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Requirement
AUSTRALIAN TAXATION LAW
Answer to question 1
Executive Summary
This sections aims in evaluating the fringe benefit tax that Charlie as well as his company, Shine Homes have to pay off to the Australian government for providing Charlie the fringe benefit. In this scenario, one can find calculation for the taxable benefit of the car as Shine Homes has provided Charlie, one of its employees through car and it falls under the category of fringe benefit. Statutory Formula for calculating car’s total taxable benefit for the year 2016-17 is considered for this scenario.
Introduction
Fringe benefit is considered as an extra supplementary benefit that an employee gets over their wages or salary from the company such as a car for private as well as work use, a private health care, and insurance benefit. However, an amount of tax is imposed for this fringe benefit that an employee has to pay off for receiving that extra benefit from the company other than wage. In this scenario, an amount of tax that Charlie has to pay off to Australian government for the use of car provided by his company, Shine Homes is being calculated. Moreover, the consequences of this taxable benefit for both Charlie as well as Shine Homes are being analyzed from the value.
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Main discussion
Charlie who is an employee of Shine Homes is getting fringe benefit from the company that is a car which he can use both for this work use as well as private use. Under the Fringe Benefits Tax Act 1968, a person using a car as a fringe benefit that has been laid out by his or her company has to bear some amount of tax to the government of Australia (Fringe Benefit Tax Act [1986]). In this case, for analyzing the fringe benefit consequence for both Charlie and Shine Homes, the taxable benefit is calculated by the help of statutory formula method. Cao et al. (2015) said that for calculating the taxable benefit of the car based on its cost price in the FBT year, the statutory formula method is an effective one.
Table 1: Computing taxable benefit of car for the year 2016-17 by using Statutory Formula method(Source: Learner)
The above calculation provides that Charlie has gathered $19, 279 as a taxable benefit from the private use of the car that has been laid out by his company. Under the rules of Australian Taxation Office, Charlie has to pay the calculated tax benefit based on the taxable value of the fringe benefit of the car. However, this situation is considered to be the consequence of fringe benefit on Charlie for using the car as a private one. The total contribution of Charlie has been considered as $2,200 as because Charlie have to bear some cost or the other for the car either for private use or for work use at one point in time. Though, he will take back the expense of the car from the company at the end of the FBT year 2016-17. In the scenario, it has been also found that Shine Homes is paying off $200 per week for car’s parking on behalf of Charlie. However, under the Fringe Benefits Tax Act 1986, a company when paying off costs for employee’s car parking, the situation falls under the category of fringe benefits taxation policy (Tang and Wan, 2015). In contrast to this, Hodgson & Pearce (2015) said that the company has to bear up some tax for laying out the fringe benefit to its employee as proposed under the regulation of IRS. Thus, in this case, also, Shine Homes have to give the Australian government some tax for Charlie as he is under the fringe benefit category of the company.
Conclusion
From the above calculation of taxable benefit, a conclusion can be drawn that Charlie is liable to pay off the calculated tax amount to the Australian government. Through consideration of the legal procedures of Australian taxation law, it has been discussed in context to both Charlie as well as Shine Homes that both have to pay tax for the car. According to ATO, Charlie has to pay the calculated amount of tax for using the car and based on the fringe benefits taxation policy laid out under Fringe Benefits Tax Act 1986, Shine Homes is also liable to pay off tax for the fringe benefit it is giving to Charlie.
Answer to question 2
Executive Summary
The scenarios that are explained in this section provide an idea about income tax consequences on several items such as gifts, selling of stocks as well as on barter system. Discussion have been upheld based on these items with reference to Australian Taxation Office and Internal Revenue Service (IRS) to understand effectively the consequences of income tax on these items whether liable to pay off tax or not. Moreover, a distinction has been made with hobby and legitimate business by focusing on a case law.
Introduction
It is very much important to understand the consequences of income tax on any items that is whether the items are either payable of any tax or not. There are some rules and regulations lay out by the Australian Taxation Office that every individual has to follow while paying off tax. In this discussion, income tax consequences on gifts, selling of stocks as well as barter system have been upheld to analyze in which condition people have to pay off tax to the government for these fields. Basic difference is analyzed between a business and a hobby with support to a case law similar to it.
Main Discussion
a. An idea of income tax consequences on gifts could be collected after analyzing the case of Allan. The scenario gives a clear idea that Allan has received a gift from the local winemaker for treating his dog in Central Victoria, the place where he lived. The local winemaker has paid off a dozen bottles of Lonarch Brea Shiraz as a gift having a retail value of $360. In this case study, the main discussion that has been put forward is to analyze the income tax consequence over the gift’s price whether the price is either inclusive under the taxation policy or not. The rule of tax payable layout by Australian Taxation Office deemed that if the price of gift payable amounts less, it falls under the category of non-payable of tax (ato.gov.au, 2017). Kerin & Findlay (2015) said that the taxation office had made the rule that people of Australia receiving gifts from other person have to keep in mind the $10,000 rule. The $10,000 rule says that the price of the gifts that a person receives from another person if does not exceed the amount of $10,000 in a financial year, that person will not have to pay off any tax for the gift to the Australian government (ato.gov.au, 2017). According to Braithwaite (2017), under this limit of $10,000 rule, the Australian Taxation Office provides a free gifting area to the people of Australia. In the case study, one can see that the price of the gift that Allan received from the local winemaker worth $360 does not void the $10,000 rule. The price of the gift falls under the category of the free gifting area laid out by the Australian government. For this reason, only, Allan will not have to pay off any kind of tax to the government for receiving the gift.
b. In order to analyze the distinction between a legitimate business and a hobby, the rules set out by the Internal Revenue Service (IRS) has been taken into consideration. According to the regulation of IRS, a business differs from hobby activities or vice versa in terms of tax (irs.gov, 2017). According to Barkoczy (2016), individuals in a business have legal rights to deduct the expenses they generate from their business and from these expenses if the business is not gaining any kind of profit, they can possibly make out the loss from it. On the other hand, Pearce & Pinto (2015) argued that individual when pursuing a hobby do not get the right for deducting their business expenses when they go through a situation of loss as well as an off from the income from their hobby and other activities. IRS propagated this situation of a hobby as the "hobby loss” rule (irs.gov, 2017). Moreover, IRS pursued that when a hobby turns to a source of income for the livelihood of the individual then it should be considered as a business. In order to illustrate this fact and identify the distinction properly, a case example has been considered. The case of Merrill C. Roberts v. Commissioner provides the information how a hobby has turned into a source of income and thereby a business. Merrill Robert who was fond of horse racing has turned his hobby to a business from which he is earning a profit for his livelihood. The Courts judgment laid out that in this case is that as horse racing has been a full-time action having regularity with a source of income for Merrill Robert; therefore it is considered to a business turned out from a hobby (Merrill C. Roberts v. Commissioner, [2014]). Section 162 (a) of IRS laid out that horse racing should be considered as a trade or even a business as it is providing horse racer higher level of income so that he is able to lead his livelihood (irs.gov, 2017). Thus, it can be said that horse racing should be considered as a business and it should not be treated as a hobby since it provides a higher level of income to the people.
c. Income tax implication on selling stocks could be identified from this scenario. Both Allan, as well as Betty, has started to grow out vegetables as well as fruits and they decided to sell out those grown crops in the local market of Newtown Growers Market. On this selling out their stocks of crops grown by them is deemed to have a tax implication. On the profit that both of them gain, the Australian Taxation Office imposes a tax which have to be paid off to the government. It is obvious that whatever Allan, as well as Betty, have spent for growing the vegetables as well as the fruits are earning more than that. This situation under the regulation of Internal Revenue Service is considered to be a profit-earning situation where both Allan, as well as Betty, is liable to pay off some tax from the profit after selling out the stocks. Moreover, it has been propounded that the scenario provides an idea about capital gains as an income tax implication on selling stocks. Braverman, Marsden & Sadiq (2015), said that capital gains have its unique classification or implication on tax as directed in the regulation of IRS. In addition to this, Cao et al. (2015) said that having a track record of selling items helps the sellers in generation of their dividend over the capital gains for the items they have sold out.
In the next case, an idea about the barter system that Allan and Betty have decided to hold with other businesses in that area has been gathered. Allan and Betty have laid out a non-commercial barter network with other businesses in their area of business. The Australian Taxation Office with consideration of IRS regulation laid out that the people or businesses holding this type of barter system are not liable for payment of any kind of tax to the government (Davis et al. 2015). On this context, Saad (2014) argued that people who are holding a barter scheme with other businesses that are social or even personal in nature are considered to as hobbies that have turned into a business. For this, they are not liable to pay off the government the tax from the profit they earned from the business.
d. From the case study, it can be identified that the business that both Allan and Betty were idealized has been evolved from their hobby. This situation is considered to as non-payable of tax for the profit they are earning from their business as per the regulation set by the Australian Taxation Office with support to IRS (Devos and Zackrisson, 2015). Not only this, since they are holding a non-commercial barter network, for this also both of them are not liable to pay off any kind of tax to the government. As their business is a social business, therefore they have the right to not paying any tax to the government from the profit of the business. In the case scenario, it has been mentioned that Allan and Betty were charging $50 for the barter scheme that the businesses or people who decide to hold up with them. This charge of $50 is considered to be profit that both Allan, as well as Betty, was earning. According to Keri and Findlay (2015), people when earning any kind of profit from the barter scheme is considered to be payable of tax to the Australian government as the rules set out by Australian Taxation Office with support to the Internal Revenue System.
Conclusion
From the above discussion, a conclusion can be drawn that gifts, selling of stocks as well as barter system have certain conditions under which they are analyzed whether to pay off tax or not. In case of gifts, it has been analyzed that if the price of gifts is an exemption from $10,000 rule, it does not lie under the rule of payable of tax. In case of selling of stocks, it has been seen that both Allan and Betty is liable of paying tax for the items they are selling as they were earning an amount of profit from it. For the barter scheme, both of them were not liable to pay off tax as because they were holding a non-commercial barter network as for it ATO gives the right of not paying of tax to the government.
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ato.gov.au (2017). Australian Taxation Office Viewed 6 December, 2017 https://www.ato.gov.au/
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Barkoczy, S. (2016). Foundations of Taxation Law 2016. London, UK: OUP Catalogue.
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Braithwaite, V. (Ed.). (2017). Taxing democracy: Understanding tax avoidance and evasion. Abingdon, UK: Routledge.
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Braverman, D., Marsden, S., & Sadiq, K. (2015). Assessing Taxpayer Response to Legislative Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl. Tax'n, 17, 1.
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Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., & Wende, S. (2015). Understanding the economy-wide efficiency and incidence of major Australian taxes. Treasury WP, 1.
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Davis, A. K., Guenther, D. A., Krull, L. K., & Williams, B. M. (2015). Do socially responsible firms pay more taxes?. The Accounting Review, 91(1), 47-68.
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Devos, K., & Zackrisson, M. (2015). Tax compliance and the public disclosure of tax information: An Australia/Norway comparison. eJournal of Tax Research, 13(1), 108.
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Fringe Benefits Tax Act [1986] (Federal Court of Australia)
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Hodgson, H., & Pearce, P. (2015). Travel Smart or travel tax breaks: is the fringe benefits tax a barrier to active commuting in Australia? 1. eJournal of Tax Research, 13(3), 819.
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irs.gov (2017). Internal Revenue Service Viewed 25 December 2017 https://www.irs.gov/
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Kerin, P., & Findlay, C. (2015). An efficient land levy could fund cuts to costly stamp duties and company taxes. The Australian, 29, 29.
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Merrill C. Roberts v. Commissioner [2014] 12010-11 (United States Tax Court)
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Pearce, P., & Pinto, D. (2015). An evaluation of the case for a congestion tax in Australia. The Tax Specialist, 18(4), 146-153.
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Saad, N. (2014). Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, 1069-1075.
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Tang, R., & Wan, J. (2015). Fringe benefits tax and fly-in fly-out arrangements: John Holland Group Pty Ltd v Commissioner of Taxation. Australian Resources and Energy Law Journal, 34(1), 17.
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