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In this taxation assignment help the house was bought which had two tennis courts in the backyard with the intention of residing in them and selling them at a profit in the near future. The primary condition to consider is that if the income generated from the sale of the house would be treated as ordinary income for the purpose of income tax act, to be precise under the s6-5 of the act. The ruling 92/3 is to analyze if the isolated transactions can be assessed as ordinary income under the income tax act. The isolated transactions refer to those transactions which have been entered primarily by non-business people and are conducted outside the ordinary scope of business. In the opinion of the court in this regards is that there is no general ground rule on the basis of which the transactions can be categorized as ordinary or extraordinary income and that the circumstances of each case has to be considered on an individual basis. This being said, the below mentioned rules are considered to be able to classify the transactions as ordinary income for the purpose of this act:
- The transaction or transactions should have been entered into by the taxpayer for the purpose of making a gain or a profit.
- Profit was made in the course of carrying on a business or conducting a commercial transaction.
The intention of the taxpayer is not only the ground considered for the purpose of this act but the circumstance surrounding the situation are considered to be able to arrive at a conclusion. Another important aspect to be considered is that it is enough if the transaction was of commercial nature to be able to be classified as ordinary income. Even though a set of laws have been set for defining or differentiating if the transaction is of capital nature or conducted in the ordinary course of business the same is very difficult to differentiate at time and in the words of Lord Greene MR “in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons."
From time to time the courts have considered the two fold principle where the transaction is characterized into inclusionary or exclusionary transaction based on its characteristics or nature. Where the gain is a result of the produce of a capital asset the same is termed to be income and where the opposite is referred to as exclusionary and of capital nature. The important facts to consider in this case would be as follows:
- The house was primarily purchased with the intention of residing in the same and also for the purpose of selling the same in the future when the prices was right or in other words when there was adequate profit
- The courts were repaired and then sold to the club at a profit
- The proposed transaction and the original transaction were both of commercial nature
- The amount of profit earned by the taxpayer
- The timing of the transaction
- The fact that the transaction involved the disposal of a property
In Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159 at 165-166 it was held by Lord Justice Clerk that the sale of an investment where there was an existence of profit motive would amount to treatment of the income as ordinary income and hence within the scope of the section 6-5. In Steinberg v FC of T 75 ATC 4221 at 4227; (1972-1975) 134 CLR 640 at 686it was held by the judge that where the investment was sold at a later date for profit constitutes a reasonable investment but where the investment property is sold with a motive of generating profit in the ordinary course of business it is not a mere realization of the asset. Considering the facts of the case it can be affirmed that the sale of tennis court by Peta would fall under the definition of ordinary business as there existed a motive to make profit and hence the income arising from the sale would be taxable under the act.
Fringe benefits refer to the expenses paid by the employer on the behalf of the employee of the organization. The fringe benefits of the employee are taxable in the hands of the employee as the same amounts to perquisites wherein the employee is deriving benefits in kind. The basic principle of fringe benefit tax is that the same is deductible to the extent the same has been incurred for the purpose of the organization or work. The left over part is taxable in the hands of the employee as a part of his salary. In the current situation the employee i.e. Alan is an employee of ABC Pty Ltd. And is in receipt of a salary income of $300,000. In addition to the same Alan also receives benefits in the form of phone or cellular bill which is paid by the employer. The employer also has given a cell phone to Alan which costs around $2000. Apart from the above mentioned benefits the tuition fees of the children of Alan is also borne by the employer i.e. ABC Pty Ltd. Another important aspect to consider is if the dinner cost paid by the employer of $66000 for hosting an annual dinner for the partners and the employees of the organization would be taxable as FBT in the hands of the employees or not.
In the case of tuition fees of the children paid by the employer since the same is GST free the employer would not be able to claim a GST credit on the payment of the same. Since 22nd October 2012 the FBT concession in this regards stands withdrawn by the order of ATO and the same would fall under the ambit of FBT. Considering or taking into account the fact the employer would not be able to claim fringe benefits credit on the same the expenses need to be grossed up by 1.9608. In this case the Fringe Benefits value would be $39216 ($20000 * 1.9608). On this amount the organization would have to pay fringe benefit tax at the rate of 49% and hence the amount of fringe benefits tax would be $19215.84.
Where the employer has paid the phone bill of the employee and the same has exclusively been used for the purpose of the employment, no fringe benefit arises at the hands of the employee and hence no fringe benefit tax is payable. However where the employer is charging a fixed amount from the employee the same would be chargeable in the hands of the employer as his income. On the contrary where the phone has been used by the employee partially or wholly for his own purpose the bill amount paid by the employer would be grossed up by 2.1463 as the employer will avail the GST credit. Once the amount has been grossed up the same is multiplied by 49% to arrive at the FBT payable by the employee.
Where the employee has been given a phone by the employer and the same is used solely for the purpose of the business management the expense would be exempt for the purpose of Fringe Benefit Tax(Section 20.8).
According to the section 20.6 of the act where the food or beverage is provided during office hours at office premises the same does not amount to entertainment. The food expenses in this particular case would be treated as an entertainment expense and hence would be eligible for FBT. If the organization were to claim the minor benefit exemption the same implies that the expense of upto $300 per employee is exempt but in this case the per head expense is $330 and hence the same is taxable.
Considering the above mentioned provisions and the facts of the case the fringe benefit liability of the employer would be as follows:
- Payment of phone bill: Exempt
- Payment of school fees of the children of the employee: $19215.84
- Purchase of mobile phone for employee: Exempt
- Total FBT liability: $19215.84
The answer would not change if the organization has 5 employees.
The employer in this situation has the option of considering or calculating the value of the benefit under the 50-50 method or under the 12 week method. Under the 50-50 method 50% of the expenses would be treated as fringe benefits
Australian Income Tax Legislation 2013 (CCH Australia, 2013)
Woellner, R. H, Australian Taxation Law2012 (CCH Australia, 2013)