custom duty that is 5% 650 Tax payable Freight, insurance and installation 2,000 GST taxable value 15,650 GST at 10% 1,550 Tax payable I will advice Sunnyville Arts Pty Ltd that they will be required to pay a tax of $ 1,550. c). To begin with GST is applicable to all supplies acquired from overseas so long as the goods are of more than $4009. Sunnyville will be required to declare the cost of the goods, transport, freight, insurance and duty made to customs department. This GST payable is made at the port of entry10. Sunnyville will apply for Business Activity Statement which will enable them make GST tax payable in liability; if the import will be regular Part B a). The shares held in Esterhill Ltd have the following cost base Date Description Cost($) Explanation 2002 10,000 A class shares in Easterhill at $ 2 20,000 The original cost of this shares is $2.00 and this is the value that should be considered 400 shares 400 The cost included in this case is the cost of acquiring the options that led to the acquiring of the class A shares. 20,400 Notes:- The cost base of Danica’s shares includes the following; 1). 10000 A class shares in Easterhill Ltd at $2 per share. This is the original price paid by Danica at the time of purchase. 2). 400 shares of class A at the cost of $400. The cost has been taken to be $400 because it is the amount that was paid to John to purchase options which led to acquisition of the 400 shares. The initial aim was to give Danica an option of purchasing 2000 B class shares. However B class shares were cancelled and Danica acquired A class shares instead of B class shares. In calculating the cost base of Danica‘s shares, the following items have not been considered. 1). The distribution of 50c per A class share. Any change to the value of shares is irrelevant to determining the cost base of shares held at that time. 2). Any payments in a form of dividends do not qualify for inclusion in determining the cost of the shares that were at hand. 3).The cancellation of all shares and issuance of new ordinary shares did not change the cost for shares that had been acquired earlier. 4).The issuance of new options did not change the cost of acquiring the original option. 5).The exercising the option available did not change the original cost of the option. b) The relocation of Danica from Australia to UK for four years made him a non- resident. This means that once Danica became a non- resident, it is assumed that he disposed off all the property he owned in Australia. When the property is assumed to be disposed off, Danica may opt to pay taxes on any capital gains made immediately or disregard the option of disposal and pay taxes for the property until she elects to take an option of disposing off and pay capital gains once. In the case Danica, I will advice her to take option 1 which has a tax saving that is calculate the capital gain on the deemed disposal at the current market rates. The following will represent capital gain or loss during the time of leaving Australia as a non resident. description cost Current market value Capital gain(loss) property 1,300,000 1,400,000 100,000 10400 shares 20,400 27560 7,160 total 107,160 Capital gain tax The capital losses made in this case will reduce the amount of taxes that Danica is likely to pay. Therefore she is expected to pay a tax on $107160. Part C A). Income tax consequences of issuing the convertible notes as proposed by Angel. The issue of convertible notes as proposed by Angel will be treated as being a revenue transaction in case there is a gain or loss during conversion, disposal or maturity. This means it will be treated under GST. If this convertible notes are converted into shares that is ordinary shares they will be dealt with as a capital transaction being recorded in the capital account. Therefore any gain or loss realized will be treated as capital gain or loss under capital gains tax11. It should be noted that the date of issue of the convertible notes is critical in determining tax consequences during conversion. In the case at hand, during conversion it will be treated as a capital gain since the investor bought them at the date of issue. Any gain or loss at the time of converting the note into ordinary shares will be assessed as other income. If the conversion is of notes that were issued after 14th May 2002, any gain or loss is disregarded. The value of shares or securities received will be based on the cost, conversion amount or any other amount incurred during conversion. The investor can receive any other security apart from ordinary shares so long as the terms of the convertible notes state so. If the investor receives equal amount as invested during conversion then there will be no capital gain or loss. Considering the above facts I will advice CSInvestments that issuing convertible notes will lead to the tax assessable during conversion under capital gains tax12. This gain or loss will be assessed as other incomes. It should be noted that CSInvestment will recognize a loss if the conversion leads to a loss thus reducing the income accessible for tax. b). Income tax of issuing preference shares Issuing preference shares will have various tax consequences to CSInvestment. First, the preference shares will be deemed to have the characteristics of debt or equity. Preferences shares are deemed to have debt characteristics when they pay a fixed interest and have a maturity date. They are deemed to have the characteristics of equity when they pay dividends and are likely to be converted into ordinary shares in the future. In this case CSInvestment will apply debt equity rules to determine whether preference shares issued have the characteristics of debt or equity. If the preference shares are considered to be having a stream of income in a form of interest in the financing company, they are the considered equity. They should also have a scheme that is paying interest to the financing company regularly without fail, then, it is debt characterization. If the shares will be issued at a price of $100 per unit they will have passed debt test. Debt test also requires the payment of a stream of income regardless the performance of the company13. The preference shares are legal form shares that are also equity interests. Accordingly, the debt equity provisions do not alter what would be their otherwise expected tax treatment by the finance company. That is, returns on the shares will be frankable but not deductible and the benchmarking rules will apply to equally to returns on ordinary and preference shares14. The finance company no longer qualifies as a subsidiary member of the consolidated group from the time of the issue of the preference shares, being the time company ceases to hold 100% of the membership interest in the finance company. Accordingly, the finance company will be deconsolidated from the consolidated group at this time. The rules in Division 711 of ITAA 1997 will need to be applied to calculate the tax cost setting amounts for CSInvestment’s membership interests in the finance company. This cost setting amount will then be allocated to the assets of the finance company moving forward as a deconsolidated entity. In order for CSInvestment to claim deduction for dividend paid under ITAA they should show that15 They incurred a loss during the period The purpose was to raise income The dividend was of a preference share characterized as debt A subsidiary member of consolidated group only leaves the group when it fails to satisfy the membership requirements. The finance company should have been treated as being a member of the consolidated group for the last 3 years as the consequences listed above will not occur. The head company CSInvestment, will have to correct previous years tax returns and correct previous years tax returns and correct any mistakenly undertaken deconsolidation. The finance company will have been entitled to deduct the annual returns paid as dividends to the extent the returns would have been deductible under general principles as if the amount was interest incurred in respect of the finance company raising finance16. Appropriate corrections to prior ear returns for CSInvestment as head entity of the consolidated group will need to be made to claim these deductions. The finance company will not have been entitled to frank the annual dividend return paid on the preference shares17. To the extent the finance company has incorrectly franked such amounts; they will be required to correct the franking account In respect of returns paid to non- residents, the finance company will have been in breach of their obligation to make appropriate interest withholding tax payments on the returns paid on the preference shares18. Any dividend withholding will, conversely, need to be claimed back. c). When CSInvestments receives $ 40,000 from CSHolding prior to issuing preference shares, the treatment of preference shares will not change. This is because the amount received is used to settle a borrowing from external bank and it has no connection with issue of preference shares. For tax purposes, the treatment of preference share is determined not by the purpose the money is being used for but the way it is issued and the terms in the memorandum. Read More