Alan and ABC Pty Ltd - Assignment Example

1.0. Question One: Case Analysis Section 6-5 of the Income Tax Assessment Act (ITAA) 1997 includes in Peta’s assessable income, where he is an Australian resident, all his ordinary income he derived, in the land during an income year. Specifically, ordinary income is understood to be his income according to ordinary concepts. It has to be noted that there have been a number of AAT and Court cases dealing with the issue Peta currently faces and whether profit from his $600,000 are assessable as income in accordance with ordinary concept or capital gain (Hodgson and Pearce 2015). Basing on this case or general principle, the activity Peta engages in will be assessed as business, or part of business or whether the engagement was a virtue of mere realization. Assessing whether Peta’s action was a mere realization, this report based on the Court ruling that involved FC of T v The Myer Emporium Ltd1. The Court noted that if the decision to renovate and sell part of the property previously acquired was taken after the acquisition of the property where there was no previous purpose or intention at the time of the property acquisition then the profit made are categorized as mere realization. Relating this decision to the case of Peta, the taxpayer purchased the house in Kew and in the process there were two key reasons; To allow her and the family to in live in the house and To allow her to build the three units on the tennis courts and sell them at a profit This this report is interested in the second intention “…build three units on the tennis courts and sell them at a profit.” It is definitely another aspect as the decision to sell the tennis court was taken by Peta by a way of implementation of purpose or intention that existed at the time of her acquisition, of making profit, at least within the context of carrying on her business or a business operation. Conclusively, the actions undertaken by Peta were not mere realization instead; her ordinary income or receipt is having sufficient connection with an earning activity. Secondly, it has been noted that the nearby tennis club made an offer to buy the old tennis court upon Peta’s restoring them to good condition. Clearly, there was a contract for the provision of service and payment was made to the taxpayer (Peta) based on the contract thus amounting to ordinary income. In ascertaining whether the intent and the decision are tantamount to ordinary income, the following factors need to be considered: The taxpayer (Peta) as the owner of the property was at first aware of the intention to sell the courts for profits The taxpayer maintained her original occupation but entered into business The tennis club next door provided the benefit because of the contractual relationship it had with the taxpayer Other than looking at the case in terms of mere realization, ascertaining whether the income received ($600,000) was ordinary income needs Taxation Ruling TR 92/3 on whether Peta’s profit on isolated transaction amount to assessable income. While isolated transaction is looked in terms of transaction outside the ordinary course of business of Peta or transaction entered by non-business taxpayers, our argument is confined within the second reason (transaction entered by non-business taxpayers) (Elliffe 2015). Generally, the profit made in Peta’s isolated transaction is an income as it meets the following criteria: Her intention of entering into selling the court was to gain or make profit and The transaction was entered into and her profit made, in the course of conducting or carrying business or commercial activity. Just like the Court noted in the case involving Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd2, profit making of the taxpayer is not the dominant purpose for her entering the transaction but profit making was her significant purpose. This purpose indeed existed at the time Peta purchased a house in Kew. 1.1. Conclusion The receipt of $600,000 is ordinary income under s 6-5 of the Income Tax Assessment Act 1997. The proposition of identifying and determining ordinary income remains multifaceted. Indeed there have been different court cases that have determined whether a transaction is ordinary income. While there are different characteristics of ordinary income (such as distinction between income and capital or ordinary income having sufficient connection with an earning activity) not all of these factors need to be present to ascertain Peta’s action. The activities that Peta has undertaken amount to carrying business whose intention was known at the point of purchase of the house. The transaction is therefore having the character of commercial transaction or business operations. 2.0. Question 2: Alan and ABC Pty Ltd 2.1. Part A: Advise ABC of its FBT Consequences ABC Pty Ltd has to note that the Australian Taxation Office has been undertaking an audit process with regard to fringe benefits they (ABC Pty Ltd) provide to the 20 employees and specifically, Alan. Accordingly, ABC Pty Ltd is advised that they should identify all applicable benefits and thereafter ensure that they carry necessary documentation to support in the calculation of each benefit Alan is entitled to and the dinner party that included the 20 employees (Australian Taxation Office 1989). Additionally, ABC Pty Ltd should ensure that any reimbursement it pays to Alan or any other employee is reported accurately and to the right office. The reimbursements are however, subject to goods and service tax (GST) (which is basically is a broad-based tax pegged at 10 percent on Australian goods and services except those sold or consumed within Australia) and 1/11th of ABC Pty Ltd amount to Alan or the 20 employees will have to be disclosed on the company’s (ABC Pty Ltd) business activity statement for the quarter in which Alan and the rest of the employees received the reimbursements. The GST consequences of providing benefits is that the company is now entitled to specific GST credits for the acquisitions named in the case now that the company is registered for GST unless the contributions were linked with input taxed supplies or GST-free. On the other hand, the income tax consequences of the company’s benefits are provided in section 14.15 of Fringe benefits tax and entertainment. As a result, the cost the company will incur in the provision of the benefits is always an allowable income tax deduction though the tax legislation prevents some benefits from employers from being deductible (Murphy 2002). While calculating FBT, Alan and other employees’ fringe benefit amount is divided by (1-the rate of FBT). Value for the latest mobile phone handset, which cost $2,000 (this mount is not included on the employees payment summary as the value of this benefit is $2,000 or less). Value for Payment of Alan's mobile phone bill $220: NOT INCLUDED in the payment summary during year ended 31 March 2016 Value for Payment of Alan's children's school fees during year ended 31 March 2016: =$20,000 FBT rate ending 31 March 2016 and 31 March 2017 =49% Amount to be included on Alan’s payment summary =$20,000 (1-0.49) =$20,000/0.51 =$39,216 In other words, had Alan earned a salary of $39,216 and paid his tax at 49% he would have been left with $20,000 after tax, thus being equal to the value of the his fringe benefits. ABC hosted a dinner during year ended 31 March 2016: $6,600 FBT rate ending 31 March 2016 and 31 March 2017 =49% Amount to be included on the employees’ payment summary =$6,600 (1-0.49) =$6,600/0.51 =$12,941 2.2. Part B: How the answer was to be different when ABC had 5 employees Essentially, benefits employees receive at ABC Pty Ltd are supposed to be included as fringe benefits the employer is providing to them. However, ABC Pty Ltd is actually providing such benefits to the other 20 associates of the employees who are the partners. If the value of a given fringe benefit ABC Pty Ltd is providing to the 20 employees and the associate (in this case the family members) is in excess of $2,000 with regard to a given Fringe Benefit Tax year (in this case ending 31 March 2016 and 31 March 2017) then ABC Pty Ltd is obliged to record the grossed-up taxable values of every benefit on the payment summary for the 20 employees for the corresponding income year (in this case ending 31 March 2016 and 31 March 2017). This will therefore amount to reportable fringe benefit for the 20 employees working for ABC Pty Ltd or the ones attended a dinner at a local Thai restaurant. The understanding of the reportable fringe benefit for the 20 employees and their partners is that 40 people (20 employees plus 20 partners associated to the employees) consumed $6,600. In other words, 20 employees consumed $3,300 in the same restaurant. Assuming that ABC Pty Ltd had 5 employees eating at the same rate then the total cost for the dinner at the same local Thai restaurant would have been for 10 people (5 employees plus 5 partners). Thus; {(10x$6,600)/40} =$1650 Now that ABC Pty Ltd would have parted with $1650 to host its 5 employees and their partners at the same restaurant value for hosting a dinner at a local Thai restaurant for all 5 employees and their partners would not have been included as it was the case in answer (a) above during year ended ending 31 March 2016 and 31 March 2017 since reportable fringe benefit is calculated on the threshold of $2,000. That is, where the value of the 5 employees is $2,000 or less then there will be no amount to be included on the 5 employees’ payment summary. 2.3. Part C: How the answer was to be different had ABC had clients of ABC attended the end-of-year dinner Australian Taxation Office is keen on the limits of benefits provided by employers and these limits have been pegged on associates of the employees and employees themselves. To that regard, including clients of the company in the end-of-year dinner does not have any effects on the reportable fringe benefits since the clients are neither employees nor associates of the employees. As such, the value will still remain for the employees and the associates of the employees which stood at $6,600. References Elliffe, C., 2015. Key Issues in the Design of Capital Gains Tax Regimes: Taxing Non-Residents. New Zealand Journal of Taxation Law and Policy, 21(1). Hodgson, H. and Pearce, P., 2015. TravelSmart or travel tax breaks: is the fringe benefits tax a barrier to active commuting in Australia? 1. eJournal of Tax Research, 13(3), p.819. Murphy, K., 2002. Procedural justice and the Australian Taxation Office: A study of scheme investors. Centre for Tax System Integrity. Office, A.T., 1989. Report of the program evaluation of selfassessment (Management Improvement and Evaluation Branch, Australian Taxation Office). Canberra: Australian Taxation Office. Read More