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ACC3TAX S1 2018 Suggested Workshop Solutions Week 6
DISCLAIMER: The solutions below represent an outline of the elements that must be present in an answer. They should be taken as a guide, not as exhaustive solutions. Please note that especially for essay questions, you must structure your answer as a proper essay, i.e., with an introduction (where you state what the issue(s) is/are), a body of text (where you will develop your arguments) and a conclusion.
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ATSM Question 541: On 01 July 2017, Tom Marks, a computer consultant, received a $75,000 low interest loan from his employer, Eastpac, at a 2.8% rate of interest. He used $30,000 to buy a car, which, on the basis of his log-books, is used 50% for business. The remaining of $45,000 was used for an extension to his house.
He also received an entertainment allowance of $1,000 per quarter, and Eastpac paid his professional subscription of $800.
Advise Eastpac of their liability for FBT for the period ending 31 March 2018.
Being the employer, Eastpac would be liable for:
Paying FBT at a 47% rate for the year ending 31/03/2018, calculated on the grossed up amount of benefits provided to the employer (self-assessment basis)
Eastpac would be entitled to a tax deduction (under ITAA97 s 8-1) for the amount of the benefits provided plus the amount of FBT paid over those benefits.
Employers are generally liable to pay FBT instalments on a quarterly basis.
Benefits provided to Tom:
A) Low Interest Loan (Loan FB, s 16 FBTAA)
$75,000 loan, at 2.8% rate
$30,000 to buy car (used 50% for business), $45,000 for house extension (private purpose) Otherwise Deductible Rule (s 19 FBTAA) applies to reduce to nil the taxable value of the business related part of the fringe benefit. Taxable Value: ($45,000 + $15,000) x (5.25% - 2.8%) = $1,470 $1,470 x 1.8868 x 47% = $1,304 As loan was provided on 01 July 2017 and liability has to be calculated until 31 March 2018, apportionment is needed in order to know how much Eastpac would need to pay on 31 March 2018, therefore $979 (for 274 days).
B) Entertainment Allowance: not a fringe benefit. Must be included in Tom’s assessable income under s 15-2 of the ITAA97. No offsetting deduction is generally available for entertainment expenditure incurred (which will be covered further in Week 9)
C) Payment of professional subscription: Exempt benefit, FBTAA s 58Y – Memberships Fees and Subscriptions are FBT exempt where they arise in relation to an employee subscription to a trade or professional journal; an employee’s entitlement to a corporate credit card (e.g. a card keeping fee) or a fee for an employee’s airport lounge membership.
Where none of these exemptions apply the professional subscription will alternatively be treated as an Expense Payment FB (s 20), but the Otherwise Deductible Rule (s 24) would apply to reduce the taxable value to nil, as it is a professional subscription (used 100% for business purposes). For example, if the professional subscription related to a professional association whose members are computer consultants such a membership fee would be treated as an expense payment fringe benefit whose taxable value would be reduced to nil under the otherwise deductible rule.
ACC3TAX S1 2018 Suggested Workshop Solutions Week 6
DISCLAIMER: The solutions below represent an outline of the elements that must be present in an answer. They should be taken as a guide, not as exhaustive solutions. Please note that especially for essay questions, you must structure your answer as a proper essay, i.e., with an introduction (where you state what the issue(s) is/are), a body of text (where you will develop your arguments) and a conclusion.
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ATSM Question 544: Joe Bronson is a marketing consultant. In August and September 2017 he undertook a number of jobs for Elite Retail, a wholesaler of clothing for women. In appreciation of his services, in November 2017 Joe received two tickets to the Australian golf from Elite Retail. The tickets were valued at $400. He also received a Christmas hamper valued at $200 from Elite Retail. On 1 February Elite Retail offered Joe a position with the firm. He was offered a salary of $120,000 with a sign-on bonus of $5,000 if he accepted the offer within 10 days. A company car would also be provided. This would be a Mazda 3. The on-road cost of the car is $30,000. He was also offered a laptop valued at $2,400 and a mobile phone valued at $800. Professional Membership of Marketing Australia would also be paid. On 10 February 2018 Joe accepted the offer. For the year ending 30.06.18, Elite Retail paid Joe an entertainment allowance of $5,000 to help cover the cost of entertaining his clients. He also had his telephone expenses of $330 paid. Half of the telephone expenses were work-related. As top salesman in the third quarter of 2017/18, Joe received a bonus of $15,000 and a trip to a computer fair in Auckland that cost $1,500. Advise Joe and Elite Retail of the tax consequences of the above benefits received by Joe. Consequences relating to non-cash benefits: Neither the tickets nor the Christmas hamper would be fringe benefits because the initial relationship between Joe and Elite Retail was a services relationship (Joe was a service provider, not an employee). Therefore these benefits do not meet the FB employment criteria, and so would be assessable to Joe as explained below:
- Two tickets to the Australian golf valued at $400: Yes, as they were given to Joe as a consequence of the services provided. The tickets will be assessable to Joe under s 15-2 ITAA97 at $400 (could be arguably assessed on the basis of s 21A ITAA36 in the context of a business relationship – this would not change the outcome of the solution).
- Christmas Hamper valued at $200: Although the hamper was given to Joe at Christmas time, it is reasonable to state that such gift was given in strict connection with the provision of his services, on the basis of KELLY (1985) and DIXON (1952), where there was a sufficient employment/services nexus between the provider of the gift and the recipient. Therefore the Christmas hamper would also be assessable to Joe at $200 under s 15-2 ITAA97 (could be arguably assessed on the basis of s 21A ITAA36 in the context of a business relationship – this would not change the outcome of the solution).
Income tax consequences related to employment taken by Joe on 10 February 2018. Joe took employment with Elite Retail on 10 Feb 2018 and was offered the following benefits:
- Salary of $120,000 per year – an amount of $46,229 will be assessable to Joe under s 6-5 ITAA97 in the 2017/18 year (salary has been apportioned to 141 days between 10 Feb 17 and 30 June 18).
- Bonus of $5,000 if accepted the offer in 10 days (which he did) – entirely assessable under s 15-2 ITAA97 in the 2017/18 year as paid in Feb 2016 as a consequence of his employment, on the basis of the principles of KELLY (1985) and DIXON (1952) where there was a sufficient employment/services nexus between the provider of the gift and the recipient.
- Entertainment allowance of $5,000 paid in the 2017/18 year - Assessable to Joe under s 15- 2 ITAA97 in the 2017/18 year.
ACC3TAX S1 2018 Suggested Workshop Solutions Week 6
DISCLAIMER: The solutions below represent an outline of the elements that must be present in an answer. They should be taken as a guide, not as exhaustive solutions. Please note that especially for essay questions, you must structure your answer as a proper essay, i.e., with an introduction (where you state what the issue(s) is/are), a body of text (where you will develop your arguments) and a conclusion.
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- As top salesman in the third quarter of 2017/18, Joe received a bonus of $15,000 – Assessable to Joe under s 15-2 ITAA97 in the 2017/18 year.
FBT consequences related to employment taken by Joe on 10 February 2018. Benefits provided to Joe included:
- Company car – Mazda 3 – cost $30,000, provided on 10 Feb 2018 – Car Fringe benefit s 7 ITAA97. Taxable value calculated according to the Statutory Formula s 9.
- TV = $30,000 x 20% x 50/365 – 0 = $822 - $822 x 2.0802 x 47% = $804 - Laptop valued at $2,400 and a mobile phone valued at $800 – Work related items, exempt
under s 58X FBTAA86. - Telephone expenses $330, being 50% work related – Expense payment FB s 20, as 50% is
work related ODR s 24 applies to reduce the TV of the benefit on the part that reflects business use. Therefore $330 x 50% x 2.0802 x 47% = $161
- Trip to a computer fair in Auckland that cost $1,500 – Could be treated both as Expense Payment FB s 20 and as Property FB s 40 if assumed that trip included both accommodation and airfare. As it is an international trip, it would be a type 2 FB. $1,500 x 1.8868 x 47% = $1,330.
- Professional Membership of Marketing Australia would also be paid – Exempt FB s 58Y Advice on Fringe Benefits Tax: Joe: As Joe is the employee, he will not be liable for FBT and the fringe benefits provided to him will not be included in his assessable income.
Elite Retail: As Elite is the employer providing fringe benefits, Elite will be able to claim a deduction under s 8-1 ITAA97 corresponding to the amount of the fringe benefits which were provided plus the amount of FBT which was paid. The total FBT liability for Elite in the 2017/18 FBT year will be $2,295. As this amount is below the threshold of $3,000, it would be due in a single instalment.