Carrying Out Employment In ABS Pty Limited - Myassignmenthelp.Com

Question: How Should Carrying Out Employment in ABS Pty Limited? Answer: Introducation In the given case, Alan has been carrying out employment in ABS Pty limited. Alan apart from his salary of $300,000 in a year has been getting some additional perks. He has been getting a mobile reimbursement worth $220 per month including the amount of GST. Alan has entered into a two year contract with the mobile company where he will have to a pay fixed amount every month and in lieu he can enjoy unlimited usage on the phone. The mobile phone for he is getting the reimbursement is been used purely for work related purposes. The company apart from paying salary to Alan also reimburses the schools fees of his children worth $20,000 per year. In the current year, the company provides him with a new mobile handset worth $2,000. This amount includes GST. At the end of the year, the company hosted party where all the 20 employees of the company were invited with their partners. The total amount that has been spent in this dinner was worth $6600 including GST. Fringe benefit tax referred to as a tax that has been levied on certain benefits that has been provided by the employer to the employee and his family members and other associates. The tax has been levied is borne by the employer himself. The benefit that has been provided in relation to fringe benefit is apart from the salary paid to the employees. The taxes that have been paid on the fringe benefits provide to the employees are separate from the income tax and the same is calculated on the taxable value of the fringe benefit that is providing to the employee. Benefits can be provided by an associate of an employer, by another person on behalf of the employer or by a third party under an arrangement with the employer. Benefits include rights, privileges and services or facility. (Adam, 2012) Fringe Benefits Tax is the tax applied by the Australian Taxation Office to fringe benefits (which are generally non-cash benefits) provided by an employer to their employees including their employees family or other associates. It was introduced on 1st July 1986; the basic motive to introduce it was to protect loss of revenue from the practice of providing (tax-free) fringe benefits in lieu of salary. It is separate from income tax and is charged on the taxable value of the fringe benefits provided by an employer to their employees. It also applies to Commonwealth and State Government departments. There are many fringe benefits which are exempt from fringe benefits tax, but the condition of granting exemption is that the benefit is used primarily to enable an employee to do his job. (Wolfram, 2014) For calculating fringe benefits tax employer is required to gross-up the taxable value of benefits after that the grossed-up value is taxed at applicable FBT rate which is 49 percent for fringe benefits tax year ending 31st March 2017. When an employer can claim the Goods and Service Tax (GST) on a benefit then the benefit provided is known as Type 1 benefit (such as holiday accommodation) and the applicable type 1 benefit gross-up rate is 2.1463 times of the cost of benefit provided. In case where an employer cannot claim the Goods and Service Tax (GST) on a benefit then the benefit provided is known as Type 2 benefit (such as private health insurance) and the applicable type 2 benefit gross-up rate is 1.9608 times of the cost of benefit provided. In the given case, ABC Company provided mobile phone worth $2000 to Alan plus they use to make the payment for the mobile usage charges for Alan worth $220 including GST. As per the provision of Australian tax, no FBT will be payable on the cost of mobile phones that are provided by the employer to the employee. Further being the mobile has been used by the employee for his office purposes, thus, the same will not be eligible for FBT. The company apart from paying salary to Alan also pays the schools fees of his children worth $20,000 per year. Being the payment has been made by the employer directly to the school which is a third party, the payment made will be covered under the provision of FBT. At the end of the year, the company hosted party where all the 20 employees of the company were invited with their partners. The total amount that has been spent in this dinner was worth $6600 including GST. Provision of fringe benefit on entertainment includes:- Entertainment in form of recreation, drink and food. Travel or accommodation with regard to or for facilitating the aforementioned entertainment. Further entertainment provisions are also applicable to:- Cocktail parties , business lunches and drinks and staff social functions Entertainment to clients and employees via theatrical and sporting events, holidays, sightseeing tours and so on. Travel and accommodation provided in regard with or to facilitate activities such as entertaining clients and employees at a tourist resort over a weekend or holiday etc. Thus, the amount that has been spent by the employer on dinner of the employee and their partner will be eligible for FBT. Being the employer can claim the GST on the benefits provided by them to the employee. The FBT will be calculated as follows: Particular Amount Amount paid as school fees (no GST) $ 20,000 Gross up 1.9608 FBT liability $ 39,216 Dinner amount (including GST) $ 6,600 Gross up 2.1463 FBT liability $ 14,166 Total FBT Liability $ 53,382 FBT tax 49% FBT $ 26,157 Further, FBT is currently payable by an employer irrespective of fact its a Sole trader, trustee, partnership, unincorporated organization, corporation, government authority or government. Regardless of the fact whether employer is providing the fringe benefit or the same is provided by another party.FBT is still be payable whether employer is liable for income tax or any other taxes. Hence even if ABC only had 5 employees fringe benefits are applicable to ABC. As stated earlier, another person can also provide fringe benefit on behalf of employer .In fact, on behalf of employee it can be provided to another person like a relative. Provision of fringe benefit on entertainment includes:- Entertainment in form of recreation, drink and food. Travel or accommodation with regard to or for facilitating the aforementioned entertainment. Wherein recreation includes sport, amusement and leisure-time pursuits and includes recreation and amusement in vessels, vehicles or aircraft (Like harbor cruises, sightseeing tours, joy flights etc) Further entertainment provisions are also applicable to:- Cocktail parties , business lunches and drinks and staff social functions Entertainment to clients and employees via theatrical and sporting events, holidays, sightseeing tours and so on. Travel and accommodation provided in regard with or to facilitate activities such as entertaining clients and employees at a tourist resort over a weekend or holiday etc. Further, if the clients attend the dinner that has been organized by the employer, then the employer will not be able to use the GST credit. However, the FBT amount will be same as calculated above. In the given case, Peta purchased a house in Kew. The house has an old tennis court at the back. Peta purchased the house with an intention of building three units on the tennis court and selling them at some profit. However, soon he got the offer from tennis club next door offered to buy the old tennis courts. Peta spent $100,000 for preparing the tennis court for sale. He resurfaces the tennis courts and builds new fences around and sold the same for $600,000. As per the Australian tax laws, ordinary income refers to the income that has been earned by a person in the form of money or moneys worth. The ordinary activity refers to the income that has been earned by a person from a profit making activity or from a property or from an investment. Ordinary income does not include voluntary income or income from gift. The normal proceeds that have been earned by a person from a business are covered under the definition of ordinary income. A business activity in this context includes an activity that has been carried out by a person on a regular basis is covered under the definition of business activity. Further, the ordinary income also includes 'adventure or concern in the nature of trade. These are a single adhoc activity that has been carried out by a person which is not the normal income generating activity of the person but the same can be considered as a business in itself. At times of calculating the ordinary income, only the profit amoun t that has been earned by the person will be considered. This amount can be calculated on notional basis as well. In the given case, Peta has spent a considerable amount i.e. $100,000 on improving the condition of the tennis court. The court was purchased by the tennis club nearby for $600,000. In this case, Peta has entered into an adhoc transactions of selling the tennis court to the tennis club. This is not his business. This is just an adhoc transaction which has been entered by him just to make quick profit. These are a single adhoc activity that has been carried out by a person which is not the normal income generating activity of the person but the same can be considered as a business in itself. In this case, the Peta has earned a profit of $500,000. Thus as per the definition provided above, the amount so earned by him will be considered as ordinary income. In the given case, the entire amount that has been received will not be considered as an ordinary income. As per the provision of the Australian tax laws, only the profit amount that has been earned by the person will be considered. This amount can be calculated on notional basis as well. Thus, in that case being Peta has spent $100,000 in resurfacing the tennis courts and build new fences around them, this will be considered as the cost. $600,000 has been received by Peta as a sales consideration for selling the tennis court to the club, thus in net the amount $500,000 has been considered as a profit which Peta has received and thus the same will be treated as ordinary income in his hands. In the above working, the capital gain tax and the original amount that Peta has to pay to purchase the tennis court along with the house has been ignored. We havent been provided with the amount that has been paid by Peta for the tennis court, thus only the net $100,000 which has been spent by him on resurfacing the court is taken into consideration for ordinary income calculation purposes. Reference: Taxpayers, 2015, Tax free benefits, Different rates, viewed on 14th May 2017, Retrieved from _ https://www.taxpayer.com.au/KnowledgeBase/10164/Small-Business-Tax-Super/Fringe_benefits_tax Wolfram P., 2014, Fringe benefits tax and salary packaging, viewed on 14th May 2017, Retrieved from _ https://www.mywealth.commbank.com.au/strategies/60-second-guide--fringe-benefits-tax-news20140611 Adams P., 2012, Fringe benefits tax fundamentals, viewed on 14th May 2017, Retrieved from _ https://www.cpaaustralia.com.au/cpd/fbtextract.pdf ATO, 2017, How to calculate fringe benefits tax, viewed on 14th May 2017, Retrieved from _ https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT/ ATO, 2017, Fringe Benefits Tax (FBT), viewed on 14th May 2017, Retrieved from _ https://www.ato.gov.au/Business/Employers/Preparing-to-engage-workers/Fringe-benefits-tax-(FBT)/ ATO, 2017, FBT Installments, viewed on 14th May 2017, Retrieved from _ https://www.ato.gov.au/Business/Business-activity-statements-(BAS)/Fringe-benefits-tax-(FBT)-instalment/ Austlii.edu, INCOME TAX ASSESSMENT ACT 1997 - SECT 6.5, viewed on 14th May 2017, Retrieved from https://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s6.5.html