Case study: Fringe Benefits Tax

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Requirement

Case study: Fringe Benefits Tax
Periwinkle Pty Ltd (Periwinkle) is a bathtub manufacturer which sells bathtubs directly to the public. On 1 May 2015, Periwinkle provided one of its employees, Emma, with a car as Emma does a lot of travelling for work purposes. However, Emma's usage of the car is not restricted to work only. Periwinkle purchased the car on that date for $33,000 (including GST).
For the period 1 May 2015 to 31 March 2016, Emma travelled 10,000 kilometres in the car and incurred expenses of $550 (including GST) on minor repairs that have been reimbursed by Periwinkle. The car was not used for 10 days when Emma was interstate and the car was parked at the airport and for another five days when the car was scheduled for annual repairs.
On 1 September 2015, Periwinkle provided Emma with a loan of $500,000 at an interest rate of 4.45%. Emma used $450,000 of the loan to purchase a holiday home and lent the remaining $50,000 to her husband (interest free) to purchase shares in Telstra. Interest on a loan to purchase private assets is not deductible while interest on a loan to purchase income-producing assets is deductible.

During the year, Emma purchased a bathtub manufactured by Periwinkle for $1,300. The bathtub only cost Periwinkle $700 to manufacture and is sold to the general public for $2,600.
(a) Advise Periwinkle of its FBT consequences arising out of the above information, including calculation of any FBT liability, for the year ending 31 March 2016. You may assume that Periwinkle would be entitled to input tax credits in relation to any GST- inclusive acquisitions.
(b) How would your answer to (a) differ if Emma used the $50,000 to purchase the shares herself, instead of lending it to her husband? 

Solution

Case study: Fringe Benefits

Salary income is taxable when there is a transaction of payment between Employer and employee. Any sum paid directly or indirectly by employer to employee is to be treated as salary income in the hands of employee (ATO, 2015). At times, in big companies and multi- nationals, in order to keep the reputation of the concerns, the employer, apart from Salary package offers, many facilities which otherwise the employee would have done as a part of his / her living. For eg Car, house. These are considered to be fringe benefits which form essential Salary taxable income. In other words it can be understood that it is a complete salary package which the employer has offered in terms of company car medical insurance, hospitalisation schemes, holiday schemes, pension plans, interest free loans, etc. It is not necessary that there has to be an establishment of Employer and employee relation (ATO, 2015). The fringe benefits could be passed on between two independent contractors also the recipient of such benefits must consider fair market value of the benefits so availed as part of their taxable income. Difference countries have different law framework for taxability of fringe benefit taxation. For eg in India, Fringe Benefit taxation has been abolished. Some of the exempt category benefits are social security, medical facilities – hospitalization, Federal unemployment taxes etc. 

In Australian republic, Fringe Benefit tax is borne by the employer (ATO, 2015). The Income Tax Assessment Act has established various provisions relating the chargeability and taxability of Fringe Benefit Taxation. 
In the given case study, the employer has given Car to employee for office to home commuting or for official purpose. 
Assuming the car is from the following category:

• Sedan / Hatch back car 

• Utility vehicle which are four wheelers 

• Passenger car – which can carry fewer than Nine passengers 

In certain cases, the Income Tax Assessment Act provides exemption to Fringe Benefit Taxation. In case the employee uses the vehicle for travelling between home and work; Marketing related travelling; official tour utility; used for minors
Any usage of car other than the specified purpose amounts to Fringe Benefit (Austaxpbr, 2001). It is therefore necessary to compute the Fringe benefit. If the employer maintains adequate records, it can compute fringe benefit on Operating cost method. 
Cost of Car = $33000
Repairing Expense= $550 (including GST) 
Time when the car was not used for official purpose. 15 days.
Fringe benefit applicable for the 15 days. 
Total days in the year when the car was put in use = 336 days. As per the Australian Taxation office, the year of computation of Fringe benefit is from 1st April to 31st March. 
Fringe Benefit (33000+550) x 15 / 336 = $1498
Fringe benefit taxation is attracted in case an employer disburses a loan to employee and charges lower rate of interest or no interest. Lower rate of interest can be construed as that rate which is lower than the statutory pre-defined rate of interest. i.e. Bank rate which can be termed as Benchmark rate. 
It is necessary to understand the nature and purpose of usage of loan. An advance salary forms part of Loan to employee and falls under the purview of Fringe benefit taxation. 
Fringe benefit can be computed as under 
Difference between statutory interest rate as prevailing in the market which could be fixed by the Apex Bank or the Prime lending rate offered by nationalized bank; and the Actual interest that will be accrued from the employee. 
Employer has given a loan of $500000 to Emma which is used to purchase private asset for $450000 and shares $50000 by husband. Both are solely used for the personal use. Fringe benefit can be extended to the family of the employee also. Hence the benefit in this case was easily diverted to the husband of the employee. This forms part of taxation to the employer. Had the shares been purchased by Emma (Employee) the same would have been included in Income Generating Asset. Hence in this case, no interest on loan benefit can be allowed as deduction to the Fringe Benefit.
Fringe Benefit for Loan = $500000 x 213 / 366 = $290984
Employer deals in Trading of Bathtubs. Trade price of bath tub for general public is $2600. Discount given to Emma (Employee) is $1300. Cost price is not to be considered. The opportunity lost is the benefit provided to the employer. 
Fringe Benefit in this case is $1300
Had the shares purchased by Emma herself. The Interest cost (500000 x 4.5% * 213/366) x 50000/500000 shall be deductible from the Fringe Benefit. 
i.e. $13094
Net Fringe Benefit = 290984 – 13094 = $277890.
The taxation of fringe benefit was started to compensate the revenue authorities from the Tax planning done by big companies. The companies used to offer salary packaging which included less of a Salary and more of Fringe Benefits. The Fringe benefits were owned by the Company and the same were claimed as Depreciation. Whereas the Employee received less salary and filed lower Return of income. The Government, identified the revenue leakage and introduced the Fringe Benefit taxation which was imposed on the Employer for administrative convenience. It is a kind of Tax deduction at source. On non compliance of the provisions, the company is liable for all interests and penal provisions. It is essential for all the employers and employees to document the bills and supportive which shall form relevant records for filing the fringe benefit return. In case the company wants to claim any allowable deduction in payment of fringe benefit, the same can be done with production of the supportive. In case the matter is taken up in scrutiny, the records in original are required to be submitted and furnished before the revenue authorities. Some employers used to plan their salary offers in terms of reimbursement of expenses. Now with the enactment of FBT, the reimbursement amounts to fringe benefits which is taxable to the employer. Such mal practices are now avoided.

References

• ATO, 2015. Is the dwelling your main residence?. [Online] 

• Available at: https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Real-estate/Is-the-dwelling-your-main-residence-/

• [Accessed 23 Sep 2016].

• ATO, 2015. Expense payment fringe benefits. [Online] 

• Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Types-of-fringe-benefits/Expense-payment-fringe-benefits/

• [Accessed 23 Sep 2016].

• ATO, 2015. Property fringe benefits. [Online] 

• Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Types-of-fringe-benefits/Property-fringe-benefits/

• [Accessed 23 Sep 2016].