The following is the advice to Winnie on the tax treatment of the various transactions she undertakes.
The payment of her Gymnasium membership fee by her employer
In this case, all staff at assistant manager level at which Winnie operates are entitled to receive an extra benefit not exceeding $1200 every year on top of their salary. In this case, she has elected to have the company pay for her annual gymnasium membership fee of $1,000. In accordance to Australian fridge benefit tax act, the payment of the membership fee by the company for Winnie constitutes a fridge benefit1. This is an entertainment benefit provided to Winnie. As such, the company will have to pay FBT on the gymnasium membership that it pays for Winnie being its employee. It is to be noted that minor benefits exemption will not apply in this case as the company provides benefits to all employees at the level of assistant manager and beyond and not only to Winnie. The fact that both the companies are registered for GST means that the employer can claim income tax deduction as well as GST credits for the cost of providing the gym membership to Winnie and for the FBT it pays2. However, it is to be noted that although the employer pays FBT on behalf of Winnie, she will have to include the benefit in her tax returns since the benefit’s grossed up amount exceeds $2,000. However, this will not affect her taxable income since the company has already paid FBT on the benefit and hence it will not be taxed again.
Treatment of travel expenses amounting to $520 for train travel and $180 for taxi travel
These will not be shown in her tax returns as they are not deductible expenses. In this case, the general principles regarding deductions under ITAA are that one can deduct from his/her assessable income any loss or outgoing that is incurred in gaining or producing assessable income or that which is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income3. On the other hand, travel expenses to and from work are generally not deductible as held in Lunney & Hayley v FCT4. In this case, these travel expenses are incurred in travelling from Winnie’s day job to Lifeline Association (LA) where she is engaged in voluntary counselling. The two jobs are not related while the counselling job does not contribute to her assessable income. Thus, she cannot deduct the travelling expenses amounting to $700 from her taxable income since travelling expenses are generally not deductible and the fact that they are not related to production of her assessable income5. Neither does she travel from her day job to another workplace related to her day time employer’s work since at this time she is out of duty.
The property buying expenses
These expenses are not deductible as they were not used in generating income. According to s8-1(1) of ITAA, a tax payer’s expenditure cannot be deducted for tax purposes unless it was incurred in the course of the taxpayer’s income producing activity6. This implies that if the expenditure was incurred prior to commencing of an income producing activity, it will not be deductible. In this regard, expenditure incurred in establishing, acquiring or adding to the taxpayer’s profit-earning structure is regarded capital7. Furthermore, if the expenditure is made once and for all, it is likely to be capital expenditure. Furthermore, if the expense brings into existence an asset or an advantage for the enduring benefit of taxpayer’s business, then it is capital. In this case, the $580 used as air fare, the $140 for air travel are used in the search for the property while the $420,000 is actually used in purchasing the property. The property is used for generating income for Winnie immediately. Thus, the expenditure is of capital nature since it has been used once to acquire the property and not for its maintenance8. In this regard therefore, Winnie will not include it in her tax returns since the expenditure was not incurred in the course of the taxpayer’s income producing activity. However, any rent collected on the property will be part of his taxable income and hence will be shown in the tax returns with any expenditure relating to the rent or property maintenance being deductible expense on the returns.
The improvements and subsequent sale of property
Replacing the stairs with a concrete ramp at a cost of $3,300 is a one-time expense intended at improving the usability of the property by the elderly so that it can continue generating rent for Winnie. Thus, this expenditure is capital in nature and thus will not be deductible for income purposes9. Thus, Winnie’s tax returns will not reflect this as revenue expenditure. The Botany property is an asset and hence its sale at $530,000 does not generate income since this is a sale of capital. Thus, any profit made above the original purchase price of $325,000 is a capital gain on which Winnie should pay capital gain tax. In computing the capital gain and hence capital gain tax, the real estate’s commission, the solicitor fee on sale, the asset improvement costs above will have to be included on the original costs of the house10. Thus, in submitting her tax returns, Winnie will have to factor in the capital gains tax on the capital gain made on selling the Botany property.
The income from her mother’s discretionary trust
Winnie will be taxable on this income and hence she should include it as part of her taxable income in the tax returns. It is worth noting that the beneficiary and not the trust pays the income tax on the trust’s taxable distributions11. In this case therefore, Winnie should include her 30% share of the trust’s profit. The amount to be included in this case is 30% of $214,000 as $214,000 is the taxable income on which the beneficiaries should pay tax.
From the above discussion, it is clear that Winnie will be only be able to claim deductions for revenue expenditures on her taxable income. Winnie’s annual salary of $79,000 is income according to ordinary concepts and hence she will be taxed on it after subtracting the revenue expenditures. On the other hand, expenditures that are capital in nature will only be deducted when computing capital gains tax on selling the respective properties.
It is worth noting that the company is entitled to GST credit for GST paid on the benefit as it is registered for GST. As such, a higher gross-up rate (type 1) will be used. For the year ending 31 March 2016 and 31 march 2017, the gross-up rate is 2.1463. Thus,
Taxable amount = 2.1463*$1,000 = $2146.3
The FBT rate for 2016 is 49%. Thus,
FBT tax liability for the company = $2146.3*49% = $1051.69
1 Fridge benefits tax assessment act 1986
2 Ato.gov.au, 2016, Fringe benefits tax (FBT), Retrieved on 3rd October 2016, from; https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/How-to-calculate-your-FBT
3ITAA 1997, s 8-1
4Lunney and Hayley v FC of T (1958) 100 CLR
5The Herald & Weekly Times Ltd v FCT (1932) 2 ATD 169
6ITAA 1997, s 8-1
7Morris & Others v FCT 2002 ATC 4404 at 4417
8W Nevill & Co Ltd v FCT (1937) 4 ATD 187
9ITAA 1997, ss 8-1, 70-25
10BP Australia Ltd v FCT (1965) 14 ATD 1 (Privy Council)
11ITAA 1997, ss 8-1, 25-25