Assignment about taxation law Essay Example

TAXATION LAW ASSIGNMENT

Introduction

Income Tax Assessment Act (ITAA97) does not give a definition of income but describes is under section 6-1(1) as consisting of ordinary income and statutory income. At the same time section 6-5(1) of ITAA97 describes assessable income to include income according to ordinary concepts directly derived directly or indirectly from all sources during the financial or income year1. It is important to note that in Australia a person residing in Australia is a resident for purposes of taxation if he actually stays in Australia continuously or intermittently during a period of more than one-half of the year of income2. In essence an amount received in relation to employment as compensation or reimbursement is treated as income for purposes of taxation.

Fringe Benefits Tax is a separate type of tax operating outside ITAA 97 and it is to tax the non-income earning private benefits provided by the employee and it is provided to the employee for income-earning purposes is subject to deductible rules3. The FBT year is as from 1st April to 31st March. FBT is self-assessed by the employer and that the employer must sign the FBT return specifying the benefit provided to the employee, taxable value of the benefit and the tax is due in respect of the benefits. FBT is only applicable when there exists an employee employer relationship and the employer is subject to tax4. In case where there is no relationship (employer-employee) but a business relationship exists then the recipient of the benefit is subject to income tax under section 6-10 of ITAA97. A benefit includes “any right, privilege, service or facility”5

ADVANCE IT Group (ADVANCE) a software corporation and has signed a contract with a multinational financial institute for the development of a new operating system in the next two years. It has plans to recruit three highly skilled programmers but each of the three candidates has proposed a package for two years contract as from 1 July 2013.

Assumption

  1. Company tax rate is 30%

  2. 2013/2014 financial year tax rate applicable is $17,574 + 37% for amounts >80,0001-<180,000 according to ATO regulations

  3. It is presumed that the amount will not change in the 2014/2015 income year

  1. Calculate and Compare the Employment Costs and FBT for next two years

In regards to the salaries proposed, these will be treated as income and therefore assessable under section 6-1 of ITAA97.

In general, salary or wages, exempt benefits, employee share schemes, superannuation payments and contributions, exempt benefits, deemed dividends and others are excluded from being fringe benefits6. Fringe Benefits falling under type one include housing, and living away from home allowance. FBT Tax is paid by the employer and not the employee, and thus the employer is entitled to deduct the FBT paid by the employer in respect of the employee. The FBT is this was will be calculated to include 1.5% medicare levy. The Gross up rules of Type 1 benefits is 2.0467.

(1 — FBT rate) x (1+ GST rate) x FBT rate which comes to: 2.0647

FBT rate + GST rate

Mr. Robert Smith, an American proposes $150,000 before tax, a home living away allowance of $3,000 p.m, or reimburses his monthly rent and food as $2,500 for rent and $500 for food p.m. If Mr. Robert Smith gets $3,000 for living away from home then it will be $3,000 x 2.0647= $6194.1 (grossed up value). The FBT to be paid by the employer will be $ 6194 x 46.5%/100=2880.21. This means that the employer will deduct ($2888.21+$3000)=$5888.21 as FBT. In this option the employment cost will be ($150,000+ $5888.21) = $155,888.21. This is an FBT since the benefit is provided to the employee for income earning purpose that is subject to the deductible rule.

In the second option to reimburse his monthly rent, the reimbursement will not be subject to deductions. This is because under section 15-2 of Income Tax Assessment Act (ITAA97) 1997 (Cth) clearly stipulates that “assessable income includes the value of all the allowances, gratuities, compensations, benefits, bonuses or premiums”7. The conditions necessary for an allowance to be assessable as income is that there needs to be an allowance, compensation, benefit, bonus or a premium and this must be given to the taxpayer, and must be in respect or, or for either directly or indirectly to any employment or services rendered by the particular taxpayer8. In the Taxation Ruling (TR) 95/15 it was held that a payment is a reimbursement or compensation when the recipient is compensated for an expense already incurred9. The reimbursement is paid regardless of whether the taxpayer incurs the expense; it is an allowance for purposes of taxation. The $2500 as reimbursement for rent is treated as an allowance under income tax and is subject to taxation as an income tax. Since he is a temporary resident, his FBT is not deductible subject to the amendments on living-away-from home benefits.

The amount of FBT payable on food is $500 however in calculation of FBT if the amount is less than $1000 according to ITAA97 at section 62, and then there will be no FBT applicable as well as it will not be subject to GST since Food is GST free.

Mr. Samuel Layton is an Australian resident and lives in Perth requiring a salary of $130,000 before tax and the company either pays a living away allowance of $3,000 pm or reimburse his monthly rent of $2,500 for rent and $500 for food per month. Samuel does not intend to maintain a home in Perth if he works in Sydney. In the case of Mr. Samuel Layton, the amount of FBT applicable will be the same as that applied in Mr. Robert Smith case. In the first option of paying an allowance of $3000, the total employment cost will be $130,000 + $ 5,888.21 which $135,888.21. In regards to payment of $2,500, this is an income assessable under section 15-1 of ITAA97.

Mr. Leslie Ross is an Australian resident living in Brisbane asked for a salary of $100,000 before tax and the company is required either to pay home living away allowance of $2,500 pm or reimburse his monthly rent of $2,000 for rent and $500 for food per month. Leslie maintains a home while he is away as his parents will live in this home.

In the case of Mr. Leslie, the FBT imposed on his home living away allowance under Type 1 benefit is calculated using the gross up value of 2.067 and therefore the gross up value of his living away from home allowance is (2.0467 x $2500)= $5116.75 . The FBT payable by the employer will be $5116.75 x 46.5% /100=$2379.30. This means that employment cost for the first option will be $4,879.30 +$100,000 which is $104, 879.30.

In the second option if he is reimbursed his rent of $2000, then there will be no FBT applicable since the amount will be treated as income and will be taxable under section 6-1 of ITAA97. The amount $500 as food, is not subject to FBT since the amount is less than $1000, and therefore there is no FBT applicable. At the same time food is free under GST.

  1. Calculate and compare the take home income after tax for next two years

If advance reimburses their rentals and food

In this case, I assume that the company tax rate applicable is 30%.

The general formula for calculating income tax is:

Taxable Income =Assessable Income Less Allowable Deductions

=Taxable Income x Tax Rate + Medicare Levy (1.5%)+ (Surcharge 1% if applicable)

=Tax payable

  1. Mr. Robert Smith

Mr. Smith is an American, hence not an Australian resident and is subject to tax payable on his first dollar of 29% and he does not obtain rebates and offsets and not subject to Medicare levy. Section 6(1) of ITAA 36 states an “Australian resident includes a person residing in Australia continuously or intermittently during more than one-half of the income year”10. Since Mr. Smith will work in Australia for two years, then he will be treated as a resident for taxation purposes.

Taxable income= $150,000 (Salary) – (2,500 (rent) +500 (food)= $147,000

= All income $80,000 -18,000 is subject to $17,547 plus 37% on all income over $80,000

= 147,000 -$80,000=67,000

=$67,000 x (37% + 1.5%) = $25,795

Tax payable = $25,795+$17, 547=$43,342

Two years is $43342 x 24= $1,040,208

Take home income after tax= ($150,000 x 24)= $3,600,000-$1,040,208

=$2,559,792

  1. Mr. Samuel Layton

Year 1 = 130,000 – (2,500+500)=$127, 000

=$127,000-80,000

=$47,000 x( 37% + 1.5%)

=$18095 + $17, 547

=$35, 642 x 24months

=$855, 408

Take home income= ($130,000 x 24)= $3120000-$855,408

=$2264592

  1. Mr Leslie

Taxable income=$ 100,000–($2000+ $500)=$97, 500

= 17,547 +((97,500-80,000) x(37%+1.5%))

=17,547 +$6737.5

Tax payable =$ 24284.50

Two years=$24284.50 x 24= $582,828

Take home income= ($100,000 x 24)= $2,400, 000 -$582, 828

=$1,817,172

Advance pays home-living-away-allowances

  1. Mr. Smith

  2. Fringe benefits are limited for temporary resident and it is not exempt income.

Taxable Income = $150,000 + $3, 000= $153,000 amounts above 80,000 subject to$ 37% tax rate and 1.5$ medicare.

Tax Payable = $17, 574 + (($153,000-$80,000) x (37% + 1.5%))

=$45,679

Two year period= $45,679 x 24= $1,096,296

Take home income =($153,000 x24)= $3,672,000-$1,096,296=$2575704

  1. Mr Layton

Taxable income =$130,000 +$3,000= $133,000 income above $80,000 hence subject to 37% tax rate

Tax Payable= $17,574 +(($133,000-$80,000) x(37% +1.5%)

Two year period= $37079 x 24 =$911496

Take home income= ($133,000 x 24)= $3,192,000-$911,496=$2,280,504

  1. Mr Leslie

Taxable income= $100,000 +$2500 = $102,500 amounts above 80,000 subject to $ 37% tax rate and 15% Medicare levy

Tax payable= $17,574 + ((102,500-80,000)x (37% + 1.5%))

=$26236.50

Two year period= $26236.50 x 24=$629676

Take home income= ($102500 x 24)= $246,000- $629676=$1,830324

  1. What is the most-cost effective option to ADVANCE IT Group

In deciding the most cost effective option of ADVANCE as the employer, the decision in Hancox v Commissioner of Taxation11is crucial. In that case a tax payer was paid $500 a week living in temporary accommodation and the taxpayer incurred losses and outgoings a s a result of the accommodation amounting to $36,124.

The taxpayer argued that $500 given per week was not a living away from home allowance within section 30 (1) of the Fringe Benefits Tax Assessment Act (FBTAA) 1986 (Cth) but was part of his assessable income under ITAA97 section 15-12. In the same regard, the taxpayer stated that the accommodation and food expenses amounting to $36, 124 was deductible under section 8-1 of ITAA97. The decision of the court was that the $500 per week was a fringe benefit as contemplated under section 31 of the FBTAA 1986 but the expenses did not fall within section 8-1 of ITAA since it was not gained in producing the taxpayer’s assessable income.

In consideration of the decision in Hancox v Commissioner of Taxation, a living away from home allowance is deductible as an expense by the employer for purposes of taxation and hence it is not subject to taxation but is deductible. However under the reform, it is only available for the first year of employment and the employee will be required to pay tax on that amount. Considering company tax is paid at 30% per annum12.

The most appropriate means is giving the potential employees a reimbursement for rent and food for which tax will be levied individually to the employee rather than as an operating cost from the company. This is because the fringe benefit will only apply for the first 12 month period and in the next year, it will not be applicable and the employer will not be allowed to deduct FBT as an expense in earning their

  1. What are the effects of the reform of the FBT treatment of living-away-from home benefits

The reforms of FBT treatment will have an impact as from 1st October 2012 . In regards to living away from home allowances and benefits given to employees in order to maintain a home in Australia but the job requires them to live away from home due to their duties. This treatment is for a 12 month period.

It also requires that the employees must substantiate that the expenses incurred in accommodation, drinks and food if it is beyond the reasonable amount of the Commissioner for Tax. The reform also applies new special rules to employees working on a fly-in fly-out drive-in drive-out basis. The new rules also extend to temporary or foreign residents maintaining a home in Australia and at the same time have an employment arrangement for living away from home allowances and benefits.

References

(Thomson Reuters, 2013).Principles of Taxation Law Coleman, C, et al.

Colin Wilmot, FBT Compliance Guide 2012(CCH Australia Limited, 2012)

Barkoczy, S, Foundations of Tax Law. (Lexis Nexis, 2013)

, (CCH Australia, 23rd ed, 2013) Australian Taxation Study ManualLes Nethercott, Grant Richardson and Ken Devos,

Thomson Reuters, 2013)(Australian Taxation Law Cases Richard, K,

Statutes

Fringe Benefits Tax Assessment Act 1986

Income Tax Assessment Act 1997

Income Tax Assessment Act 1936

ATO Interpretative Decision ID 2003/458

Indooroopilly Children Services (QLD) Pty Ltd v FC of T (2007) ATC 4236

Hancox v Commissioner of Taxation[2013] FCA 735

(Thomson Reuters, 2013).Principles of Taxation Law Coleman, C, et al.
1

2
ITAA 36 s 6-1(a)

3 Les Nethercott, Grant Richardson and Ken Devos, Australian Taxation Study Manual, (CCH Australia, 23rd ed, 2013)

4
Indooroopilly Children Services (QLD) Pty Ltd v FC of T (2007) ATC 4236

5 ATO Interpretative Decision ID 2003/458

6
Colin Wilmot, FBT Compliance Guide 2012(CCH Australia Limited, 2012)

7 ITAA97 s 15-2 (1)

8
S. Barkoczy, Foundations of Tax Law. (Lexis Nexis, 2013)

9
TR 92/15

10
ITAA 36 s 6-1(a)(ii)

12 Richard, K, Australian Taxation Law Cases(Thomson Reuters, 2013)