Economic descriptive assignment on: Short Questions on Fringe benefits or exempt fringe benefits

Economic descriptive assignment on: Short Questions on Fringe benefits or exempt fringe benefits

Question 1

 Determine whether the following benefits are fringe benefits or exempt fringe benefits and, where applicable, the relevant category of fringe benefit. Provide reasons for your answer: a)      Kerry is an employee of the University. She is provided with 10 gift vouchers worth $50 each for use at the local supermarket as a Christmas gift. Advise Kerry and the University of this transaction. ANSWER – 1 (a)

The amounts which have been paid by the employers of the University for Exchange of services have been regarded as Fringe Benefits. The Fringe Benefits have been divided into two sections i.e. Taxable & Exempt fringe benefits. This segregation has been done by the Fringe Benefits Tax Assessment Act, 1986. Based upon Wilmot 2011, the “taxable fringe benefits” have been defined as the benefits where in some cash transactions are involved between the employee & the employer for providing a particular service. Whereas, when no cash is involved within the transaction between the employee & the employer it is termed as an “Exempt Fringe Benefit”. It shall be seen that, the gift vouchers received by Kerry as an employee of the University are the ones which are intended to provide discount over the purchases done & are issued free of cost to the regular customers. These discount coupons are passed on to the employees and will not be considered as a “Fringe Benefit” to Kerry by the University people. Hence, the University people will not be liable for Fringe Benefit Tax over it.

b)      Sorella borrowed $10,000 from her employer on 4 September 2010 as her home was damaged in a freak storm. The loan was provided at no interest. On 15 January 2011, her employer informed Sorella that she was only required to repay half the loan. Advise Sorella and her employer of this transaction.

ANSWER – 1 (b)

Amount which is paid to the employee by its employer which does not ask for a service in return is not covered under FBTAA 1986 provisions. Based upon the case let given above it can be seen that, Sorell borrowed an approximate amount of $10,000 from its employer to be used in the repairing of the home. The amount provided to Sorell by its employer treated it as a regular loan and hence no benefits were arrived from the same. Therefore, this amount will be regarded as a personal loan on the part of the employee.But, in the case let mentioned above the employer changed the terms of the personal loan repayment by converting it into an interest free loan to a concessional loan. After the change in the terms of the loan, Sorella would be required to pay half of the loan amount. The change in the terms ahs provided the employees a benefit to pay half of the amount. Therefore, this amount will be converted in to fringe benefit. Hence, under the provisions of FBTAA, 1986, the employer will be liable to pay Fringe Benefit Tax on waived amount of $5,000, as per Maisto (ed), (2010).

c)      Penny is employed as a secretary by a law firm. As part of her remuneration package, the firm agrees to provide her with legal services in relation to her divorce at a 60% discount to its normal rates. The firm also purchases a plasma TV set for $5,500 (inclusive of GST), which it gives to Penny. Explain how the taxable value of these fringe benefits will be calculated.ANSWER – 1 (c)

Based upon the FBTAA, 1986 fringed benefits can be segregated into two segments i.e. Type 1 & Type 2. Type 1 fringe benefits will consist of the Taxable Fringe Benefits whereas Type 2 consists of the Exempted Fringe Benefits. In order to calculate the fringe benefits, FBTAA 1986 consists of a fixed criterion. In Type 1, the value of fringe benefits would be calculated by ‘Higher Gross up Rate’ (Wilmot, 2011). Whereas in type 2, the value of fringe benefits would be calculated by ‘Lower Gross up Rate’.

The formulas for both the segments have been listed as under. They are:

Higher Gross – Up Rate = {FBT Rate + GST Rate}

{(1 – FBT Rate) x (1+GST Rate) x (FBT Rate)}

With the present rate of Fringe Benefit Tax at 46.5% and Goods and Service Tax at 10%, the Higher Gross-Up Rate using the above formula calculates to 2.0647.

Lower Gross-Up Rate =             1             
(1 – FBT Rate)

With the same values, the Lower Gross-Up Rate using the above formula calculates to 1.8692.

The total fringe benefit would be calculated as under:

{(Total Amount of Type-1 Fringe Benefits) X (Higher Gross-up Rate)} +

{(Total Amount of Type-2 Fringe Benefits) X (Lower Gross-up Rate)}

The services offered by Penny are at discounted rate which makes the remuneration paid by the employer to its employee as fringe benefits. It shall be kept in mind that, the discount rate has been specified the FBT will be calculated at $100.

The calculation for the FBT has been highlighted as under:

= $[(40 x 2.0674) + (0 x 1.8692)]

= $82.70

For the plasma television, the FBT will be calculated as under:

= $[(5500×2.0674) + (0 x 1.8692)]

= $11,370.70

Question 2 Peter sold an investment property in Sydney and the transaction was settled on 30 June 2012 for $800,000. He incurred legal fees of $1,100 and a real estate agent’s commission of $9,900 in relation to the sale. Peter purchased the investment property in March 1987 for $100,000. He paid $2,000 in stamp duty on the transfer and incurred legal fees of $1,000 in relation to the purchase.

a) Calculate the capital gain under the indexation method.

b) Calculate the capital gain under the 50% discount method.

c) Which method should be used in this case?

Explaining the Capital Gains and Losses

Capital Asset refers to the amount which has been generated when the Australian resides or invests its capital in an immovable property, shares, funds, bonds, etc.  After a particular time the asset is being disposed off. This either leads to Capital Gain or Loss. Based upon the ITAA 1997, capital gain or loss has been treated as the same as compared to the profit or loss to the tax payer. The tax payer is given the liberty to set off its profits against the future losses or profits (Leow, Murphy & Hooper, 2009).Defining CGT Event

A gain or loss on the sale of an asset shall be kept in mind as a capital gain or loss on the date of the sale of the equipment. In order to calculate the capital gain or loss on an asset, the tax payer shall record the Date of Acquisition (DOA). The tax payer shall also keep in mind the Date of Sale in order to know the income year where in the asset will be taxed (Thuronyi, 1998).

Calculating Capital Gains / Losses

Capital Gain or Loss is generally reported by the taxpayer to be covered under the heading “Income”. It shall be seen that, if the taxpayer specifies the income from the sale of an asset then he is not required to report capital gain tax separately (McCouat, 2011).

Exemptions, Rollovers and Concessions in CGT

Capital Gain Tax exemptions are applicable over assets such as car, home, collectables and other depreciable assets which are owned by the tax payers. In case the assets are transferred on an event such as marriages in that case capital gain tax is deferred.

 Calculating Capital Gains / Loss AmountPeter has mainly three options to choose from the three methods for calculating Capital Gain or loss as per the provisions of ITAA 1997.

Methods for calculating Capital Gain or Loss are as follows:

(Capital Proceeds – Indexed Cost Base)The amount of capital gain will be calculated by:

[Cost of Proceeds {after deduction of the capital losses} –Cost Base] now reduce this amount by 50%.The amount of capital gain will be calculated by:

(Sale Proceeds – Purchase Costs)

After considering the three options of calculating the amount of Capital Gains, Peter has choices any of the indexation and the Discount Method as the asset shas been held for more than12 months.

The Indexation Method

Since Capital Gain Tax happened before 21^st September 1999 & Peter retained this asset for more than 12 months therefore he can used this method to calculate capital Gain. In order to calculate the index factor Consumer Price Index (CPI) for each quarter is to be ascertained by using the following formula i.e.

CPI for quarter ending 30.09.1999 is 123.4.

= 123.4 / 81.4

= 1.5160

The Discount Method

It shall be seen that, Peter can opt for the Discount Method in order to calculate the amount of capital gain or loss. This is because; the asset was acquired by Peter 12months before 21^st September, 1999 and the asset was held for more than 12 months before the Capital Gain Tax event (Barkoczy, 2011).

Calculating Capital Gains Tax

Using the Indexation Method

(Purchase Amount Paid) x (Indexation factor)
$100,000 x 1.5160$151,600(Stamp Duty Amount) x (Indexation factor)
$2,000 x 1.5160

$3,032

(Legal Fee Amount) x (Indexation factor)
$1,000 x 1.5160$1,516    Total Cost Base $156,148 Capital Proceeds Received / Receivable$800,000LESS:

Legal Fee

Estate Agent’s Commission

$1,100

$9,900NET Sale Proceeds$789,000Total Capital Gain for Peter by Indexation Method$632,852

Discount Method

Total Purchase Amount

$100,000ADD: Stamp Duty Paid$2,000Legal Fee Paid$1,000    Total Cost Base $103,000 Sale Amount Received$800,000LESS:

Legal Fee

Agent’s Commission

NET Sale Proceeds

LESS: Total Cost Base

$1,100

$9,900

$789,000

$103,000Capital Gain (before discount)$686,000LESS: Applicable Discount$343,000Net Capital Gain for Peter by Discount Method$343,000

 It can be seen that, Discount Method will provide Peter with better options to benefit in assessing Capital Gain Tax Liability for the present income year.

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