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Contents

• Question 1
• Question 2
  • A
  • B
  • C
• References

Question 1

Assessable income when falls under ordinary concepts is called ordinary income under Income Tax Assessment 1997 – Section 6-5 (1). Considering Peta as an Australian resident, whatever she earns that is derived directly or indirectly from any source, whether she is within Australia or residing abroad, during the assessment year or the income year. In the particular case, Peta acquired a house in Kew and almost has spent $ 100000 for the renovation to sale the two tennis courts that the house possessed. In the current assessment year the tennis courts were sold out for $ 600000. This particular income is considered as an ordinary income as the sale of the tennis courts was occurred outside Australia during the assessment year.

By the term ordinary income, under ITA 1997, refers to the income that is generated from any sources rather than capital gains. Ordinary income comprises of the income generated from the wages, salaries, bonuses, interests, dividends etc. According Bastagli, (2012) Income under [“ordinary concepts’] is usually undefined but is considered as the earnings or amounts that individuals usually consider as income that finds relevance under the Australian law of income under section 6-5.  The income generated from sale of the tennis courts is so far considered as an isolated transaction. Under ITA 199, section 6-5, if the commercial transaction owns the capacity to replicate to profit-making objectives, then the proceeds gained from that transaction shall be regarded as the ordinary income under section 6-5. This particular transaction is considered as the source to apply to the profit-making purposes, at the time acquisition of the assets. The transaction shall find consistency with the process through which the individual is trying to make profits.  Profit generated from an isolated transaction is considered as an ordinary income, owing to the consequences of the transaction based on the following two fundamentals:

1. The intent of the taxpayer to enter into a transaction was specifically to earn profits
2. The transaction was undertaken and accordingly profit was generated in due course of conducting a business or executing a business operations or any commercial transaction

In consideration to the above provisions as per ITA, the purpose of the taxpayers is not the biased or subjective intent to make profits. However, in consideration to the present scenario, and as per the overviews of Dzhumashev and Gahramanov, (2010) the taxpayers are however intended to earn profits with an objective consideration to considerably deal with the consequences of entering into that transaction. Since in this particular case, Peta has entered into the commercial transaction with the profit making concerns, the profit earned by the sale of the existing tennis courts to tennis club falls under the original income of a taxpayer with the dominant intention to make profit from the sale.

Peta is not attached with any business thus but there was such intention to make profits from the refurbishments and sale of tennis courts. This particular transaction is referred to as “first limb of Myers”. To apply this consideration of “first limb of Myers” in practice, it is imperative that the profit making purpose of acquiring an asset shall be made constant with the attempts undertaken to make profits (Gravelle, 2010). In order to apply Myers, there should be the presence of the intention to make profits that also existed in the process of development and sale of the property. Again in the contrary, it can be made apparent that in the above case, the original purpose to make profits from the development and sale of the property was forsaken and this was done at best possible prices. Since Peta was approached by the tennis club next door, this transaction also draws importance on the fact that there was an intention for change in the plan and as a result the original intention to make profit from the sale and refurbishment was compromised.

As per the Income Tax Assessment 1997, the assessable income of an individual, being a taxpayer, can be classified as follows:

1. Possession of the property, with the profit making concern by most suitable means and afterwards the profit is made by any means that coheres with the initial profit making concerns (Gutiérrez‐i‐Puigarnau, 2011)
2. Acquisition of the property by a wide range of several methods for earning profits and the application of any one method to make the profits
3. Entering into a transaction for profit making purposes in terms of a particular means but ultimately the profit is made by other means

In this case scenario, Peta initially intended to develop and renovate the tennis so that she could develop three more units of tennis courts and then accordingly sell all the units for making profit. But later, Peta chose a different process whereby she chose and accepted the offer made by tennis club. Therefore profit is earned by different means that is by spending $ 100000 for the refurbishment of the tennis courts for sale without building three more units for expanding the tennis court. The original intention to make profits was replaced by another means ultimately. Therefore this is argued to be an assessable income. Peta being the taxpayer, is liable for using a wide range of alternatives to make profit, this transaction can be treated as an original income. Though argued, the profit from the commercial operation is an ordinary income, considering that a) any gross receipts from the transaction or operation and b) the taxpayer entered the transaction to make profits and c) with the objective to undergo commercial transaction.

Question 2

FBT refers to the Fringe Benefit Tax. FBTs are usually paid by the management or the employers on several benefits that are offered to the employees of any management. Tax implication levied on the fringe benefits is usually practical on the non-cash benefits that are being provided by the employers to their employees. There lie some differences between FBT and Income Tax. Usually as per the IT Act, FBT are estimated @ 47% on the benefits being provided by the employers to the employees with effect from (w.e.f) 1^st April to 31^st March of the assessment year.

FBT charges are not imposed certain benefits, rather exempted benefits like as salary, wages, ESS, superannuation contributions etc. Moreover, as per the regulation as directed by the federal government of Australia, Johnson, et al., (2011) stated that FBT is exempted on some specific benefits such as – exempted loans; remote area housing; employee relocation expenses; benefits valued at $ 300; exempted car payment benefits; new equipment costs etc. However, here are some benefits on which FBT is imposed – car; loan waiver; housing loans; airline travelling allowances; car parking; property; meal entertainment; residual; residing away from home allowance and tax exempt body entertainment etc.

Since children educational fees amounting to $ 20000 was paid by the ABC Ltd. then amount would be liable to FBT. Though the children school fees were free from Goods and Service Tax (GST) and thus is liable to the FBT as per the laws intervened by the federal government of Australia.

At the end of financial year as the host of the dinner party was ABC Ltd at a Thai restaurant, and since the entire cost borne by ABC Ltd. amounted to $ 6600 inclusive of GST, this amount is ascertained as entertainment expenses as the meal provided was not during the working hours. Therefore, the entire amount of $ 6600 is imposed to FBT.

A

Considering the case scenario of Alan, it is proposed and quite obvious that the allowance of mobile bills shall be exempted from FB, being provided in the salary package (Paturot, 2013). This is so because the phone was used for official purposes only and not for personal use and is categorised under the exclusion category of corporate expenses. The total cost of $ 2000 thus would not be chargeable to FBT.

It is the management of ABC Ltd. has decided to render a mobile phone to Alan for using the same for the official purpose and the mobile bills incurred by Alan were paid the company itself. This particular expense are exempted from FBT since these expenses are incurred for the official uses only and not for any personal use.

Calculations for FBT

The FBT liability for the current year 31^st March = $ 20000 = 1.8868

= $ 37736

Therefore, FBT liability = $ 37736 * 47% = $ 17735.92

Dining benefits offered to Alan = $ 6600 inclusive of GST

FBT calculation = $ 6600 * 1.1 * 2.0802 * 50%

FBT liability for dining facilities = $ 7551 * 47% = $ 3548.97

Therefore, total FBT liability for the benefits offered to Alan = $ [17735.92 +  3548.97]

= $ 21285

B

The dinner was actually arranged for 20 professionals of ABC ltd and that has cost $ 6600 inclusive of GST. Now if the case arises where ABC ltd organizes a dinner for 5 individuals, the total costs incurred by ABC ltd would definitely differ. This however would affect the FBT charges as if the number of individuals attending the dinner party were than that of the actual payment that was made, then that would have impacted the FBT charges (Schofield, et al., 2011). Per head cost of each diner plate was = $ 6600 / 20 = $ 330. Therefore, if 5 individuals were invited for dinner, it would have cost $ 330 * 5 = $ 1650. Since the dinner costs are categorized under entertainment expenses, the expense in liable to FBT charges. Therefore the FBT charges for $ 6600 would definitely differ from $ 1650.

For 5 individuals, the FBT charges would have been = 1650 * 1.1 *50% = $ 1888

Therefore, the FBT liability                = $ 1888 * 47% = $ 886.8

C

As discussed earlier, FBT is charged and levied on dining meals for dinner as the dinner arrangements are categorised under entertainment expenses for ABC Ltd. This is because; the entire amount is borne by the management of ABC Ltd. Now if the total number of invitees exceed by inviting the existing clients of ABC Ltd, then as per the laws of the federal government, the FBT charged for the benefits received by the employees as well as the existing acquaintances and the partners and not for the clients who actually hold stakes on ABC Ltd (Tiley and Loutzenhiser, 2012).

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